1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
DELAWARE 11-2994671
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
565 TAXTER ROAD, ELMSFORD, NEW YORK 10523-2300 (ADDRESS OF
PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(914) 592-6677
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF
CHANGED SINCE LAST REPORT)
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
APPLICABLE ONLY TO CORPORATE ISSUERS:
64,878,969 SHARES $.01 PAR VALUE,
OF COMMON STOCK, WERE OUTSTANDING AS OF NOVEMBER 6, 1998
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CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition at September 30, 1998 and
December 31, 1997 2
Consolidated Statements of Operations for the three months and
the nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the nine months ended September 30,
1998 and 1997 4
Notes to Consolidated Financial Statements 5-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13-31
PART II - OTHER INFORMATION 32-38
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 24,839,839 $ 2,594,163
Cash held in escrow 7,179,480 24,207,517
Mortgage servicing receivables 7,461,648 9,524,535
Trading securities 76,586,673 126,475,656
Mortgage loans held for sale, net 124,090,229 93,290,024
Mortgages held for investment, net 4,969,176 6,530,737
Equipment and leasehold improvements, net 4,524,605 6,058,206
Investment in discontinued operations, net 24,763,569 84,232,000
Income taxes receivable 1,698,166 18,376,574
Other assets 29,854,395 27,267,770
------------- -------------
Total assets $ 305,967,780 $ 398,557,182
============= =============
LIABILITIES
Warehouse financing facilities $ 110,913,223 $ 77,479,007
Accounts payable and other liabilities 66,394,368 63,427,810
Allowance for losses 7,461,648 4,555,373
Income taxes payable 2,034,098 300,000
Notes and loans payable 300,000,000 300,000,000
Convertible subordinated debentures 129,620,000 129,620,000
------------- -------------
Total liabilities 616,423,337 575,382,190
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 10,000,000 shares authorized;
5,177 shares issued and outstanding; Liquidation
Preference - Series A Preferred Stock, $7,416,016; Series B Preferred
Stock, $64,850,476 at September 30, 1998; 5,295 shares issued and
outstanding; Liquidation Preference - Series A Preferred Stock,
$6,820,800; Series B Preferred Stock, $47,046,745 at December 31, 1997 52 53
Common stock, $.01 par value, 100,000,000 shares authorized; 64,948,969
and 47,648,738 shares issued at September 30, 1998 and December 31, 1997 649,489 476,487
Treasury stock, 70,000 shares at September 30, 1998 and December 31,
1997, at cost (175,000) (175,000)
Additional paid-in capital 175,304,103 175,477,104
Retained earnings (accumulated deficit) (486,234,201) (352,603,652)
------------- -------------
Total stockholders' equity (deficit) (310,455,557) (176,825,008)
------------- -------------
COMMITMENTS AND CONTINGENCIES ------------- -------------
Total liabilities and stockholders' equity (deficit) $ 305,967,780 $ 398,557,182
============= =============
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Gain on sale of loans $ 2,228,984 $ 20,073,841 $ 926,772 $ 81,830,010
Net unrealized loss on valuation of residuals (7,817,022) (72,149,611) (26,303,825) (72,149,611)
Interest 3,948,955 22,229,287 10,035,360 56,338,464
Mortgage origination income 593,325 1,390,507 2,046,651 3,604,777
Other 728,270 3,071,146 1,227,588 5,278,472
------------- ------------- ------------- -------------
Total revenues (317,488) (25,384,830) (12,067,454) 74,902,112
------------- ------------- ------------- -------------
EXPENSES
Salaries and employee benefits 8,569,729 12,264,996 25,876,102 33,770,753
Interest expense 15,126,427 18,102,327 43,280,304 53,755,859
Selling expenses 1,179,260 1,139,014 3,171,811 2,634,476
Other operating expenses 16,472,620 9,765,738 40,806,921 24,047,900
Provision for loan losses 4,728,073 11,964,919 4,728,073 11,964,919
Restructuring charge -- -- 3,233,760 --
------------- ------------- ------------- -------------
Total expenses 46,076,109 53,236,994 121,096,971 126,173,907
------------- ------------- ------------- -------------
(Loss) earnings from continuing operations
before income taxes (46,393,597) (78,621,824) (133,164,425) (51,271,795)
Income tax (benefit) provision 166,067 (31,250,496) 466,126 (18,860,828)
------------- ------------- ------------- -------------
(Loss) earnings from continuing operations (46,559,664) (47,371,328) (133,630,551) (32,410,967)
Discontinued operations:
(Loss) earnings from discontinued operations, net of
income tax benefit of $14,218,420 and $9,970,915
for the three and nine months ended September 30,
1997 and net of extraordinary item of $425,000 -- (22,271,374) -- (16,425,467)
------------- ------------- ------------- -------------
Net (loss) earnings (46,559,664) (69,642,702) (133,630,551) (48,836,434)
Preferred stock dividends paid in common stock -- 1,035,315 -- 2,102,189
Preferred stock dividends - increase in liquidation
preference 2,436,488 -- 6,097,567 --
Preferred stock - default payments 5,792,899 -- 13,615,115 --
------------- ------------- ------------- -------------
NET (LOSS) EARNINGS APPLICABLE TO COMMON STOCK $ (54,789,051) $ (70,678,017) $(153,343,233) $ (50,938,623)
============= ============= ============= =============
Earnings (loss) per common share:
Basic
(Loss) earnings from continuing operations $ (0.84) $ (1.50) $ (2.71) $ (1.12)
(Loss) earnings from discontinued operations -- (0.69) -- (0.53)
------------- ------------- ------------- -------------
Net (loss) earnings $ (0.84) $ (2.19) $ (2.71) $ (1.65)
============= ============= ============= =============
Diluted
(Loss) earnings from continuing operations $ (0.84) $ (1.50) $ (2.71) $ (1.12)
(Loss) earnings from discontinued operations -- (0.69) -- (0.53)
------------- ------------- ------------- -------------
Net (loss) earnings (1) $ (0.84) $ (2.19) $ (2.71) $ (1.65)
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic 64,878,969 32,346,059 56,566,295 30,936,205
============= ============= ============= =============
Diluted (1) 64,878,969 32,346,059 56,566,295 30,936,205
============= ============= ============= =============
(1) For the three months and nine months ended September 30, 1998 and 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.
