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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, 1997
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number: 0-27314
CITYSCAPE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 11-2994671
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
565 Taxter Road, Elmsford, New York 10523-2300
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(Address of principal executive offices, including zip code)
(914) 592-6677
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 6, 1998, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $20,788,195 based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
SmallCap 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 6, 1998, the number of shares of
the registrant's Common Stock outstanding was 47,578,738.
Documents Incorporated by Reference
None.
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PART I
This report on Form 10-K contains forward-looking statements which involve
risk and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including, but not limited to, risks related to the completion
of a sale of its UK operation, the ability to access loan warehouse or purchase
facilities in amounts, if at all, necessary to fund the Company's loan
production, the successful execution of loans sales in the whole loan sales
market, the ability of the company to successfully restructure its balance
sheet, the initiatives to streamline the company's legal proceedings and other
operations, the ability to of the Company to retain an adequate number and mix
of its employees, legal proceedings and other matters discussed in Item 3 of
this report, adverse economic conditions, competition and other risks detailed
from time to time in the Company's SEC reports. The Company undertakes no
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
Item 1. Business
General(1)
Cityscape Financial Corp. (the "Company") is a consumer finance company
engaged in the business of originating, 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 46 states and the District of Columbia.
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-2300 and its telephone number is (914) 592-6677.
The Company
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 City Mortgage Corporation Limited, a company organized
under English law ("CSC-UK"). 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 $788,000 (the "J&J Acquisition"). J&J provides
primarily second lien mortgage loans to UK borrowers who, similar to the
Company's UK borrowers, are unable or unwilling to obtain mortgage financing
from Conventional UK Lenders.
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(1) All references herein to "$" are United States dollars; all references
to "(pound)" are to British Pounds Sterling. Unless otherwise specified,
translation of amounts from British Pounds Sterling to United States dollars has
been made herein using exchange rates at the end of the period for which the
relevant statements are prepared for balance sheet items and the weighted
average exchange rates for the relevant period for statement of operations
items, each based on the noon buying rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.
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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") resulting in the recognition of $25.4 of goodwill.
Greyfriars provides mortgage loans to borrowers that generally have higher
quality credit profiles than the Company's typical UK borrowers.
In May 1997, CSC-UK acquired the assets of Midland & General PLC, a
London-based mortgage broker ("M&G") in exchange for (pound)6.5 million ($10.6
million based on the Noon Buying Rate on the date of such acquisition) (the "M&G
Acquisition"). Pursuant to the M&G Acquisition, the Company acquired assets with
a fair value of $764,000, consisting primarily of property, plant and equipment.
The M&G Acquisition resulted in the recognition of $10.2 million of goodwill. In
connection with the M&G Acquisition, the company entered into a five-year
non-compete agreement with the former principals of M&G for (pound)3.0 million
($4.9 million), which is being amortized using the straight-line method over
five years.
Recent Developments
For the last several months, the Company has been operating in an
increasingly difficult environment and the Company expects to continue to
operate in this environment for the foreseeable future. The market price of the
Common Stock has fallen from a high during the first quarter of 1997 of $32.00
to a low during the fourth quarter of 1997 of $0.25. The Company's operations
for 1997 have consumed substantial amounts of cash and have generated
significant net losses, which have reduced stockholders' equity to a deficit of
$176.8 million at December 31, 1997. Because the Company has been operating on a
negative cash flow basis over the last few years, the Company's ability to
operate has been dependent upon continued access to capital through the issuance
of debt securities, loan warehouse facilities and loan purchase facilities. The
Company is unable to access the capital markets and is experiencing great
difficulties in maintaining or securing loan warehouse or purchase facilities.
The terms of the Company's current loan warehouse and purchase facilities are
much less advantageous to the Company than the terms of the Company's prior
facilities. The Company expects that its difficulties in accessing capital,
which has had a negative impact on liquidity as well as profitability, will
continue for the foreseeable future. The profitability of the Company has been
and will continue to be adversely affected due to an inability to sell its loan
production through securitizations. Furthermore, primarily due to a reduction in
the Company's Corresponded Loan Acquisition Program, through which the Company
originated a significant portion of its loan production from selected financial
institutions and mortgage bankers known as loan correspondents, and the
discontinuation of many of the loan products previously offered by the Company,
the Company anticipates that its revenues will be substantially lower in 1998
than in 1997. As discussed in Note 1 to the Consolidated Financial Statements,
there is substantial doubt about the Company's ability to continue as a going
concern. The Company believes that its future success is dependent upon its
ability to (i) complete a sale of its UK operation, (ii) access loan warehouse
or purchase facilities, (iii) successfully sell loans in the whole loan sales
market, (iv) restructure its balance sheet, (v) streamline its US operations and
(vi) retain an adequate number and mix of its employees. No assurance can be
given that the Company will be able to achieve these results.
OFT. Beginning in March of 1997, CSC-UK received various correspondence
from the Office of Fair Trading (the "OFT") which has the responsibility for the
granting of consumer credit licenses in the UK to mortgage lenders and for the
subsequent monitoring of their activities to ensure continued fitness to hold
such licenses. The OFT has set forth certain practices deemed by the OFT to be
inappropriate, regardless of their legality, including the use of
standard/concessionary rate structures and, with respect to unregulated loans,
the calculation of prepayments using the Rule of 78s method. During 1997, CSC-UK
eliminated from the loans it was originating the concessionary/standard rate
structure and, with respect to regulated loans, the Rule of 78s method. Such
elimination had a negative impact on profit margins for CSC-UK's loans. In
January 1998, as a result of discussions and correspondence between CSC-UK and
the OFT, the Company agreed, with respect to its existing loans containing such
provisions, to lower the differential between the standard rate of interest and
the concessionary rate of interest to not more than 2.5% and, with respect to
unregulated loans, to eliminate the use of the Rule of 78s method. As a result
of these revisions to the terms of the applicable UK loans, the Company
recognized an impairment in the value of its mortgage servicing receivables in
the UK of $106.2 million and wrote off unamortized goodwill of $52.7 million
recorded in connection with its UK operations. See Item 3 for a discussion
regarding the OFT. In March 1998, as a result of significant losses in the UK
stemming from such regulatory changes and due to the inability of the Company to
fund such losses from its cash flows due to other negative recent developments,
the Company adopted a plan to sell the operations of CSC-UK. See Item 7 -
Discontinued Operations.
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Lawsuits. Beginning in September 1997, a number of class action lawsuits
have been filed against the Company and certain of its officers and directors on
behalf of all purchasers of the Common Stock. In these actions, plaintiffs
allege that the Company and its senior officers engaged in securities fraud by
affirmatively misrepresenting and failing to disclose material information
regarding the lending practices of the Company's UK subsidiary, and the impact
that these lending practices would have on the Company's financial results.
Plaintiffs allege that a number of public filings and press releases issued by
the Company were false or misleading. In each of the complaints, plaintiffs have
asserted violations of Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Plaintiffs seek
unspecified damages, including pre-judgment interest, attorneys' and
accountants' fees, and court costs. See Item 3 for this and other legal
proceedings. Although no assurance can be given as to the outcome of these
lawsuits, the Company believes that the allegations in each of the actions are
without merit and that its disclosures were proper, complete and accurate. The
Company intends to defend vigorously against these actions and seek their early
dismissal. These lawsuits, however, if decided in favor of plaintiffs, could
have a material adverse effect on the Company.
Dilution of Common Stock. In April 1997 and again in September 1997, the
Company issued Preferred Stock in exchange for an aggregate gross proceeds of
$100.0 million. The Company's Preferred Stock may be converted into Common Stock
based on a conversion price related to a discounted market price of the Common
Stock. As a result of the precipitous drop in the trading price of the Common
Stock, the number of shares of Common Stock outstanding has increased
substantially from 29,744,322 as of March 25, 1997 to 47,578,738 as of March 6,
1998 primarily as a result of such conversions. As of March 6, 1998, an
aggregate of 4,328 shares and 377 shares of Series A Preferred Stock and Series
B Preferred Stock, respectively, had been converted (672 shares and 4,623
shares, respectively remain outstanding) into an aggregate of 16,851,414 shares
of Common Stock. As of March 6, 1997 all of the Series A Warrants and Series B
Warrants were outstanding. If all of the Series A Warrants and Series B
Preferred Stock were converted into Common Stock, the Company would not have
sufficient authorized shares of Common Stock to satisfy all of such
conversions. Assuming the Company had a sufficient number of authorized shares
of Common Stock to satisfy such conversions, as of March 6, 1998 the shares of
Common Stock issuable upon conversion of the outstanding shares of Series A
Preferred Stock would represent approximately 75% of the Common Stock on a
fully diluted basis. In addition, based on changes in the trading price of the
Common Stock and the shares of Preferred Stock that remain outstanding,
substantial dilution could occur in the future. See "Item 7 - Liquidity and
Capital Resources-Convertible Preferred Stock."
Nasdaq Delisting. In December 1997, the Company was notified by the Nasdaq
Stock Market, Inc. ("Nasdaq") that the Common Stock would be delisted from the
Nasdaq National Market as a result of the Company's non-compliance with Nasdaq's
listing requirements and corporate governance rules. In January 1998, the
Company received notice from Nasdaq that the Common Stock would be moved from
the Nasdaq National Market to the Nasdaq SmallCap Market subject to the Company
achieving a $1.00 per share bid price on or before May 22, 1998. As a result of
the delisting from the Nasdaq National Market, the Company is subject to certain
unfavorable provisions pursuant to the Certificates of Designations of the
Company's Preferred Stock. See "Item 7 - Liquidity and Capital Resources -
Convertible Preferred Stock." No assurance can be given that the Company will be
able to comply with the listing requirements of the Nasdaq SmallCap Market.
Failure to so comply, additional violations of Nasdaq corporate governance rules
or an adverse finding following the review of the decision moving the Common
Stock from the Nasdaq National Market to Nasdaq SmallCap Market will likely
result in the Common Stock being delisted from the SmallCap Market, which will
likely have an adverse effect on the price and trading of the Common Stock.
Restructuring. The Company has announced a number of initiatives,
including having retained Bear, Stearns & Co. Inc. ("Bear Stearns") to explore
strategic alternatives for the Company. These initiatives include the disposal
of loans through whole loan sales, the sale of interest-only and residual
certificates and increased focus on the Company's higher margin product lines.
The Company has announced that it has begun implementing a restructuring plan
that includes streamlining and downsizing its operations. The Company is
reducing its workforce and has closed its branch operations in Virginia,
significantly reduced its correspondent originations for the foreseeable future
and exited its conventional lending business. The Company expects to record a
restructuring charge of $2.6 million in the first quarter of 1998.
In addition, the Company has retained CIBC Oppenheimer Corp. ("CIBC") to
explore strategic alternatives. CIBC is advising the Company with respect to
strategic alternatives including the restructuring, refinancing,
recapitalization or reorganization of the Company and exploration of the sale of
all or part of the Company's UK business. No assurance can be given that the
Company will be successful in pursuing strategic alternatives or in implementing
any of its initiatives. Furthermore, even if the Company is successful in
implementing its strategic alternatives and initiatives, no assurance can be
given as to the effect of any such success on the Company's results of
operations or financial condition.
Employee Attrition. As a result of the difficult environment the Company
has recently been operating in, the Company is experiencing an increase in the
rate of attrition of its employees and an inability to attract, hire and retain
qualified replacement employees. On December 31, 1997, the Company had 837
employees. As part of its initiatives designed to improve the efficiency and
productivity of the Company's operations, the Company reduced its workforce by
136 employees in February 1998. Due to additional attrition, however, the
Company's workforce was reduced to 577 employees as of March 1, 1998. Further
attrition, may hinder the ability of the Company to operate efficiently which
could have a material adverse effect on the Company's results of operations and
financial condition. No assurance can be given that such attrition will not
occur.
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Discontinued Operations
As a result of liquidity constraints, the Company adopted a plan in March
1998 to sell the assets of CSC-UK (the "CSC-UK Sale"). CSC-UK focuses on lending
to individuals who are generally unable to obtain mortgage financing from
conventional UK sources such as banks and building societies because of impaired
or unsubstantiated credit histories and/or unverifiable income, or who otherwise
choose not to seek financing from such conventional lenders. CSC-UK originated
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.
Accordingly, the operating results of CSC-UK and it subsidiaries have been
segregated from continuing operations and reported as a separate line item on
the Company's financial statements. In addition, net assets of CSC-UK have been
reclassified on the Company's financial statements as investment in discontinued
operations. The Company has restated its prior financial statements to present
the operating results of CSC-UK as a discontinued operation.
As a result of revisions to the terms of certain of CSC-UK's loans as
required by the OFT, CSC-UK has recognized in the fourth quarter of 1997 an
impairment in the value of its mortgage servicing receivables of $106.2 million
and has written off unamortized goodwill of $52.7 million recorded in connection
with its UK acquisitions. See Item 3 for a discussion regarding the OFT.
On March 31, 1998, the Company announced that it had entered into
definitive agreements with Ocwen Financial Corporation ("Ocwen") for the sale
of substantially all of the businesses and assets, and certain liabilities of
the UK operations of CSC-UK. The acquisition includes the purchase of CSK-UK's
whole loan portfolio, securitized loan residuals and loan origination and
servicing businesses for a price of approximately (pound) 285 million, subject
to adjustment as of closing based on an agreed upon formula (currently
estimated to result in an upward or downward adjustment of approximately (pound)
5 million). Closing, which is anticipated to occur in April 1998, is subject to
satisfaction of a number of conditions, including obtaining rating agency
consents and various substitutions in connection with the transfer of the
securitized residual and related servicing rights (which will require the
consents of the trustees of several securitizations). As a result, there can be
no assurance that the transaction will be consummated.
As a result of the Company's adoption of a plan to institute the UK Sale,
the Company's net interest in its UK discontinued operations represents
expected proceeds of $102.2 million, net of accrued losses of $18.0 million.
Expected costs related to the disposal of UK discounted operations of $16.4
million is included in accounts payable and other liabilities at December 31,
1997.
Business Strategy
The Company's near-term priorities are to improve liquidity and to
reestablish profitability in order to restore confidence in the Company. 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. The Company primarily originates loans through an extensive network of
independent mortgage brokers.
Improve Liquidity. The Company has taken a number of steps to improve
liquidity. In January 1998, the Company sold residual certificates and
associated mortgage servicing receivables relating to certain of the Company's
home equity loan products for net proceeds of $26.5 million. Although no
assurance can be given regarding its completion, the CSC-UK Sale, should it
occur, will substantially improve the Company's near-term cash position. In
addition, the Company has redirected its efforts to actively pursue the sale of
its loans through whole loan sales rather than through securitizations. Whole
loan sales are immediately cash flow positive because, when the Company sells
loans through whole loan sales, it receives a cash premium at the time of sale.
Streamline Operations. As part of its initiatives designed to improve the
efficiency and productivity of the Company's operations, the Company reduced its
workforce by 136 employees in February 1998. Due to additional attrition,
however, the Company's workforce was reduced to 577 employees as of March 1,
1998. In addition, the Company has closed its branch processing operations in
Virginia and plans to process loans originated from this region through the
Company's New York and Atlanta offices.
Maintain Geographic Coverage. The Company intends to maintain its current
independent mortgage broker network on a nationwide basis. The Company currently
has an extensive independent broker network covering 46 states and the District
of Columbia utilizing the Company's New York headquarters and three regional
processing centers located in California, Georgia and Illinois. The Company's
strategy involves (i) maintaining existing markets where the Company has been
successful in originating and
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purchasing loans, (ii) searching for and retaining business development
representatives for each area who have (or have the ability to develop) contacts
with the independent mortgage brokers originating loans in that area and (iii)
marketing to the independent mortgage brokers through the business development
representatives in order to generate loan originations. The Company intends to
increase the number of business development representatives to further penetrate
the eastern seaboard states as well as to broaden the depth and breadth of its
coverage in the western states.
Maintain Independent Mortgage Broker Relationships. The Company seeks to
maintain, and then to grow, its loan origination capability from its network of
independent mortgage brokers by restoring confidence in the Company by providing
consistent underwriting and prompt and efficient service at competitive prices.
The Company offers 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.
Improve Servicing Performance. In the first quarter of 1998, the Company
retained an affiliate of Ocwen Financial Corporation (including its affiliates,
"Ocwen"), an established leader in the management and resolution of
underperforming loans, as a special loan servicer to sub-service the Company's
90-day-plus delinquent loans. The Company intends to deliver such non-performing
loans to Ocwen on an ongoing basis. In the first quarter of 1998, the Company
transferred to Ocwen 993 non-performing loans with an aggregate unpaid principal
balance of $66.4 million. The Company is evaluating arrangements for the use of
additional sub-servicers in the future and will attempt to continuously resolve
loans more than 90 days delinquent.
Overview
The Company primarily 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. The Company also offers
"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).
The Company originates loans principally through an extensive network of
independent mortgage brokers utilizing the Company's New York headquarters and
three regional processing offices located in California, Georgia and Illinois.
The Company's highest producing broker accounted for 1.1% of the total
origination and purchase volume in 1997. The Company strives to 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. Additionally, during 1997, the
Company originated a significant portion of its loan production through its
Correspondent Loan Acquisition Program from selected financial institutions and
mortgage bankers known as loan correspondents, in accordance with the Company's
underwriting guidelines. The Company purchases such loans in the form of
complete loan
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packages. The highest producing loan correspondent in the Correspondent Loan
Acquisition Program accounted for 2.8% of the total origination and purchase
volume in 1997. The Company has significantly reduced its correspondent
originations and will continue to do so for the foreseeable future.
The Company offers a wide range of loan products, including fixed and
adjustable rate residential mortgage loans for refinancing, educational, home
improvement and debt consolidation purposes and fixed and adjustable rate
purchase money mortgage loans ("Core Products"). The Company also offers
"Sav*-A-Loan(R)" mortgage loans. Due to the Company's decision to focus on
higher margin products, the Company recently discontinued offering jumbo loans,
conventional home loans, Title I loans (loans partially insured by the Federal
Housing Administration (the "FHA"), an agency of the US Department of Housing
and Urban Development ("HUD"), pursuant to the Title I credit insurance program
of the National Housing Act of 1934) and loans on small multi-family and
mixed-use properties ("Discontinued Products").
As a result of the Company's liquidity inititatives, the Company
anticipates selling substantially all of its loan production through whole loan
sales with servicing released in private placements to a variety of
institutional purchasers. Accordingly, the Company anticipates that the size of
its servicing portfolio will decrease over time. During 1997, 1996 and 1995,
however, the Company sold its loan production primarily through securitizations
and, to a lesser extent, through whole loan sales. Through 1994, the Company had
sold virtually all of its loan production through whole loan sales. The Company
funds its originations and purchases through warehouse lines of credit. During
1997, 1996 and 1995, the Company sold $518.4 million, $73.5 million and $209.0
million of its loan production in whole loan sales to institutional investors
and sold $1.1 billion, $993.6 million and $235.0 million, respectively, of its
loan production through securitizations.
Although the Company releases the servicing rights to substantially all of
the loans it sells through whole loan sales, the Company had retained the
servicing rights to the loans it sold through securitizations prior to the
fourth quarter of 1997. 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. During 1997, the Company sold the servicing
rights to $408.2 million of loans in connection with its whole loan sales. In
the first quarter of 1998, the Company sold the servicing rights to $407.3
million of loans in connection with its sale of residual certificates.
Loans
Overview
The Company's consumer finance activities primarily consist of
originating, selling and servicing mortgage loans. The loans are secured by
first mortgages or junior mortgages on one- to four-family residences. 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 on a whole loan basis to institutional
purchasers. The Company releases the right to service the loan origination and
purchase volume that it sells through whole loan sales. 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 loans in 46 states and
the District of Columbia through a network of independent mortgage brokers and
through its three branch offices. To a lesser extent, the Company also purchases
loans on a wholesale basis from selected financial institutions and mortgage
bankers. The Company expects that, during 1998, loan purchases through its
Correspondent Loan Acquisition Program will continue to become a less
significant portion of the Company's loan production. The Company believes that
its strategy of originating loans through independent mortgage
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brokers is efficient as it allows the Company to maintain lower overhead
expenses than competing companies utilizing a more extensive branch office
system.
Channels of Loan Originations and Purchases
Year ended December 31,
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1997 1996 1995
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(Dollars in thousands)
Independent Mortgage Brokers:
Principal balance.............. $ 985,823 $ 548,242 $ 291,907
Number of loans................ 17,850 9,173 4,161
Average principal balance
per loan....................... $ 55.2 $ 59.8 $ 70.2
Correspondent Loan Acquisition
Program:
Principal balance.............. $ 669,209 $ 741,113(1) $ 125,957
Number of loans................ 11,752 11,960(1) 1,847
Average principal balance
per loan....................... $ 56.9 $ 62.0(1) $ 68.2
Total Loan Originations and
Purchases:
Principal balance.............. $1,655,032 $1,289,355 $ 417,864
Number of loans................ 29,602 20,863 6,008
Average principal balance
per loan....................... $ 55.9 $ 61.8 $ 69.6
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(1) Includes a one-time bulk purchase of $129.1 million bulk purchase of 2,259
loans with an average principal balance of $57,100.
Independent Mortgage Brokers. During 1997, 1996 and 1995, $985.8 million
(59.6%), $548.2 million (42.5%) and $291.9 million (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
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 anticipates that a substantial majority of the
Company's future loan origination volume will be derived from independent
mortgage brokers due to the Company's initiatives to refocus its efforts on the
more profitable broker loans.
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. The Company believes that consistent underwriting, quick response times
and personal service are critical to successfully originating loans through
independent mortgage brokers. During 1997, 1996 and 1995, the single highest
producing independent mortgage broker accounted for 1.1%, 1.9% and 6.4%,
respectively, of the Company's production volume, and the ten highest producing
independent mortgage brokers accounted for 5.3%, 7.8% and 21.0%, respectively,
of the Company's loan production volume. 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.
Correspondent Loan Acquisition Program. In addition to originating loans
through its network of independent mortgage brokers, the Company historically
purchased loans on a flow basis through its Correspondent Loan Acquisition
Program. These loan purchases are in the form of complete loan packages
originated by loan correspondents. Commenced in 1994, the Correspondent Loan
Acquisition Program
8
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accounted for $669.2 (40.4%), $612.0 million (47.5%) and $126.0 million (30.1%)
of the Company's total loan origination and purchase volume for 1997, 1996 and
1995, respectively. No single financial institution or other mortgage banker in
the Correspondent Loan Acquisition Program accounted for more than 2.8%, 7.4% or
6.4% of the Company's loan originations and purchases during 1997, 1996 or 1995,
respectively. As part of the Company's liquidity initiatives, the Company
anticipates that this program will account for substantially less of the
Company's total loan origination and purchase volume in the future because of
higher costs and lower positive cash flows associated with purchases under this
program as compared to originations through independent mortgage brokers.
Geographic Distribution of Loans. Although the Company is licensed or
registered in 46 states and the District of Columbia, it has historically
concentrated its business in the eastern seaboard states and the midwest. New
York contributed 14.9%, 17.7% and 37.0% of the Company's total loan production
volume for 1997, 1996 and 1995. The Company intends to maintain its loan
origination and purchase activities within the states it currently serves
through independent mortgage brokers. The Company intends to increase the number
of business development representations to further penetrate the eastern
seaboard states as well as to broaden the depth and breadth of its coverage in
the western states.
Geographic Distribution of Loan Originations
and Purchases
Year Ended December 31,
----------------------------------------
States: 1997 1996 1995
------------------------- ---------- ---------- ----------
New York................. 14.9% 17.7% 37.0%
Maryland................. 10.3 7.0 7.6
New Jersey............... 7.5 10.9 6.4
Illinois................. 7.1 10.0 17.6
Georgia.................. 6.3 4.9 4.2
Florida.................. 6.0 2.0 0.6
Pennsylvania............. 5.7 8.4 5.8
Virginia................. 5.6 4.6 2.5
Michigan................. 4.5 5.8 1.1
California............... 4.1 2.5 --
Ohio..................... 3.7 1.3 2.3
North Carolina........... 3.4 1.9 1.6
South Carolina........... 3.4 3.8 1.7
Massachusetts............ 3.2 3.8 1.9
Indiana.................. 2.6 1.7 4.1
All others............... 11.7 13.7 5.6
------ ------ ------
Total................. 100.0% 100.0% 100.0%
====== ====== ======
The following table highlights certain selected information relating to
the origination and purchase of loans by the Company during the periods shown.
Loan Originations and Purchases
Year Ended December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
Type of mortgage securing loan:
Core Products:
First mortgage............ 91.7% 94.0% 89.0%
Second mortgage........... 8.3% 6.0% 11.0%
Sav*-A-Loan(R) Products.....
First mortgage............ 1.4% 0.8% N/A
Second mortgage........... 98.6% 98.2% N/A
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Weighted average interest rate:
Core Products............... 11.2% 11.8 11.9
Sav*-A-Loan(R)Products...... 14.0% 14.4% N/A
Discontinued Products....... 9.0% 10.5% 12.8%
Weighted average initial
loan-to-value ratio (Core
Products)(1) 73.6% 72.5% 66.4%
- ----------
(1) 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
Underwriting Guidelines for Core Products. The following is a description
of the underwriting guidelines customarily and currently employed by the Company
with respect to Core Products which it originates. 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 Core Products.
The principal balance of the loans purchased or originated by the Company
generally ranges from a minimum of $10,000 to a maximum of $500,000. Under the
Company's current policy, the majority of the mortgage loans the Company
acquires or originates have loan-to-value ratios which do not exceed 90%. Such
ratio may exceed 90% in the future.
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 or unimproved land as collateral.
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The Company's mortgage loan programs include: (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 or 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.
Credit reports by two independent, nationally recognized credit reporting
agency (or a merged report) 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 (within 45 days) at the time of closing. A
lack of credit history will not necessarily preclude a loan if the borrower has
sufficient equity in the property. Serious delinquent 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 Core Products based on the Company's internal borrower
classification, along with weighted average coupons, during the years ended
December 31, 1997, 1996 and 1995.
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Core Products Originations
For the Year Ended
-----------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
--------------------------- --------------------------- --------------------------
The Company's Weighted Weighted Weighted
Borrower % of Average % of Average % of Average
Classification Total Total Coupon Total Total Coupon Total Total Coupon
- -------------- ----- ----- -------- ----- ----- -------- ----- ----- --------
(Dollars in million)
"A" Risk $347.6 42.3% 10.3% $ 546.2 49.6% 11.2% $ 181.2 44.6% 11.2%
"B" Risk 363.8 44.3% 11.2% 364.4 33.1% 11.6% 152.0 37.4% 12.0%
"C" Risk 72.2 8.8% 12.2% 107.4 9.7% 12.8% 46.0 11.3% 13.2%
"D" Risk 38.5 4.7% 13.2% 83.8 7.6% 14.8% 27.1 6.7% 14.2%
------ ----- ----- -------- ----- ----- -------- ----- -----
Total $822.1 100.0% 11.0% $1,101.8 100.0% 11.8% $ 406.3 100.0% 11.9%
====== ===== ===== ======== ===== ===== ======== ===== =====
The criteria currently used by the Company in classifying loan applicants
for Core Products 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.
o Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of two 30-day late payment(s)
within the last 12 months being acceptable.
o Non-mortgage credit: minor derogatory items are allowed; any recent open
collection accounts or open charge-offs, judgments or liens would
generally disqualify a loan applicant from this category.
o Bankruptcy filings: must have been discharged more than four years for
Chapter 7 filings and more than two years for Chapter 13 filings prior to
closing with credit re-established.
o Maximum loan-to-value ratio: up to 90% is permitted for a loan secured
by an owner-occupied one-to-four family residence; 85% for a loan secured
by an owner-occupied condominium; and 80% for a loan secured by a
non-owner occupied one- to four-family residence.
o Debt service-to-income ratio: generally 50% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
o Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of two 60-day late payments
within the last 12 months being acceptable.
o Non-mortgage credit: some prior defaults may have occurred, but major
credit paid or installment debt paid as agreed may offset some
delinquency.
o Chapter 7 bankruptcy filings: must have been discharged more than two
years prior to closing with credit re-established.
o Chapter 13 bankruptcy filings: must be open a minimum of two years and
be paid with no 30-day delinquencies.