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CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
Cash flows from operating activities:
(Loss) earnings from continuing operations $ (133,630,551) $ (32,410,967)
Adjustments to reconcile net (loss) earnings from continuing
operations to net cash used in continuing operating activities:
Depreciation and amortization 2,553,173 847,563
Income taxes payable 18,412,506 (31,679,643)
Increase in accounts receivable and due from broker for
securities transactions (1,354,940) (1,374,298)
Decrease in mortgage servicing receivables 4,969,162 19,981,522
Decrease (increase) in trading securities 49,888,983 (75,441,477)
Net purchases of securities under agreements to resell -- 102,385,208
Proceeds from securities sold but not yet purchased -- (101,034,401)
Proceeds from sale of mortgages 370,326,000 1,275,509,452
Mortgage origination funds disbursed (418,629,718) (1,301,928,103)
Other, net 34,830,604 34,980,195
--------------- ---------------
Net cash used in continuing operating activities (72,634,781) (110,164,949)
--------------- ---------------
Net cash used in discontinued operating activities -- (108,711,510)
--------------- ---------------
Net cash used in operating activities (72,634,781) (218,876,459)
--------------- ---------------
Cash flows from investing activities:
Sale from discontinued operations, net 59,468,431 --
Purchases of equipment (1,019,572) (4,632,678)
Proceeds from equipment sale and lease-back financing -- 1,776,283
Proceeds from sale of available-for-sale securities -- 2,254,232
Proceeds from sale of mortgages held for investment 2,997,382 --
--------------- ---------------
Net cash provided by (used in) investing activities 61,446,241 (602,163)
--------------- ---------------
Cash flows from financing activities:
Increase in warehouse financings 33,434,216 1,004,327
Decrease in standby facility -- (7,966,292)
Proceeds from notes and loans payable -- 49,000,000
Repayment of notes and loans payable -- (161,405,843)
Net proceeds from issuance of preferred stock -- 98,249,950
Net proceeds from issuance of common stock -- 321,319
Net proceeds from issuance of Notes -- 290,758,908
--------------- ---------------
Net cash provided by financing activities 33,434,216 269,962,369
--------------- ---------------
Net increase in cash and cash equivalents 22,245,676 50,483,747
Cash and cash equivalents at beginning of period 2,594,163 446,285
--------------- ---------------
Cash and cash equivalents at end of period $ 24,839,839 $ 50,930,032
=============== ===============
Supplemental disclosure of cash flow information: Income
taxes paid during the period:
Continuing operations $ 1,230 $ 4,856,056
=============== ===============
Discontinued operations $ -- $ --
=============== ===============
Interest paid during the period:
Continuing operations $ 6,928,187 $ 27,269,967
=============== ===============
Discontinued operations $ -- $ 441,000
=============== ===============
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. Organization
Cityscape Financial Corp. ("Cityscape" or the "Company") is a consumer
finance company that, through its wholly-owned subsidiary, Cityscape Corp.
("CSC"), engages in the business of originating, purchasing, selling and
servicing mortgage loans secured primarily by one- to four-family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation,
financing of home improvements and educational expenditures, among others. CSC
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 originated, sold and serviced loans in England, Scotland and
Wales in which the Company initially held a 50% interest and subsequently
purchased the remaining 50%. CSC-UK had no operations and no predecessor
operations prior to May 1995. In April 1998, the Company sold all of the assets,
and certain liabilities, of CSC-UK (see Note 4).
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The accompanying consolidated financial statements and the
information included under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be read in conjunction
with the consolidated financial statements and related notes of the Company for
the year ended December 31, 1997.
The Company's unaudited 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 Filings (see Note 3), related circumstances and
the losses from operations raise substantial doubt about the Company's ability
to continue as a going concern. The appropriateness of using the going concern
basis is dependent upon, among other things, confirmation of a plan of
reorganization, which hearing is presently scheduled for November 13, 1998 (and
may be adjourned), the successful sale of loans in the whole loan sales market,
the ability to access warehouse lines of credit and future profitable
operations. While under the protection of chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the accompanying consolidated financial
statements. Should the Plan (as defined in Note 3) be confirmed, the Company
will adopt fresh-start accounting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). The
accompanying consolidated financial statements do not include any adjustments
that may result from the adoption of SOP 90-7, or in the event of the Plan not
being confirmed. The consolidated financial statements do not include any
adjustments relating to the Company's ability to continue as a going concern.
The consolidated unaudited financial statements of the Company include the
accounts of CSC and its wholly-owned subsidiaries. The Company has restated its
prior financial statements to present the operating results of CSC-UK as a
discontinued operation as discussed in Note 4. All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain amounts in the statements have been reclassified to conform with
the 1998 classifications.
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3. Chapter 11 Proceedings
The Company has determined that the best alternative for recapitalizing the
Company over the long-term and maximizing the recovery of creditors and senior
equity holders of the Company is through a prepackaged plan of reorganization
for the Company and its wholly-owned subsidiary, CSC, pursuant to chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code"). Toward that end,
during the second and third quarters of 1998, the Company engaged in
negotiations, first, with holders of a substantial majority of the Notes (as
defined below) and, second, with holders of a substantial majority of the
Convertible Debentures (as defined below) on the terms of a plan of
reorganization that both groups would find acceptable. Those negotiations have
resulted in acceptance by both groups by the requisite majorities of the terms
of a plan of reorganization (the "Plan").
On October 6, 1998, the Company and CSC (the "Debtors") filed voluntary
petitions (the "Petitions") in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). The Company had
solicited the holders of its Notes, Convertible Debentures and Preferred Stock.
The Plan received the requisite approval from all classes except for the holders
of the Company's Series B Preferred Stock (as defined below).
In summary, the Plan, if confirmed by the Bankruptcy Court, would provide
that: (i) holders of Notes would receive in exchange for all of their claims, in
the aggregate, 90.5% of the new common stock of the reorganized company and $75
million in initial principal amount of 10-year senior notes (on which interest
could be paid in kind at the reorganized company's option); (ii) holders of the
Convertible Debentures would receive in exchange for all of their claims, in the
aggregate, 9.5% of the new common stock of the reorganized company and warrants
to purchase additional common stock representing 5% of the new common stock of
the reorganized company on a fully diluted basis, which warrants would be
exercisable if and when the enterprise value of the reorganized company reached
$300 million; (iii) holders of Series A Preferred Stock (as defined below) would
receive in exchange for their interests in the Company, in the aggregate, 10.5%
of the warrants to purchase common stock representing 10% of the new common
stock of the reorganized company on a fully diluted basis, all of which warrants
would be exercisable if and when the enterprise value of the reorganized company
reached $430 million; (iv) holders of Series B Preferred Stock will receive or
retain no property; and (v) existing Common Stock (as defined below) and
warrants of the Company would be extinguished and holders thereof would receive
no distributions under the Plan. Consummation of the Plan is conditioned upon,
among other things, the Company obtaining sufficient post-reorganization
warehouse financing facilities. The Company is currently in discussions with
potential lenders regarding post-reorganization warehouse financing facilities.
The Debtors are currently operating their business as debtors-in-possession.
On October 27, 1998, the Bankruptcy Court entered a final order approving
debtor-in-possession financing arrangements (see Note 11). Under the Bankruptcy
Code, the Debtors may elect to assume or reject real estate leases and other
pre-petition executory contracts, subject to Bankruptcy Court approval. Upon
rejection, under Section 502 of the Bankruptcy Code, a lessor's claim for
damages resulting from the rejection of a real property lease is limited to the
rent to be received under such lease, without acceleration, for the greater of
one year, or 15%, not to exceed three years, of the remaining term of the lease
following the earlier of the date of the Petitions or the date on which the
property is returned to the landlord. On October 30, 1998, the Debtors filed a
schedule with the Bankruptcy Court listing executory contracts and real estate
leases to be rejected.
By a motion dated October 6, 1998 (the "Motion"), Elliott Associates L.P. and
Westgate International, L.P. sought the entry of an order, pursuant to section
1104(c) of the Bankruptcy Code, directing the appointment of an Examiner. By
order dated October 30, 1998 (the "Order"), this Court granted the Motion and
directed the United States Trustee for the Southern District of New York to
appoint an Examiner. The Order authorized the Examiner to conduct a preliminary
investigation and issue a written report regarding the facts and circumstances
surrounding certain releases given by the Debtors under the Plan.
On November 9,1998 the Examiner filed the Examiner Report Pursuant to Order
of October 20, 1998 (the "Examiner Report"). The Examiner Report stated, among
other things, that (i) there was no evidence that any representative of the
Company or CSC acted in bad faith, recklessly or unreasonably with respect to
the Company's and CSC's accounting issues for the second quarter of 1996; (ii)
no material misstatements, omissions or delays were found with respect to the
Company's and CSC's public disclosures concerning the developments in United
Kingdom during the period from March 1997 through August 1997, (iii) with the
exception of the ongoing SEC investigation, there were no investigations,
regarding the restatements of the Company's financial statements and write-downs
of assets performed by the Company, CSC or anyone else; (iv) no evidence was
found that the Company's or CSC's current or former officers or directors
engaged in any short sales of the Company's common stock of any kind during 1997
and 1998 (or at any other time); (v) there was no evidence of bad faith, lack of
integrity, self-dealing, falsification or manipulation of corporate records or
other impropriety; and (vii) the Plan contained third party releases that should
be removed.
Liabilities subject to compromise as of September 30, 1998, pursuant to the
Plan are summarized as follows:
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12 3/4% Senior Notes $ 300,000,000
6% Convertible Subordinated Debentures 129,620,000
Accrued interest related to Senior Notes
and Convertible Debentures 39,004,100
==============
$ 468,624,100
==============
Other potential consequences of reorganization under chapter 11 that have not
been recorded including the effect of the determination as to the disposition of
executory contracts and leases as to which a final determination by the
Bankruptcy Court as to rejection had not yet been made. Trade creditors,
pursuant to the Plan, are unimpaired. Pursuant to an order of the Bankruptcy
Court signed October 7, 1998, prepetition amounts owed to such trade creditors
are being paid in the ordinary course of business.
In connection with the Company's restructuring efforts, the Company
deferred the June 1, 1998 and May 1, 1998 interest payments on its Notes and
Convertible Debentures, respectively. The continued deferral of the interest
payments on the Notes and Convertible Debentures constitutes an "Event of
Default" pursuant to the respective Indenture under which the securities were
issued. The Company stopped accruing interest on the Notes and Convertible
Debentures on October 6, 1998, the date the Company filed the Petitions in the
Bankruptcy Court.
4. The CSC-UK Sale; 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 focused 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 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.
In April 1998, pursuant to an Agreement for the Sale and Purchase of the
Business of CSC-UK and its Subsidiaries and the Entire Issued Share Capital of
City Mortgage Receivables 7 Plc, dated March 31, 1998 (the "UK Sale Agreement"),
the Company completed the sale to Ocwen Financial Corporation ("Ocwen") and
Ocwen Asset Investment Corp. ("Ocwen Asset") of substantially all of the assets,
and certain liabilities, of CSC-UK (the "UK Sale"). The sale did not include the
assumption by Ocwen of all of CSC-UK's liabilities, and therefore, no assurances
can be given that claims will not be made against the Company in the future
arising out of its former UK operations. Such claims could have a material
adverse effect on the Company's financial condition and results of operations.
The UK Sale included the acquisition by Ocwen of CSC-UK's whole loan portfolio
and loan origination and servicing businesses for a price of pound sterling
249.6 million, the acquisition by Ocwen Asset of CSC-UK's securitized loan
residuals for a price of pound sterling 33.7 million and the assumption by Ocwen
of pound sterling 7.2 million of CSC-UK's liabilities. The price paid by Ocwen
is subject to adjustment to account for the actual balances on the closing date
of the loan portfolio and the assumed liabilities. As a result of the sale, the
Company received proceeds, at the time of the closing, of $83.8 million, net of
closing costs and other fees.
Accordingly, the operating results of CSC-UK and its 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 of September 30, 1998, the Company's net investment in discontinued
operations totaled $24.8 million, representing cash on hand in the discontinued
operation of approximately $16.1 million and net receivables (net of
liabilities) due of approximately $8.7 million. The Company expects to maintain
a balance of cash on hand in the discontinued operation to cover existing and
potential liabilities and costs until the dissolution of the existing legal
entities of CSC-UK and its subsidiaries. Additionally, as of
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September 30, 1998, there were liabilities related to the discontinued
operations of approximately $555,000 included in accounts payable and other
liabilities.
Included in such net receivables is approximately $10.0 million due from
Ocwen under the terms of the UK Sale Agreement. The Company, however, received a
letter from Ocwen in which Ocwen has taken the position that the Company owes
approximately $21.4 million in connection with the transaction. The Company and
Ocwen are currently in dispute over these amounts. See "Legal Proceedings."
5. New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 defines
internal-use software and establishes accounting standards for the costs of such
software. The Company has not completed its analysis of SOP 98-1.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company has not completed its analysis of SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998. The Company has not completed its analysis of this
statement.