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o Maximum loan-to-value ratio: up to 80% (or 90% with no more than three
30-day mortgage delinquencies) is permitted for a loan secured by an
owner-occupied one- to four-family residence; and 70% (or 80% with no more
than three 30-day mortgage delinquencies) for a loan secured by a
non-owner-occupied one- to four-family residence.
o 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.
o Existing mortgage loans: must be brought current from loan proceeds;
applicant is allowed a maximum of one 90-day late payment within the last
12 months.
o 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 (with the
exception of $2,000 in major credit card charge-offs or collections and
$2,000 in medical charge-offs or collections).
o Chapter 7 bankruptcy filings: must have been discharged for a minimum of
two years, and a history of re-established credit is required.
o Chapter 13 bankruptcy filings: must be open a minimum of two years and
be paid with no 30-day delinquencies.
o Maximum loan-to-value ratio: up to 75% is permitted for a loan secured
by an owner-occupied one- to four-family residence; 70% for a loan secured
by an owner-occupied condominium; and 65% for a non-owner-occupied one- to
four-family residence.
o 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.
o Existing mortgage loans: must be brought current from loan proceeds and
no more than 120 days delinquent at closing; an explanation for such
delinquency is required.
o 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 (with the exception of $2,000 in major credit
card charge-offs or collections and $2,000 in medical charge-offs or
collections).
o Bankruptcy filings: Chapter 13 bankruptcies open a minimum of one year
will be considered with evidence that the plan is being paid according to
terms with one 30 day delinquency; outstanding balance must be paid in
full and discharged from loan proceeds.
o 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 60% for a non- owner-occupied one-
to four-family residence.
o 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
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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 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 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 and/or debt
consolidation. Under the "Sav*-A-Loan(R)" program, the Company obtains credit
information from two sources or a merged report 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 $100,000, with interest rates generally
ranging from 11.75% to 14.25%. 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. Each property must be an owner occupied, one- to
two-family residence.
Loans of $10,000 to $25,000 require a title report. Loans of more than
$25,000 require a full title insurance policy. To establish property value, the
Company requires the original documentation reflecting the sales price (HUD-IA)
for properties purchased within the last 12 months. All others require a
drive-by appraisal or an existing appraisal if dated less than six months prior
to application. Third liens or loans of more than $75,000 require full
appraisals. The Company will consider the property value stated on the
application for certain A Grade borrowers with a minimum industry credit score
("Credit Score") of 660. The maximum loan amount accepted under this program is
$35,000.
Certain criteria currently used by the Company in classifying loan
applicants for Sav*-A-Loan(R) products can be generalized as follows:
"A" Grade:
o Existing Mortgage Loans: Required to be current at the time the
application is submitted, with no 30-day late payment(s) within
the last 12 months; or a maximum of one 30-day late payment within
the last 24 months.
o Non-Mortgage Credit: Up to a maximum of three 30-day late payments
within the last 24 months.
o There must be no bankruptcies, judgements, tax liens, charge-offs
or foreclosures.
"B" Grade:
o Existing Mortgage Loans: Required to be current at the time the
application is submitted, with one 30-day late payment within the
last 12 months; or a maximum of two 30-day late payments within
the last 24 months.
o Non-Mortgage Credit: Up to a maximum of four 30-day late payments
within the last 24 months.
o There must be no foreclosures or bankruptcies in the last three
years; tax liens, minor judgements or charge-offs are acceptable
(but must be paid) with reasonable explanations.
The Company currently offers three Sav*-A-Loan(R) programs: Platinum, Gold
and Silver. Certain criteria currently used by the Company in classifying loan
applicants with such Sav*-A-Loan(R) programs is as follows:
Platinum Program:
o Credit Score: Minimum qualifying score of 700
o Loan Limits: Minimum of $10,000, maximum of $100,000
o Debt Ratio: 40% maximum
o Disposable Income: Minimum of $2,000 monthly
o Grade: A only
o Loan Purpose: Debt consolidation and home improvement (minimum of
50% of loan must be used for debt consolidation)
o Cash Out: Maximum of 25% of loan may be used for other purposes
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Gold Program:
o Credit Score: A Grade - minimum qualifying score of 620, B Grade -
minimum qualifying score 640
o Loan Limits: Minimum of $10,000, maximum of $75,000
o Debt Ratio: A Grade - 42% maximum (fixed income applicants maximum
of 40%), B Grade - 40% maximum
o Disposable Income: Minimum of $1,500 monthly
o Loan Purpose: 100% of debt consolidation
o Cash out: maximum of 15% of loan may be used for other purposes
Silver Program:
o Credit Score: A Grade - minimum qualifying score of 620, B Grade -
minimum qualifying score 640
o Loan Limits: Minimum of $10,000, maximum of $60,000
o Debt Ratio: A Grade - 45% maximum, B Grade - 42% maximum, Fixed
income applicants - 40% maximum
o Disposable Income: Minimum of $1,200 monthly
o Loan Purpose: Debt consolidation (maximum of 65% must be used for
debt consolidation) and home improvement
o Cash out: Maximum of 10% of loan may be used for other purposes
Loan Sales
The Company sells substantially all of its loan production volume. During
1997, 1996 and 1995, the Company sold $1.6 billion, $1.3 billion and $359.0
million of loans, representing 98.9%, 99.1%, 85.9% of total originations and
purchases during these periods, respectively. In the fourth quarter of 1997,
as result of the Company's liquidity initiatives, the Company's strategy
shifted from emphasizing the sale of its loan production volume through
securitizations to the use of whole loan sales.
Whole Loan Sales. By employing whole loan sales, the Company is better
able to manage its cash flow. Whole loan sales, unlike loan sales through
securitization, are immediately cash flow positive but produce lower margins
and, therefore, will negatively impact the Company's earnings. Whole loan sales
represented all of the Company's loan sales during 1994, but with the Company's
prior emphasis on the sale of loans through securitizations, had represented
31.7%, 5.8% and 24.8%, respectively, of all loan sales in 1997, 1996 and 1995.
The Company anticipates that the disposition of substantially all of its loan
production volume in 1998 will be through whole loan sales. No assurance can be
given, however, that the Company will be successful in selling all of its loan
production through whole loan sales or otherwise.
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 whole loan sales represented
4.5%, 1.6% and 22.8%, respectively, of the Company's total revenues and 9.7%
($8.1 million), 2.2% ($1.7 million) and 31.6% ($8.3 million), respectively, of
the Company's total gain on sale of loans in 1997, 1996 and 1995.
The Company sells substantially all of its loan production 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.
15
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Securitizations. During 1997, 1996 and 1995, the Company sold $1.1
billion, $993.6 million and $235.0 million, respectively, of its loan production
volume in securitizations. Due to the Company's current financial condition and
its inability to access the capital markets and in order to improve its cash
flow, the Company does not anticipate selling its loan production volume in
securitizations for the foreseeable future.
In loan sales through securitizations, the Company sells its loans into a
trust for a cash purchase price and interests in such trust consisting of
interest-only regular interests and the residual interest which are represented
by the interest-only and residual certificates. The Company retains no interest
in the loans sold into such trust other than its interest as a holder of the
interest-only and residual certificates issued by such trust. The cash purchase
price is raised through an offering by the trust of pass-through certificates
representing regular interests in the trust. Following the securitization, the
purchasers of the pass-through certificates receive the principal collected and
the investor pass-through 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
trust with fixed terms that unconditionally entitles the holder to receive
interest payments that are either fixed or derived from a formula. A residual
certificate represents the interest in the trust which has no principal amount
and does not unconditionally entitle the holder to receive payments. A holder of
the residual certificate is entitled only to the remainder, if any, of the
interest cash flow from the mortgage loans sold to the trust after payment of
all other interests in such trust and as such bears the greatest degree of risk
regarding the performance of such mortgage loans. Securitizations take the form
of pass-through certificates which represent undivided beneficial ownership
interests in a portfolio consisting of the Company's loans that the Company has
sold to a trust. The servicer of the loan portfolio remits the principal and
part of the interest payments on such loans to the trust which in turn passes
them to investors in the pass-through certificates. A portion of the Company's
securitizations have also included the payment of pre-funded amounts.
The Company recognizes as current revenue the fair value of the
interest-only and residual certificates and, in future periods, may adjust the
value of such certificates to reflect the Company's estimate of the fair value
of such certificates at such time. Fair value is determined based on various
economic factors, including loan type, balance, interest rate, date of
origination, term and geographic location. The Company also uses other available
information such as reports on prepayment rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review, as well as actual valuations resulting from the sale of such
certificates. The Company estimates the expected cash flows that it will receive
over the life of a portfolio of loans. These expected cash flows constitute the
excess of the interest rate payable by the obligors of loans over the interest
rate paid on the related securities, less applicable fees and credit losses. The
Company discounts the expected cash flows at a discount rate which it believes
to be consistent with the required risk-adjusted rate of return to an
independent third party purchaser of the interest-only and residual
certificates. Realization of the value of these residual interests in cash is
subject to the prepayment and loss characteristics of the underlying loans and
to the timing and ultimate realization of the stream of cash flows associated
with such loans.
In a securitization, the Company purchases credit enhancements to the
senior interest in the related trusts in the form of insurance policies provided
by insurance companies. The pooling and servicing agreements that govern the
distribution of cash flows from the loans included in the trusts require either
(i) the establishment of a reserve that may be funded with an initial cash
deposit by the Company or (ii) the over-collateralization of the trust intended
to result in receipts and collections on the loans that exceed the amounts
required to be distributed to holders of senior interests. To the extent that
borrowers default on the payment of principal or interest on the loans, losses
will be paid out of the reserve account or will reduce the
over-collateralization to the extent that funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company.
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17
If payment defaults exceed the amount in the reserve account or the amount of
over-collateralization, as applicable, the insurance policy maintained by the
Company will pay any further losses experienced by holders of the senior
interests in the related trust. The delinquency rates on the pool of loans sold
in five of the Company's 14 securitizations as of December 31, 1997 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.
In securitizations, the Company may be required either to repurchase or to
replace loans which do not conform to the representations and warranties made by
the Company in the pooling and servicing agreements entered into when the
portfolios of loans are sold through a securitization. During 1997, 1996 and
1995, the Company repurchased 63 loans for $5.4 million, 73 loans for $4.7
million and seven loans for $623,300, respectively, primarily due to first month
defaults that remain uncured for 90 days.
Loan Servicing and Collections
Loan servicing is the collection of payments due under a loan, the
monitoring of the loan, the remitting of payments to the holder of the loan,
furnishing reports to such holder and the enforcement of such holder's rights,
including attempting to recover delinquencies and instituting loan foreclosures.
In order to maximize the premium earned on the sale of loans through whole
loan sales, the Company will release servicing rights on substantially all of
the loan origination and purchase volume it sells through whole loan sales. The
Company expects that as a result of its selling loans through whole loan sales
with servicing released, the size of its managed servicing portfolio will
decrease in the future. The Company anticipates that such decrease will permit
the Company to better service the loans for which servicing rights are retained.
The Company retained the servicing rights to 75.1% of the $1.6 billion in loans
it sold during 1997, 97.8% of the $1.3 billion in loans it sold during 1996 and
74.2% of the $359.0 million in loans it sold during 1995.
As of December 31, 1997, the Company was servicing 47,020 loans
representing an aggregate of $2.6 billion. The Company's servicing portfolio was
decreased to $1.8 billion at February 28, 1998 primarily as a result of the sale
of its 1997 home equity residual certificates with the accompanying servicing
rights and the sale through whole loan sales with servicing related loans
originated in 1997 but sold in 1998. Revenue generated from loan servicing
amounted to 0.9% (excluding $148.0 million of net unrealized losses), 2.6% and
2.0% of total revenues for 1997, 1996 and 1995, respectively.
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 Company maintains its loan servicing
computer operations with CPI/Alltel ("CPI"), a service bureau located in
Jacksonville, Florida. 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.
Recently, the Company retained Ocwen, an established leader in the
management and resolution of underperforming loans, as a special loan servicer
to sub-service the Company's 90-day-plus delinquent loans. The Company has the
right to deliver non-performing loans to Ocwen on an ongoing basis. In the
first quarter of 1998, the Company transferred to Ocwen 993 non-performing
loans with an aggregate unpaid principal balance of $66.4 million.
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, it
is decided whether to foreclose or to take other action. All collection
activity, including
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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.
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 force placed insurance will be obtained 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 following table provides data on delinquency experience and real
estate owned ("REO") properties for the Company's serviced portfolio (excluding
loans for which the Company acted as sub-servicer for others).
As of December 31,
----------------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------------ ------------------------
% of % of % of
Dollars in Serviced Dollars in Serviced Dollars in Serviced
Thousands Portfolio Thousands Portfolio Thousands Portfolio
---------- --------- ---------- ---------- ---------- ---------
Serviced portfolio ...... $2,231,519 100.0% $1,470,344 100.0% $ 311,649 100.0%
========== ===== ========== ===== ========== ======
Delinquencies:
30-59 days delinquent . $ 65,063 2.9% $ 54,733 3.7% $ 5,479 1.8%
60-89 days delinquent . 30,479 1.4 19,733 1.4 1,580 0.5
90 days or more
delinquent .......... 27,808 1.3 24,800 1.7 4,968 1.6
---------- ----- ---------- ----- ---------- ------
Total delinquencies . $ 123,350 5.6% $ 99,266 6.8% $ 12,027 3.9%
========== ===== ========== ===== ========== ======
Defaults:
Bankruptcies .......... $ 25,131 1.1% $ 4,269 0.3% $ -- --
Foreclosures .......... 100,901 4.5 27,689 1.9 -- --
---------- ----- ---------- ----- ---------- ------
Total defaults ...... $ 126,032 5.6% $ 31,958 2.2% $ -- --
========== ===== ========== ===== ========== ======
REO property ............ $ 8,549 0.4% $ 1,328 0.1% $ 141 --
========== ===== ========== ===== ========== ======
Charge-offs ............. $ 4,734 0.2% $ 36 0.0% $ -- --
========== ===== ========== ===== ========== ======
Foreclosure Regulation and practices regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated or purchased by the Company are
secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to various
notice and filing requirements. If foreclosure is effected by judicial action,
as in New York and Illinois for example, the foreclosure proceedings may take
several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other designated costs and expenses incurred in enforcing the obligation
during a statutorily prescribed reinstatement period. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, in certain states the borrower or junior lienholder has the right of
redemption of the property by paying the loan in full to prevent the scheduled
foreclosure sale. For example, in Illinois the right of redemption exists for 90
days from the date of foreclosure judgment; New York law does not recognize a
right of redemption.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
second mortgage loan unless it forecloses subject to
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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. Due to these restrictions, as the
Company has experienced an increase in the number of loans serviced and in the
percentage of such loans that are delinquent, there has been a substantial
increase in the number of properties pending foreclosure.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien due to several factors,
including the difficulty of determining the exact status of title to the
property, the possible deterioration of the property during the foreclosure
proceedings and a requirement that the purchaser pay for the property in cash or
by cashier's check. Thus, the foreclosing lender often purchases the property
from the trustee or referee for an amount equal to the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending upon market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property. If, after determining
that purchasing a property securing a loan will minimize the loss associated
with the defaulted loan, the Company may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure.
Except when subcontracted, loan foreclosures are the responsibility of the
Company's loan servicing operations. Prior to a foreclosure, the Company
performs a foreclosure analysis with respect to the mortgaged property to
determine the value of the mortgaged property and the bid that the Company will
make at the foreclosure sale. This is based on (i) a current valuation of the
property obtained through a drive-by appraisal conducted by an independent
appraiser, (ii) an estimate of the sale price of the mortgaged property obtained
by sending two local realtors to inspect the property, (iii) an evaluation of
the amount owed, if any, to a senior mortgagee and for real estate taxes and
(iv) an analysis of marketing time, required repairs and other costs, such as
real estate broker fees, that will be incurred in connection with the
foreclosure sale. The Company has established a committee comprised of members
of senior management to perform the foreclosure analyses.
The Company assigns all foreclosures to outside counsel located in the
same state as the mortgaged property. Bankruptcies filed by borrowers are also
assigned to appropriate local counsel who are required to provide monthly
reports on each loan file.
Marketing
The Company focuses its marketing efforts on sources of loan originations,
as opposed to individual borrowers, through six regional managers and more than
50 business development representatives. 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.
Through its focus on sources of originations as opposed to loan applicants, the
Company avoids additional 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 magazines. These representatives also provide the
Company with information relating to customers, competitive
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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
as a result of their efforts.
Competition
As a consumer finance company, the Company faces intense competition.
Negative recent developments have caused the Company to be competitively
disadvantaged. Competitors use information about the Company's losses and market
valuation to attract customers away from the Company. 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.
The Company competes 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.
Regulation
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's 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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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.
In the course of its business, the Company has acquired, and may acquire
in the future, properties securing loans which are in default. Although the
Company primarily lends to owners of residential properties, there is a risk
that the Company could be required to investigate and clean up hazardous or
toxic substances or chemical releases at such properties after acquisition by
the Company, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. In addition, the
owner or former owners of a contaminated site may be subject to common law
claims by third parties based on damages and costs resulting from environmental
contamination emanating from such property. On all loan applications where the
Company believes there may exist, or an appraisal may indicate, a possible
environmental problem, the Company requires a Phase I Environmental Report.
Employees
As part of the Company's cost saving initiatives, the Company has reduced
its workforce from 924 employees as of June 30, 1997 to 837 employees as of
December 31, 1997, 13 of whom were part-time employees and 824 of whom were
full-time employees. Of the Company's employees, 5.5% were in management, 57.5%
were in sales and marketing, 24.3% were in administrative support and 12.7% were
in servicing. The Company had 579 employees working at its New York headquarters
as of December 31, 1997. None of the Company's employees is covered by a
collective bargaining agreement. As a result of negative recent developments,
the Company is experiencing an increase in the rate of attrition of its
employees and an inability to attract, hire and retain qualified replacement
employees. Further attrition, may hinder the ability of the Company to operate
efficiently which could have a material adverse effect on the Company's results
of operations and financial condition. No assurance can be given that such
attrition will not occur. As of March 1, 1998, the Company's workforce was
reduced to 577 employees. The Company considers its relations with its employees
to be satisfactory.
Item 2. Properties
The Company's executive and administrative offices and the majority of its
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 is evaluating and anticipates reducing its office space to
meet its needs for the next 12 months. The anticipated loss related to the
reduction of the Company's office space has been included in the $2.6 million
restructuring charge taken in the first quarter of 1998.
Item 3. Legal Proceedings
In March 1997, CSC-UK received a letter from the OFT which has
responsibility for the granting of consumer credit licenses in the UK 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
provides that, when determining the fitness of licensees, the OFT would
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consider whether the licensee or its associates have engaged in business
practices which appear to be inappropriate, regardless of their legality. The
letter specified certain practices deemed by the OFT to fall within such
categories, including the appropriateness of standard/concessionary rate
structures, as well as the calculation of prepayments using the Rule of 78s
method which were two material aspects of the Company's UK loan programs at that
time. Following the receipt of the letter, the Company commenced a review and
evaluation of its practices with respect to each issue raised in the letter and
entered into discussions with the OFT regarding its concerns.
In July 1997, the Director General of the OFT issued "Non-Status Lending
Guidelines for Lenders and Brokers" (the "July Non-Status Guidelines") that are
applicable to mortgage lenders like CSC-UK that focus on lending to individuals
who are unable or unwilling to obtain mortgage financing from conventional
mortgage sources. The July Non-Status Guidelines highlighted some of the main
practices that the OFT considered to be inappropriate, whether or not lawful.
The OFT stated that if lenders and/or brokers continued these practices, the OFT
would take regulatory action against them. The majority of these practices were
either (i) not applicable to CSC-UK's operations or (ii) practices in which the
Company believed CSC-UK to be in compliance with the July Non-Status Guidelines.
In the July Non-Status Guidelines, however, the OFT announced that (i) dual
interest rate structures involving a large differential between the two interest
rates are inappropriate and should be discontinued and (ii) the Rule of 78s
method of calculating prepayments is inappropriate in the non-status lending
market, should be discontinued at the earliest opportunity and should not be
applied to existing loan agreements without some form of cap to ensure payments
are not excessive. Furthermore, the July Non-Status Guidelines stressed that
lenders seeking to recoup administrative costs associated with defaults should
do so in accordance with a published scale of charges and with respect to
prepayments, charges for early redemption should do no more than cover the
lender's unrecovered administrative and other costs incurred to the date of
prepayment.
In response to the changes in the regulatory environment being brought
about by the OFT, CSC-UK eliminated the concessionary/standard rate in its new
loan programs and replaced it with a single rate. The average single rate that
CSC-UK charges is higher than the average concessionary rate and lower than the
average standard rate that CSC-UK had charged previously. In August 1997, CSC-UK
discontinued originating loans that calculate prepayments using the Rule of 78s
method. CSC-UK is calculating prepayments using alternative methods in
accordance with the July Non-Status Guidelines.
In December 1997, the Company received from the OFT "Non-Status Lending
Guidelines for Lenders and Brokers Revised November 1997" (the "Revised
Non-Status Guidelines"), which revise the July Non-Status Guidelines, and a
letter from the OFT (the "OFT Letter") expressing the OFT's views on the
Company's compliance with the Unfair Terms in Consumer Contracts Regulations
1994 (the "Consumer Contracts Regulations") with respect to loan originated by
the Company prior to August 1997.
In the Revised Non-Status Guidelines, the OFT announced revisions which
affected a significant portion of the Company's loans that were originated prior
to the issuance of such guidelines. With respect to loans that provide for dual
interest rates, it is the OFT's belief that dual interest rate structures (i)
may be unenforceable through the courts where the sum payable from the higher
rate exceeds a genuine estimate of the lender's loss arising from a breach of
the borrower's contractual duty and (ii) in substance provide for payment of
compensation upon a breach of an obligation and may be challenged under the
Consumer Contracts Regulations as unfair and non-binding on the borrower if such
compensation is disproportionately high. With respect to unregulated loans that
provide for the Rule of 78s method for calculating prepayments (regulations
currently promulgated under the CCA specify the use of Rule of 78s for
calculating prepayments for regulated loans) it is the OFT's belief that such
calculation similarly may result in a borrower paying a disproportionately high
sum to redeem a mortgage and may be challenged under the Consumer Contracts
Regulations as being unfair and therefore non-binding on the borrower.
The Consumer Contracts Regulations set forth various terms which are
considered unfair in consumer contracts and therefore can be challenged as
unenforceable against the consumer. In the Revised Non-Status Guidelines, the
OFT stated that it believed dual interest rate structures and Rule of 78s
calculations
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are two such unfair terms. In the OFT Letter, the OFT requested assurances from
the Company that it would discontinue with respect to its existing loans the use
of certain contract terms, including the Rule of 78s for unregulated loans and
the standard/concessionary rate structure, and the OFT stated that, in the
absence of receipt of suitable assurances, it will seek an injunction intended
to restrain the Company from using such terms.
In January 1998, as a result of discussions and correspondence between
CSC-UK and the OFT regarding the OFT's Revised Non-Status Lending Guidelines,
the Company agreed to take action with respect to the use of certain contract
terms in CSC-UK's existing loan agreements. CSC-UK agreed to eliminate the use
of the Rule of 78s method for calculating prepayment fees on unregulated loans
and revise the standard/concessionary rate structure, and has provided
assurances to the OFT regarding CSC-UK's future use of such revised terms.
With respect to the use of the Rule of 78s method on existing unregulated
loans, CSC-UK agreed that it would not use such a formula to calculate
prepayments. Instead, CSC-UK will collect prepayment fees by reference to a
sliding scale whereby six months' interest will be charged for prepayments
occurring during the first three years of a loan, reducing to one month's
interest in the eighth year of a loan. There will be no prepayment fee levied
after the eighth year of a loan. Such prepayment fees will be based on the
concessionary rate of interest.
With respect to the standard/concessionary rate structure on existing
loans, CSC-UK agreed that it would lower the differential between the standard
rate of interest and the concessionary rate of interest to not more than 2.5%.
For example, on a loan where the standard/concessionary rates had been 18% and
9.9%, respectively, the loan agreement will now provide for the
standard/concessionary rates to be 12.4% and 9.9%, respectively.
The elimination of the concessionary/standard rate structure and Rule of
78s method on loan products offered has had a material negative impact on profit
margins for CSC-UK's loans and the results of operations and financial condition
of the Company. In addition, as a result of revisions to the terms of UK loans
containing such provisions, CSC-UK recognized in the fourth quarter of 1997 an
impairment in the value of its mortgage servicing receivables of $106.2 million,
wrote off unamortized goodwill of $52.7 million and wrote off the unamortized
commitment fee of $32.4 million in connection with its UK operations.
Additionally, CSC-UK and the OFT continue discussions with respect to
CSC-UK's borrowers who, at the time their loans were made, were vulnerable due
to undue pressure from brokers or others or inability to understand the loan
terms. CSC-UK has undertaken a review of its UK borrowers to ascertain to what
extent its borrowers were vulnerable. The OFT has indicated that, in appropriate
cases involving vulnerable borrowers, additional modifications of loan terms
beyond those discussed above may be required. The OFT has indicated that those
modifications may include termination of the loan without prepayment fee or
application of the concessionary rate to the loan with the right to terminate
subsequently without prepayment fee. As a result of CSC-UK's ongoing review of
its borrowers and its continuing discussions with the OFT, no assurance can be
given that the value of CSC-UK's mortgage servicing receivables in the UK will
not be further impaired which could have a material adverse effect on the
Company's results of operations and financial condition.
In September 1997, a putative class action lawsuit (the "Ceasar Action")
was filed against the Company and two of its officers and directors in the
United States District Court for the Eastern District of New York (the "Eastern
District") on behalf of all purchasers of the Company's Common Stock during the
period from April 1, 1997 through August 15, 1997. Between approximately October
14, 1997 and December 3, 1997, nine additional class action complaints were
filed against the same defendants, as well as certain additional Company
officers and directors. Four of these additional complaints were filed in the
Eastern District and five were filed in the United States District Court for the
Southern District of New York (the "Southern District"). On or about October 28,
1997, the plaintiff in the Ceasar Action filed an amended complaint naming three
additional officers and directors as defendants. The amended complaint
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in the Ceasar Action also extended the proposed class period from November 4,
1996 through October 22, 1997. The longest proposed class period of any of the
complaints is from April 1, 1996 through October 22, 1997. On or about February
2, 1998, an additional lawsuit brought on behalf of two individual investors,
rather than on behalf of a putative class of investors, was filed against the
Company and certain of its officers and directors in federal court in New Jersey
(the "New Jersey Action").
In these actions, plaintiffs allege that the Company and its senior
officers engaged in securities fraud by affirmatively misrepresenting and
failing to disclose material information regarding the lending practices of the
Company's UK subsidiary, and the impact that these lending practices would have
on the Company's financial results. Plaintiffs allege that a number of public
filings and press releases issued by the Company were false or misleading. In
each of the putative class action complaints, plaintiffs have asserted
violations of Section 10(b) and Section 20(a) of the Exchange Act of 1934.
Plaintiffs seek unspecified damages, including pre-judgment interest, attorneys'
and accountants' fees, and court costs.
The complaints filed in the Southern District actions have all been
transferred to the Eastern District. On December 5, 1997, the Eastern District
plaintiffs filed a motion for appointment of lead plaintiffs and approval of
co-lead counsel. The court has not yet ruled on plaintiffs' motion. The Company
anticipates that, at a minimum, all of the putative class action complaints will
be consolidated with the Ceasar Action in the Eastern District. In addition,
plaintiffs in the New Jersey Action have consented to pre-trial consolidation of
their case with the class actions currently pending in the Eastern District.
Accordingly, on March 25, 1998, the company and its defendant officers and
directors filed a motion with the federal Judicial Panel for Multidistrict
Litigation, which seeks consolidation of all current and future securities
actions, including the New Jersey Action, for pre-trial purposes before Judge
Sterling Johnson in the Eastern District.
In November 1997, Resource Mortgage Banking, Ltd., Covino and Company,
Inc. and LuxMac LLC filed against the Company, CSC, and two of the Company's
officers and directors in state court in Connecticut an application for a
prejudgment remedy. The object of the application for the prejudgment remedy was
to obtain a court order granting these plaintiffs prejudgment attachment against
assets of the Company and CSC in Connecticut pending resolution of plaintiffs'
underlying claims. Plaintiffs proposed to file an 18 count complaint against the
defendants seeking $60 million in purported damages that allegedly result from
an asserted breach of an alleged five-year oral contract. The proposed complaint
also sought injunctive relief, treble damages and punitive damages in an
unspecified sum. In February 1998, Judge William B. Lewis orally granted
defendants' motion to dismiss on the ground of forum non conveniens and entered
a judgment of dismissal. Shortly thereafter, in a memorandum of decision Judge
Lewis set forth his reasons for granting the motion to dismiss. Plaintiffs have
not filed an appeal of the order of dismissal and their time to do so has
expired.
In February 1998, Resource Mortgage Banking, Ltd., Covino and Company,
Inc. and LuxMac LLC filed an action against the Company, CSC, and two of the
Company's officers and directors in state court in New York. Plaintiffs'
complaint asserts 17 causes of action, including breach of contract, fraud and
conversion. Plaintiffs seek $60 million in purported damages that allegedly
result primarily from an asserted breach of an alleged five-year oral contract,
and also seek injunctive relief, treble damages and punitive damages in an
unspecified sum.