6. Earnings Per Share
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128
simplifies the standards for computing earnings per share ("EPS") previously
found in Accounting Principles Board 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 for 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 shares 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 shares of
Common Stock outstanding during the period plus the dilutive potential shares of
Common Stock that were outstanding during the period.
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the three and nine months ended September 30, 1998
and 1997 is as follows:
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THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Earnings (loss) from continuing operations $(46,559,664) $ (47,371,328)
Less: Preferred stock dividends 2,436,488 1,035,315
Preferred stock - default payments 5,792,899 -
------------- --------------
BASIC EPS
Earnings (loss) applicable to common stock (54,789,051) 64,878,969 $ (0.84) (48,406,643) 32,346,059 $ (1.50)
======== ========
EFFECT OF DILUTIVE SECURITIES
Warrants - -
Stock options - -
Convertible preferred stock - -
Convertible Debentures - -
------------- ----------- -------------- -----------
DILUTED EPS
Earnings (loss) applicable to common stock+
assumed conversions $(54,789,051) 64,878,969 $ (0.84) $ (48,406,643) 32,346,059 $ (1.50)
============= =========== ======== ============== =========== ========
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Earnings (loss) from continuing operations $(133,630,551) $(32,410,967)
Less: Preferred stock dividends 6,097,567 2,102,189
Preferred stock - default payments 13,615,115 -
-------------- -------------
BASIC EPS
Earnings (loss) applicable to common stock (153,343,233) 56,566,295 $(2.71) (34,513,156) 30,936,205 $(1.12)
======= =======
EFFECT OF DILUTIVE SECURITIES
Warrants - -
Stock options - -
Convertible preferred stock - -
Convertible Debentures - -
-------------- ----------- ------------- -----------
DILUTED EPS
Earnings (loss) applicable to common stock +
assumed conversions $(153,343,233) 56,566,295 $(2.71) $(34,513,156) 30,936,205 $(1.12)
============== =========== ======= ============= =========== =======
For the three and nine months ended September 30, 1998 and 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 September 30, 1998 that could potentially dilute basic
EPS in the future are as follows: Series A Warrants; Series B Warrants (as such
terms are defined below); Convertible Debentures; Series A Preferred Stock;
Series B Preferred Stock; and options to purchase the Company's Common Stock,
par value $0.01 per share (the "Common Stock"). If the Plan is confirmed by a
bankruptcy court, there would be severe impairment of the Company's preferred
equity and complete impairment of the Company's Common Stock (see Note 3).
7. Streamlining and Downsizing
In February 1998, the Company announced that it had begun implementing a
restructuring plan that includes streamlining and downsizing its operations. The
Company has closed its branch operation in Virginia and significantly reduced
its correspondent originations for the foreseeable future and has exited
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its conventional lending business. Accordingly, in the first quarter of 1998,
the Company has recorded a restructuring charge of $3.2 million. Of this amount,
$1.1 million represents severance payments made to 142 former employees and $2.1
million represents costs incurred in connection with lease obligations and
write-offs of assets no longer in service. At September 30, 1998, the Company
had available a reserve of $2.1 million for these restructuring charges. See
also Note 12.
8. Valuation of Residuals
The interests that the Company receives upon loan sales through its
securitizations are in the form of interest-only and residual mortgage
securities which are classified as trading securities. The Company's trading
securities are comprised of interests in home equity mortgage loans and
"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 make home improvements).
The table below summarizes the value of the Company's trading securities
by product type.
September 30, December 31,
1998 1997
---- ----
Home Equity $ 25,855,753 $ 75,216,390
Sav*-A-Loan(R) 50,730,920 51,259,266
============ ============
$ 76,586,673 $126,475,656
============ ============
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 loss and prepayment rates of
the portfolio under review. If the fair value of the interest-only and residual
certificates is different from the recorded value, the unrealized gain or loss
will be reflected on the Consolidated Statements of Operations.
During the first quarter of 1998, the Company recorded an unrealized loss
on valuation of residuals of $7.1 million which reflected an increase in the
expected loss rate on the Company's home equity securitized loans. As a result
of the increase in the volume of home equity loan liquidations during the first
quarter resulting from the Company's increased liquidation efforts, and
corresponding higher losses experienced than previously expected on such
liquidations, the Company increased its loss rate assumption to 3.3% per annum
at March 31, 1998 from 1.7% per annum at December 31, 1997. At March 31, 1998
and December 31, 1997, the Company used a weighted average discount rate of 15%
and a weighted average prepayment speed of 31.8%.
In the second quarter of 1998, the Company recorded an additional $11.4
million unrealized loss on valuation of residuals resulting from continued
higher than expected losses and increased prepayment speeds experienced on its
home equity securitized loans. As of June 30, 1998, the Company increased its
weighted average loss rate to 4.35% per annum and increased its weighted average
prepayment speed to 34.8% for its home equity securitized loans and maintained
its use of a 15% discount rate.
In the third quarter of 1998, the Company recorded a further unrealized
loss on valuation of residuals of $7.8 million consisting of a $5.5 million
unrealized loss on its home equity residuals and $2.3 million on its
Sav*-A-Loan(R) residuals. This unrealized loss was primarily a result of the
Company increasing the weighted average discount rate used to value its
residuals to 17% at September 30, 1998 from 15% at June 30, 1998 for both its
home equity and Sav*-A-Loan(R) residuals. The increase in the discount rate
reflects the changes in market conditions experienced in the overall
mortgage-backed securities markets since the second quarter of 1998.
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In addition to the discount rate noted above, as of September 30, 1998 the
assumptions used to value the Company's home equity residuals included a
weighted average loss rate of 4.95% per annum and a weighted average constant
prepayment speed of 34.8%. For the Company's Sav*-A-Loan(R) residuals, the
Company used a weighted average loss rate of 3.3% and a weighted average
constant prepayment speed of 16.8% for the periods ended September 30, 1998 and
December 31, 1997.
In order to enhance the Company's liquidity position, 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 (which equated to the book value at December 31, 1997).
9. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The financial statements reflect
the adoption of SFAS No. 130.
Total comprehensive loss for the three months ended September 30, 1998 and
1997 was $54.8 million and $75.7 million, respectively. Total comprehensive loss
for the nine months ended September 30, 1998 and 1997 was $153.3 million and
$60.0 million, respectively. For the three months ended September 30, 1997,
comprehensive loss represented net loss of $70.7 million and other comprehensive
loss of $5.0 million. For the nine months ended September 30, 1997,
comprehensive loss represented net loss of $50.9 million and other comprehensive
loss of $9.1 million. The table below details the comprehensive loss for the
three and nine months ended September 30, 1997.
Three Months Ended September 30, 1997
Tax Benefit/
Before Tax (Provision) After Tax
---------- ----------- ---------
Unrealized holding gain (losses) $ 718,765 $ (285,709) $ 433,056
Foreign currency translation (9,015,788) 3,583,776 (5,432,012)
----------- ----------- -----------
$(8,297,023) $ 3,298,067 $(4,998,956)
=========== =========== ===========
Nine Months Ended September 30, 1997
Before Tax Tax Benefit After Tax
---------- ----------- ---------
Unrealized holding gain (losses) $ (1,218,032) $ 448,114 $ (769,918)
Foreign currency translation (13,107,589) 4,822,282 (8,285,307)
------------ ------------ ------------
$(14,325,621) $ 5,270,396 $ (9,055,225)
============ ============ ============
10. Subservicing Agreements
Due to the Company exceeding the delinquency rates permitted under the terms
of the pooling and servicing agreements with respect to the Company's 1995-2,
1995-3, 1996-1, 1996-2, 1996-3 and 1996-4 home equity securitizations, during
the third quarter of 1998 the Company entered into subservicing agreements with
respect to such loans with Fairbanks Capital Corp. ("Fairbanks"). As of
September 30, 1998, the outstanding amount of such loans was $605.5 million or
46.7% of the Company's total servicing portfolio and 97.5% of the Company's home
equity servicing portfolio. Under the terms of the subservicing agreements,
Fairbanks as subservicer retains all rights, including the normal servicing fee
and any ancillary income, and obligations of the servicer as provided for under
the terms of the applicable securitizations and servicing agreements.
11. Debtor-in-Possession Financing Arrangements
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Subsequent to the filing of the Petitions and pursuant to a final order of
the Bankruptcy Court dated October 27, 1998 authorizing the Company to obtain
post-petition financing, the Company paid Greenwich (as defined below), as
lender under the Greenwich Facility (as defined below) which had provided
commitments aggregating approximately $150 million, approximately $99 million to
extinguish Greenwich's prepetition security interest. The Greenwich Facility was
replaced by a debtor-in-possession facility (the "Greenwich DIP Facility") with
Greenwich that is guaranteed by the Company and is secured by substantially all
of the assets of CSC and the capital stock of CSC, pari passu with the lien
granted to CIT (as defined below) under the CIT DIP Facility (as defined below).
The Greenwich DIP Facility bears interest at a rate of LIBOR plus 2.75% and
provides a $100.0 million commitment. The Greenwich DIP Facility terminates on
the earlier of (i) the date that the chapter 11 case has been confirmed by an
order of the Bankruptcy Court or (ii) March 1, 1999.
Subsequent to the filing of the Petitions and pursuant to an interim order of
the Bankruptcy Court dated October 13, 1998 authorizing the Company to obtain
post-petition financing, the Company paid CIT (as defined below), as lender
under the CIT Facility (as defined below) which had provided commitments
aggregating $30 million, approximately $14 million to extinguish CIT's
prepetition security interest. On October 27, 1998, a final order was granted by
the Bankruptcy Court. The CIT Facility was replaced by a debtor-in-possession
facility (the "CIT DIP Facility") with CIT and Nomura Asset Capital Corporation
that is guaranteed by the Company and is secured by substantially all of the
assets of CSC and the capital stock of CSC, pari passu with the lien granted to
Greenwich under the Greenwich DIP Facility. The CIT DIP Facility bears interest
at a rate of LIBOR plus 2.75% or the Prime Rate and provides a $150.0 million
commitment. The CIT DIP Facility terminates on the earlier of (i) the date that
the chapter 11 case has been confirmed by an order of the Bankruptcy Court or
(ii) March 1, 1999.
12. Subsequent Events
As part of its restructuring plan that includes streamlining and downsizing
its operations, on October 22, 1998, the Company reduced its workforce by 243
employees (24 of which will remain employed for up to ten weeks), representing
53.5% of its workforce, from 454 employees to 211 employees. In connection with
this reduction, the Company has closed its branch operations in California and
Illinois, while maintaining its offices in New York and Georgia. Accordingly,
the Company anticipates that it will record a restructuring charge of
approximately $8 million to $10 million in the fourth quarter of 1998.
Based on the Company's discussions with potential lenders regarding
post-reorganization warehouse financing facilities, the Company has determined
that it is unlikely that such financing will be provided for its Sav*-A-Loan(R)
products. Therefore, on November 13, 1998, the Company decided to suspend
indefinitely the origination and purchase of its Sav*-A-Loan(R) products. As a
result, the Company expects to further streamline and downsize its operations
and reduce its workforce and will record an additional restructuring charge in
the fourth quarter of 1998 as noted above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including, but not limited to, the ability to access loan
warehouse or purchase facilities in amounts, if at all, necessary to fund the
Company's loan production, the successful implementation of loan sales in the
whole loan sales market, the confirmation and consummation of the Company's plan
of reorganization under Chapter 11 of the Bankruptcy Code, the ability of the
Company to successfully restructure its balance sheet, the initiative to
streamline the Company's operations, the ability of the Company to retain an
adequate number and mix of its employees, legal proceedings and other matters,
adverse economic conditions and other risks detailed from time to time in the
Company's Securities and Exchange Commission (the "Commission") 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
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The majority of the Company's loans are made
to owners of single family residences who use the loan proceeds for such
purposes as debt consolidation and financing of home improvements and
educational expenditures, among others. The Company is licensed or registered to
do business in 46 states and the District of Columbia.
For the last year, 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 Company's operations for 1997 and
the first nine months of 1998 have consumed substantial amounts of cash and have
generated significant net losses, which have reduced stockholders' equity to a
deficit of $310.5 million at September 30, 1998. The Company is unable to access
the capital markets and has experienced difficulties in securing loan warehouse
or purchase facilities. The Company's ability to operate is dependent upon
continued access to loan warehouse facilities and loan purchase facilities. The
terms of the Company's current loan warehouse and purchasing facilities are less
advantageous to the Company than the terms of the Company's previous 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 by an inability to sell its loan production through
securitizations. Furthermore, primarily due to a reduction in the Company's
Correspondent 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.
Revenues will be further negatively effected by the Company's decision on
November 13, 1998 to suspend the origination and purchase of its Sav*-A-Loan(R)
products. 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,
among other things, confirmation of a plan of reorganization, which hearing was
originally scheduled for November 13, 1998 and has been adjourned to November
19, 1998 (and may be further adjourned) (see " - Chapter 11 Proceedings"), the
successful sale of loans in the whole loan sales market, the ability to access
warehouse lines of credit and future profitable operations. The Company has
concluded that the best way to recapitalize the Company over the long-term and
maximize the recovery of creditors and senior equity interest holders of the
Company is through a prepackaged plan of reorganization for the Company and its
wholly-owned subsidiary, CSC. See " -- Chapter 11 Proceedings." No assurance can
be given that the Company will be able to achieve these results.