In March 1998, Plaintiffs filed papers seeking to have the New York court
direct the Company and CSC to refrain from selling certain assets known as
strip, residuals, excess servicing and/or servicing rights and their substantial
equivalent having as constituent any mortgage loan exceeding $350,000 generated
by the Company or CSC between September 2, 1994, and April 1, 1997, and any
mortgage loan exceeding $500,000 generated by the Company or CSC from April 1,
1997, to present. The New York Court has not yet determined whether Plaintiffs
are entitled to the relief that they have requested, but has signed a temporary
restraining order that, pending the Court's decision on Plaintiffs' motion,
requires the Company and CSC to refrain from the specified sales. The time for
the Company to respond to the complaint has not expired.
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The Company intends to file a motion seeking dismissal of Plaintiffs' claims and
also an answer denying all liability.
In February 1998, a putative class action lawsuit (the "Simpson Action")
was filed against the Company in the U.S. District Court for the Northern
District of Mississippi (Greenville Division). The Simpson Action is a class
action brought under the anti-kickback provisions of Section 8 of the Real
Estate Settlement Procedures Act ("RESPA"). The complaint alleges that, on
November 19, 1997, plaintiff Laverne Simpson, through the services of Few
Mortgage Group ("Few"), a mortgage broker, obtained refinancing for the mortgage
on her residence in Greenville, Mississippi. Few secured financing for plaintiff
through Cityscape. In connection with the financing, Cityscape is alleged to
have paid a premium to Few in the amount of $1,280.00. Plaintiff claims that the
payment was a referral fee and duplicative payment prohibited under Section 8 of
RESPA. Plaintiff is seeking compensatory damages for the amounts "by which the
interest rates and points charges were inflated." Plaintiff also claims to
represent a class consisting of all other persons similarly situated, that is,
persons (a) who secured mortgage financing from Cityscape through mortgage
brokers from an unspecified period to date (claims under Section 8 of RESPA are
governed by a one year statute of limitations), and (b) to whose mortgage broker
Cityscape paid a fee to the mortgage broker who originated the class member's
loan. Plaintiff is seeking to recover compensatory damages, on behalf of the
putative class, which is alleged to be "numerous," for the amounts that "the
interest rates and points charges were inflated" in connection with each class
member's mortgage loan transaction. Cityscape anticipates answering the
complaint on April 2, 1998. Plaintiff has not yet moved for class certification.
As of March 25, 1998, there had been no ruling on the merits of either
plaintiff's individual claim or the claims of the putative class.
Although no assurance can be given as to the outcome of these lawsuits,
the Company believes that the allegations in each of the actions are without
merit and that its disclosures were proper, complete and accurate. The Company
intends to defend vigorously against these actions and seek their early
dismissal. These lawsuits, however, if decided in favor of plaintiffs, could
have a material adverse effect on the Company.
In January 1998, the Company commenced a breach of contract action in the
Southern District against Walsh Securities, Inc. ("Walsh"). The action alleges
that Walsh breached certain obligations that it owed to the Company under an
agreement whereby Walsh sold mortgage loans to the Company. The Company claims
damages totaling in excess of $11.9 million. On March 5, 1998, Walsh filed a
motion to dismiss or, alternatively, for summary judgment. The Company is
currently preparing papers in opposition to Walsh's motion, which papers must be
filed by May 4, 1998. After the Company files its opposition, Walsh will have
thirty days to reply.
In August 1997, the Company commenced an action in the Queen's Bench
Division of the English High Court against the proprietor and publisher of The
Times newspaper, an English national daily, Peter Stothard, the Editor of The
Times, and Gavin Lumsden, a journalist employed by The Times. This action is a
libel claim and arises from the publication of what the Company believes to be
untrue defamatory allegations in an article written by Gavin Lumsden and
published in The Times in August 1997. The Company claims damages and requests
an injunction against repetition of the defamatory allegations. The Times has
stated it will defend the proceedings.
In October 1996, the Company received a request from the staff of the
Securities and Exchange Commission (the "Commission") for additional information
concerning the Company's voluntary restatement of its financial statements for
the quarter ended June 30, 1996. The Company initially valued the mortgage loans
in the J&J Acquisition and the Greyfriars Acquisition at the respective fair
values which were estimated to approximate par (or historical book value). Upon
the subsequent sale of the mortgage portfolios, the Company recognized the fair
value of the mortgage servicing receivables retained and recorded a
corresponding gain for the fair value of such mortgage servicing receivables.
Upon subsequent review, the Company determined that the fair value of such
mortgage servicing rights should have been included as part of the fair value of
the mortgage loans acquired as a result of such acquisition. The effect of this
accounting change resulted in a reduction in reported earnings of $26.5 million.
Additionally, as a result of this accounting change the goodwill initially
recorded in connection with such acquisitions was reduced resulting in a
reduction of goodwill amortization of approximately $496,000 from the previously
reported figure for the second quarter. On November 19, 1996, the Company
announced that it had determined that certain additional adjustments relating to
the J&J Acquisition and the Greyfriars Acquisition should be made to the
financial statements for the quarter ended June 30, 1996. These adjustments
reflect a change in the accounting treatment with respect to restructuring
charges and deferred taxes recorded as a result of such acquisitions. This
caused an increase in the amount of goodwill recorded which resulted in an
increase of amortization expense as previously reported in the second quarter
of 1996 of $170,692. The Staff of the Securities and Exchange Commission has
requested additional information from the Company in connection with the
accounting related to the J&J Acquisition and the Greyfriars Acquisition. The
Company is supplying such requested information. In mid-October 1997, the
Commission authorized its staff to conduct a formal investigation which, to
date, has continued to focus on the issues surrounding the restatement of the
financial statements for the quarter ended June 30, 1996. The Company is
continuing to cooperate fully in this matter.
In October 1997, the Company received requests from Nasdaq for information
regarding the Company's compliance with Nasdaq's listing requirements and
corporate governance rules. The Company requested a hearing to review its
compliance with the Nasdaq listing requirements and the findings of the Listing
Qualifications Staff. In January 1998, the Company received notice from Nasdaq
that the Common
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Stock would be moved from the Nasdaq National Market to the Nasdaq SmallCap
Market effective with the opening of business on January 29, 1998. The Company
believes that it meets all of the initial inclusion requirements for listing on
The Nasdaq SmallCap Market, with the exception of the $4.00 per share bid price
requirement. Nasdaq has adopted new maintenance standards, which become
effective on February 23, 1998, requiring a minimum $1.00 per share bid price
which the Company's Common Stock currently does not meet. Accordingly, the
Nasdaq Listing Qualifications Panel has informed the Company that the securities
were moved to The Nasdaq SmallCap Market pursuant to a waiver of the $4.00 per
share initial inclusion requirement and an exception to the $1.00 per share
maintenance requirement. The exception requires the Company to achieve a bid
price of at least $1.00 per share on or before May 22, 1998. There can be no
assurance that the Company will be able to meet the terms of such exception. For
the duration of the exception, the Company's Nasdaq symbol will be "CTYSC."
In March 1998, the Company received notice from the Nasdaq Hearing and
Review Council (the "Review Council") that it will review the decision of the
Nasdaq Listing Qualifications Panel and whether it was appropriate to move the
Company to the Nasdaq SmallCap Market. The Review Council stated that it will
issue its decision after the NASD Board of Governors has had an opportunity to
review the Review Council's decision, which will likely occur at the June NASD
Board meeting. There can be no assurance that the Company will be successful in
such review. If at some future date the Company's Common Stock should cease to
be listed on The Nasdaq SmallCap Market, the Common Stock may be listed on the
OTC Bulletin Board. Should the Common Stock be de-listed from the Nasdaq
SmallCap Market, it is likely that the liquidity of the Company's securities
will be impaired, delays will occur in the processing of purchase and sale
transactions in the Common Stock and coverage of the Company by security
analysts and the media will be reduced, all of which likely will result in lower
prices for the Company's securities than would otherwise prevail.
As a result of the Company's recent negative operating results, the
Company has received inquiries from the New York State Department of Banking
regarding the Company's qualifications to continue to hold a mortgage banking
license. In connection with such inquiries, the Company was fined $50,000 and
has agreed to provide the banking department with specified operating
information on a timely basis and to certain restrictions on its business.
Although the Company believes it complies with its licensing requirements, no
assurance can be given that additional inquiries by the banking department or
similar regulatory bodies will not have an adverse effect on the licenses that
the Company holds which in turn could have a negative effect on the Company's
results of operations and financial condition.
In addition, the Company is a party to various legal proceedings arising
out of the ordinary course of its business. Management believes that none of
these ordinary course actions, individually or in the aggregate, will have a
material adverse affect on the results of operations or financial condition of
the Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
Effective with the opening of business on January 29, 1998, the Company's
Common Stock began to trade on the Nasdaq SmallCap Market under the symbol
"CTYSC." Previously, the Company's Common Stock traded on the Nasdaq National
Market under the symbol "CTYS."
The following table sets forth the range of high and low trading prices
per share for the Common Stock for the periods indicated as reported by Nasdaq
and reflects the 100% stock dividend paid by the Company in July 1996.
High Low
------ -----
Year ended December 31, 1996:
First quarter........................... $17.75 $9.88
Second quarter.......................... 25.63 18.88
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27
Third quarter........................... 36.00 24.75
Fourth quarter.......................... 29.50 19.00
Year ended December 31, 1997:
First quarter........................... 31.50 17.75
Second quarter.......................... 19.94 12.50
Third quarter........................... 18.38 9.25
Fourth quarter.......................... 10.13 0.34
As of March 25, 1998, there were 512 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 considerations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Recent Sales of Unregistered Securities
In April 1997, the Company completed the private placement to accredited
investors pursuant to Regulation D of the Securities Act of 1933, as amended
("Reg D"), of 5,000 shares of its 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 shares of Common Stock (the "Series A Warrants") for an aggregate gross
consideration of $50.0 million. The Series A Preferred Stock is convertible into
shares of Common Stock, subject to redemption rights, at a conversion price
equal to the lowest daily sales price of the Common Stock during the four
consecutive trading days (or with respect to conversions from December 24, 1997
through the earlier of the tenth day after the effective date of a registration
statement or April 24, 1998, 127 calendar days) immediately preceding such
conversion, discounted by up to 4% and subject to certain adjustments. See "Item
7 - Liquidity and Capital Resources - Convertible Preferred Stock."
In September 1997, the Company completed the private placement to
accredited investors pursuant to Reg D of 5,000 shares of 6% Convertible
Preferred Stock, Series B (the "Series B Preferred Stock"), with a Liquidation
Preference of $10,000 per share, and related five-year warrants to purchase
500,000 shares of Common Stock (the "Series B Warrants") for an aggregate gross
consideration of $50.0 million. The Series B Preferred Stock is convertible into
shares of Common Stock, subject to certain redemption rights and restrictions,
at a conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding such conversion,
discounted up to 4% and subject to certain adjustments. See "Item 7 - Liquidity
and Capital Resources - Convertible Preferred Stock."
27
28
Item 6. Selected Financial Data
The selected consolidated financial data set forth below as of December
31, 1997, 1996, 1995 and 1994 and for the years then ended have been derived
from the consolidated financial statements of the Company, of which the balance
sheet data at December 31, 1997 and 1996 and the operating results data for the
years ended December 31, 1997, 1996 and 1995 have been derived from audited
consolidated financial statements and notes thereto included in this Report. The
selected consolidated financial data set forth below as of December 31, 1993 and
for the year then ended have been derived from the audited consolidated
financial statements of CSC. 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
Year Ended December 31, December 31,
------------------------------------------------------ -------------
1997 1996 1995 1994 (2) 1993
----------- ----------- ----------- --------- ---------
(Dollars in thousands, except for share and per share data)
Statement of Operations Data:
Revenues:
Gain on sale of loans ............... $ 83,365 $ 76,820 $ 26,305 $ 5,691 $ 2,088
Net unrealized loss on valuation of
residuals ........................ (148,004) -- -- -- --
Mortgage origination income ......... 4,849 2,812 2,751 2,551 1,455
Interest ............................ 73,520 24,535 6,110 1,900 536
Other ............................... 20,302 3,681 1,306 1,032 378
----------- ----------- ----------- --------- ---------
Total revenues ................. 34,032 107,848 36,472 11,174 4,457
Costs and expenses:
Salaries and benefits ............... 41,089 26,288 10,861 4,280 1,939
Other costs and expenses ............ 129,526 38,360 11,080 5,041 2,195
----------- ----------- ----------- --------- ---------
Total costs and expenses ....... 170,615 64,648 21,941 9,321 4,134
(Loss) earnings from continuing
operations before extraordinary
item and income taxes ............... (136,583) 43,200 14,531 1,853 323
Income taxes (benefit provision) ...... (18,077) 19,325 6,410 1,450(3) 8
----------- ----------- ----------- --------- ---------
(Loss) earnings from continuing
operations before
extraordinary item ...................... (118,506) 23,875 8,121 403 315
Discontinued operations:
(Loss) earnings from discontinued
operations, net of income tax
(benefit) provision, net of
extraordinary item, net of tax ..... (245,906) 26,806 3,750 -- --
Loss on disposal of discontinued
operations ........................ (49,940) -- -- -- --
----------- ----------- ----------- --------- ---------
(Loss) earnings before extraordinary
item ............................... (414,352) 50,681 11,871 403 315
Extraordinary item .................... -- -- (296) -- --
----------- ----------- ----------- --------- ---------
Net (loss) earnings ................... (414,352) 50,681 11,575 403 315
Preferred stock dividends paid in
Common Stock ........................ 905 -- -- -- --
Preferred stock - increase in
Liquidation Preference .............. 917 -- -- -- --
Preferred stock - beneficial discount . 2,725 -- -- -- --
----------- ----------- ----------- --------- ---------
Net (loss) earnings applicable to
Common Stock ........................ $ (418,899) $ 50,681 $ 11,575 $ 403 $ 315
=========== =========== =========== ========= =========
Earnings (loss) per
Common share (9):
Basic:
Continuing operations before
Extraordinary item ................ $ (3.70) $ 0.81 $ 0.38 $ 0.02 $ 0.02
Discontinued operations ............. (7.40) 0.91 0.18
Disposal of discontinued operations . (1.50) -- --
Extraordinary item .................. -- -- (0.02) -- --
----------- ----------- ----------- --------- ---------
Net (loss) earnings ................. $ (12.60) $ 1.72 $ 0.54 $ 0.02 $ 0.02
=========== =========== =========== ========= =========
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29
Diluted (10):
Continuing operations before
extraordinary item ................ $ (3.70) $ 0.78 $ 0.34 $ 0.02 $ N/A
Discontinued operations ............. (7.40) 0.88 0.16 -- N/A
Disposal of discontinued operations . (1.50) -- -- -- N/A
Extraordinary item .................. -- -- (0.01) -- N/A
----------- ----------- ----------- --------- ---------
Net (loss) earnings ................. $ (12.60) $ 1.66 $ 0.49 $ 0.02 $ N/A
=========== =========== =========== ========= =========
Weighted average number of shares
Outstanding equivalents:
Basic ............................... 33,244 29,405 21,244 20,042 20,000
=========== =========== =========== ========= =========
Diluted ............................. 33,244 30,538 23,839 20,561 N/A
=========== =========== =========== ========= =========
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Company CSC(1)
--------------------------------------------------- --------------
December 31, December 31,
--------------------------------------------------- --------------
1997 1996 1995 1994(2) 1993
----------- ----------- ----------- ----------- --------------
(Dollars in thousands)
Balance Sheet Data:
Total assets.................. $ 398,559 $ 673,904 $ 138,077 $ 21,816 $ 13,605
Mortgage servicing receivables 9,525 50,130 5,567 -- --
Trading securities(5)......... 126,476 103,200 15,571 -- --
Mortgage loans held for sale,
net......................... 93,290 88,127 73,852 16,681 10,271
Investment in discontinued
operations, net............. 84,232 212,590 26,832 -- --
Total debt(6)................. 507,099 335,479 72,942 16,100 10,165
Total liabilities............. 575,382 535,072 80,980 18,030 11,207
Total stockholders' equity
(deficit)................... (176,825) 138,832 57,099 3,177 2,398
Company CSC(1)
--------------------------------------------------- --------------
Year Ended
Year Ended December 31, December 31,
--------------------------------------------------- --------------
1997 1996(7) 1995 1994(2) 1993
----------- ----------- ----------- ----------- --------------
(Dollars in thousands)
Operating Statistics:
Loan originations and purchases:
One- to four-family products.. $ 818,023 $ 1,115,959 $ 417,864 $ 154,410 $ 77,586
Sav*-A-Loan(R)products........ 669,119 137,318 -- -- --
Discontinued products......... 167,890 36,078 -- -- --
---------- ----------- ------------ ---------- ---------
Total...................... $1,655,032 $ 1,289,355 $ 417,864 $ 154,410 $ 77,586
Average principal balance per
loan originated and purchased:... $ 56 $ 62 $ 70 $ 77 $ 74
Weighted average initial
loan-to-value ratio(7): 73.6% 72.5% 66.4% 59.7% --
Loan sales:...................... $1,637,387 $ 1,270,897 $ 358,997 $ 138,041 $ 61,293
Loans serviced(8):............... $2,590,479 $ 1,519,395 $ 386,720 $ 56,340 --
Loans 30+ days past due as a
percentage of serviced portfolio: 11.2% 8.9% 3.9% 3.4% --
Charge-offs:..................... $ 4,734 $ 167 $ 52 -- --
- ----------
(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.
30
31
(6) Includes short-term borrowings due under warehouse facilities. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
(7) Excludes the Company's Sav*-A-Loan products and Discontinued Products.
(8) Includes contract servicing operations by the Company. See "Business --
Loans -- Loan Servicing and Collections."
(9) Earnings per share figures for the effected periods reflect the 100% stock
dividends paid in September 1995 and July 1996.
(10) For the year ended December 31, 1997, the incremental shares from assumed
conversions are not included in computing the diluted per share amounts
because their effect would be antidilutive since an increase in the number
of shares would reduce the amount of loss per share. Therefore, basic and
diluted earnings per share figures are of equal amount.
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, 1997, 1996 and 1995. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors including, but not
limited to, risks related to the completion of a sale of its UK operation, the
ability to access loan warehouse or purchase facilities in amounts, if at all,
necessary to fund the Company's loan production, the successful execution of
loans sales in the whole loan sales market, the ability of the Company to
successfully restructure its balance sheet, the initiatives to streamline the
Company's operations, the ability too of the Company to retain an adequate
number and mix of its employees, legal proceedings and other matters discussed
in Item 3 of this report, adverse economic conditions, competition and other
risks detailed from time to time in the Company's SEC reports. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
General
Discontinued Operations
As a result of liquidity constraints, the Company adopted a plan in March
1998 to sell the assets of CSC-UK. CSC-UK focuses on lending to individuals who
are generally unable to obtain mortgage financing from conventional UK sources
such as banks and building societies because of impaired or unsubstantiated
credit histories and/or unverifiable income, or who otherwise choose not to seek
financing from such conventional lenders. CSC-UK originated 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.
Accordingly, the operating results of CSC-UK and it subsidiaries have been
segregated from continuing operations and reported as a separate line item on
the Company's financial statements. In addition, net assets of CSC-UK have been
reclassified on the Company's financial statements as investment in discontinued
operations. The Company has restated its prior financial statements to present
the operating results of CSC-UK as a discontinued operation.
As a result of revisions to the terms of certain of CSC-UK's loans as
required by the OFT, CSC-UK has recognized in the fourth quarter of 1997 an
impairment in the value of its mortgage servicing receivables of $106.2 million
and has written off unamortized goodwill of $52.7 million and $32.4 million of
unamortized commitment fee recorded in connection with its UK acquisitions. See
Item 3 for a discussion regarding the OFT.
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On March 31, 1998, the Company announced that it had entered into
definitive agreements with Ocwen for the sale of substantially all of the
businesses and assets, and certain liabilities of the UK operations of CSC-UK.
The acquisition includes the purchase of CSC-UK's whole loan portfolio,
securitized loan residuals and loan origination and servicing businesses for a
price of approximately (pound) 285 million, subject to adjustment as of closing
based on an agreed upon formula (currently estimated to result in an upward or
downward adjustment of approximately (pound) 5 million). Closing, which is
anticipated to occur in April 1998, is subject to satisfaction of a number of
conditions, including obtaining rating agency consents and various substitutions
in connection with the transfer of the securitized residual and related
servicing rights (which will require the consents of the trustees of several
securitizations). As a result, there can be no assurance that the transaction
will be consummated.
As a result of the Company's adoption of a plan to institute the UK Sale,
the Company's net interest in its UK discontinued operations represents
expected proceeds of $102.2 million, net of accrued losses of $18.0 million.
Expected costs related to the disposal of UK discontinued operations of $16.4
million is included in accounts payable and other liabilities at December 31,
1997.
UK Facilities. In March 1996, CSC-UK entered into a mortgage loan purchase
agreement with Greenwich International Ltd. (together with its affiliates,
"Greenwich") effective as of January 1, 1996 (the "UK Greenwich Facility").
Pursuant to the UK Greenwich Facility, 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. This agreement expires on December 31, 2015. CSC-UK paid a fee
to Greenwich in connection with the UK Greenwich Facility in the aggregate
amount of $38.0 million, which was being amortized over the life of the
agreement. During the first quarter of 1998, Greenwich indicated to the Company
that the Company could not access the UK Greenwich Facility pursuant to its
terms, and no assurance could be given that the Company would be able to access
it at any time in the future. Due to the uncertainty of the Company's ability to
access the UK Greenwich Facility in the future, the Company determined that it
was necessary to write off the unamortized portion of the prepaid commitment fee
to Greenwich resulting in a charge of $32.4 million during the fourth quarter of
1997.
In February 1998, CSC-UK, Mortgage Management Limited, a wholly-owned
subsidiary of CSC-UK ("MML"), and Greenwich entered into a loan facility (the
"MML Facility"). The MML Facility makes available (i) a term loan in an amount
of (pound)187.0 million and (ii) a revolving credit facility in an amount of
(pound)35.0 million. Amounts outstanding under the MML facility bear interest at
the rate of LIBOR plus 200 basis points and mature at the earlier to occur of
(i) 180 days from the date of the advance or (ii) December 30, 1998. Funds
advanced under the term loan and (pound)21.0 million of the revolving credit
facility are to finance the purchase of mortgage loans previously sold to
Greenwich under the UK Greenwich Facility. The balance of the revolving credit
facility is available to CSC-UK and certain affiliates to finance the
origination and purchase of mortgage loans. As of March 13,1998, MML has drawn
(pound) 24.0 million under the revolving credit facility of the MML Facility to
finance the origination and purchase of mortgage loans, leaving (pound) 11.0
million available for future originations and purchases.
Restructuring. The Company has announced a number of initiatives,
including having retained Bear Stearns to explore strategic alternatives for the
Company. These initiatives include the disposal of loans through whole loan
sales, the sale of interest-only and residual certificates and increased focus
on the Company's higher margin lines of business. The Company has announced that
it has begun implementing a restructuring plan that includes streamlining and
downsizing its operations. The Company is reducing its workforce and has closed
its branch operations in Virginia, significantly reduced its correspondent
originations for the foreseeable future and exited its conventional lending
business. The Company expects to record a restructuring charge of $2.6 million
in the first quarter of 1998.
In addition, the Company has retained CIBC Oppenheimer Corp. ("CIBC") to
explore strategic alternatives. CIBC is advising the Company with respect to
strategic alternatives including the restructuring, refinancing,
recapitalizition or reorganization of the Company and exploration of the sale of
all or part of the Company's UK business. No assurance can be given that the
Company will be successful in pursuing strategic alternatives or in implementing
any of its initiatives. Furthermore, even if the Company is successful in
implementing its strategic alternatives and initiatives, no assurance can be
given as to the effect of any such success on the Company's results of
operations or financial condition.
Overview
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The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured 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. The Company is licensed or registered to do business in 46 states
and the District of Columbia.
The Company primarily generates income from gain on sale of loans
recognized from premiums on loans sold through whole loan sales to institutional
purchasers, interest earned on loans held for sale, excess mortgage servicing
receivables, origination fees received as part of the loan application process
and fees earned on loans serviced. Historically, the Company also recognized
gain on sale of loans sold through securitizations. Recently, however, the
Company has redirected its efforts to actively pursue the sale of its loans
through whole loan sales rather than through securitizations. By employing whole
loan sales, the Company is better able to manage its cash flow as compared to
disposition of loans through securitizations. Whole loan sales represented all
of the Company's loan sales during 1994, but with the Company's prior emphasis
on the sale of loans through securitizations, had represented 31.7%, 5.8% and
24.8%, respectively, of all loan sales in 1997, 1996 and 1995. The Company
anticipates that substantially all of its loan production volume will be sold
through whole loan sales in 1998. Whole loan sales, unlike loan sales through
securitization, are immediately cash flow positive but produce lower margins
and, therefore, will negatively impact the Company's earnings.
Gain on sale of loans includes the present value of the differential
between the interest rate payable by an obligor on a loan over the interest rate
passed through to the purchaser acquiring an interest in such loan, less
applicable recurring fees, including the costs of credit enhancements and
trustee fees. For the prior three fiscal years, gain on sale of loans also
included gain on securitization representing the fair value of the interest-only
and residual certificates that the Company received upon the sale of loans
through securitizations which are reflected as trading securities. During 1997,
1996 and 1995, gain on sale of loans constituted approximately 45.8% (excluding
a net unrealized loss on valuation of residuals of $148.0 million), 71.2% and
72.1%, respectively, of total revenues.
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
For the Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
Loan originations and purchases:
Core Products:
Independent mortgage brokers $ 392,330 $ 364,168 $ 291,907
Correspondent Loan Acquisition Program 425,693 572,484 125,957
------------ ------------ ------------
Total Core Products................ 818,023 936,652 417,864
Sav*-A-Loan(R) Products:
Independent mortgage brokers 429,126 97,753 --
Correspondent Loan Acquisition Program 239,993 39,565 --
------------ ------------ ------------
Total Sav*-A-Loan(R)Products........ 669,119 137,318
Discontinued Products.................. 167,890 86,321 --
Bulk purchases......................... -- 129,064 --
------------ ------------ ------------
Total originations and purchases..... $ 1,655,032 $ 1,289,355 $ 417,864
============ =========== ===========
Weighted average interest rate:
Core Products.......................... 11.2% 11.8% 11.9%
Sav*-A-Loan(R)Products.................. 14.0% 14.4% --
Discontinued Products.................. 9.0% 10.5% 12.8%
33
34
Bulk purchases......................... -- 12.0% ---
Overall weighted average interest rate.... 12.0% 12.0% 11.9%
Weighted average initial loan-to-value
ratio(1)............................... 73.6 72.5 66.4
Percentage of loans secured by first mortgages:
Core Products.......................... 91.7% 94.0% 89.0%
Sav*-A-Loan(R)Product................... 1.4% 0.8% --
- ----------
(1) Excludes the Company's Sav*-A-Loan(R) products and Discontinued 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 loan originations and purchases in 1997 to $1.7
billion from $1.3 billion in 1996. The average principal balance of the
Company's loans for 1997 was $55,910 as compared to $61,801 in 1996. This
decrease was due primarily to a larger percentage of the Company's originations
consisting of Sav*-A-Loan(R) product, which typically has a lower principal
balance than Core Product originations. Primarily due to a reduction in the
Correspondent Loan Acquisition Program and the discontinuation of many of the
loan products previously offered by the Company, the Company anticipates that
its loan production volume will be substantially lower in 1998 than in 1997.
The Company's originations of Core Products from brokers increased in 1997
to $392.3 million from $364.2 million in 1996, representing an increase of $28.1
million (or 7.7%). This increase reflects the Company's geographic expansion and
its increased emphasis on attracting and maintaining broker relationships. The
Company's Correspondent Loan Acquisition Program for Core Products substantially
decreased in 1997 to $425.7 million from $572.5 million in 1996, representing a
decrease of $146.8 million (or 25.6%). This reflects management's decision to
focus its efforts on the more profitable and less cash intensive broker
business.
The Company's originations of Sav*-A-Loan(R) products from brokers
increased in 1997 to $429.1 million from $97.8 million in 1996, representing an
increase of $331.3 million (or 339.0%). Additionally, the Company's
Correspondent Loan Acquisition Program for Sav*-A-Loan(R) product increased
$200.4 million (506.1%) to $240.0 million in 1997 from $39.6 million in 1996.
These results reflect a full year of Sav*-A-Loan(R) originations, as compared to
only a partial year in 1996, as well as the Company's efforts to expand both its
broker and correspondent Sav*-A-Loan(R) business.
The weighted average coupon of Core Products decreased to 11.2% in 1997
from 11.8% in 1996. Additionally, the Sav*-A-Loan(R) product weighted average
coupon has decreased to 14.0% in 1997 from 14.4% in 1996. These decreases result
from increased competition within the financial services industry and the
interest rate environment.
Loan Sales
The Company sells, without recourse, virtually all of the loans it
originates in loan sales through whole loan sales. See "Item 1 -- Loans-- Loan
Sales." During 1997, 1996 and 1995, the Company sold $1.6 billion, $1.3 billion
and $359.0 million of loans, respectively, of which $518.4 million, $73.5
million and $105.8 million, respectively, were sold in whole loan sales. Gains
on the sale of loans through securitizations and into loan purchase facilities
were $75.3 million, $75.1 million and $17.6 million, or 41.3%, 69.6% and 48.1%
of the Company's total revenues in 1997, 1996 and 1995, respectively. Gains on
whole loan sales represented 4.5%, 1.6% and 22.8% of the Company's total
revenues in 1997, 1996 and 1995, respectively. The Company expects that it will
sell substantially all of its loans through whole loan sales for the foreseeable
future. Whole loan sales, unlike loan sales through securitization, are
immediately cash flow positive but produce lower margins and, therefore, will
negatively impact the Company's earnings.
34
35
During 1997, 1996 and 1995, gains on loan sales totaled $83.4 million
(5.1% weighted average gain), $76.8 million (6.0% weighted average gain) and
$26.3 million (7.3% weighted average gain), respectively.
Loan Servicing
Prior to 1994, the Company typically sold loans with servicing rights
released. In 1997, 1996 and 1995, however, the Company retained the servicing
rights for approximately 75.1%, 98.4% and 74.2%, respectively, of the loans it
sold. The Company anticipates that it will continue to sell whole loans on a
servicing released basis. As of December 31, 1997, the Company was servicing
47,020 loans with an aggregate principal balance of $2.6 billion, representing a
73.3% increase over an aggregate principal balance of $1.5 billion serviced as
of December 31, 1996. Revenue generated from loan servicing amounted to 0.9%
(excluding $148.0 million of net unrealized losses), 2.6% and 2.0% of total
revenues for 1997, 1996 and 1995, respectively. The servicing portfolio was
reduced to $1.8 billion during the first two months of 1998 primarily as a
result of the sale of the 1997-A, 1997-B and 1997-C securitizations and the
associated servicing rights and the sale through whole loan sales with servicing
released of loans originated in 1997 but sold in 1998. The Company anticipates
selling substantially all of its loan production through whole loan sales with
servicing released. Also, the Company may sell interest-only and residual
certificates with the associated servicing rights. As a result of these factors,
as well as loan prepayments and defaults on existing loans, the Company
anticipates that the size of the servicing portfolio will continue to decrease
in the future.
In January 1998, the Company retained Ocwen, an established leader in the
management and resolution of underperforming loans, as a special loan servicer
to sub-service the Company's 90-day-plus delinquent loans. The Company delivers
such non-performing loans to Ocwen on an ongoing basis. The Company transferred
to Ocwen 993 non-performing loans with an aggregate unpaid principal balance of
$66.4 million. In the future, the Company expects to sell its loans as whole
loans with servicing released.
The following table provides data on delinquency experience and REO
properties for the Company's serviced portfolio (excluding loan balances under
contract servicing agreements). Because the Company has only expanded into the
business of loan servicing during 1994, the Company's serviced portfolio was
relatively unseasoned in 1995. Accordingly, during 1997 and 1996 the Company
experienced an increase in total delinquencies as a percentage of the serviced
portfolio as a result of the seasoning of the serviced portfolio. No assurances,
however, can be given as to the Company's future delinquency experience.
As of December 31,
----------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- ------------------------
% of % of % of
Dollars in Serviced Dollars in Serviced Dollars in Serviced
Thousands Portfolio Thousands Portfolio Thousands Portfolio
----------- ---------- ----------- --------- ----------- ---------
Serviced portfolio........ $2,231,519 100.0% $1,470,344 100.0% $ 311,649 100.0%
---------- ------ ---------- ------- --------- ------
Delinquencies:
30-59 days delinquent.. $ 65,063 2.9% $ 54,733 3.7% $ 5,479 1.8%
60-89 days delinquent.. 30,479 1.4 19,733 1.4 1,580 0.5
90 days or more
delinquent........... 27,808 1.3 24,8004 1.7 4,968 1.6
---------- ------ ---------- ------- --------- ------
Total delinquencies.. $ 123,350 5.6% $ 99,266 6.8% $ 12,027 3.9%
========== ====== ========== ======= ========= ======
Defaults:
Bankruptcies........... $ 25,131 1.1% $ 4,269 0.3% $ -- %
Foreclosures........... 100,901 4.5 27,689 1.9 -- --
---------- ------ ---------- ------- --------- ------
Total Defaults....... $ 126,032 5.6 $ 31,958 2.2 $ -- --%
========== ====== ========== ======= ========= ======
REO property.............. $ 8,549 0.4% $ 1,328 0.1% $ 141 --%
========== ====== ========== ======= ========= ======
Charge-Offs............... $ 4,734 0.2% $ 36 -- $ -- --%
========== ====== ========== ======= ========= ======
Impact of Year 2000
Many existing software programs use only two digits to identify the year
in the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail or generate erroneous
results. The Company's information systems are networked and client server
based. The Company believes that all of its information processing
infrastructure, from the desktop computers to the servers including the network,
desktop and applications server operating systems are Year 2000 compliant.
Although the Company believes it will not suffer any interruption of service or
impairment of functionality, if such interruption or impairment were to occur,
it could have a material adverse effect on the Company's results of operations
and financial condition. There can be no assurance that such impairment or
interruption will not occur.
The Company's loan servicing computer operations are performed by CPI. CPI
provides the Company with quarterly updates regarding CPI's progress and
schedule for Year 2000 compliance. If such compliance is not achieved in a
timely manner, the Year 2000 issue could have a material adverse effect on the
servicing operations conducted by the Company and, as a result, have a material
adverse effect on the results of operations and the financial condition of the
Company.
Results Of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
35
36
Total revenues decreased $73.8 million or 68.5% to $34.0 million in 1997
from $107.8 million in 1996. This decrease was due primarily to a net unrealized
loss on valuation of residuals of $148.0 million during 1997, offset by
increased gain on sale of loans of $6.6 million, increased interest income of
$49.0 million resulting primarily from an increase in intercompany income from
CSC-UK, and a gain on sale of available-for-sale securities of $18.0 million.
Gain on sale of loans increased $6.6 million or 8.6% to $83.4 million in
1997 from $76.8 million in 1996. The increase was due to increased volume of
loan sales at lower average gains ($1.6 billion of loan sales at a weighted
average gain of 5.1% in 1997 as compared to $1.3 billion of loan sales at a
weighted average gain of 6.0% in 1996). The lower average gain on sale of loans
recognized in 1997 was due primarily to lower margins from correspondent loans,
as well as a higher percentage of the Company's loan originations and purchases
being sold as whole loan sales to enhance the Company's liquidity position.
Whole loans sales result in lower margins than loans sold in securitizations,
but are immediately cash flow positive. The Company expects that it will sell
the majority of its loans through whole loan sales and therefore expects to
continue to recognize lower net margins in the future.
During 1997, the Company recognized an unrealized loss on valuation of
residuals of $148.0 million. This unrealized loss consists of $89.8 million of
losses on its home equity residuals, $35.9 million on its Sav*-A-Loan(R)
residuals and $22.3 million on its mortgage servicing receivables. At December
31, 1997, the Company determined the fair value of its home equity residuals
based upon the net realizable value as implied by the first quarter 1998 sale of
certain of its home equity residuals and recorded net unrealized losses of $89.8
million. The unrealized loss related to the Sav*-A-Loan(R) residuals reflects
the Company's change in the assumptions used to value such residuals as follows:
the discount rate was increased to 15% from 12%; constant prepayment speed was
increased to 16.8% from 14% after the twelfth month; and the default rate was
increased to a weighted average of 306 basis points per annum from a weighted
average default rate of 175 basis points per annum. The Company valued its
mortgage servicing receivables on a net realizable value assuming a liquidation
price based upon the value implied by the servicing rights sold in conjunction
with the January 1998 home equity residual sale.
Mortgage origination income increased $2.0 or 71.4% to $4.8 million in
1997 from $2.8 million in 1996. This increase was due primarily to higher
originations during 1997 partially offset by lower fees earned on the Company's
broker originations. It is anticipated that the Company's origination fees as a
percentage of loans originated will continue to decrease in the future.
Interest income increased $49.0 million or 200.0% to $73.5 million in 1997
from $24.5 million in 1996. This increase was due primarily to the increased
intercompany note interest charged on a higher average note balance with CSC-UK
from $149.3 million at December 31, 1996 to $309.3 million at December 31, 1997,
as well as interest earned on a higher average balance of mortgage loans held
for sale balance resulting from increased loan production volume in excess of
loans sold during the period.
Other income increased $16.6 million or 448.6% to $20.3 million in 1997
from $3.7 million in 1996. This increase was due primarily to the inclusion of
$18.0 million of gain on the sale of IMC Mortgage Company ("IMC") Common Stock
owned by the Company. The increase was offset by the decrease in servicing
income of $1.2 million or 42.9% to $1.6 million in 1997 from $2.8 million in
1996. The Company expects servicing income to continue to decrease in the future
primarily due to the continued attrition of the loans that were sold with
servicing retained prior to the Company's adoption of SFAS No. 122, "Accounting
for Mortgage Servicing Rights."
Total expenses increased $106.0 million or 164.1% to $170.6 million in
1997 from $64.6 million in 1996. This increase was due primarily to increased
salaries, selling expenses and operating expenses related to increased loan
origination and purchase volume during 1997. Excluding the net unrealized loss
on valuation of residuals, total expenses as a percentage of total revenues
increased to 93.7% in 1997 from 59.9% in 1996. As a result of streamlining
efforts begun by the Company during the first quarter of 1998, the Company
expects total expenses to decrease in the future.
36
37
Salaries and benefits increased $14.8 million or 56.3% to $41.1 million in
1997 from $26.3 million in 1996. This increase was due primarily to increased
staffing levels to 838 US employees at December 31, 1997 compared to 638
employees at December 31, 1996, with an average of 844 employees for the year of
1997. This increase in average employees resulted from the growth in loan
production volume and geographic expansion and increased loans serviced. As a
result of the Company's restructuring and streamlining efforts, the number of
employees has decreased to 577 at March 15, 1998.
Interest expense increased $53.4 million or 308.7% to $70.7 million in
1997 from $17.3 million in 1996. This increase was due primarily to increased
interest expense related to $300.0 million of Senior Notes issued in May 1997 as
well as the increased balance of loans held pending sale during 1997, resulting
from the increased loan production volume during 1997. Also included in interest
expense for the year ended December 31, 1997 is a one-time charge of $4.7
million related to the $14.0 million induced conversion of the Convertible
Debentures in April 1997.
Selling and other expenses increased $25.7 million or 125.4% to $46.2
million in 1997 from $20.5 million in 1996. This increase was due primarily to
increased other operating expenses of $23.9 million or 131.3% to $42.1 million
in 1997 from $18.2 million in 1996 resulting from increased professional fees,
travel and entertainment and occupancy costs incurred to support the increased
loan production volume. Additionally, the increase was due to increased selling
costs of $1.8 million or 78.3% to $4.1 million in 1997 from $2.3 million in 1996
as a result of increased loan production volume in 1997 as compared to 1996.
Provision for loan losses of $12.6 million was recorded for the year ended
December 31, 1997 as compared to $532,396 for the year ended December 31, 1996.
This increase was due primarily to an increased balance of mortgages held for
investment resulting from increased loan production volume during 1997.
Income tax benefit (expense) changed from an expense of $19.3 million in
1996 to an income tax benefit of $18.1 million in 1997 due to pretax losses of
$136.6 million. The 1997 tax benefit was reduced due to a valuation reserve
established in 1997 due to the uncertainty of the Company's ability to continue
as a going concern.
The Company recorded a loss from continuing operations of $118.5 million
for the year ended December 31, 1997 as compared to earnings from continuing
operations of $23.9 million for the year ended December 31, 1996. This loss was
primarily due to the Company recognizing a net unrealized loss on valuation of
residuals of $148.0 million during 1997 as well as increased total expenses
during 1997 and lower average gains.
The Company recorded a loss from discontinued operations of $245.9 million
for the year ended December 31, 1997 as compared to earnings from discontinued
operations of $26.8 million for the year ended December 31, 1996. This loss from
discontinued operations in 1997 was due primarily to a valuation adjustments
related to the OFT initiatives and the write-off of unamortized goodwill and
commitment fees. See " - Discontinued Operations."
The Company adopted a plan in March 1998 to sell the assets of CSC-UK. As
a result, the Company recorded a $49.9 million loss on disposal of discontinued
operations.
The Company recorded a net loss applicable to common stock of $418.9
million for the year ended December 31, 1997 as compared to net earnings
applicable to common stock of $50.7 million in 1996. This loss was due primarily
to the loss from discontinued operations of $245.9 million, the $148.0 million
net unrealized loss on the valuation of residuals, as well as the loss on the
disposal of discontinued operations of $49.9 million.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased $71.3 million or 195.3% to $107.8 million in 1996
from $36.5 million in 1995. This increase was due primarily to 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 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.
37
38
Gain on sale of loans increased $50.5 million or 192.0% to $76.8 million
in December 31, 1996 from $26.3 million in 1995. The increase was due primarily
to increased volume of loan sales at lower average gains ($1.3 billion of loan
sales at a weighted average gain of 6.0% in 1996 as compared to $359.0 million
of loan sales at a weighted average gain of 7.3% in 1995). The lower average
gain on sale of loans recognized in 1996 was due primarily to the lower average
margins from bulk purchases which occurred during the second quarter of 1996,
lower margins from correspondent loans, as well as lower margins from changes in
interest rates during the second quarter of 1996.
Mortgage origination income increased $60,733 or 2.2% to $2.8 million in
1996 from $2.7 million in 1995. This increase was due primarily to the increase
in loan production volume to $1.3 billion in 1996 from $417.9 million in 1995,
partially offset by lower average origination fees earned.
Interest income increased $18.4 million or 301.6% to $24.5 million in 1996
from $6.1 million in 1995. This increase was due primarily to the increased
balance of loans held for sale during 1996 resulting from the increased loan
production 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.
Other income increased $2.4 million or 184.6% to $3.7 million in 1996 from
$1.3 million in 1995. This increase was due primarily to increased servicing
income of $2.1 million or 281.4% to $2.8 million in 1996 from $731,862 in 1995.
This increased income was due primarily to an increase in the average balances
of loans serviced to $933.6 million in 1996 from $140.3 million in 1995.
Additionally, earnings from partnership interest increased $272,211 or 56.5% to
$754,000 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 $42.7 million or 195.0% to $64.6 million in 1996
from $21.9 million in 1995. This increase was due primarily to increased
salaries, selling expenses and operating expenses related to increased loan
production volume during 1996. Total expenses as a percentage of total revenues
decreased to 59.9% in 1996 from 60.0% in 1995.
Salaries and benefits increased $15.4 million or 141.3% to $26.3 million
in 1996 from $10.9 million in 1995. This increase was due primarily to increased
staffing levels to 638 employees at December 31, 1996 compared to 264 employees
at December 31, 1995 resulting from the growth in loan production volume and
geographic expansion and increased loans serviced.
Interest expense increased $12.8 million or 284.4% to $17.3 million in
1996 from $4.5 million in 1995. 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, as well as an increased balance of loans held
pending sale during 1996, resulting from the increased loan production volume
during 1996.
Selling and other expenses increased $14.0 million or 215.4% to $20.5
million in 1996 from $6.5 million in 1995. This increase was due primarily to
the increased loan production volume during 1996 as compared to 1995.
Earnings from continuing operations before extraordinary item increased
$15.8 million or 195.1% to $23.9 million in 1996 from $8.1 million in 1995. This
increase was due primarily to increased revenues resulting from an increase in
loan production 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.
38
39
Earnings from discontinued operations increased $23.0 million or 605.3% to
$26.8 million in 1996 from $3.8 million in 1995. This increase was due primarily
to increased revenues resulting from an increase in UK loan origination and
purchase volume and volume of loans sold during 1996.
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 loan production 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.
Financial Condition
December 31, 1997 Compared to December 31, 1996
Cash and cash equivalents increased $2.1 million or 481.3% to $2.6 million
at December 31, 1997 from $446,285 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. There were no securities
purchased under agreements to resell at December 31, 1997 as compared to $154.2
million at December 31, 1996 due to the closing of all open positions. The
Company no longer employs this strategy because it typically holds loans
pending whole loan sales for less time than it holds loans pending sale through
securitization.
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. During 1997, the Company sold its equity interest in IMC for net proceeds
of $18.0 million. Prior to June 1996, the Company had recorded a 9.1% limited
partnership interest in IMC. Available-for-sale securities were 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 decreased $40.6 million or 81.0% to $9.5
million at December 31, 1997 from $50.1 million at December 31, 1996. This
decrease was due primarily to a $22.3 million valuation adjustment during 1997,
the securitization of pools of mortgages that had $34.6 million of mortgage
servicing receivables associated with such loans and amortization of $3.4
million. These decreases were offset by the recognition of $19.6 million of
mortgage servicing receivables primarily resulting from loans sold with
servicing retained during the first three quarters of 1997.
Trading securities, which consist of interest-only and residual
certificates, increased $23.3 million or 22.6% to $126.5 million at December 31,
1997 from $103.2 million at December 31, 1996. This increase was due to the $1.1
billion of US securitizations completed during 1997, offset by valuation
adjustments of $125.7 million.
Mortgage loans held for sale, net increased $5.2 million or 5.9% to $93.3
million at December 31, 1997 from $88.1 million at December 31, 1996. This
increase was due primarily to the volume of loans originated exceeding loan sale
volume in 1997.
Mortgage loans held for investment, net increased $1.3 million or 25.0% to
$6.5 million at December 31, 1997 from $5.2 million at December 31, 1996. This
increase was due primarily to the Company's increased loan production volume. As
a percentage of total assets, mortgage loans held for investment increased to
1.7% at December 31, 1997 from 0.8% at December 31, 1996.
Other assets decreased $1.3 million or 4.5% to $27.3 million at December
31, 1997 from $28.6 million at December 31, 1996. This decrease was due
primarily to a $14.9 million decrease in loans receivable -
39
40
subwarehousing at December 31, 1997, partially offset by a $9.2 million increase
in deferred debt issuance costs related to the issuance of $300.0 million Senior
Notes.
Investment in discontinued operations, net decreased $128.4 million or
60.4% to $84.2 million at December 31, 1997 from $212.6 million at December 31,
1996. This decrease was due primarily to the impact of the OFT guidelines
resulting in an impairment in the value of CSC-UK's mortgage servicing
receivables of $106.2 million and the write-off of unamortized goodwill of $52.7
million and commitment fees of $32.4 million.
Warehouse financing facilities outstanding increased $5.2 million or 7.2%
to $77.5 million at December 31, 1997 from $72.3 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 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. There was no balance at December 31, 1997 as compared to
$152.9 million at December 31, 1996 due to the closing of all open positions.
Accounts payable and other liabilities increased $36.2 million or 133.1%
to $63.4 million at December 31, 1997 from $27.2 million at December 31, 1996.
This increase was due primarily $16.4 million of accrued expenses related to the
sell of CSC-UK as well as increased escrow balances associated with the
increased servicing portfolio and increased accrued professional fees.
Allowance for losses decreased $5.5 million or 54.5% to $4.6 million at
December 31, 1997 from $10.1 million at December 31, 1996. This decrease was due
primarily to the securitization of pools of mortgages previously recorded as
mortgage servicing receivables. Upon securitization of such loans, the allowance
for loss is embedded in the value of the trading security rather than classified
as a separate liability.
Notes and loans payable totaled $300.0 million at December 31, 1997
representing the Senior Notes as compared to $111.5 million at December 31, 1996
which represented $100.0 million outstanding under a senior secured facility,
$6.5 million of advances under the US Greenwich Facility (as defined below) and
a $5.0 million term loan with The First National Bank of Boston. The $111.5
million outstanding at December 31, 1996 was repaid in May 1997 with proceeds
from the $300.0 million Senior Notes.
A stockholders' deficit of $176.8 million was recorded at December 31,
1997 as compared to stockholders' equity of $138.8 million at December 31, 1996.
This deficit was primarily the result of a net loss of $414.4 million for the
year ended December 31, 1997, as well as $4.5 million of preferred stock
dividends, offset by $98.0 million of net proceeds received from the 1997
issuance of preferred stock and $18.2 million from the induced conversion of the
Convertible Debentures.
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 production, payment of interest expenses, operating expenses and income
taxes. The Company uses its cash flow from whole loan sales, loans sold through
securitizations, loan origination fees, processing fees, net interest income and
borrowings under its loan warehouse and purchase facilities to meet its working
capital needs. The Company's business requires continual access to short- and
long-term sources of debt. 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 obligations. In October 1997, the Company
announced that it was exploring strategic alternatives for the Company's ability
to continue as a going concern. The Company believes that its future success is
dependent upon its ability to (i) complete a sale of its UK operation, (ii)
access loan warehouse or purchase facilities, (iii) successfully sell loans in
the whole loan sales market, (iv) restructure its balance sheet, (v) streamline
its operations and (vi) retain an adequate number and mix of its employees. No
assurance can be given that the Company will be able to achieve these results.
The Company must successfully implement a number of initiatives to generate cash
(such as the use of whole loan sales which, unlike loan sales through
securitizations, are immediately cash flow positive from the cash premium paid
at the time of sale, but will produce lower margins and, therefore, will
negatively impact the Company's earnings). Other potential initiatives include
the sale for cash of the Company's home equity interest-only and residual
interests. The implementation of any of these or other liquidity initiatives is
likely to have a negative impact on the Company's profitability. The Company's
liquidity is dependent upon its continued access to funding sources and can be
negatively affected by a number of factors including conditions in the whole
loan sale market and the Company's ability to sell certain assets. No assurances
can be given as to such continued access or the occurrence of such factors
Absent successful implementation of the Company's liquidity initiation, the
Company's current sources of liquidity are not adequate to meet the Company's
liquidity needs. In addition, the Company will be required to restructure its
balance sheet in the near term in order to meet its longer term liquidity needs.
There can be no assurance that the CSC-UK Sale will be consummated or that the
Company will be successful in such restructuring.
The Company has operated, and expects to continue to operate, on a
negative cash flow basis. During 1997, 1996 and 1995, the Company used net cash
in continuing operations of approximately $124.7 million, $105.9 million, and
$70.3 million,
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respectively. Additionally, in 1996 and 1995, the Company used $3.5 million and
$277,041, respectively, in investing activities. During 1997, the Company was
provided $30.2 million of cash from investing activities, primarily the sale of
available-for-sale securities and mortgages held for sale. 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 1997, 1996 and 1995, the Company received cash from financing activities
of $273.9 million, $255.5 million and $73.5 million, respectively. During 1997,
1996 and 1995, the Company used net cash in discontinued operations of $177.3
million, $149.3 million and $262,654 million, respectively.
The Company is required to comply with various operating covenants as
defined in the agreements described below. The covenants include restrictions,
on among other things, the ability to (i) incur or suffer the existence of
indebtedness, (ii) incur or suffer to exist liens or other encumbrances on
certain assets, (iii) to engage in dissolutions, consolidations,
reorganizations, mergers, sales, transfers of assets or certain changes of
control, (iv) incur or suffer to exist any lease obligations on real or personal
property, (v) engage in sale-leaseback transactions, (vi) declare, pay or set
apart funds for dividends, distributions or the acquisition of capital stock, or
redeem, repurchase or otherwise acquire for value the capital stock of the
Company, CSC or certain affiliates, (vii) make investments, loans or purchase or
otherwise acquire an interest in another Person, (viii) engage in derivatives or
hedging transactions, (ix) assume, guarantee or become directly or contingently
responsible for the obligations of another Person, (x) enter into transactions
with any affiliate, (xi) make bulk purchases of mortgage loans, (xii) forgive
indebtedness, (xiii) create subsidiaries, (xiv) limit the transfer of property
or assets, the payment of dividends or the lending of funds among affiliates,
and (xv) change its line of business. The description above of the covenants
contained in the Company's credit facilities and other sources of funding does
not purport to be complete and is qualified in its entirety by reference to the
actual agreements, which are filed by the Company with the Commission and can be
obtained from the Commission. The continued availability of funds provided to
the Company under these agreements is subject to the Company's continued
compliance with these covenants. In addition, the Notes, the Convertible
Debentures, the Series A Preferred Stock and the Series B Preferred Stock permit
the holders of such securities to require the Company to purchase such
securities upon a change of control (as defined in the respective Indenture or
Certificate of Designations, as the case may be).
In October 1997, Moody's lowered its rating of the Company's Notes (as
defined below) to Caa1 and of the Company's Convertible Debentures (as defined
below) to Caa3. Also, in October 1997, S&P
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42
lowered its ratings of the Company's Notes and long-term counterparty credit
to CCC. S&P's ratings remain on "CreditWatch" with developing implications.
These reductions in the ratings of the Company's debt will likely increase the
Company's future borrowing costs.
Credit Facilities
Greenwich Warehouse Facility. In January 1997, the Company entered into a
secured warehouse credit facility with Greenwich Capital Financial Products,
Inc., an affiliate of Greenwich Capital Markets, Inc. (referred to herein,
including any affiliates as "Greenwich") to provide a $400.0 million warehouse
facility under which the Company borrows funds on a short-term basis to support
the accumulation of loans prior to sale (the "Greenwich Facility"). Advances
under the Greenwich Facility bore interest at a rate of LIBOR plus 150 basis
points (7.34% at December 31, 1997). The Greenwich Facility is secured by
certain residual securities pledged by the Company. This facility was terminated
on December 31, 1997, at which time the Company and Greenwich entered into an
extension agreement through April 30, 1998 (as amended, the "Extension
Agreement"). The Extension Agreement provides for a maximum credit line of
$100.0 million, subject to adjustment by Greenwich, at an interest rate of LIBOR
plus 200 basis points and a fee of 0.25% of the aggregate principal balance of
loans to be paid to Greenwich in connection with any sale, securitization of any
other transfer to any third party of loans funded under this agreement. As of
March 26, 1998, $24.8 was outstanding under this arrangement. There can
be no assurance that CSC can extend the term of the Greenwich Facility or obtain
any replacement financing beyond April 30, 1998.
CIT Warehouse Facility. On February 3, 1998, CSC entered into a revolving
credit facility with The CIT Group/Equipment Financing, Inc. (the "CIT
Facility") to finance CSC's origination and purchase of mortgage loans, the
repayment of certain indebtedness and, subject to certain limits, other general
corporate purposes. The CIT Facility is guaranteed by the Company, and bears
interest at the prime rate plus 50 basis points. Pursuant to the CIT Facility,
CSC has available a secured revolving credit line in an amount equal to the
lesser of (i) $30.0 million or (ii) a commitment calculated as a percentage
(generally 80% or 85%) of the mortgage loans securing the CIT Facility. The CIT
Facility is also subject to sublimits on the amount of certain varieties of
mortgage loan products that may be used to secure advances thereunder. In
addition, the CIT Facility is secured by a pledge of 65% of the capital stock of
CSC-UK and certain residual securities pledged by the Company. The CIT Facility
terminates on February 3, 2000. As of March 26, 1998, the outstanding balance
on the CIT Facility was $4.7 million.
Loan Sales
The Company disposes of loans through whole loan sales which are
immediately cash flow positive. In 1997, 1996 and 1995, the Company sold $518.4
million, $73.5 million and $105.8 million, respectively, in whole loan sales,
accounting for 31.7%, 5.6% and 24.8% of all loan sales in the respective
periods.
The Company 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."
The Company has derived a significant portion of its income by recognizing
gains upon the sale of loans through securitizations based on the fair value of
the interest-only and residual certificates that the Company receives upon the
sale of loans through securitizations and on sales into loan purchase
facilities. In loan sales through securitizations, the Company sells loans that
it has originated or purchased to a trust for a cash purchase price and
interests in such trust consisting of interest-only regular interest and
the residual interest which are represented by the interest-only and residual
certificates. The
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cash purchase price is raised through an offering by the 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.
Since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights"
in October 1995, the Company 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 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, 1997, the Company's balance sheet reflected the fair value of
interest-only and residual certificates and mortgage servicing receivables of
$126.5 million and $9.5 million less an allowance for losses of $4.6 million,
respectively.
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."
Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures"), convertible at
any time prior to redemption or maturity, at the holder's option, into shares of
the Company's Common Stock at a conversion price of $26.25, subject to
adjustment. The Convertible Debentures may be redeemed, at the option of the
Company, in whole or in part, at any time after May 15, 1999 at predetermined
redemption prices together with accrued and unpaid interest to the date fixed
for redemption. The coupon at 6% per annum, is payable semi-annually on each May
1 and November 1, having commenced November 1, 1996. The terms of the indenture
governing the Convertible Debentures do not limit the incurrence of additional
indebtedness by the Company, nor do they limit the Company's ability to make
payments such as dividends.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance upon conversion of 533,332 shares of the Common Stock (at a conversion
price of $26.25 per share) pursuant to the terms of the Convertible Debentures.