The Company's stockholders' deficit, recent losses and need to restructure
its balance sheet create serious risks of loss for the holders of the Company's
debt and equity securities. No assurances can be given that the Company will be
successful in its restructuring efforts, or, that as a result of such efforts,
the value of the Company's debt and equity securities will not be materially
impaired. In particular, the Company can give no assurances that a successful
restructuring will not result in a material impairment of the value of the Notes
or the Convertible Debentures or a severe or complete impairment of the value of
the
13
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Company's preferred and common equity. The Company's current restructuring plans
provide for severe impairment of the Company's preferred equity and complete
impairment of the Company's common equity. See "-- Chapter 11 Proceedings." The
extent of any such impairment will depend on many factors including the
Company's reorganization plan discussed below as well as other factors set forth
in the paragraph discussing forward-looking statements above.
CHAPTER 11 PROCEEDINGS
The Company has determined that the best alternative for recapitalizing the
Company over the long-term and maximizing the recovery of creditors and senior
equity holders of the Company is through a prepackaged plan of reorganization
for the Company and its wholly-owned subsidiary, CSC, pursuant to the Bankruptcy
Code. Toward that end, during the second and third quarters of 1998, the Company
engaged in negotiations, first, with holders of a substantial majority of the
Notes and, second, with holders of a substantial majority of the Convertible
Debentures on the terms of a plan of reorganization that both groups would find
acceptable. Those negotiations have resulted in acceptance by both groups by the
requisite majorities of the terms of the Plan.
On October 6, 1998, the Debtors filed the Petitions in the Bankruptcy Court.
The Company had solicited the holders of its Notes, Convertible Debentures and
Preferred Stock. The Plan received the requisite approval from all classes
except for the holders of the Company's Series B Preferred Stock.
In summary, the Plan, if confirmed by the Bankruptcy Court, would provide
that: (i) holders of Notes would receive in exchange for all of their claims, in
the aggregate, 90.5% of the new common stock of the reorganized company and $75
million in initial principal amount of 10-year senior notes (on which interest
could be paid in kind at the reorganized company's option); (ii) holders of the
Convertible Debentures would receive in exchange for all of their claims, in the
aggregate, 9.5% of the new common stock of the reorganized company and warrants
to purchase additional common stock representing 5% of the new common stock of
the reorganized company on a fully diluted basis, which warrants would be
exercisable if and when the enterprise value of the reorganized company reached
$300 million; (iii) holders of Series A Preferred Stock would receive in
exchange for their interests in the Company, in the aggregate, 10.5% of the
warrants to purchase common stock representing 10% of the new common stock of
the reorganized company on a fully diluted basis, all of which warrants would be
exercisable if and when the enterprise value of the reorganized company reached
$430 million; (iv) holders of Series B Preferred Stock, will receive or retain
no property; and (v) existing Common Stock and warrants of the Company would be
extinguished and holders thereof would receive no distributions under the Plan.
Consummation of the Plan is conditioned upon, among other things, the Company
obtaining sufficient post reorganization warehouse financing facilities. The
Company is currently in discussions with potential lenders regarding
post-reorganization warehouse financing facilities.
The Debtors are currently operating their business as debtors-in-possession.
On October 27, 1998, the Bankruptcy Court entered a final order approving
debtor-in-possession financing arrangements (see "-- Liquidity and Capital
Resources"). Under the Bankruptcy Code, the Debtors may elect to assume or
reject real estate leases and other pre-petition executory contracts, subject to
Bankruptcy Court approval. Upon rejection, under Section 502 of the Bankruptcy
Code, a lessor's claim for damages resulting from the rejection of a real
property lease is limited to the rent to be received under such lease, without
acceleration, for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease following the earlier of the date of the
Petitions or the date on which the property is returned to the landlord. On
October 30, 1998, the Debtors filed a schedule with the Bankruptcy Court listing
executory contracts and real estate leases to be rejected.
By the Motion dated October 6, 1998, Elliott Associates L.P. and Westgate
International, L.P. sought the entry of an order, pursuant to section 1104(c) of
the Bankruptcy Code, directing the appointment of an Examiner. By the Order
dated October 30, 1998, this Court granted the Motion and directed the United
States Trustee for the Southern District of New York to appoint an Examiner. The
Order authorized the Examiner to conduct a preliminary investigation and issue a
written report regarding the facts and circumstances surrounding certain
releases given by the Debtors under the Plan.
On November 9,1998 the Examiner filed the Examiner Report Pursuant to Order
of October 20, 1998 (the "Examiner Report"). The Examiner Report stated, among
other things, that (i) there was no evidence that any representative of the
Company or CSC acted in bad faith, recklessly or unreasonably with respect to
the Company's and CSC's accounting issues for the second quarter of 1996; (ii)
no material misstatements, omissions or delays were found with respect to the
Company's and CSC's public disclosures concerning the developments in United
Kingdom during the period from March 1997 through August 1997, (iii) with the
exception of the ongoing SEC investigation, there were no investigations,
regarding the restatements of the Company's financial statements and write-downs
of assets performed by the Company, CSC or anyone else; (iv) no evidence was
found that the Company's or CSC's current or former officers or directors
engaged in any short sales of the Company's common stock of any kind during 1997
and 1998 (or at any other time); (v) there was no evidence of bad faith, lack of
integrity, self-dealing, falsification or manipulation of corporate records or
other impropriety; and (vii) the Plan contained third party releases that should
be removed.
Liabilities subject to compromise as of September 30, 1998, pursuant to the
Plan are summarized as follows:
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12 3/4% Senior Notes $ 300,000,000
6% Convertible Subordinated Debentures 129,620,000
Accrued interest related to Senior Notes
and Convertible Debentures 39,004,100
==============
$ 468,624,100
==============
Other potential consequences of reorganization under chapter 11 that have not
been recorded including the effect of the determination as to the disposition of
executory contracts and leases as to which a final determination by the
Bankruptcy Court as to rejection had not yet been made. Trade creditors,
pursuant to the Plan, are unimpaired. Pursuant to an order of the Bankruptcy
Court signed October 7, 1998, prepetition amounts owed to such trade creditors
are being paid in the ordinary course of business.