To induce conversion, the Company issued an additional 342,708 shares of Common
Stock and paid the holders of the induced Convertible Debentures $420,000 in
cash. In the second quarter of 1997, these transactions resulted in the
reduction of Convertible Debentures by $14.0 million, a charge to interest
expense of $4.7 million related to the fair market value of the 342,708
inducement shares ($4.3 million) and the cash payment and an increase in
stockholders' equity of $18.2 million due to the issuance of the conversion
shares and the inducement shares. The net effect of these transactions was an
increase of $13.6 million to stockholders' equity in the second quarter of 1997.
During 1997, an aggregate of $14.1 million of
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44
Convertible Debentures had been converted into Common Stock, including the
induced conversion described above. As of March 6, 1998, there were $129.6
million of Convertible Debentures outstanding.
Senior Notes
In May 1997, the Company issued $300.0 million aggregate principal amount
of 12 3/4% Senior Notes due September 1, 2004 in a private placement. Such Notes
are not redeemable prior to maturity except in limited circumstances. The coupon
at 12 3/4% per annum, is payable semi-annually on each June 1 and December 1,
having commenced December 1, 1997. In September 1997, the Company completed the
exchange of such Notes for a like principal amount of 12 3/4% Series A Senior
Notes due 2004 (the "Notes") which have the same terms in all material respects,
except for certain transfer restrictions and registration rights.
Convertible Preferred Stock
In April 1997, the Company completed the private placement of 5,000 shares
of its 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), with an initial liquidation preference (the "Liquidation Preference")
of $10,000 per share, and related five-year warrants (the "Series A Warrants")
to purchase 500,000 shares of Common Stock with an exercise price of $20.625 per
share. Dividends on the Series A Preferred Stock are cumulative at the rate of
6% of the Liquidation Preference per annum payable quarterly. Dividends are
payable, at the option of the Company, (i) in cash, (ii) in shares of Common
Stock valued at the closing price on the day immediately preceding the dividend
payment date or (iii) by increasing the Liquidation Preference in an amount
equal to and in lieu of the cash dividend payment.
During 1997, preferred stock dividends of $904,531 were paid to the
holders of the Series A Preferred Stock in the form of 67,863 shares of the
Common Stock. For the December 31, 1997 dividend, the Company elected to add an
amount equal to the dividend to the Liquidation Preference of the Series A
Preferred Stock in lieu of payments of such dividend. The new Liquidation
Preference is $10,150 per share. During 1997, there was also recognition of the
effect of a beneficial conversion feature related to the Series A Preferred
Stock of $1.1 million.
The Series A Preferred Stock is redeemable at the option of the Company at
a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. The Series A Preferred Stock is convertible into shares of Common
Stock, subject to redemption rights, at a conversion price equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
(or with respect to conversions from December 24, 1997 through the earlier of
the tenth day after the effective date of a registration statement or April 24,
1998, 127 calendar days) immediately preceding such conversion, discounted by up
to 4% and subject to certain adjustments.
As of March 6, 1998, an aggregate of 4,328 shares of the Series A
Preferred Stock had been converted (672 shares remain outstanding) into an
aggregate of 10,570,119 shares of Common Stock. As of March 6, 1998, all
Series A Warrants were outstanding.
In September 1997, the Company completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), with an initial Liquidation Preference of $10,000 per share, and
related five-year warrants (the "Series B Warrants") to purchase 500,000 shares
of Common Stock with an exercise price per share equal to the lesser of (i)
$14.71 or (ii) 130% of the average closing sales prices over the 20 trading day
period ending on the trading day immediately prior to the first anniversary of
the original issuance of the Series B Warrants. Dividends on the Series B
Preferred Stock are cumulative at the rate of 6% of the Liquidation Preference
per annum payable quarterly. Dividends are payable, at the option of the
Company, (i) in cash, (ii) in shares of Common Stock valued at the closing price
on the day immediately preceding the dividend payment date or (iii) by
increasing the Liquidation Preference in an amount equal to and in lieu of the
cash dividend payment.
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45
The first dividend payment date was December 31, 1997. For this dividend,
the Company elected to add an amount equal to the dividend to the Liquidation
Preference of the Series B Preferred Stock in lieu of payment of such dividend.
The new Liquidation Preference is $10,177. During 1997, there was also
recognition of the effect of a beneficial conversion feature related to the
Series B Preferred Stock of $1.6 million.
The Series B Preferred Stock is redeemable at the option of the Company at
a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. In addition, the Series B Preferred Stock is redeemable at a
redemption price equal to 115% of the Liquidation Preference upon notice of, or
the announcement of the Company's intent to engage in a change of control event,
or, if such notice or announcement occurs on or after March 14, 1998, the
redemption price will equal 125% of the Liquidation Preference. The Series B
Preferred Stock is convertible into shares of Common Stock, subject to certain
redemption rights and restrictions, at a conversion price equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
immediately preceding such conversion, discounted up to 4% and subject to
certain adjustments.
As of March 6, 1998, an aggregate of 377 shares of Series B Preferred
Stock had been converted (4,623 shares remain outstanding) into an aggregate of
6,281,295 shares of Common Stock. As of March 6, 1998, all Series B Warrants
were outstanding.
In addition, pursuant to the terms of the Company's Series A Preferred
Stock and the Company's Series B Preferred Stock (together the "Preferred
Stock"), the Company is required to continue the listing or trading of the
Common Stock on the Nasdaq National Market or certain other securities
exchanges. As a result of the delisting of the Common Stock from the Nasdaq
National Market, (i) the conversion restrictions that apply to the Series B
Preferred Stock are lifted (prior to delisting, no more than 50% of the 5,000
shares of Series B Preferred Stock initially issued could be converted) and (ii)
the conversion period is increased to 15 consecutive trading days and the
conversion discount is increased to 10% (prior to delisting the conversion price
was equal to the lowest daily sale s price of the Common Stock during the four
consecutive trading days immediately preceding conversion, discounted by up to
5.5%). In addition, as a result of the delisting of the Common Stock and during
the continuance of such delisting, (i) the dividend rate is increased to 15% and
(ii) the Company is obligated to make monthly cash payments to the holders of
the Preferred Stock equal to 3% of the $10,000 liquidation preference per share
of the Preferred Stock, as adjusted, provided that if the Company does not make
such payments in cash, such amounts will be added to the Liquidation Preference.
Based on the market price of the Common Stock as of March 6,1998, the Company
did not have available a sufficient number of authorized but unissued shares of
Common Stock to permit the conversion of all of the shares of the Preferred
Stock.
The description above of the covenants contained in the Company's credit
facilities and other sources of funding does not purport to be complete and is
qualified in its entirety by reference to the actual agreements, which are filed
by the Company with the Commission and can be obtained from the Commission. The
continued availability of funds provided to the Company under these agreements
is subject to the Company's continued compliance with these covenants. In
addition, the Notes, the Convertible Debentures, the Series A Preferred Stock
and the Series B Preferred Stock permit the holders of such securities to
require the Company to purchase such securities upon a change of control (as
defined in the respective Indenture or Certificate of Designations, as the case
may be).
Accounting Considerations
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In June 1997, the FASB issued SFAS No. 130, "Reporting on Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
historical statements issued for periods beginning 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......... 47
Report of Independent Auditors by BDO Stoy Hayward,
Registered Auditors........................................... 48
Consolidated Statements of Financial Condition at December 31,
1997 and 1996................................................. 49
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................... 50
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995........................ 51
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.............................. 52
Notes to Consolidated Financial Statements...................... 53
46
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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, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1997. 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 revenues constituting 26 percent of the Company's total
revenue 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 the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
The accompanying 1997, 1996 and 1995 consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company has suffered a
significant net loss for the year ended December 31, 1997, and has a net capital
deficiency as of December 31, 1997. At December 31, 1997, these circumstances
raise substantial doubt about the entity's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The 1997 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying 1997 financial statements.
KPMG Peat Marwick LLP
New York, New York
March 31, 1998
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48
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
48
49
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------------
1997 1996
-----------------------------
ASSETS
Cash and cash equivalents $ 2,594,163 $ 446,285
Cash held in escrow 24,207,517 12,762,992
Securities purchased under agreements to resell -- 154,176,608
Available-for-sale securities -- 14,618,194
Mortgage servicing receivables 9,524,535 50,130,313
Trading securities 126,475,656 103,199,936
Mortgage loans held for sale, net 93,290,024 88,127,184
Mortgages held for investment, net 6,530,737 5,206,618
Equipment and leasehold improvements, net 6,058,206 4,062,037
Investment in discontinued operations, net 84,232,000 212,589,597
Income taxes receivable 18,376,574 --
Other assets 27,267,770 28,584,620
------------- -------------
Total assets $ 398,557,182 $ 673,904,384
============= =============
LIABILITIES
Warehouse financing facilities $ 77,479,007 $ 72,262,291
Securities sold but not yet purchased -- 152,862,526
Accounts payable and other liabilities 63,427,810 27,216,650
Allowance for losses 4,555,373 10,062,614
Income taxes payable 300,000 9,451,099
Standby financing facility -- 7,966,292
Notes and loans payable 300,000,000 111,520,719
Convertible subordinated debentures 129,620,000 143,730,000
------------- -------------
Total liabilities 575,382,190 535,072,191
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 10,000,000 shares authorized;
5,295 shares issued and outstanding at December 31, 1997;
Liquidation Preference - Series A Preferred Stock, $10,150 per
share; Series B Preferred Stock, $10,177 per share 53 --
Common stock, $.01 par value; 100,000,000 shares authorized;
47,648,738 and 29,649,133 issued at December 31, 1997
and 1996, respectively 476,487 296,491
Treasury stock, 70,000 shares at December 31, 1997, at cost (175,000) --
Additional paid-in capital 175,477,104 57,782,609
Unrealized gain on available-for-sale securities, net of taxes -- 8,328,950
Retained earnings (accumulated deficit) (352,603,652) 72,424,143
------------- -------------
Total stockholders' equity (deficit) (176,825,008) 138,832,193
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' equity (deficit) $ 398,557,182 $ 673,904,384
============= =============
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------------------------------------------
Revenues
Gain on sale of loans $ 83,365,502 $ 76,820,290 $ 26,304,663
Net unrealized loss on valuation of residuals (148,004,447) -- --
Interest 73,520,473 24,535,115 6,110,258
Mortgage origination income 4,848,613 2,811,534 2,750,801
Other 20,301,883 3,680,938 1,305,980
------------- ------------ ------------
Total revenues 34,032,024 107,847,877 36,471,702
------------- ------------ ------------
Expenses
Salaries and employee benefits 41,088,956 26,287,642 10,861,363
Interest expense 70,689,198 17,279,836 4,505,893
Selling expenses 4,136,812 2,337,544 1,737,246
Other operating expenses 42,085,275 18,210,714 4,836,741
Provision for loan losses 12,614,269 532,396 --
------------- ------------ ------------
Total expenses 170,614,510 64,648,132 21,941,243
------------- ------------ ------------
(Loss) earnings from continuing operations before
income taxes and extraordinary item (136,582,486) 43,199,745 14,530,459
Income tax (benefit) provision (18,076,574) 19,324,460 6,410,078
------------- ------------ ------------
(Loss) earnings from continuing operations before
extraordinary item (118,505,912) 23,875,285 8,120,381
Discontinued operations:
(Loss) earnings from discontinued operations, net
of income tax (benefit) provision of
($37,188,000), $15,102,974 and $2,105,155 and
net of extraordinary item of $425,000 (245,906,000) 26,805,597 3,750,227
Loss on disposal of discontinued operations (49,939,996) -- --
------------- ------------ ------------
(Loss) earnings before extraordinary item (414,351,908) 50,680,882 11,870,608
Extraordinary item:
Loss from extinguishment of debt, net of taxes -- -- (295,943)
------------- ------------ ------------
Net (loss) earnings (414,351,908) 50,680,882 11,574,665
Preferred stock dividends paid in common stock 904,531 -- --
Preferred stock - increase in liquidation preference 917,530 -- --
Preferred stock - beneficial discount 2,725,000 -- --
------------- ------------ ------------
Net (loss) earnings applicable to common stock $(418,898,969) $ 50,680,882 $ 11,574,665
============= ============ ============
Earnings (loss) per common share(1):
Basic
(Loss) earnings from continuing operations
before extraordinary item $ (3.70) $ 0.81 $ 0.38
(Loss) earnings from discontinued operations (7.40) 0.91 0.18
Loss on disposal of discontinued operations (1.50) -- --
Extraordinary item -- -- (0.02)
------------- ------------ ------------
Net (loss) earnings (12.60) $ 1.72 $ 0.54
============= ============ ============
Diluted(2)
(Loss) earnings from continuing operations
before extraordinary item $ (3.70) $ 0.78 $ 0.34
(Loss) earnings from discontinued operations (7.40) 0.88 0.16
Loss on disposal of discontinued operations (1.50) -- --
Extraordinary item -- -- (0.01)
------------- ------------ ------------
Net (loss) earnings $ (12.60) $ 1.66 $ 0.49
============= ============ ============
Weighted average number of common shares outstanding(1):
Basic 33,244,212 29,404,557 21,243,536
============= ============ ============
Diluted 33,244,212(2) 30,537,991 23,838,617
============= ============ ============
(1) EPS figures for the effected periods reflect the 100% stock dividends paid
in September 1995 and July 1996.
(2) For the year ended December 31, 1997, the incremental shares from assumed
conversions are not included in computing the diluted per share amounts
because their effect would be antidilutive since an increase in the number
of shares would reduce the amount of loss per share. Therefore, basic and
diluted EPS figures are the same amount.
See accompanying notes to consolidated financial statements.
50
51
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1996 and 1995
Preferred Shares Common Shares(1)
-------------------- ------------------------- Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital(1)
--------- ------- ----------- ---------- -------------
Balance at December 31, 1994 -- $ -- 20,214,980 $ 202,149 $ 2,571,130
Issuance of common stock -- -- 5,085,752 50,858 20,680,513
UK Acquisition -- -- 3,600,000 36,000 21,586,500
Foreign currency translation adjustment,
net of taxes -- -- -- -- --
Net earnings -- -- -- -- --
----- ------ ---------- ---------- -------------
Balance at December 31, 1995 -- -- 28,900,732 289,007 44,838,143
Unrealized gain on available-for-sale
securities, net of taxes -- -- -- -- --
Issuance of common stock -- -- 101,039 1,010 672,246
J & J Acquisition -- -- 548,000 5,480 9,789,164
Greyfriars Acquisition -- -- 99,362 994 2,483,056
Foreign currency translation adjustment,
net of taxes -- -- -- -- --
Net earnings -- -- -- -- --
----- ------ ---------- ---------- -------------
Balance at December 31, 1996 -- -- 29,649,133 296,491 57,782,609
Issuance of common stock -- -- 204,288 2,043 829,864
Induced conversion of convertible
subordinated debentures -- -- 876,040 8,760 18,170,749
Issuance of preferred stock 10,000 100 -- -- 97,958,497
Conversion of preferred stock (4,705) (47) 16,851,414 168,514 (168,467)
Preferred stock dividends paid in
common stock -- -- 67,863 679 903,852
Changes in unrealized gain on available-
for-sale securities, net of taxes -- -- -- -- --
Purchase of treasury stock -- -- (70,000) -- --
Foreign currency translation adjustment,
net of taxes
Net loss -- -- -- -- --
----- ------ ---------- ---------- -------------
Balance at December 31, 1997 5,295 $ 53 47,578,738 $ 476,487 $ 175,477,104
===== ====== ========== ========== =============
Retained
Earnings
Unrealized Accumulated Treasury
Gain (Deficit) Stock Total
----------- ------------- ------------ --------------
Balance at December 31, 1994 $ -- $ 403,459 $ -- $ 3,176,738
Issuance of common stock -- -- -- 20,731,371
UK Acquisition -- -- -- 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 -- 11,971,905 -- 57,099,055
Unrealized gain on available-for-sale
securities, net of taxes 8,328,950 -- -- 8,328,950
Issuance of common stock -- -- -- 673,256
J & J Acquisition -- -- -- 9,794,644
Greyfriars Acquisition -- -- -- 2,484,050
Foreign 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 8,328,950 72,424,143 -- 138,832,193
Issuance of common stock -- -- -- 831,907
Induced conversion of convertible
subordinated debentures -- -- -- 18,179,509
Issuance of preferred stock -- -- -- 97,958,597
Conversion of preferred stock -- -- -- --
Preferred stock dividends paid in
common stock -- (904,531) -- --
Changes in unrealized gain on available-
for-sale securities, net of taxes (8,328,950) -- -- (8,328,950)
Purchase of treasury stock -- -- (175,000) (175,000)
Foreign currency translation adjustment,
net of taxes (9,771,356) (9,771,356)
Net loss -- (414,351,908) -- (414,351,908)
---------- ------------- ----------- -------------
Balance at December 31, 1997 $ -- $(352,603,652) $ (175,000) $(176,825,008)
========== ============= =========== =============
(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.
51
52
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
Cash flows from operating activities:
(Loss) earnings from continuing operations $ (118,505,912) $ 23,875,285 $ 8,120,381
Adjustments to reconcile net earnings from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 2,846,394 3,110,200 176,738
Income taxes payable (27,527,673) 5,251,091 (2,904,746)
Earnings from partnership interest -- (753,663) (481,789)
Unrealized gain on securities -- (429,688) --
Decrease (increase) in mortgage servicing receivables 40,605,778 (42,432,634) (5,195,625)
Increase in trading securities (23,275,720) (87,628,481) (15,571,455)
Provision for losses 12,614,269 7,931,660 --
Net purchases (sales) of securities under agreement
to resell 154,176,608 (153,796,920) --
(Repayment of) proceeds from securities sold
but not yet purchased (152,862,526) 152,862,526 --
Proceeds from sale of mortgages 1,637,387,344 1,270,897,455 358,997,000
Mortgage origination funds disbursed (1,655,191,573) (1,289,354,776) (417,864,000)
Other, net 5,061,521 4,590,793 4,400,528
--------------- --------------- ---------------
Net cash used in continuing operating activities (124,671,490) (105,877,152) (70,322,968)
--------------- --------------- ---------------
Net cash used in discontinued operating activities (177,259,754) (149,317,683) (262,654)
--------------- --------------- ---------------
Net cash used in operating activities (301,931,244) (255,194,835) (70,585,622)
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sale & lease-back financing 1,776,283 -- --
Purchases of equipment (5,134,122) (4,578,368) (705,515)
Proceeds from sale of mortgages held for investment 15,248,227 -- --
Proceeds from sale of available-for-sale securities 18,288,999 -- --
Net distributions from partnership -- 1,099,488 428,474
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 30,179,387 (3,478,880) (277,041)
--------------- --------------- ---------------
Cash flows from financing activities:
Increase in warehouse facility 5,216,716 91,745 54,810,450
(Decrease) increase in standby financing facility (7,966,292) 7,194,931 --
Proceeds from notes and loan payable 49,000,000 144,520,719 --
Repayment of notes and loans payable (161,405,843) (33,000,000) --
Proceeds from issuance of preferred stock 98,249,950 -- --
Proceeds from issuance of convertible subordinated debentures -- 136,060,800 --
Proceeds (redemption) of subordinated debentures -- -- (2,000,000)
Net proceeds from issuance of common stock 221,296 653,256 20,731,371
Purchase of treasury stock (175,000) -- --
Net proceeds from issuance of senior notes 290,758,908 -- --
--------------- --------------- ---------------
Net cash provided by financing activities 273,899,735 255,521,451 73,541,821
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,147,878 (3,152,264) 2,679,158
Cash and cash equivalents at beginning of the year 446,285 3,598,549 919,291
--------------- --------------- ---------------
Cash and cash equivalents at end of the year $ 2,594,163 $ 446,285 $ 3,598,449
=============== =============== ===============
Supplemental disclosure of cash flow information:
Income taxes paid during the year:
Continuing operations $ 5,904,507 $ 14,699,560 $ 9,049,002
Discontinued operations 767,335 5,012,017 --
Interest paid during the year:
Continuing operations $ 57,194,601 $ 11,625,526 $ 6,601,382
Discontinued operations 867,394 1,231,438 104,293
See accompanying notes to consolidated financial statements.
52
53
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
1. Organization and Recent Events
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 46 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. In March 1998, the Company's
Board of Directors adopted a plan to sell the operations of CSC-UK (See Note 2).
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and the liquidation of liabilities and commitments in the normal course
of business. The Company's operations for 1997 have consumed substantial amounts
of cash and have generated significant net losses which have reduced
stockholders' equity to a deficit of $176.8 million at December 31, 1997. The
Company is unable to access the capital markets, which negatively affects
profitability, as well as liquidity. The profitability of the Company has been
and will be affected due to an inability to sell its loan production through
securitizations. Furthermore, many of the loan products previously offered by
the Company have been discontinued and the Company anticipates that its revenues
will be substantially lower in 1998 then in 1997. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management believes that the Company's future success is dependent upon its
ability to (i) complete a sale of its UK assets, (ii) streamline its US
operations, (iii) successfully sell loans in the whole loan sales market, (iv)
restructure its balance sheet, (v) access warehouse lines of credit and (vi)
retain an adequate number and mix of its employees. The Company has begun
reducing costs (see Note 28) and has expanded its secondary marketing and sales
efforts to pursue whole loan sales opportunities. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company adopted a plan in March 1998 to sell the assets of CSC-UK
(the "CSC-UK Sale"). See Note 2 below. As a result, the Company has restated
its prior financial statements to present the operating results of CSC-UK as a
discontinued operation. On March 31, 1998, the Company announced that it had
entered into definitive agreements with Ocwen Financial Corporation ("Ocwen")
for the sale of substantially all of the business and assets, and certain
liabilities of the UK operations of CSC-UK. The acquisition includes the
purchase of CSC-UK's whole loan portfolio, securitized loan residuals and loan
origination and servicing businesses for a price of approximately (pound) 285
million, subject to adjustment as of closing based on an agreed upon formula
(currently estimated to result in an upward or downward adjustment of
approximately (pound) 5 million). Closing, which is anticipated to occur in
April 1998, is subject to satisfaction of a number of conditions, including
obtaining rating agency consents and various substitutions in connection with
the transfer of the securitized residual and related servicing rights (which
will require the consents of the trustees of several securitizations). As a
result, there can be no assurance that the transaction will be consummated.
As a result of the Company's adoption of a plan to institute the UK Sale,
the Company's net interest in its UK discontinued operations represents expected
proceeds of $102.2 million, net of accrued losses of $18.0 million. Expected
costs related to the disposal of UK discontinued operations of $16.4 million is
included in accounts payable and other liabilities at December 31, 1997.
Recent Events
UK Recent Events. As a result of discussions and correspondence, which
began in March of 1997, between the Company and the United Kingdom's Office of
Fair Trading (the "OFT") regarding the OFT's revised Non-Status Lending
Guidelines for Lenders and Brokers received by the Company in December 1997 (the
"Revised Non-Status Guidelines"), the Company has agreed to take action with
respect to the use of certain contract terms in the Company's existing UK loan
agreements. The Company has agreed to eliminate the use of the Rule of 78s
method for calculating prepayment fees on unregulated loans and revise the
standard/concessionary rate structure, and has provided assurances to the OFT
regarding the Company's future use of such revised terms.
With respect to the use of the Rule of 78s method on existing unregulated
loans, the Company agreed that it would not use such formula to calculate
prepayments. Instead, the Company will collect prepayment fees by reference to a
sliding scale whereby six months' interest will be charged for prepayments
occurring during the first three years of a loan, reducing to one month's
interest in the eighth year of a loan. There will be no prepayment fee levied
after the eighth year of a loan. Such prepayment fees will be based on the
concessionary rate of interest.
With respect to the standard/concessionary rate structure on existing
loans, the Company agreed that it would lower the differential between the
standard rate of interest and the concessionary rate of interest to not more
than 2.5%. For example, on a loan where the standard/concessionary rates had
been 18.0% and 9.9%, respectively, the loan agreement will now provide for the
standard/concessionary rates to be 12.4% and 9.9%, respectively.
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54
As a result of these revisions to the terms of the applicable UK loans,
during the fourth quarter of 1997 the Company recognized an impairment in the
value of its mortgage servicing receivables in the UK of $106.2 million and has
written-off unamortized goodwill of $52.7 million recorded in connection with
its UK acquisitions.
US Recent Events. In order to enhance the Company's liquidity position, in
January 1998 the Company sold interest-only and residual certificates and
associated mortgage servicing receivables relating to certain of the Company's
home equity loan products with a book value of $38.4 million for net proceeds of
$26.5 million. As a result of the expected net realizable values implied by such
sale, the Company recognized an impairment of the value of its interest-only and
residual certificates and mortgage servicing receivables relating to the
Company's home equity loan products of $112.1 million during the second half of
1997. Additionally, due to the continual review of the assumptions underlying
the valuation of its interest-only and residual certificates relating to the
Company's Sav*-A-Loan(R) product, including the loss expectations and discount
rate of such certificates, the Company recognized an impairment of $35.9
million of such certificates during 1997.
Additionally, the Company has redirected its efforts to actively pursue
the sale of its loans through whole loan sales rather than through
securitizations. Whole loan sales are immediately cash flow positive because,
when the Company sells loans through whole loan sales, it receives a cash
premium at the time of sale.
2. Discontinued Operations
In May 1995, the Company and three principals of a privately held UK-based
mortgage banker 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.
In April 1996, CSC-UK acquired all the outstanding capital stock of J&J
Securities Limited, a London-based mortgage banker ("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"), resulting in the
recognition of $5.2 million of goodwill. 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.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars Group Limited, a mortgage banker based in Reading, England (formerly
known as Heritable Finance 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"), resulting in the recognition of $25.4 million of goodwill.
Greyfriars provides mortgage loans to borrowers that generally have higher
quality credit profiles than the Company's typical UK borrowers.
In May 1997, CSC-UK acquired the assets of Midland & General PLC, a
London-based mortgage broker ("M&G"), in exchange for (pound)6.5 million ($10.6
million based on the Noon Buying Rate on the date of such acquisition) (the "M&G
Acquisition"). Pursuant to the M&G Acquisition, the Company acquired assets with
a fair value of approximately $764,000, consisting primarily of property, plant
and equipment. The M&G Acquisition resulted in the recognition of $10.2 million
of goodwill. In connection with the M&G Acquisition, the Company entered into a
five-year non-compete agreement with the former principals of M&G for (pound)3.0
million ($4.9 million), which was being amortized using the straight-line method
over a life of five years.
As a result of the issuance of the OFT guidelines (see Note 1), the
Company determined that the earnings of CSC-UK would be significantly reduced
thereby impairing the recoverability of the remaining $52.7 million in recorded
goodwill which, accordingly, was written off at
December 31, 1997.
54
55
As a result of these revisions to the terms of the applicable UK loans,
during the fourth quarter of 1997 the Company also recognized an impairment in
the value of its mortgage servicing receivables in the UK of $106.2 million.
In March 1998, the Company's Board of Directors adopted a plan to sell the
operations of CSC-UK. It is management's intention to complete this transaction
by April 30, 1998 and accordingly has included the loss on disposal and
operating losses from January 1, 1998 to April 30, 1998 in its estimated loss on
disposal of discontinued operations in 1997. The operating results of CSC-UK
have been segregated from continuing operations and reported as a separate line
item on the Consolidated Statements of Operations. In addition, net assets of
CSC-UK have been reclassified on the Consolidated Statements of Financial
Condition as investment in discontinued operations.
The Company has restated its prior financial statements to present the
operating results of CSC-UK as a discontinued operation.
Summarized financial information for the discontinued operations is as
follows:
1997 1996 1995
------------- ------------- -------------
Summarized Statements of Operations:
Revenues
Gain on sale of loans $ 27,797,000 $ 79,432,000 $ 11,893,458
Net unrealized loss on
valuation of mortgage
servicing receivables (106,153,000) - -
Interest income 18,811,000 12,333,000 595,417
Other income 21,444,000 7,167,000 550,061
------------- ------------- -------------
(38,101,000) 98,932,000 13,038,936
Expenses
Interest expense 26,599,000 7,564,334 -
Write-off and amortization of
goodwill 58,185,000 3,775,176 493,794
Write-off and amortization of
prepaid commitment fees 35,245,000 1,800,000 -
Other operating expenses 125,389,000 43,883,919 6,689,760
------------- ------------- -------------
(Loss) earnings before income
taxes and extraordinary item (283,519,000) 41,908,571 5,855,382
Extraordinary item, gain on
extinguishment of debt,
net of taxes 425,000 - -
------------- ------------- -------------
(Loss) earnings before income
taxes (283,094,000) 41,908,571 5,855,382
Income tax (benefit) provision (37,188,000) 15,102,974 2,105,155
------------- ------------- -------------
(Loss) earnings from discontinued
operations $(245,906,000) $ 26,805,597 $ 3,750,227
============= ============= =============
55
56
1996
-------------
Investment in discontinued
operations:
Mortgage servicing receivables, net of reserves $ 169,112,000
Credit enhancement deposits 35,082,000
Prepaid commitment fee 35,917,000
Goodwill 47,466,835
Other assets 37,656,737
Liabilities (112,644,975)
-------------
Investment in discontinued operations $ 212,589,597
=============
On March 31, 1998, the Company entered into an agreement with Ocwen
pursuant to which it will sell substantially all of the assets of CSC-UK,
including the shares of certain of CSC-UK's subsidiaries, to Ocwen. Accordingly,
the Company's net interest in discontinued operations represents expected
proceeds of $102.2 million, net of accrued losses of $18.0 million. Expected
costs related to the disposal of discontinued operations of $16.4 million is
included in accounts payable and other liabilities at December 31, 1997.
UK Financing Facilities. In March 1996, CSC-UK entered into a mortgage loan
purchase agreement with Greenwich Capital Markets, Inc. (referred to herein,
including any affiliates, as "Greenwich") effective as of January 1, 1996 (the
"UK Greenwich Facility"). Pursuant to the UK Greenwich Facility and with certain
exceptions, CSC-UK sold all of the loans it originated to Greenwich which was
obligated to buy such loans. CSC-UK and/or Greenwich will subsequently resell
these loans through whole loan sales or securitizations. This agreement was
terminated in February 1998. CSC-UK paid 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 which was due in December 1997, but was paid in
May 1997. This fee was being amortized over the life of the agreement. Due to
the early extinguishment of debt, an extraordinary gain of $425,000, net of
taxes, was recognized in the second quarter of 1997.
During the first quarter of 1998, Greenwich indicated to the Company that the
Company could not access the UK Greenwich Facility pursuant to its terms, and no
assurance could be given that the Company would be able to access it at any time
in the future. Additionally in February 1998, the Company entered into a
(pound)35.0 million UK Warehouse Facility with Greenwich to fund the Company's
UK originations. Due to the Company's inability to access the UK Greenwich
Facility in the future, the Company has determined that the asset is impaired
and wrote off the unamortized portion of the prepaid commitment fee to Greenwich
resulting in a charge of $32.4 million during the fourth quarter of 1997.
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. The Company has restated
its prior financial statements to present the operating results of CSC-UK as a
discontinued operation as discussed in Note 2. All significant intercompany
balances and transactions have been eliminated in consolidation.
56
57
Revenue Recognition
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." SFAS No. 125 requires prospective
implementation only; however, certain reclassifications have been made to prior
year's financial statements to conform to the current year's presentation.
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.
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 penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when collected.
Valuation of Residuals
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 sale of loans 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
57
58
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 funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company.
Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates and mortgage servicing
receivables likely to be realized, the rate of prepayment and the amount of
defaults utilized by the Company are estimates and actual experience may vary
from its estimates. The fair value of the interest-only and residual
certificates and mortgage servicing receivables recorded by the Company upon the
sale of loans through securitizations will have been overstated if prepayments
or losses are greater than anticipated. Higher than anticipated rates of loan
prepayments or losses would require the Company to write down the fair value of
the interest-only and residual certificates, adversely impacting earnings.
Similarly, if delinquencies, liquidations or interest rates were to be greater
than was initially assumed, the fair value of the interest-only and residual
certificates would be negatively impacted which would have an adverse effect on
income for the period in which such events occurred. The Company reviews these
factors and, if necessary, adjusts the remaining asset to the fair value of the
interest-only and residual certificates, pursuant to SFAS No. 115. Should the
estimated average loan life assumed for this purpose be shorter than the actual
life, the amount of cash actually received over the lives of the loans would
exceed the gain previously recognized at the time the loans were sold through
securitizations and would result in additional income. In the second half of
1997, the Company has valued its interest-only and residual certificates on its
US Home Equity securitizations based upon the expected net realizable value upon
a liquidation sale. This change in valuation policy is a result of the Company's
initiative to enhance liquidity by potential sale of such securities.
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. 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 Consolidated Statements
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, as amended by SFAS No. 125, 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.
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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 SFAS No. 65 "Accounting
for Certain Mortgage Banking Activities."
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
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.
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
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future benefit may indicate a decline in value. If the Company determines that
there had 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
Effective December 15, 1997, the Company adopted SFAS No. 128, "Earnings
per Share". SFAS No. 128 simplifies the standards for computing earnings per
share ("EPS") previously found in Accounting Principles Board ("APB") Opinion
No. 15 and makes them comparable to international earnings per share standards.
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Basic EPS is computed by dividing net earnings applicable to Common Stock
by the weighted average number of Common Stock outstanding during the period.
Diluted EPS is based on the net earnings applicable to Common Stock adjusted to
add back the effect of assumed conversions (e.g., after-tax interest expense of
convertible debt) divided by the weighted average number of Common Stock
outstanding during the period plus the dilutive potential Common Stock that were
outstanding during the period.
For the year ended December 31, 1997, the Company has a net loss
applicable to Common Stock. Including potential Common Stock in the denominator
of a diluted EPS calculation would be antidilutive since an increase in the
number of shares outstanding would reduce the amount of loss per share. Thus,
there is no difference between basic and diluted EPS for this period.
EPS figures for prior periods have been restated and reflect the 100%
stock dividends paid in September 1995 and July 1996.
Reclassifications
Certain amounts in the statements have been reclassified to conform to the
1997 classifications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
valuation of the interest and residual certificates included in trading
securities, the valuation of mortgage sevicing receivables, and the valuation
of the loss on the sale of the Company's UK operations.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting on Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
historical statements issued for periods beginning after December 15, 1997. The
Company has not completed its analysis of this statement.
4. Available-for-Sale Securities
Available-for-sale securities at December 31, 1996 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.
During 1997, the Company sold all shares of IMC for net proceeds of $18.1
million and a pre-tax gain of $18.0 million, which was included in other income
on the Consolidated Statements of Operations. Such securities were marked to
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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.
5. Mortgage Servicing Receivables
This represents the unamortized net present value of the mortgage
servicing rights retained by the Company taking into account several factors
including industry practices. The amount is amortized over the estimated lives
of the underlying receivables sold.
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting
for Mortgage Servicing Rights." This statement changed the methodology used to
measure impairments of its mortgage servicing receivable. The new accounting
methodology, as amended by SFAS No. 125, measures the asset's impairment on a
disaggregate basis based on the predominant risk characteristic of the
portfolio and discounts 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.
The activity in the mortgage servicing receivables for the years ended
December 31, 1997 and 1996 is summarized as follows:
1997 1996
---------------------------
Balance, beginning of year $ 50,130,313 $ 6,001,161
Additions from operations 19,583,586 49,687,033
Valuation adjustments (22,266,661) -
Securitizations (34,571,269) -
Amortization (3,351,434) (5,557,881)
---------------------------
Balance, end of year $ 9,524,535 $ 50,130,313
===========================
At December 31, 1996, 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.
The weighted average rate used to discount the cash flows for the year
ended December 31, 1996 was approximately 11.0%. The weighted average constant
prepayment speed was 24% per annum, and the weighted average default rates was
0.5% per annum. The mortgage servicing receivable is amortized using the same
discount rate used to determine the original servicing recorded.
As a result of the Company's liquidity concerns (see Note 1), the Company
sold trading securities during the first quarter of 1998 for net proceeds of
$26.5 million (see Note 6). Included in the sale of the trading securities were
the mortgage servicing rights. Accordingly, at December 31, 1997, the Company
valued its mortgage servicing receivable on a net realizable value assuming a
liquidation of such assets and recognized an impairment to the value of the
mortgage servicing receivables of $22.3 million.
During 1997, $34.6 million of mortgage servicing receivables were
transferred to trading securities reflecting the Company's securitization of its
excess servicing rights on a pool of mortgage loans resulting in the Company
recording interest-only and residual certificates.
At December 31, 1997 and 1996, the carrying amount of existing mortgage
servicing rights is considered to be a reasonable estimate of fair value.
6. Trading Securities
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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.
The table below summarizes the value of the Company's trading securities
by product type.
1997 1996
---------------------------
Home Equity $ 75,216,390 $103,199,936
Sav*-A-Loan(R) 51,259,266 -
---------------------------
Total $126,475,656 $103,199,936
===========================
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.
At December 31, 1997, the Company determined the fair value of its home
equity securitizations based upon the net realizable value as implied by the
first quarter 1998 sale of three of its home equity residuals see (Note 1).
Accordingly, the Company recorded net unrealized losses of $89.8 million during
1997 related to its home equity securitizations.
The unrealized loss of $35.9 million related to the Sav*-A-Loan(R)
residuals reflects the Company's change in the assumptions used to value such
residuals as follows: discount rate increased to 15% from 12%, constant
prepayment speed increased to 16.8% from 14% after the twelfth month, and the
annual default rate increased from a weighted average default rate of 175 basis
points to a weighted average default rate of 306 basis points per annum.
For the period ended December 31, 1996, the assumptions used to value the
home equity trading securities included a weighted average discount rate of 10%,
a weighted average default rate of 0.5% and a weighted average constant
prepayment speed of 24%. For the period ended December 31, 1997, the assumptions
used to value the Sav*-A-Loan(R) trading securities included a weighted average
discount rate of 15%, a weighted average default rate of 3.0% and a weighted
average constant prepayment speed of 16.8%.
During the years ended December 31, 1997, 1996 and 1995, the Company sold
$1.1 billion, $993.6 million and $235.0 million of its loan origination and
purchase volume in various securitizations. In loan sales through
securitizations, the Company sells loans that it has originated or purchased to
a real estate trust for a cash purchase price and interests in such trusts which
are represented by the interest-only and residual certificates. The cash
purchase price is raised through an offering of pass-through certificates by the
trust.
7. Mortgage Loans Held for Sale, Net
The following table summarizes the carrying values of the Company's
mortgage loans held for sale at December 31, 1997 and 1996:
1997 1996
---------------------------
Home Equity $ 40,992,381 $ 80,332,329
Sav*-A-Loan(R) 52,297,643 7,794,855
---------------------------
Total $ 93,290,024 $ 88,127,184
===========================
Substantially all of the mortgages are pledged as collateral for the
Company's warehouse financing facilities. Mortgage loans held for sale, net are
reported at the lower of cost or market value; determined on an aggregate basis.
There was no allowance for market losses on mortgage loans held for sale at
December 31, 1997 and 1996, respectively.
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8. Mortgage Loans Held for Investment, Net
The following table summarizes the carrying values of the Company's
mortgage loans held for investment, net, at December 31, 1997 and 1996:
1997 1996
---------------------------
Mortgage loans held for investment $ 11,906,032 $ 5,270,402
Allowance for loan losses (5,375,295) (63,784)
---------------------------
Mortgage loans held for investment, net $ 6,530,737 $ 5,206,618
===========================
During 1997, the allowance for loan losses was increased by provisions
through the statement of operations of $12.6 million and decreased by
charge-offs of $7.3 million. There was no significant activity in the allowance
for loan loss account during 1996 and 1995.
9. Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, at cost, are summarized as
follows:
December 31,
1997 1996
---------------------------
Office equipment $ 6,049,157 $ 4,063,375
Leasehold improvements 672,713 208,347
Capitalized leases 1,351,283 673,535
---------------------------
8,073,153 4,945,257
Accumulated depreciation (2,014,947) (883,220)
---------------------------
Balance, end of year $ 6,058,206 $ 4,062,037
===========================
10. Other Assets
Other assets at December 31, 1997 and 1996 consist of the following:
1997 1996
---------------------------
Prepaid expenses $ 548,952 $ 1,630,238
Deferred debt issuance costs 13,509,074 4,305,001
Loans receivable - subwarehousing, net - 14,888,497
Accrued interest receivable 1,175,234 1,353,274
Accounts receivable 6,297,270 3,067,557
Premium due on sales 2,072,457 -
Servicing advances 2,600,776 1,188,831
Real estate owned, net 328,064 220,782
Other 735,943 1,930,440
---------------------------
Total $ 27,267,770 $ 28,584,620
===========================
Loans receivable - subwarehousing represented 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 had a term
of not more than 30 days.
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Deferred debt issuance costs represent the deferred expenses for the
Convertible Debentures (see Note 14), issued in May 1996, and the Senior Notes
(see Note 13) which were issued in May 1997.
11. Financing Facilities and Loan Purchase Agreements
Bear Stearns Facility. In September 1997, the Company entered into a $300.0
million warehouse facility with Bear Stearns Mortgage Capital Corporation (the
"Bear Stearns Facility") under which the Company borrows funds on a short-term
basis to support the accumulation of loans prior to sale. The Bear Stearns
Facility bears interest at LIBOR plus 125 basis points (7.10% at December 31,
1997) and is for a term of one year, subject to certain provisions. Each
borrowing under the facility is subject to the lender's approval, and the
facility may be terminated by the lender upon 30 days prior notice. At December
31, 1997, there was no outstanding balance under the Bear Stearns Facility.
CoreStates Warehouse Facility. The Company borrows funds on a short-term
basis to support the accumulation of loans prior to sale. These short-term
borrowings were made under a warehouse line of credit with a group of banks for
which CoreStates Bank N.A. served as agent (the "Warehouse Facility"). Pursuant
to the Warehouse Facility, the Company had available a secured revolving credit
line of $20.0 million as of December 31, 1997 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 was settled on a revolving basis in conjunction with ongoing loan
sales and bore interest at a variable rate based on 25 basis points over the
higher of either the prime rate or the federal funds rate plus 50 basis points
(8.75% at December 31, 1997). The outstanding balance of this portion of the
Warehouse Facility was $13.9 million at December 31, 1997 as compared to $66.3
million at December 31, 1996. The Revolving Credit Line was terminated in
January 1998.
Greenwich Warehouse Facility. In January 1997, the Company entered into a
secured warehouse credit facility with Greenwich Capital Financial Products,
Inc., an affiliate of Greenwich Capital Markets, Inc. (referred to herein,
including any affiliates as "Greenwich") to provide a $400.0 million warehouse
facility under which the Company borrows funds on a short-term basis to support
the accumulation of loans prior to sale (the "Greenwich Facility"). Advances
under the Greenwich Facility bore interest at a rate of LIBOR plus 150 basis
points (7.34% at December 31, 1997). This facility was terminated on December
31, 1997, at which time the Company and Greenwich entered into an extension
agreement through April 30, 1998 (as amended, the "Extension Agreement"). The
Extension Agreement provides for a maximum credit line of $100.0 million,
subject to adjustment by Greenwich, at an interest rate of LIBOR plus 200 basis
points and a fee of 0.25% of the aggregate principal balance of loans to be paid
to Greenwich in connection with any sale, securitization of any other transfer
to any third party of loans funded under this agreement. As of December 31,
1997, $63.5 million was outstanding under this agreement.
CIT Warehouse Facility. On February 3, 1998, CSC entered into a revolving
credit facility with The CIT Group/Equipment Financing, Inc. (the "CIT
Facility") to finance CSC's origination and purchase of mortgage loans, the
repayment of certain indebtedness and, subject to certain limits, other general
corporate purposes. The CIT Facility is guaranteed by the Company, and bears
interest at the prime rate plus 50 basis points. Pursuant to the CIT Facility,
CSC has available a secured revolving credit line in an amount equal to the
lesser of (i) $30.0 million or (ii) a commitment calculated as a percentage
(generally 80% or 85%) of the mortgage loans securing the CIT Facility. The CIT
Facility is also subject to sublimits on the amount of certain varieties of
mortgage loan products that may be used to secure advances thereunder. In
addition, the CIT Facility is secured by a pledge of 65% of the capital stock of
CSC-UK and certain residual securities pledged by the Company.
The carrying amount of the financing facilities is considered to be a
reasonable estimate of fair value.
12. 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.
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. There were no
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open positions at December 31, 1997. During the years ended December 31, 1997
and 1996, the Company recognized interest income on securities purchased under
agreements to resell of $4,174,561 and $1,528,797, respectively.
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. There were no open positions at December 31,
1997. During the years ended December 31, 1997 and 1996, the Company recognized
interest expense on securities sold but not yet purchased of $5,155,695 and
$1,844,403, respectively.
During the years ended December 31, 1997 and 1996, the Company recognized
gains on these transactions of $453,086 and $429,688, respectively.
13. Notes and Loans Payable
In May 1997, the Company issued $300.0 million aggregate principal amount
of 12 3/4% Senior Notes due September 1, 2004 in a private placement. Such Notes
are not redeemable prior to maturity except in limited circumstances. The coupon
at 12 3/4% per annum, is payable semi-annually on each June 1 and December 1
which commenced December 1, 1997. In September 1997, the Company completed the
exchange of such Notes for a like principal amount of 12 3/4% Series A Senior
Notes due 2004 (the "Notes") which have the same terms in all material respects,
except for certain transfer restrictions and registration rights.
At December 31, 1996, notes and loans payable of $111.5 million were
outstanding. This represented $100.0 million outstanding under a senior
secured facility, $6.5 million of advances under the US Greenwich Facility and
a $5.0 million term loan with the First National Bank of Boston. The $111.5
million was repaid with proceeds from the Notes.
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
was converted into shares of 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 the Common Stock (at a conversion
price of $26.25 per share) pursuant to the terms of the Convertible Debentures.
To induce conversion, the Company issued an additional 342,708 shares of Common
Stock and paid the holders of the induced Convertible Debentures $420,000 in
cash. In the second quarter of 1997, these transactions resulted in the
reduction of Convertible Debentures by $14.0 million, a charge to interest
expense of $4.7 million related to the fair market value of the 342,708
inducement shares ($4.3 million) and the cash payment and an increase in
stockholders' equity of $18.2 million due to the issuance of the conversion
shares and the inducement shares. The net effect of these transactions was an
increase of $13.6 million to stockholders' equity in the second quarter of 1997.
During 1997, an aggregate of $14.1 million of Convertible Debentures had been
converted into Common Stock, including the induced conversion described above.
As of December 31, 1997, there were $129.6 million of Convertible Debentures
outstanding.
15. Convertible Preferred Stock
Series A Preferred Stock
In April 1997, the Company completed the private placement of 5,000 shares
of its 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), with an initial liquidation preference (the "Liquidation Preference")
of $10,000 per share, and related five-year warrants (the "Series A Warrants")
to purchase 500,000 shares of Common Stock with an exercise price of $20.625 per
share.
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Dividends on the Series A Preferred Stock are cumulative at the rate of 6%
of the Liquidation Preference per annum payable quarterly. Dividends are
payable, at the option of the Company, (i) in cash, (ii) in shares of Common
Stock valued at the closing price on the day immediately preceding the dividend
payment date or (iii) by increasing the Liquidation Preference in an amount
equal to and in lieu of the cash dividend payment.
During 1997, preferred stock dividends of $904,531 were paid to the
holders of the Series A Preferred Stock in the form of 67,863 shares of the
Common Stock. For the December 31, 1997 dividend, the Company elected to add an
amount equal to the dividend to the Liquidation Preference of the Series A
Preferred Stock in lieu of payments of such dividend. The new Liquidation
Preference is $10,150 per share. During 1997, there was also recognition of the
effect of a beneficial conversion feature related to the Series A Preferred
Stock of $1.1 million.
The Series A Preferred Stock is redeemable at the option of the Company at
a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. The Series A Preferred Stock is convertible into shares of Common
Stock, subject to redemption rights, at a conversion price equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
(or with respect to conversions from December 24, 1997 through the earlier of
the tenth day after the effective date of a registration statement or April 24,
1998, 127 calendar days) immediately preceding such conversion, discounted by up
to 4% and subject to certain adjustments.
As of December 31, 1997, an aggregate of 4,328 shares of the Series A
Preferred Stock had been converted (672 shares remain outstanding) into an
aggregate of 10,570,119 shares of Common Stock. As of December 31, 1997, all
Series A Warrants were outstanding.
Series B Preferred Stock
In September 1997, the Company completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), with an initial Liquidation Preference of $10,000 per share, and
related five-year warrants (the "Series B Warrants") to purchase 500,000 shares
of Common Stock with an exercise price per share equal to the lesser of (i)
$14.71 or (ii) 130% of the average closing sales prices over the 20 trading day
period ending on the trading day immediately prior to the first anniversary of
the original issuance of the Series B Warrants. Dividends on the Series B
Preferred Stock are cumulative at the rate of 6% of the Liquidation Preference
per annum payable quarterly. Dividends are payable, at the option of the
Company, (i) in cash, (ii) in shares of Common Stock valued at the closing price
on the day immediately preceding the dividend payment date or (iii) by
increasing the Liquidation Preference in an amount equal to and in lieu of the
cash dividend payment.
The first dividend payment date was December 31, 1997. For this dividend,
the Company elected to add an amount equal to the dividend to the Liquidation
Preference of the Series B Preferred Stock in lieu of payment of such dividend.
The new Liquidation Preference is $10,177 per share. During 1997, there was also
recognition of the effect of a beneficial conversion feature related to the
Series B Preferred Stock of $1.6 million.
The Series B Preferred Stock is redeemable at the option of the Company at
a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. In addition, the Series B Preferred Stock is redeemable at a
redemption price equal to 115% of the Liquidation Preference upon notice of, or
the announcement of the Company's intent to engage in a change of control event,
or, if such notice or announcement occurs on or after March 14, 1998, the
redemption price will equal 125% of the Liquidation Preference. The Series B
Preferred Stock is convertible into shares of Common Stock, subject to certain
redemption rights and restrictions, at a conversion price equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
immediately preceding such conversion, discounted up to 4% and subject to
certain adjustments.
As of December 31, 1997, an aggregate of 377 shares of Series B Preferred
Stock had been converted (4,623 shares remain outstanding) into an aggregate of
6,281,295 shares of Common Stock. As of December 31, 1997, all Series B Warrants
were outstanding.
As of December 31, 1997, if all of the outstanding shares of the Series A
Preferred Stock and those shares of the Series B Preferred Stock not subject to
conversion restrictions, were converted into Common Stock, the Company would not
have sufficient authorized shares of Common Stock to satisfy all of these
conversions.
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In addition, pursuant to the terms of the Company's Series A Preferred
Stock and the Company's Series B Preferred Stock (together the "Preferred
Stock"), the Company is required to continue the listing or trading of the
Common Stock on Nasdaq or certain other securities exchanges. As a result of the
delisting of the Common Stock from the Nasdaq National Market (see Note 28), (i)
the conversion restrictions that apply to the Series B Preferred Stock are
lifted (prior to the delisting, no more than 50% of the 5,000 shares of Series B
Preferred Stock initially issued could be converted) and (ii) the conversion
period is increased to 15 consecutive trading days and the conversion discount
is increased to 10% (prior to the delisting, the conversion price was equal to
the lowest daily sales price of the Common Stock during the four consecutive
trading days immediately preceding conversion, discounted by up to 5.5%). In
addition, as a result of the delisting of the Common Stock and during the
continuance of such delisting, (i) the dividend rate is increased to 15% and
(ii) the Company is obligated to make monthly cash payments to the holders of
the Preferred Stock equal to 3% of the $10,000 liquidation preference per share
of the Preferred Stock, as adjusted, provided that if the Company does not make
such payments in cash, such amounts will be added to the Liquidation Preference.
Based on the current market price of the Common Stock, the Company does not have
available a sufficient number of authorized but unissued shares of Common Stock
to permit the conversion of all of the shares of the Preferred Stock. At
December 31, 1997, the Company is precluded from paying dividends under Delaware
law.
16. Stockholders' Equity (Deficit)
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.
During 1997, the Company issued 204,288 shares of Common Stock resulting
in an increase to Stockholders' equity of $831,907.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance of 876,040 shares of Common Stock (see Note 14). The net result of this
transaction was an increase of $18.2 million to Stockholders' equity.
In April and September 1997, the Company issued 5,000 shares,
respectively, (10,000 shares in total) of preferred stock (see Note 15). During
1997, 4,705 shares of preferred stock were converted into 16,851,414 shares of
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Common Stock. In addition, 67,863 shares of Common Stock were issued as
preferred stock dividends. The net result of these transactions was an increase
of $98.0 million to Stockholders' equity.
During 1997, the Company purchased 70,000 shares of Common Stock which
resulted in a decrease in Stockholders' equity of $175,000.
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 a discretionary annual profit sharing contribution on behalf of its
employees. The Company's contribution to the plan amounted to $155,011, $87,126
and $25,319 for the years ended December 31, 1997, 1996 and 1995, respectively.
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. For the plan periods ending June 30, 1997 and December 31,
1997, employees purchased 11,754 and 17,345 shares at a price of $16.95 and
$0.43 per share, respectively. In accordance with APB No. 25, "Accounting for
Stock Issued to Employees", the Stock Purchase Plan is deemed to be
non-compensatory and results in no expense.
The Directors Plan
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 15,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible
non-employee director of the Company. Initial options granted under the
Directors Plan generally vest 50% upon the first anniversary of the grant date
and 50% upon the second anniversary of the grant date. Additional options
generally vest upon the first anniversary of the grant date. The exercise price
of any options granted under the Directors Plan is the fair market value of the
Common Stock on the date of grant. No more than 400,000 shares of Common Stock
may be issued upon exercise of options granted under the Directors Plan, subject
to adjustment to reflect stock splits, stock dividends and similar capital stock
transactions. Options may be granted under the Directors Plan until June 1,
2005.
Stock Option Plans
Effective June 1, 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan (the "1995
Stock Option Plan"). No more than 3,600,000 shares of Common Stock may be issued
upon exercise of options granted under the 1995 Stock Option Plan, and no
eligible person may receive options to purchase more than 600,000 shares of
Common Stock during any calendar year, subject to adjustment to reflect stock
splits, stock dividends and similar capital stock transactions. Options granted
under the 1995 Stock Options Plan vest over periods not exceeding six years. The
exercise price of the options granted under the 1995 Stock Option Plan
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cannot be less than the fair market value of the Common Stock on the date of
grant. Options may be granted under the 1995 Stock Option Plan until June 1,
2005.
Effective April 17, 1997, the Board of Directors adopted, and the
stockholders of the Company approved, the 1997 Stock Option Plan (the "1997
Stock Option Plan"). No more than 1,500,000 shares of Common Stock may be issued
upon exercise of options granted under the 1997 Stock Option Plan, and no
eligible person may receive options to purchase more than 500,000 shares of
Common Stock during any calendar year, subject to adjustment to reflect stock
splits, stock dividends and similar capital stock transactions. Options granted
under the 1997 Stock Option Plan vest over periods not exceeding one year. The
exercise price or the options granted under the 1997 Stock Option Plan cannot be
less than the fair market value of the Common Stock on the date of grant.
Options may be granted under the 1997 Stock Option Plan until April 17, 2007.
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 1997, 1996 and 1995, respectively: (1) dividend
yield of zero; (2) expected volatility of 51%, 51% and 50%; (3) risk-free
interest rates of 6.7%, 6.1% and 6.0% and (4) expected lives of 4.9, 5.2 and 4.8
years.
A summary of the status of the Company's stock option plans as of December
31, 1997, 1996 and 1995, and changes during the years ending on these dates is
presented below:
1997 1996 1995
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- -------- ---------- ------- ----------
Outstanding at beginning of year 1,988,200 $10.17 940,000 $2.52 - $ -
Granted 1,764,850 13.35 1,104,000 16.40 940,000 2.52
Exercised (101,000) 3.31 (54,800) 4.50 - -
Canceled (68,547) 17.92 (1,000) 10.00 - -
--------- --------- -------
Outstanding at end of year 3,583,503 $11.78 1,988,200 $10.17 940,000 $2.52
========= ========= =======
Options exercisable at year-end 1,344,503 540,200 180,000
Weighted average fair value of
options granted during the year $6.89 $9.21 $1.26
========= ========= =======
The following table summarizes information about stock options outstanding
at December 31, 1997:
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Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Number Weighted
Outstanding Average
at Remaining Number
December Contractual Weighted Exercisable at Weighted
31, Life Average December 31, Exercise
1997 (Years) Exercise Price 1997 Price
------------ ------------ -------------- ------------ -----------
Range of Exercise Prices
- ------------------------
$2.50 to $2.63 810,000 6.7 $2.52 690,000 $2.52
$10.00 to $10.88 429,200 3.4 10.04 199,200 10.08
$13.03 to $15.50 1,726,303 7.5 13.33 417,303 13.57
$20.50 to $23.13 618,000 5.6 20.77 38,000 22.86
------------ ------------
$2.50 to $23.13 3,583,503 6.5 $11.78 1,344,503 $7.65
============ ============
Had compensation costs for the Company's 1997, 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:
1997 1996 1995
---------------------------------------
(in thousands, except per share data)
As reported $ (418,899) $ 50,681 $ 11,575
Net earnings (loss) Pro forma $ (424,670) (1) $ 49,229 $ 11,404
Basic earnings (loss) per share As reported $ (12.60) $ 1.72 $ 0.54
Pro forma $ (12.77) $ 1.67 $ 0.54
Diluted earnings (loss) per share As reported $ (12.60) $ 1.66 $ 0.49
Pro forma $ (12.77) $ 1.61 $ 0.48
(1) As a result of its significant loss in 1997, the Company is in a tax loss
carryforward position and has taken a valuation allowance against its net
deferred tax asset (see Note 20). Therefore, the pro forma compensation
cost for 1997 is not tax effected.