In connection with the Company's restructuring efforts, the Company
deferred the June 1, 1998 and May 1, 1998 interest payments on its Notes and
Convertible Debentures, respectively. The continued deferral of the interest
payments on the Notes and Convertible Debentures constitutes an "Event of
Default" pursuant to the respective Indenture under which the securities were
issued. The Company stopped accruing interest on the Notes and Convertible
Debentures on October 6, 1998, the date the Company filed the Petitions in the
Bankruptcy Court.
THE CSC-UK SALE; 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 focused 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 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.
In April 1998, pursuant to the UK Sale Agreement, the Company completed
the sale to Ocwen and Ocwen Asset of substantially all of the assets, and
certain liabilities, of CSC-UK. The sale did not include the assumption by Ocwen
of all of CSC-UK's liabilities, and therefore, no assurances can be given that
claims will not be made against the Company in the future arising out of its
former UK operations. Such claims could have a material adverse effect on the
Company's financial condition and results of operations. The UK Sale included
the acquisition by Ocwen of CSC-UK's whole loan portfolio and loan origination
and servicing businesses for a price of pound sterling 249.6 million, the
acquisition by Ocwen Asset of CSC-UK's securitized loan residuals for a price of
pound sterling 33.7 million and the assumption by Ocwen of pound sterling 7.2
million of CSC-UK's liabilities. The price paid by Ocwen is subject to
adjustment to account for the actual balances on the closing date of the loan
portfolio and the assumed liabilities. As a result of the sale, the Company
received proceeds, at the time of the closing, of $83.8 million, net of closing
costs and other fees.
Accordingly, the operating results of CSC-UK and its 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 of September 30, 1998, the Company's net investment in discontinued
operations totaled $24.8 million, representing cash on hand in the discontinued
operation of approximately $16.1 million and net receivables (net of
liabilities) due of approximately $8.7 million. The Company expects to maintain
a balance of cash on hand in the discontinued operation to cover existing and
potential liabilities and costs until the dissolution of the existing legal
entities of CSC-UK and its subsidiaries. Additionally, as of September 30, 1998,
there were liabilities related to the discontinued operations of approximately
$555,000 included in accounts payable and other liabilities.
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Included in such net receivables is approximately $10.0 million due from
Ocwen under the terms of the UK Sale Agreement. The Company, however, received a
letter from Ocwen in which Ocwen has taken the position that the Company owes
approximately $21.4 million in connection with the transaction. The Company and
Ocwen are currently in dispute over these amounts. See "Legal Proceedings."
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.
On or about September 14, 1998, Elliott Associates, L.P. and Westgate
International, L.P. filed a lawsuit against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of New York. In the complaint, plaintiffs describe the lawsuit as "an
action for securities fraud and breach of contract arising out of the private
placement, in September 1997, of the Series B Preferred Stock of Cityscape."
Plaintiffs allege violations of Section 10(b) of the Exchange Act (Count I);
Section 20(a) of the Exchange Act (Count II); and two breach of contract claims
against the Company (Counts III and IV). Plaintiffs allege to have purchased a
total of $20 million of such preferred stock. Plaintiffs seek unspecified
damages, including pre-judgement interest, attorneys' fees, other expenses and
court costs. The Company and its defendant officers and directors have moved to
dismiss this action.
See Part II, Item 1 for these 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 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
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 64,878,969 as of November 6, 1998, primarily as a result of such
conversions. As of November 6, 1998, an aggregate of 4,374 shares and 449 shares
of Series A Preferred Stock and Series B Preferred Stock, respectively, had been
converted (626 shares and 4,551 shares, respectively remain outstanding) into an
aggregate of 34,151,645 shares of Common Stock. As of November 6, 1998 all of
the Series A Warrants and Series B Warrants were outstanding. If all of the
Series A Preferred Stock 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. 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 "Liquidity and
Capital Resources -- Convertible Preferred Stock." In addition, if the Plan is
confirmed by the Bankruptcy Court, existing Common Stock and related warrants
would be extinguished and the holders thereof would receive no distributions
under the Plan. See "-- Chapter 11 Proceedings."
NASDAQ DELISTING
In December 1997, the Company was notified by 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
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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.
On May 1, 1998, the Company was informed by Nasdaq that the Company's
Common Stock would be delisted from the Nasdaq SmallCap Market effective with
the close of business on May 1, 1998, and that the Company does not meet the
criteria necessary for immediate eligibility for quotation on the OTC Bulletin
Board. As a result of this delisting, it is likely that the liquidity of the
Company's Common Stock will be materially impaired which is likely to materially
and adversely affect the price of the Common Stock.
EMPLOYEE ATTRITION
As a result of the difficult environment the Company has 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 142 employees in February 1998.
On October 22, 1998, of 454 employees then remaining, the Company reduced its
workforce by 243 additional employees (24 of which will remain employed for up
to ten weeks) to 211 employees. The Company expects to further reduce its
workforce as a result of its decision on November 13, 1998 to suspend
indefinitely the origination and purchase of its Sav*-A-Loan(R) products.
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.
In order to retain key executive officers through the restructuring
period, the Company or CSC has entered into new employment agreements that
extend through December 31, 1998 or December 31, 1999. Such agreements provide
for stay bonuses, ranging from $100,000 to $400,000, portions of which were paid
upon signing the agreements, with the balance of such payments, accrued and
payable on a monthly basis through December 31, 1998.
LIQUIDITY CONCERNS
During the third quarter of 1998, turmoil in the financial markets greatly
affected the stock price and profits of U.S. finance companies. This was
especially true for companies in the subprime home equity sector. Many companies
in this sector have historically sold their loans through securitizations.
However, due to the global economic turmoil, investors sought safe haven and
securities such as U.S. Treasury securities, shunning other types of bonds.
Consequently, the demand for mortgage-backed securities decreased significantly,
causing credit spreads to widen substantially. This was exacerbated by the fact
that many subprime home equity companies have credit facilities to fund their
operations with banks and brokerage firms that were hit hard with emerging
market and hedge fund losses. As a result, funding became more costly and scarce
causing a liquidity crunch in the sector. This forced many of the subprime home
equity companies to seek strategic partners of buyers. The companies have been
unsuccessful in these efforts.
As a result of the disarray in the mortgage-backed securities market, the
Company is experiencing difficulty in successfully implementing loan sales in
the increasingly competitive whole loan sales market. The lack of funding
sources in the sector is having a negative effect on the Company's ability to
continue to access loan warehouse or purchase facilities. In addition, based on
the Company's discussions with potential lenders regarding post-reorganization
warehouse financing facilities, the Company has determined that it is unlikely
that such financing will be provided for its Sav*-A-Loan(R) products. As a
result, on November 13, 1998, the Company decided to suspend originating and
purchasing its Sav*-A-Loan(R) products. There can be no assurance as to when, if
ever, the Company will again originate or purchase Sav*-A-Loan(R) product.