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. Other Income
Other income includes the following for the years ended December 31, 1997,
1996 and 1995:
1997 1996 1995
----------- ----------- -----------
Servicing income $ 1,640,288 $ 2,791,348 $ 731,862
Earnings from partnership interest - 753,663 481,789
Gain on sale of available-for-sale securities 17,957,258 - -
Other income 704,337 135,927 92,329
----------- ----------- -----------
20,301,883 3,680,938 1,305,980
=========== =========== ===========
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Gain on sale of available-for-sale securities represent the pre-tax gain
on the sale of 1,090,910 shares of IMC during 1997 (see Note 4). Prior to IMC's
conversion to corporate form, the Company recorded its investment under the
equity method of accounting and as such recognized earnings from partnership
interest of $753,663 and $481,789 in 1996 and 1995, respectively.
19. Other Operating Expenses
Other operating expenses include the following for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
------------------------------------------
Professional fees $ 12,272,453 $ 5,754,908 $ 1,170,135
Travel and entertainment 2,656,336 2,069,164 855,615
Telephone 2,055,482 1,335,232 587,078
Foreclosure costs 3,266,222 161,490 34,388
Occupancy 2,476,794 1,186,797 533,896
Office and computer supplies 2,560,059 1,186,447 386,892
Temporary help 1,267,265 437,150 52,612
Equipment leasing 1,386,113 416,397 133,726
Depreciation 1,361,670 553,941 176,738
Reserves and allowances 7,054,969 642,244 159,019
Other 5,727,912 4,466,944 746,642
------------------------------------------
Total $ 42,085,275 $ 18,210,714 $ 4,836,741
------------------------------------------
20. Income Taxes
The provision for income taxes from continuing operations for the years
ended December 31, 1997, 1996 and 1995 are comprised of the following:
1997 1996 1995
------------------------------------------
Current
Federal $ (14,558,408) $13,436,306 $ 5,295,717
State 300,000 3,638,803 1,388,288
------------------------------------------
(14,258,408) 17,075,109 6,684,005
Deferred
Federal (3,818,166) 1,999,996 (224,620)
State - 249,355 (49,307)
------------------------------------------
(3,818,166) 2,249,351 (273,927)
------------------------------------------
Provision for income taxes
from continuing operations $ (18,076,574) $19,324,460 $ 6,410,078
==========================================
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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, 1997,
1996 and 1995 is as follows:
1997 1996 1995
------------------------------
Federal income tax at statutory rate (35.0%) 35.0% 35.0%
State and local taxes, net of federal
tax benefit - 5.5% 5.6%
Unrecognized deferred tax asset 19.3% - -
Other, net 2.5% 4.2% 3.5%
------------------------------
(13.2%) 44.7% 44.1%
==============================
Deferred income taxes included in the Consolidated Statements of Financial
Condition reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax reporting purposes primarily resulting from the use of
the cash basis for tax reporting purposes.
Deferred taxes as of December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---------------------------------------
Gross deferred tax assets $ 69,914,468 $10,293,342 $ 868,406
Less: valuation allowance (26,376,554) - (284,779)
---------------------------------------
Net deferred assets 43,537,914 10,293,342 583,627
---------------------------------------
Deferred tax liabilities 43,537,914 14,111,508 785,702
---------------------------------------
Net deferred tax liabilities $ - $ 3,818,166 $ 202,075
=======================================
The major components of the gross deferred tax assets and the gross
deferred tax liabilities are the net operating loss and the book versus tax
differences relating to the gain on sale of loans.
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.
The Company has certain federal and state net operating loss carryforwards
of $31.4 million which maybe subject to certain limitations and will expire at
2012. The valuation allowance in 1997 primarily relates to the uncertainty
associated with the future realization of the net operating loss carryforwards
and other deferred tax assets.
21. Extraordinary Item
In December 1995, the Company extinguished senior subordinated debentures
with proceeds from the public offering of its Common Stock (as more fully
described in Note 16). As a result of this early extinguishment of debt, the
Company recorded an extraordinary loss of $295,943, net of taxes.
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22. (Loss) Earnings per Share
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the years ended December 31, 1997, 1996 and 1995 is
as follows:
Income Shares Per Share
1997 (Numerator) (Denominator) Amount
- ------------------------------------------ -------------- ------------- ---------
Earnings (loss) from continuing operations $(118,505,912)
Less: Preferred stock dividends 4,547,061
-------------
Basic EPS
Earnings (loss) applicable to Common Stock (123,052,973) 33,244,212 $(3.70)
======
Effect of Dilutive Securities
Stock options - -
Warrants - -
Convertible preferred stock - -
Convertible Debenture - -
------------- ----------
Diluted EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $(123,052,973) 33,244,212 $(3.70)
============= ========== ======
1996
- ------------------------------------------
Earnings (loss) from continuing operations $23,875,285
Basic EPS
Earnings (loss) applicable to Common Stock $23,875,285 29,404,557 $0.81
======
Effect of Dilutive Securities
Stock options - 1,133,434
Convertible Debentures - -
------------- ----------
Diluted EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $23,875,285 30,537,991 $0.78
============= ========== ======
1995
- ------------------------------------------
Basic EPS
Earnings (loss) from continuing operations
before extraordinary item $8,120,381 21,243,536 $0.38
======
Effect of Dilutive
Securities
Warrants - 2,260,419
Stock options - 334,662
------------- ----------
Diluted EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $8,120,381 23,838,617 $0.34
============= ========== ======
For the year ended December 31, 1997, the incremental shares from assumed
conversions are not included in computing the diluted per share amounts because
their effect would be antidilutive since an increase in the number of shares
would reduce the amount of loss per share. Securities outstanding at December
31, 1997 that could potentially dilute basic EPS in the future are as follows:
Convertible Debentures; stock options; Series A Preferred Stock; Series B
Preferred Stock; Series A Warrants; and Series B Warrants. For the year ended
December 31, 1996, the effect of the Convertible Debentures is antidilutive and
is not included in the computation of diluted EPS.
EPS figures for the effected periods have been restated to reflect the
100% stock dividends paid in September 1995 and July 1996.
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23. Commitments and Contingencies
Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1997
are as follows:
1998 $ 3,651,115
1999 3,662,610
2000 3,048,558
2001 1,757,345
2002 71,150
-----------
Total $12,190,778
===========
Rent expense for office space amounted to $2.3 million, $1.1 million and
$484,426 for the years ended December 31, 1997, 1996 and 1995, respectively.
Obligations under capital leases total $7.1 million and represent leases
for office furniture, equipment, motor vehicles, and computer hardware and
software. Minimum annual capital lease payments at December 31, 1997 are as
follows:
1998 $ 2,551,773
1999 2,486,158
2000 1,681,250
2001 360,000
-----------
Total $ 7,079,181
===========
Litigation
In the normal course of business, aside from the matters discussed below,
the Company is subject to various legal proceedings and claims, the resolution
of which, in management's opinion, will not have a material adverse effect on
the consolidated financial position or the results of operations of the Company.
On or about September 29, 1997, a putative class action lawsuit (the
"Ceasar Action") was filed against the Company and two of its officers and
directors in the United States District Court for the Eastern District of New
York (the "Eastern District") on behalf of all purchasers of the Company's
Common Stock during the period from April 1, 1997 through August 15, 1997.
Between approximately October 14, 1997 and December 3, 1997, nine additional
class action complaints were filed against the same defendants, as well as
certain additional Company officers and directors. Four of these additional
complaints were filed in the Eastern District and five were filed in the United
States District Court for the Southern District of New York (the "Southern
District"). On or about October 28, 1997, the plaintiff in the Ceasar Action
filed an amended complaint naming three additional officers and directors as
defendants. The amended complaint in the Ceasar Action also extended the
proposed class period from November 4, 1996 through October 22, 1997. The
longest proposed class period of any of the complaints is from April 1, 1996
through October 22, 1997. On or about February 2, 1998, an additional lawsuit
brought on behalf of two individual investors, rather than on behalf of a
putative class of investors, was filed against the Company and certain of its
officers and directors in federal court in New Jersey (the "New Jersey Action").
In these actions, plaintiffs allege that the Company and its senior
officers engaged in securities fraud by affirmatively misrepresenting and
failing to disclose material information regarding the lending practices of the
Company's UK subsidiary, and the impact that these lending practices would have
on the Company's financial results. Plaintiffs allege that a number of public
filings and press releases issued by the Company were false or misleading. In
each of the putative class action complaints, plaintiffs have asserted
violations of Section 10(b) and
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Section 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Plaintiffs seek unspecified damages, including pre-judgment
interest, attorneys' and accountants' fees, and court costs.
The complaints filed in the Southern District actions have all been
transferred to the Eastern District. On December 5, 1997, the Eastern District
plaintiffs filed a motion for appointment of lead plaintiffs and approval of
co-lead counsel. The court has not yet ruled on plaintiffs' motion. The Company
anticipates that, at a minimum, all of the putative class action complaints will
be consolidated with the Ceasar Action in the Eastern District. In addition,
plaintiffs in the New Jersey Action have consented to pre-trial consolidation of
their case with the class actions currently pending in the Eastern District.
Accordingly, on March 25, 1998, the company and its defendant officers and
directors filed a motion with the federal Judicial Panel for Multidistrict
Litigation, which seeks consolidation of all current and future securities
actions, including the New Jersey Action, for pre-trial purposes before Judge
Sterling Johnson in the Eastern District.
In November 1997, Resource Mortgage Banking, Ltd., Covino and Company,
Inc. and LuxMac LLC filed against the Company, CSC, and two of the Company's
officers and directors in state court in Connecticut an application for a
prejudgment remedy. The object of the application for the prejudgment remedy was
to obtain a court order granting these plaintiffs prejudgment attachment against
assets of the Company and CSC in Connecticut pending resolution of plaintiffs'
underlying claims. Plaintiffs proposed to file an 18 count complaint against the
defendants seeking $60 million in purported damages that allegedly result from
an asserted breach of an alleged five-year oral contract. The proposed complaint
also sought injunctive relief, treble damages and punitive damages in an
unspecified sum. In February 1998, Judge William B. Lewis orally granted
defendants' motion to dismiss on the ground of forum non conveniens and entered
a judgment of dismissal. Shortly thereafter, in a memorandum of decision Judge
Lewis set forth his reasons for granting the motion to dismiss. Plaintiffs have
not filed an appeal of the order of dismissal and their time to do so has
expired.
In February 1998, Resource Mortgage Banking, Ltd., Covino and Company,
Inc. and LuxMac LLC filed an action against the Company, CSC, and two of the
Company's officers and directors in state court in New York. Plaintiffs'
complaint asserts 17 causes of action, including breach of contract, fraud and
conversion. Plaintiffs seek $60 million in purported damages that allegedly
result primarily from an asserted breach of an alleged five-year oral contract,
and also seek injunctive relief, treble damages and punitive damages in an
unspecified sum.
In March 1998, Plaintiffs filed papers seeking to have the New York court
direct the Company and CSC to refrain from selling certain assets known as
strip, residuals, excess servicing and/or servicing rights and their
substantial equivalent having as constituent any mortgage loan exceeding
$350,000 generated by the Company or CSC between September 2, 1994, and April
1, 1997, and any mortgage loan exceeding $500,000 generated by the Company or
CSC from April 1, 1997, to present. The New York Court has not yet determined
whether Plaintiffs are entitled to the relief that they have requested, but has
signed a temporary restraining order that, pending the Court's decision on
Plaintiffs' motion, requires the Company and CSC to refrain from the specified
sales. The time for the Company to respond to the complaint has not expired.
The Company intends to file a motion seeking dismissal of Plaintiffs' claims
and also an answer denying all liability.
Although no assurance can be given as to the outcome of these lawsuits,
the Company believes that the allegations in each of the actions are without
merit and that its disclosures were proper, complete and accurate. The Company
intends to defend vigorously against these actions and seek their early
dismissal. These lawsuits, however, if decided in favor of plaintiffs, could
have a material adverse effect on the Company.
Other
In October 1996, the Company received a request from the staff of the
Securities and Exchange Commission (the "Commission") for additional information
concerning the Company's voluntary restatement of its financial statements for
the quarter ended June 30, 1996. The Company initially valued the mortgage loans
in the J&J Acquisition and the Greyfriars Acquisition at the respective fair
values which were estimated to approximate par (or historical book value). Upon
the subsequent sale of the mortgage portfolios, the Company recognized the fair
value of the mortgage servicing receivables retained and recorded a
corresponding gain for the fair value of such mortgage servicing receivables.
Upon subsequent review, the Company determined that the fair value of such
mortgage servicing rights should have been included as part of the fair value of
the mortgage loans acquired as a
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result of such acquisition. The effect of this accounting change resulted in a
reduction in reported earnings of $26.5 million. Additionally, as a result of
this accounting change the goodwill initially recorded in connection with such
acquisitions was reduced resulting in a reduction of goodwill amortization of
approximately $496,000 from the previously reported figure for the second
quarter. On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the
Greyfriars Acquisition should be made to the financial statements for the
quarter ended June 30, 1996. These adjustments reflect a change in the
accounting treatment with respect to restructuring charges and deferred taxes
recorded as a result of such acquisitions. This caused an increase in the
amount of goodwill recorded which resulted in an increase of amortization
expense as previously reported in the second quarter of 1996 of $170,692. The
Staff of the Securities and Exchange Commission has requested additional
information from the Company in connection with the accounting related to the
J&J Acquisition and the Greyfriars Acquisition. The Company is supplying such
requested information. In mid-October 1997, the Commission authorized its staff
to conduct a formal investigation which, to date, has continued to focus on the
issues surrounding the restatement of the financial statements for the quarter
ended June 30, 1996. The Company is continuing to cooperate fully in this
matter.
As a result of the Company's recent negative operating results, the
Company has received inquiries from the New York State Department of Banking
regarding the Company's qualifications to continue to hold a mortgage banking
license. In connection with such inquiries, the Company was fined $50,000 and
has agreed to provide the banking department with specified operating
information on a timely basis and to certain restrictions on its business.
Although the Company believes it complies with its licensing requirements, no
assurance can be given that additional inquiries by the banking department or
similar regulatory bodies will not have an adverse effect on the licenses that
the Company holds which in turn could have a negative effect on the Company's
results of operations and financial condition.
Employee Agreements
The Company has employment agreements with 9 officers of the Company. The
Company guarantees annual compensation ranging from $200,000 to $260,000 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.
24. Concentrations
For the years ended December 31, 1997, 1996 and 1995, revenues from loan
sales and loan servicing constituted the primary source of the Company's
revenues. For the years ended December 31, 1997 and 1995, there were no
institutional purchasers who accounted for more than 10% of the total revenues.
For the year ended December 31, 1996, there was one institutional purchaser who
acted as a conduit to securitize the Company's loan originations that accounted
for 10% or more (36.7%) of the total revenues.
25. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair market value.
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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 on the Company's Sav*-A-Loan(R) trading
securities was determined by using estimated discounted future cash flows taking
into consideration the current interest rate environment, current prepayment
rates and default experience. Such securities are carried at fair value. The
fair value on the Company's home equity trading securities was based upon net
realizable value.
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 $95.2 million and $94.3 million at
December 31, 1997 and 1996, 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 12.2% and 16.7% at
December 31, 1997 and 1996, 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 and Senior Notes: Fair value was based
on quoted market prices. As of December 31, 1997, the fair values were less than
the carrying values for 1997 and 1996 by $123.1 million and $156.0 million,
respectively.
26. Supplemental Schedule of Noncash Investing and Financing Activities
The following is a summary of the significant noncash investing and
financing activities during the years ended 1997 and 1996:
1997:
----
Reclassification of mortgages held for sale to
mortgages held for investment $14,641,389
Conversion of Convertible Debentures into
Common Stock 14,110,000
Preferred Dividends paid in the form of
Common Stock 904,531
1996:
----
Available-for-sale securities received $14,618,194
Reclassification of morgages held for sale to
morgages held for investment 4,182,414
Conversion of Convertible Debentures into
Common Stock 20,000
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27. 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,
------------ ----------- ------------ ------------
1996
Revenues $15,832,612 $20,887,927 $ 32,873,161 $ 38,254,177
Earnings from continuing operations 3,433,928 7,111,505 8,193,845 5,136,007
Earnings from discontinued operations, net of taxes 5,839,216 4,014,491 6,220,992 10,730,898
Net earnings $ 9,273,144 $11,125,996 $ 14,414,837 $ 15,866,905
Earnings per common share(1)(2):
Basic
Continuing operations $ 0.12 $ 0.24 $ 0.28 $ 0.18
Discontinued operations 0.20 0.14 0.21 0.36
----------- ----------- ------------ -------------
Net earnings $ 0.32 $ 0.38 $ 0.49 $ 0.54
=========== =========== ============ =============
Diluted
Continuing operations $ 0.11 $ 0.24(3) $ 0.26 $ 0.16(3)
Discontinued operations 0.20 0.13 0.17 0.35
----------- ----------- ------------ -------------
Net earnings $ 0.31 $ 0.37 $ 0.43 $ 0.51
=========== =========== ============ =============
1997
Revenues $45,549,383 $54,737,559 $(25,384,830) $(40,870,088)
Earnings (loss) from continuing operations 7,486,095 7,474,266 (47,371,328) (86,094,945)
Earnings (loss) from discontinued operations
net of taxes 9,308,696 (3,462,789) (22,271,374) (229,480,533)
Loss on disposal of discontinued operations - - - (49,939,996)
Net earnings (loss) 16,794,791 4,011,477 (69,642,702) (365,515,474)
Preferred stock dividends - 1,066,874 1,035,315 2,444,872
Net earnings (loss) applicable to common stock $16,794,791 $ 2,944,603 $(70,678,017) $(367,960,346)
Earnings (loss) per common share(1)(2):
Basic
Continuing operations $ 0.25 $ 0.21 $ (1.50) $ (2.21)
Discontinued operations 0.32 (0.11) (0.69) (5.72)
Disposal of discontinued operations - - - (1.25)
----------- ----------- ------------ -------------
Net (loss) earnings $ 0.57 $ 0.10 $ (2.19) $ (9.18)
=========== =========== ============ =============
Diluted
Continuing operations $ 0.24(3) $ 0.20(4) $ (1.50) $ (2.21)
Discontinued operations 0.30 (0.11) (0.69) (5.72)
Disposal of discontinued operations - - - (1.25)
----------- ----------- ------------ -------------
Net (loss) earnings $ 0.54 $ 0.09 $ (2.19)(5) $ (9.18) (5)
=========== =========== ============ =============
(1) In the fourth quarter of 1997, the Company adopted SFAS No. 128. Prior
period amounts have been restated to comply with the requirements of SFAS
No. 128 (see Notes 3 and 22).
(2) The total of the four quarters' earnings (loss) per share may not equal
the annual earnings (loss) per share.
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(3) For these quarters, the Convertible Debentures are antidilutive and are
not included in the computation of diluted EPS. Earnings from continuing
operations is used as the "control number" in determining whether these
potential common shares are dilutive or antidilutive.
(4) For this quarter, Convertible Debentures and convertible preferred stock
are antidilutive and are not included in the computation of diluted EPS.
Earnings from continuing operations is used as the "control number" in
determining whether these potential common shares are dilutive or
antidilutive.
(5) For these quarters, the incremental shares from assumed conversions are
not included in computing the diluted per share amounts because their
effect would be antidilutive since an increase in the number of shares
would reduce the amount of loss per share. Therefore, basic and diluted
EPS figures are the same amount
28. Subsequent Events
Reorganization. In February 1998, the Company announced that it has begun
implementing a restructuring plan that includes streamlining and downsizing its
operations. The Company has closed its branch operations in Virginia and
significantly reduced its correspondent originations for the foreseeable future
and has exited its conventional lending business. Accordingly, the Company
expects to record a restructuring charge in the first quarter of 1998 of
approximately $2.6 million. Of this amount, $525,000 represents severance
payments made to 136 former employees and $2.1 million represents costs incurred
with lease obligations and write-offs of assets no longer in service.
Nasdaq National Market. On October 27, 1997, the Company received requests
from the Nasdaq Stock Market, Inc. ("Nasdaq") for information regarding the
Company's compliance with Nasdaq's listing requirements and corporate governance
rules. Following submission to Nasdaq of the requested information, the Company
was notified on December 5, 1997 by Nasdaq that the Company's Common Stock (the
"Common Stock") would be delisted from the Nasdaq National Market. On January
28, 1998, the Company received notice from Nasdaq that the Common Stock would be
moved from the Nasdaq National Market to the Nasdaq SmallCap Market effective
with the opening of business on January 29, 1998.
The Company believes that it meets all of the initial inclusion
requirements for the listing on the Nasdaq SmallCap Market, with the exception
of the $4.00 per share bid price requirement. Nasdaq has adopted new maintenance
standards, which became effective on February 23, 1998, requiring a minimum
$1.00 per share bid price which the Company's Common Stock currently does not
meet. Accordingly, Nasdaq has informed the Company that the securities were
moved to the Nasdaq SmallCap Market pursuant to a waiver of the $4.00 per share
initial inclusion requirement and an exception to the $1.00 per share
maintenance requirement. The exception requires the Company to achieve a bid
price of at least $1.00 per share on or before May 22, 1998. If the Company is
deemed to have met the terms of the exception, the Common Stock shall continue
to be listed on the Nasdaq SmallCap Market.
The Company believes that it can meet this condition; however, there can
be no assurances that it will be able to do so. If at some future date the
Company's Common Stock should cease to be listed on the Nasdaq SmallCap Market,
the Common Stock may be listed on the OTC Bulletin Board. For the duration of
the exception, the Company's Nasdaq symbol will be (CTYSC).
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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
- ---- --- --------------------------
Steven M. Miller 42 Chief Executive Officer, President and Director;
Senior Vice President and Director of CSC
Robert C. Patent 47 Vice Chairman of the Board, Executive Vice
President, Treasurer and Director; Executive
Vice President, Treasurer, Assistant Secretary
and Director of CSC
Robert Grosser 40 Chairman of the Board and Director; Director
of CSC
Jonah L. Goldstein 62 General Counsel and Director; General Counsel
and Director of CSC
Arthur P. Gould 80 Director
Hollis W. Rademacher 62 Director
Peter S. Kucma 48 President and Director of CSC
Cheryl P. Carl 45 Vice President and Secretary; Senior Vice
President, Secretary and Director of CSC
Steven P. Weiss 41 Senior Vice President/Sales and Director of CSC
Tim S. Ledwick 40 Vice President and Chief Financial Officer;
Senior Vice President, Chief Financial Officer
of CSC
Robert J. Blackwell 59 Senior Vice President/Special Products Division
of CSC
Gregg L. Armbrister 42 Senior Vice President/Operations of CSC
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 and CSC are appointed by their respective Boards of Directors. The name
and business experience during the past five years of each director and
executive officer of the Company are described below:
Steven M. Miller has been Chief Executive Officer and President since
November 1997. Mr. Miller has also served as Senior Vice President and Director
of CSC since March 1997. Previously, Mr. Miller was Senior Vice President and
Co-Head of the Asset Backed Group of Greenwich Capital Markets, Inc. Mr. Miller
became a Senior Vice President at Greenwich Capital Markets, Inc. in 1992 and in
May 1995 he was given the additional role of Co-Head of the Asset Backed Group.
Prior to that time, Mr. Miller was a Vice President at Greenwich Markets, Inc.
Robert C. Patent has been Executive Vice President and a Director of the
Company since April 1994, Treasurer since June 1995 and the Vice Chairman of its
Board since September 1995. Mr. Patent also has served as Executive Vice
President and as Director of CSC since October 1990 and as Treasurer since
January 1994 and Assistant Secretary since January 1995. Mr. Patent has served
as a Director of CSC-UK since its formation. Mr. Patent currently serves as
President of Colby Capital Corp.
Robert Grosser has been a Director of the Company since April 1994 and its
Chairman of the Board since September 1995. Mr. Grosser has also served as a
Director of CSC since its inception. Until
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resigning from such positions in November 1997, Mr. Grosser had also served as
Chief Executive Officer and President of the Company and CSC. Mr. Grosser 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.
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. 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.
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,
and as Director of Wintrust Financial Corp. From 1988 to 1993, Mr. Rademacher
served as Chief Financial Officer of Continental Bank Corp.
Peter S. Kucma has been President and a Director of CSC since November
1997. Previously he served as Senior Vice President and Chief Operating Officer
of CSC since May 1997. Prior to joining the Company, Mr. Kucma was employed by
GE Capital Mortgage Services, Inc., serving as Vice President (General Manager)
- - GE Capital Home Equity Services from 1996 through April 1997, Vice President -
Operations Management/Business Development from 1994 to 1996, Vice President -
Asset and Risk Management from 1991 to 1994 and Vice President of Finance and
Chief Financial Officer from 1990 to 1991. From 1985 to 1990, Mr. Kucma served
as Vice President of Finance and Chief Financial Officer of Travelers Mortgage
Services, Inc.
Cheryl P. Carl has been Secretary of the Company since June 1994 and Vice
President since June 1996. Ms. Carl also has served as Vice President of CSC
since January 1994, Secretary of CSC since June 1994 and as Assistant Treasurer
and as Director of CSC since January 1995. Ms. Carl was promoted to Senior Vice
President/Operations of CSC in June 1996. 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.
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.
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Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995 and Vice President since June 1996. Mr. Ledwick also has served as Vice
President, Chief Financial Officer of CSC since September 1994. Mr. Ledwick was
promoted to Senior Vice President of CSC in March 1997. From 1992 until 1994,
Mr. Ledwick was Vice President/Controller-Subsidiaries and from 1989 until 1992
was Controller-Subsidiaries for River Bank America.
Robert J. Blackwell has been Vice President/Special Products Division of
CSC since January 1996. In August 1996, Mr. Blackwell was promoted to Senior
Vice President/Specialty Products 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. Mr. Blackwell is a Director of Colony Mortgage Inc. and Empire Mortgage,
Inc.
Gregg L. Armbrister has been Senior Vice President/Operations of CSC since
May 1997. Prior to joining the Company, Mr. Armbrister served as President and
Managing Director of K. M'Kenzie & Associates Inc. from 1989 through April 1997,
a consulting firm providing services to mortgage brokers, bankers, thrifts and
investment firms in connection with organization structures and controls,
business development, acquisitions, dispositions and loan origination,
underwriting, servicing and secondary marketing. From 1987 to 1989, Mr.
Armbrister served as Senior Vice President and consultant to Norwest Mortgage
Inc., and from 1984 to 1987 he served as President and a mortgage banker for
American First Mortgage Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
executive officers and directors and persons who own more than 10% of the
Company's Common Stock to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission (the "Commission").
Executive officers, directors and 10% stockholders are required by the
Commission to furnish the Company with copies of all Forms 3, 4 and 5 that they
file.
Based solely on its review of copies of such forms and such written
representations regarding compliance with such filing requirements as were
received from its executive officers, directors and greater than 10%
stockholders, the Company believes that all such Section 16(a) filing
requirements were complied with respect to the Company's 1997 fiscal year.
Item 11. Executive Compensation
Board Of Directors
The Company maintains a compensation committee, an audit committee, a
stock option plan committee and a stock purchase plan committee of the Board of
Directors. Messrs. Gould and Rademacher serve on the compensation committee,
Messrs. Gould, Rademacher and Patent serve on the audit committee and Messrs.
Gould and Rademacher serve on the stock option plan committee and the stock
purchase plan committee.
Non-Employee Director Compensation
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 15,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible
non-employee director of the Company. The exercise price of any options granted
under the Directors Plan is the fair market value of the Common Stock on the
date of grant. No more than 400,000 shares of Common
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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 1997, Messrs. Gould and Rademacher each were granted
options to purchase 15,000 shares of Common Stock under the Directors Plan.
In addition, non-employee directors of the Company receive an annual
retainer of $30,000 (the "Annual Retainer"), if chairman of a committee of the
Board of Directors, up to an additional $6,000, and are reimbursed for
reasonable expenses incurred in connection with attendance at Board of
Directors' meetings or committee meetings.
Compensation Committee Interlocks and Insider Participation
During fiscal 1997, the Compensation Committee was comprised of Messrs.
Gould and Rademacher, neither of whom are executive officers of the Company.
None of the executive officers of the Company served on the board of directors
or on the compensation committee of any other entity, any of whose officers
served either on the Board of Directors or on the Compensation Committee of the
Company.
Executive Officers' Compensation
The following table sets forth certain information concerning the annual
and long-term compensation earned by the Company's Chief Executive Officers and
each of the four other most highly compensated individuals who were serving as
executive officers on December 31, 1997 and a former executive officer of the
Company who would have been one of such four individuals but for the fact such
individual was not serving as an executive officer on December 31, 1997 whose
annual salary and bonus during the fiscal years presented exceeded $100,000
(the "Named Executive Officers").
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Summary Compensation Table
Long Term
Compensation
---------------------
Annual Compensation Awards
--------------------------- ---------------------
Name and Fiscal Securities Underlying All Other
Principal Position Year Salary Bonus Options/SARs Compensation
----------------------------- ------- --------- ---------- --------------------- ------------
Steven M. Miller 1997 $201,923 $ -- 500,000 $ 80,000(2)
President and Chief Executive 1996 -- -- -- --
Officer; Senior Vice 1995 -- -- -- --
President of CSC (1)
Robert Grosser 1997 $274,566 $ -- 25,000 $ --
President and Chief Executive 1996 268,068 1,326,997 -- 47,997(4)
Officer; President of CSC (3) 1995 259,155 275,788 -- 3,915(5)
Robert C. Patent 1997 $232,274 $ -- 20,000 $ --
Executive Vice President and
Treasurer; 1996 226,174 884,665 -- 70,990(6)
Executive Vice President and 1995 219,550 183,858 -- 3,915(5)
Treasurer of CSC
Steven P. Weiss 1997 $215,720 $118,000 12,000 $ --
Senior Vice President/Sales 1996 180,235 378,287 -- 3,000(5)
of CSC 1995 187,798 30,000 150,000 3,915(5)
David Steene 1997 $255,899 272,884 16,000 $1,004,100(8)
Managing Director of 1996 218,359 726,038 -- --
CSC-UK (7) 1995 104,867 -- -- --
Gerald Epstein 1997 $253,899 $272,884 16,000 $1,004,100(8)
Financial Director of 1996 218,359 726,038 -- --
CSC-UK (7) 1995 104,867 -- -- --
Martin Brand 1997 $190,876 $272,167 10,750 $956,572(8)
Lending Director of 1996 218,359 726,038 -- --
CSC-UK (9) 1995 104,867 -- -- --
- ------------------
(1) Mr. Miller has been the President and Chief Executive Officer of the
Company since November 1997.
(2) Represents consulting fees paid to Mr. Miller prior to his joining
the Company.
(3) Mr. Grosser resigned as President and Chief Executive Officer of the
Company and President of CSC effective November 1997.
(4) Represents premium payments of $44,997 made by the Company pursuant to a
split-dollar life insurance policy that provided a benefit of $13,463
and $3,000 paid as qualified matching contributions under the Company's
employee benefit plan.
(5) Reflects amounts paid as qualified matching contributions under the
Company's employee benefit plan.
(6) Represents premium payments of $67,990 made by the Company pursuant to
a split-dollar life insurance policy that provided a benefit of $2,136
and $3,000 paid as qualified matching contributions under the Company's
employee benefit plan.
(7) Resigned effective February 1998.
(8) Payable in connection with the resignation of such person.
(9) Resigned effective September 1997.
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Employment Agreements
The Company has employment agreements with each of the Named Executive
Officers other than Mr. Miller, as well as with certain other executive officers
of the Company and CSC. Each agreement, other than that with Mr. Goldstein,
requires the executive officer to devote his or her full time and best efforts
to the Company during the term of the agreement.
The employment agreements with Messrs. Grosser and Patent are for a term
commencing January 1, 1995 and ending December 31, 1998. The agreements provide
for an annual salary of $260,000 and $220,000, respectively, plus increases
based on the percentage increase, if any, in the Consumer Price Index, or by a
greater amount, at the discretion of the Board of Directors. In addition, the
agreements provide for payment to Mr. Grosser and Mr. Patent of an amount equal
to 1.5% and 1.0%, respectively, of the pre-tax profits of the Company, as
determined by the Company's outside auditors in accordance with generally
accepted accounting principles, in excess of certain scheduled thresholds.
The employment agreements with Ms. Carl and Messrs. Weiss and Goldstein
are for a term commencing on July 1, 1995 and continuing through December 31,
1998. Each agreement provided for an annual salary of $160,000, plus increases
based on the percentage increase, if any, in the Consumer Price Index, or by a
greater amount, in the discretion of the Board of Directors. As of September 1,
1996, the annual salary was increased to $210,000 for the remaining term of each
agreement. In addition, each agreement provided for payment of an annual bonus
of $30,000 if the Company's gross volume of loans originated by the Company in
the case of Ms. Carl and Messrs. Weiss and Goldstein exceeds certain specified
levels for each year during the term of the agreement. Such bonus provision was
amended as set forth below. In addition, each agreement provided for a one-time
grant of 150,000 incentive stock options at an exercise price of $2.50 per share
in accordance with the Company's 1995 Stock Option Plan (the "1995 Stock Option
Plan"). Of the options granted, 40,000 options were exercisable upon grant,
40,000 options as of July 1, 1996, 40,000 options as of July 1, 1997 and 30,000
options as of July 1, 1998.
The employment agreement with Mr. Ledwick is for a term commencing on
January 1, 1996 and continuing until December 31, 1999. The agreement provided
for an annual salary of $150,000 plus increases based on the percentage
increase, if any, in the Consumer Price Index, or by a greater amount, in the
discretion of the Board of Directors. In January 1997, the annual salary was
increased to $200,000. In addition, the agreement provided for payment of an
annual bonus of $15,000 and an additional bonus at the option of the Board of
Directors. Such bonus provision was amended as set forth below. The agreement
also provided for a one-time grant of 100,000 incentive stock options at an
exercise price of $10.00 per share in accordance with the 1995 Stock Option
Plan. Of the options granted, 40,000 options were exercisable upon grant, 30,000
options as of January 1, 1997 and 30,000 options as of January 1, 1998.
As of September 1, 1996, the Board of Directors approved a three year
bonus pool which replaced the existing bonus provisions in the employment
agreements of Messrs. Ledwick, Weiss and Goldstein and Ms. Carl. The pool
provides that each, along with certain others, share in a bonus pool of 5% of
the pre-tax profits of CSC above certain thresholds. The participants in the
pool receives a pro rata portion of the pool based on his or her annual salary
up to 200% of salary with the payment of any excess being deferred and paid over
three years, one-third each year. Any deferred payment will earn interest at the
Citibank N.A. prime rate plus one percent. The CSC earnings threshold for
providing a pool will be increased based on the prior year's pre-tax earnings
plus the percentage increase, if any, in the Consumer Price Index. For 1997,
such threshold was not reached.
The employment agreement with Mr. Blackwell is for a term commencing on
February 1, 1996 and continuing until January 31, 1999. The agreement provides
for an annual salary of $200,000 plus increases based on the percentage
increase, if any, in the Consumer Price Index, or by a greater amount, in the
discretion of the Board of Directors. In addition, the agreement provides for
the payment of a bonus at the option of the Board of Directors. The agreement
also provided for a one-time grant of 300,000 incentive stock options at an
exercise price of $10.00 per share in accordance with the 1995 Stock Option
Plan. Of
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the options granted, 100,000 options were exercisable as of January 15, 1997,
100,000 options as of January 15, 1998 and 100,000 options as of January 15,
1999.
The employment agreement with Peter S. Kucma is for a term commencing on
May 1, 1997 and continuing until April 30, 2001. The agreement provides for an
annual salary of $250,000 plus increases based on the percentage increase, if
any, in the Consumer Price Index, or by a greater amount, in the discretion of
the Board of Directors. In addition, the agreement provides for the payment of
an annual bonus, equal to not less than the base salary for that year, payable
upon the attainment of certain performance goals. The agreement also provided
for a one-time bonus of $50,000 ($25,000 of which was paid on May 1, 1997 and
$25,000 of which is payable on May 1, 1998) and a one-time grant of 400,000
incentive stock options at an exercise price of $13.25 per share in accordance
with the 1995 Stock Option Plan. Of the options granted, 100,000 options become
exercisable in each of 1998, 1999, 2000 and 2001.
The employment agreement with Gregg L. Armbrister is for a term commencing
on May 1, 1997 and continuing until April 30, 2001. The agreement provides for
an annual salary of $210,000 plus increases based on the percentage increase, if
any, in the Consumer Price Index, or by a greater amount, in the discretion of
the Board of Directors. In addition, the agreement provides for the payment of
an annual bonus, payable upon the attainment of certain performance goals. The
agreement also provided for a one-time grant of 200,000 incentive stock options
at an exercise price of $13.25 per share in accordance with the 1995 Stock
Option Plan. Of the options granted, 50,000 options were immediately exercisable
and 50,000 options become exercisable in each of 1998, 1999 and 2000. In
addition, the agreement provides that, during each year of the term of the
agreement, if the pre-tax profits of the Company exceed those of the previous
year by 20% or more, Mr. Armbrister will receive immediately exercisable options
to purchase no less than 6,750 shares at the then current market price.
CSC-UK entered into employment agreements dated as of April 5, 1995 with
Messrs. Steene, Brand and Epstein which extend through April 5, 1999. Each
agreement provides for an annual salary of L150,000 plus increases based on the
percentage increase, if any, in the Retail Price Index. In addition, each
agreement provides for the payment of an annual bonus related to the pre-tax
profits of CSC-UK not to exceed L500,000 in the aggregate for the term of the
agreement. As of September 1, 1996, the Board of Directors approved a three year
bonus pool which provided that for 1996, because pre-tax profits of CSC-UK
exceeded $8.2 million, each shared in a bonus pool of 3% of the pre-tax profits
of CSC-UK. The participants in the pool received a pro rata portion of the pool
based on his annual salary up to 200% of salary with the payment of any excess
being deferred and paid over three years, one-third each year. Any deferred
payment will earn interest at the Citibank N.A. prime rate plus one percent. For
1997, the CSC-UK earnings threshold for providing a pool was increased based on
the prior year's pre-tax earnings plus the percentage increase, if any, in the
Consumer Price Index.
Employee Stock Plans
Effective June 1995, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's 1995 Stock Option Plan. No more than
3,600,000 shares of Common Stock may be issued upon exercise of options granted
under the 1995 Stock Option Plan, and no eligible person may receive options to
purchase more than 600,000 shares of Common Stock during any calendar year,
subject to adjustment to reflect stock splits, stock dividends, and similar
capital stock transactions. The 1995 Stock Option Plan is administered by a
committee of non-employee directors or the entire Board of Directors as a group
which has the authority to determine the terms and conditions of options granted
under the 1995 Stock Option Plan and to make all other determinations deemed
necessary or advisable for administering the 1995 Stock Option Plan, provided
that the exercise price of the options granted under the 1995 Stock Option Plan
cannot be less than the fair market value of the Common Stock on the date of
grant. As of March 23, 1998, there were 3,259,800 options outstanding under the
1995 Stock Option Plan.
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's Stock Purchase Plan. The
Stock Purchase Plan, and the right of participants to make purchases of the
Common Stock thereunder, is intended to qualify under the provisions of Section
421 and 423 of the Code and for persons subject to Section 16 of the Exchange
Act, under the provisions of Rule 16b-3 of the Exchange Act. The Stock Purchase
Plan is generally administered by a committee appointed by the Board of
Directors of the Company which has the authority to make all determinations,
interpretations and rules deemed necessary or advisable for administering the
Stock Purchase Plan. The Stock Purchase Plan permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to ten percent
of their salary, up to a maximum of $25,000 for all purchase periods ending
within any calendar year. The price of Common Stock purchased under the Stock
Purchase Plan will be 85% of the lower of the fair market value of a share of
Common Stock on the commencement date or the termination date of the relevant
offering period. No more than 1,600,000 shares of Common Stock may be issued
upon exercise of options granted under the Stock Purchase Plan and no more than
400,000 shares plus unissued shares from prior offerings may be issued in each
calendar year under the Stock
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Purchase Plan. To date, 118,330 shares of Common Stock have been issued pursuant
to the Stock Purchase Plan.
Effective June 1997, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's 1997 Stock Option Plan. No more than
1,500,000 shares of Common Stock may be issued upon exercise of options granted
under the 1997 Stock Option Plan, and no eligible person may receive options to
purchase more than 500,000 shares of Common Stock during any calendar year,
subject to adjustment to reflect stock splits, stock dividends, and similar
capital stock transactions. The 1997 Stock Option Plan is administered by a
committee of non-employee directors or the entire Board of Directors as a group
which has the authority to determine the terms and conditions of options granted
under the 1997 Stock Option Plan and to make all other determinations deemed
necessary or advisable for administering the 1997 Stock Option Plan, provided
that the exercise price of the options granted under the 1997 Stock Option Plan
cannot be less than the fair market value of the Common Stock on the date of
grant. As of March 23, 1998, there were 145,000 options outstanding under the
1997 Stock Option Plan.
In April 1997, the compensation committee approved, and the Board Of
Directors ratified, an annual stock option program for certain executive
officers. The program authorizes the grant of options to purchase shares of
Common Stock based on the Company's performance during fiscal years 1996, 1997
and 1998. If the Company's annual earnings exceed those of the previous year by
at least 20%, certain minimum grants are guaranteed and the option committee may
make larger grants. If the Company's earnings do not exceed those of the
previous year by at least 20%, the option committee may make smaller or larger
grants. Annual option grants for certain executive officers may range from
7,500-23,500 shares and all options granted will have an exercise price equal to
the market value on the date of grant.
Option Grants in 1997
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1997:
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Number of Assumed Annual Rates of Stock
Securities % of Total Price Appreciation
Underlying Options Granted Exercise For Option Term (2)
Options to Employees in Price Expiration ------------------------------
Name Granted(#)(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---------------------- ------------- --------------- --------- ---------- ----------- ------------
Steven M. Miller 500,000 (3) 29.1% $ 13.25 06/01/05 $ 3,211,016 $ 7,712,276
Robert Grosser 25,000 (4) 1.5 13.25 06/01/05 160,551 385,614
Robert C. Patent 20,000 (4) 1.2 13.25 06/01/05 128,441 308,491
Steven P. Weiss 12,000 (4) 0.7 13.25 06/01/05 77,064 185,095
7,547 (4) 13.25 05/17/98 5,513 11,053
David Steene (5) 8,453 (4) 0.9 13.25 08/17/98 7,334 14,774
7,547 (4) 13.25 05/17/98 5,513 11,053
Gerald Epstein (5) 8,453 (4) 0.9 13.25 08/17/98 7,334 14,774
7,547 (4) 13.25 12/05/97
Martin Brand (5) 3,203 (4) 0.6 13.25 03/05/98 N/A N/A
- ----------------
(1) All options were granted in April 1997, with an exercise price equal to
the average of the high and low sale prices of the Company's Common Stock
as reported on the Nasdaq National Market on the date of grant.
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(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Commission and do not represent the Company's estimate or
projection of the future price of its Common Stock. The actual value, if
any, which a Named Executive Officer may realize upon the exercise of
stock options will be based upon the difference between the market price
of the Company's Common Stock on the date of exercise and the exercise
price.
(3) Grant vests to the extent of 50,000 shares on the date of grant and
112,500 on each of the first, second, third and fourth anniversary of the
date of grant.
(4) Grant vests on the date of grant.
(5) Resigned effective February 1998.
(6) Resigned effective September 1997.
Aggregated Option Exercises in 1997 and 1997 Year-End Option Values
The following table sets forth for the Chief Executive Officers and the
other Named Executive Officers, information with respect to unexercised options
and year-end option values, in each case with respect to options to purchase
shares of the Company's Common Stock:
Shares Value of Unexercised
Acquired on Value Number of Unexercised Options In-The-Money Options
Exercise Realized Held as of December 31, 1997 at December 31, 1997 (1)
-------- -------- ---------------------------- ------------------------
Name Exercisable Nonexercisable Exercisable Nonexercisable
- ---- ----------- -------------- ----------- --------------
Steven M. Miller --- $ --- 50,000 450,000 $ --- $ ---
Robert Grosser --- --- 25,000 --- --- ---
Robert C. Patent --- --- 20,000 --- --- ---
Steven P. Weiss 40,000 1,160,000 92,000 30,000 --- ---
David Steene --- --- 16,000 --- --- ---
Gerald Epstein --- --- 16,000 --- --- ---
Martin Brand --- --- 3,203 --- --- ---
- ----------------
(1) No options were in-the-money as of December 31, 1997.
401(k) Plan
The Company sponsors a 401(k) plan, a savings and investment plan intended
to be qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"). Participating employees may make pre-tax contributions,
subject to limitations under the Code, of a percentage of their total
compensation. The Company, in its sole discretion, may make matching
contributions for the benefit of all participants with at least one year of
service who make pre-tax contributions. The Board of Directors has not yet
determined if a matching contribution will be made for the 1997 plan year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to shares of Common Stock of
the Company owned as of March 6, 1997, by (i) each person who, to the extent
known to the Company, beneficially owned more than 5% of such outstanding Common
Stock; (ii) each director; and (iii) each Named Executive Officer of the
Company; and (v) all directors and executive officers as a group.
Shares
Beneficially Owned
-----------------------
Name of Beneficial Owner(1) Number Percent
- ----------------------------------------------------- ------- -------
Steven M. Miller (2)................................. 162,500 * %
Robert Grosser (3)................................... 3,787,284 8.0
Robert C. Patent (4)................................. 3,927,192 8.3
Steven P. Weiss (5).................................. 92,008 *
Arthur P. Gould...................................... -- --
Hollis W. Rademacher (6)............................. 52,600 *
David Steene (7)..................................... 16,000 *
Gerald Epstein (7)................................... 18,200 *
Martin Brand (8)..................................... 600,000 1.3
All directors and executive officers as a group
(12 persons) (9)................................. 9,756,542 19.6
Franklin Mutual Advisers, Inc. (10).................. 4,140,000 8.7
Elliot Associates, L.P. (11) ........................ 4,998,425 9.9
Westgate International, L.P. (12) ................... 4,998,425 9.9
- ------------------
* Less than one percent.
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned by it. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Report upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options that are held
by such person (but not those held by any other person) and that are
exercisable within 60 days from the date of this Report have been
exercised. The table, therefore, does not give effect to the conversions
of the outstanding shares of the Company's Preferred Stock (other than as
indicated) and the issuance of Common Stock upon such conversions.
Assuming the Company had a sufficient number of authorized shares of
Common Stock to satisfy such conversions, as of March 6, 1998, the shares
of Common Stock issuable upon conversion of the outstanding shares of
Series A and Series B Preferred Stock would represent approximately 75%
of the Common Stock.
(2) Includes options to purchase 50,000 shares granted pursuant to the 1995
Stock Option Plan.
(3) Includes 640 shares owned by Mr. Grosser's spouse, with respect to all of
which Mr. Grosser disclaims beneficial ownership, 3,200 shares owned by
Mr. Grosser's daughters and options to purchase 25,000 shares granted
pursuant to the 1995 Stock Option Plan. Mr. Grosser's business address is
565 Taxter Road, Elmsford, New York 10523-5200.
(4) Includes 400 shares owned by Mr. Patent's spouse, with respect to all of
which Mr. Patent disclaims beneficial ownership, 40,800 shares owned by
Mr. Patent's two children and options to purchase 20,000 shares granted
pursuant to the 1995 Stock Option Plan. Mr. Patent's business address is
565 Taxter Road, Elmsford, New York 10523-5200.
(5) Represents options to purchase 92,000 shares granted pursuant to the 1995
Stock Option Plan.
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(6) Includes options to purchase 46,000 shares granted pursuant to the
Directors Plan.
(7) Resigned in February 1998. Includes options to purchase 16,000 shares
granted pursuant to the 1995 Stock Option Plan.
(8) Resigned in September 1997.
(9) See Notes (1)-(8).
(10) The number of shares is based on information from Schedule 13G dated
December 10, 1997. The address of Franklin Mutual Advisors, Inc. is 51
John F. Kennedy Parkway, Short Hills, New Jersey 07078.
(11) Limited to 9.9% of the outstanding shares of Common Stock. The address
of Elliot Associates, L.P. is 712 Fifth Avenue, 36th floor, New York, New
York 10019. Schedule 13G, filed jointly with Westgate International,
L.P. and Martley International, Inc. and dated March 6, 1998, indicates
sole voting and dispositive power as to 3,937,600 shares of Common Stock.
(12) Limited to 9.9% of the outstanding shares of Common Stock. The address of
Westgate International, L.P. is c/o Midland Bank Trust Corporation
(Cayman) Limited, P.O. Box 1109, Mary Street, Grand Cayman, Cayman
Islands, B.W.I. Schedule 13G, filed jointly with Elliot Associates, L.P.
and Martley International, Inc. and dated March 6, 1998, indicates shared
voting and dispositive power with Martley International, Inc. as to
3,959,806 shares of Common Stock.
Item 13. Certain Relationships and Related Transactions
The Company paid $166,300 in legal fees and $5,000 in director fees during
1997 to Mr. Fensterheim, the father-in-law of Mr. Grosser and a prior director
of the Company.
The Company has granted to Franklin Mutual Advisors, Inc. registration
rights relating to the resale of shares of the Company's Common Stock. These
registration rights required the Company to file a registration statement for
the resale of the shares of Common Stock subject to the options and use its
reasonable efforts to maintain the effectiveness of the registration statement.
During 1997, Samboy sold $11.7 million of loans to the Company and, in the
first three months of 1998, sold $64,000 of loans to the Company. Mr. Jonah
Goldstein owns 20% of the outstanding capital stock of Samboy.
Mr. Eric Goldstein, the son of Mr. Jonah Goldstein is employed as a Senior
Vice President of CSC. During 1997, he received $612,655, including the payment
of $378,287 as a bonus for services rendered in 1996, and was granted 12,000
options pursuant to the 1995 Stock Option Plan at an exercise price per share of
$13.25. Mr. Eric Goldstein is anticipated to receive approximately $240,000 in
compensation during 1998.
Mr. Paul Goldstein, the son of Mr. Jonah Goldstein, was employed as an
Assistant Vice President of CSC. During 1997, Mr. Paul Goldstein received
$673,255, including $617,083 in commissions and compensation recognized from the
exercise of stock options. Mr. Paul Goldstein is no longer employed by the
Company.
The Company loaned to Mr. Weiss $55,000 and $63,000 in August 1997 and
October 1997, respectively. Such amounts were repaid in February 1998.
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,
1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
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Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the
Commission on June 26, 1997
3.2 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on
December 20, 1995
4.1 Indenture, dated as of May 7, 1996, between the Company and
The Chase Manhattan Bank, N.A., incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q filed with the Commission on May 15, 1996
4.2 Indenture, dated as of May 14, 1997, among the Company, CSC
and The Chase Manhattan Bank, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement
on Form S-4 filed with the Commission on June 26, 1997
10.1 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 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
10.6 Employment Agreement, dated as of July 1, 1995, between CSC
and Steven Weiss,
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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
10.7 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
10.8 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
10.9 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
10.10 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
10.11 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
10.12 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
10.13 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
10.14 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
10.15 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
10.16 Lease, dated as of October 1, 1996, between CSC and Reckson
Operating Partnership, L.P., incorporated by reference to
Exhibit 10.41 to the Company's Annual Report of Form 10-K
filed with the Commission on March 31, 1997
10.17 1997 Stock Option Plan, as amended, incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form
S-8 as filed with the Commission on September
19, 1997
10.18 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
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to the Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996
10.19 Registration Rights Agreement, dated as of May 14, 1997, among
the Company, CSC, CIBC Wood Gundy Securities Corp., Bear,
Stearns & Co. Inc. and Oppenheimer & Co., Inc., incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 filed with the Commission on June 26,
1997
10.20* Master Loan and Security Agreement, dated as of January 1,
1997, between CSC and Greenwich Capital Financial Products,
Inc., as amended by the Extensiion Agreement, dated as of
December 31, 1997, and the First Renewal Agreement, dated
March 27, 1998.
10.21* Revolving Credit and Security Agreement, dated as of February
3, 1998, among CSC, CFC and The CIT Group/Equipment Financing,
Inc.
10.22* Employment Agreement, dated as of April 18, 1997, between CSC
and Peter S. Kucma
10.23* Employment Agreement, dated as of April 24, 1997, between CSC
and Gregg Armbrister
10.24* Greenwich Refinancing Agreement, dated as of February 1998,
between CSC-UK and certain of its subsidiaries and Greenwich
10.25 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.
10.26 Service Agreement, dated as of April 5, 1995, between CSK-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.
10.27 Service Agreement, dated as of April 5, 1995, between CSC-UK,
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.
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of BDO Stoy Hayward
27.1* Financial Data Schedule for the year ended December 31, 1997
* Filed herewith.
(a) Reports on Form 8-K:
1. Form 8-K dated October 9, 1997 reporting that a class action was
filed against the Company and two of its officers and directors
alleging violations of the federal securities laws.
2. Form 8-K dated October 22, 1997 reporting the retention of Bear,
Stearns & Co. Inc. as a financial advisor to explore strategic
alternatives for the Company.
3. Form 8-K dated October 29, 1997 reporting two additional class
action complaints against the Company.
4. Form 8-K dated November 18, 1997 reporting selected operating data
for the quarter ending September 30, 1997.
5. Form 8-K dated December 5, 1997 reporting the receipt of revised
Non-Status Lending Guidelines for Lenders and Brokers in the UK from
the Office of Fair Trading.
6. Form 8-K dated December 18, 1997 reporting that the Company's Common
Stock will be de-listed from the Nasdaq National Market pending a
hearing to review the Company's compliance with the Nasdaq Listing
Qualifications.
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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 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title
--------- -----
/s/Steven M. Miller Chief Executive Officer, President and
- --------------------------------- Director (Principal Executive Officer)
Steven M. Miller
/s/Robert C. Patent
- --------------------------------- Vice Chairman of the Board and Director
Robert C. Patent
/s/Robert Grosser Chairman of the Board and Director
- ---------------------------------
Robert Grosser
/s/Jonah L. Goldstein Director
- ---------------------------------
Jonah L. Goldstein
/s/Arthur P. Gould Director
- ---------------------------------
Arthur P. Gould
/s/Hollis W. Rademacher Director
- ---------------------------------
Hollis W. Rademacher
/s/Tim S. Ledwick Vice President, Chief Financial Officer
- --------------------------------- (Principal financial officer and
Tim S. Ledwick principal accounting officer)
Date: March 31, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the
Commission on June 26, 1997
3.2 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on
December 20, 1995
4.1 Indenture, dated as of May 7, 1996, between the Company and
The Chase Manhattan Bank, N.A., incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
filed with the Commission on May 15, 1996
4.2 Indenture, dated as of May 14, 1997, among the Company, CSC
and The Chase Manhattan Bank, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement
on Form S-4 filed with the Commission on June 26, 1997
10.1 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 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
10.6 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
10.7 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
10.8 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
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10.9 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
10.10 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
10.11 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
10.12 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
10.13 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
10.14 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
10.15 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
10.16 Lease, dated as of October 1, 1996, between CSC and Reckson
Operating Partnership, L.P., incorporated by reference to
Exhibit 10.41 to the Company's Annual Report of Form 10-K
filed with the Commission on March 31, 1997
10.17 1997 Stock Option Plan, as amended, incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form
S-8 as filed with the Commission on September 19, 1997
10.18 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
10.19 Registration Rights Agreement, dated as of May 14, 1997, among
the Company, CSC, CIBC Wood Gundy Securities Corp., Bear,
Stearns & Co. Inc. and Oppenheimer & Co., Inc., incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 filed with the Commission on June 26,
1997
10.20* Master Loan and Security Agreement, dated as of January 1,
1997, between CSC and Greenwich Capital Financial Products,
Inc., as amended by the Extension Agreement, dated as of
December 31, 1997, and the First Renewal Agreement dated
March 27, 1998.
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10.21* Revolving Credit and Security Agreement, dated as of February
3, 1998, among CSC, CFC and The CIT Group/Equipment Financing,
Inc.
10.22* Employment Agreement, dated as of April 18, 1997, between CSC
and Peter S. Kucma
10.23* Employment Agreement, dated as of April 24, 1997, between CSC
and Gregg Armbrister
10.24* Greenwich Refinancing Agreement, dated as of February 1998,
between CSC-UK and certain of its subsidiaries and Greenwich
10.25 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.
10.26 Service Agreement, dated as of April 5, 1995, between CSK-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.
10.27 Service Agreement, dated as of April 5, 1995, between CSC-UK,
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.
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of BDO Stoy Hayward
27.1* Financial Data Schedule for the year ended December 31, 1997
* Filed herewith.
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