BUSINESS OVERVIEW
The Company primarily generates revenue 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. Gain on sale of loans
through securitizations includes the present value of the
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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. Commencing in the fourth quarter of 1997, 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. During the first nine months of
1998, all loans were sold through whole loan sales as compared to the first nine
months of 1997, when all loans were sold into securitizations. The Company
anticipates that substantially all of its loan production volume will be sold
through whole loan sales in 1998. Whole loan sales produce lower margins than
securitizations and, therefore, have and will negatively impact the Company's
earnings.
The following table sets forth selected operating data for the Company for
the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Origination and Sale Data:
Loan originations and purchases:
Core Products(1) $ 36,684 $ 198,855 $ 169,024 $ 652,201
Sav*-A-Loan(R) Products(2) 65,967 181,998 241,989 512,926
Discontinued Products(3) -- 69,565 4,336 126,321
---------- ---------- ---------- ------------
$ 102,651 $ 450,418 $ 415,349 $ 1,291,448
========== ========== ========== ============
Average principal balance per loan
originated and purchased $ 49.7 $ 56.4 $ 51.5 $ 55.7
Weighted average coupon:
Core Products:
Fixed rate loans 10.1% 11.3% 10.2% 11.6%
Variable rate loans 9.2% 10.4% 9.1% 10.4%
Sav*-A-Loan(R) Products 12.7% 14.2% 12.9% 14.1%
Discontinued Products -- 9.1% 9.0% 9.5%
Loans sold $ 75,174 $ 445,096 $ 370,327 $ 1,274,947
(1) Fixed and adjustable rate residential mortgage loans for refinancing,
educational, home improvement and debt consolidation purposes and fixed
adjustable rate purchase money loans.
(2) 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 make home improvements. On November 13, 1998 the
Company decided to suspend indefinitely originating and purchasing such
products. There can be no assurance as to when, if ever, the Company will
again originate or purchase such products.
(3) Discontinued in April 1998, includes jumbo loans, conventional home loans,
Title I loans and loans on small multi-family and mixed-use properties.
The following table sets forth selected portfolio data for the Company for
the periods indicated:
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AS OF SEPTEMBER 30, 1998 AS OF DECEMBER 31, 1997
DOLLARS IN % OF SERVICED DOLLARS IN % OF SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- --------- --------- ---------
Portfolio Data:
Serviced portfolio(1) $1,297,810(2) 100.0% $2,231,519 100.0%
============ ===== ========== =====
Delinquencies:
30-59 days delinquent $ 55,319 4.3% $ 65,063 2.9%
60-89 days delinquent 21,746 1.7% 30,479 1.4%
90 days or more delinquent 36,780 2.8% 27,808 1.3%
---------- ----- ---------- -----
Total delinquencies $ 113,845 8.8% $ 123,350 5.6%
============ ===== ========== =====
Defaults:
Bankruptcies $ 34,360 2.6% $ 25,131 1.1%
Foreclosures 74,961 5.8% 100,901 4.5%
---------- ----- ---------- -----
Total defaults $ 109,321 8.4% $ 126,032 5.6%
============ ===== ========== =====
REO property $ 17,744 1.4% $ 8,549 0.4%
============ ===== ========== =====
Charge-offs for the nine months
months ended September 30,
1998 the twelve months
ended December 31, 1997 $ 22,109 1.7% $ 4,734 0.2%
============ ===== ========== =====
(1) Excludes loans serviced pursuant to contract servicing agreements.
(2) Includes $605.5 million of loans (representing the Company's 1995-2,
1995-3, 1996-1, 1996-2, 1996-3 and 1996-4 home equity securitizations)
serviced by Fairbanks under subservicing agreements entered into during
the third quarter of 1998. The loans serviced under the Fairbanks
subservicing agreements represent 46.7% of the Company's total servicing
portfolio and 97.5% of the Company's home equity servicing portfolio.
Under the terms of the subservicing agreements, Fairbanks as subservicer
retains all rights, including the normal servicing fee and any ancillary
income, and obligations of the servicer as provided for under the terms of
the applicable securitizations and servicing agreements.
The servicing portfolio decreased to $1.3 billion as of September 30, 1998
from $2.2 billion as of December 31, 1997, 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 of loans through whole loan sales with servicing released
during the first nine months of 1998. During the remainder of 1998, the Company
anticipates continuing to sell substantially all of its loan production through
whole loan sales with servicing released. As a result of such sales, as well as
loan prepayments and defaults on existing loans, the Company anticipates that
the size of the servicing portfolio will substantially decrease in the future.
IMPACT OF YEAR 2000
Issues surrounding the Year 2000 arise out of the fact that many existing
computer programs use only two digits to identify a year in the date field. With
the approach of the Year 2000, computer hardware and software that are not made
Year 2000 ready might interpret "00" as Year 1900 rather than Year 2000. The
Year 2000 problem is not just a technology issue; it also involves the Company's
customers, suppliers and third parties.
The Company's information systems are networked and client server based.
The Company believes that all of its information processing infrastructure, from
desktop computers to the servers including the network, desktop and applications
server operating systems are Year 2000 ready.
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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/Alltel ("CPI"). CPI provides the Company with quarterly updates regarding
CPI's progress and schedule for Year 2000 readiness. If CPI is not Year 2000
ready by the end of the second quarter of 1999, the Company believes it will
be able to transfer its servicing platform to a Year 2000 ready service
provider, although no assurance can be given of such transfer. The failure to
achieve such compliance or transfer of the servicing platform in a timely manner
could have an adverse effect on the servicing operations conducted by the
Company.
The Company's loan origination system is not currently Year 2000
ready. The Company is currently reviewing these systems and the costs
associated with remediating these systems to ensure Year 2000 readiness. The
Company is currently reviewing contingency plans and in the event the above
system is not Year 2000 ready, the Company believes that it will be able to
purchase, install and implement a Year 2000 ready "off the shelf"
origination system. The Company plans to complete a review such systems before
the end of the first quarter of 1999. The Company's financial reporting systems
are currently believed to be Year 2000 ready.
The Company is currently reviewing the expected costs to complete its
assessment of its Year 2000 readiness. The costs incurred to date have not been
material; however, there can no assurances that such costs in the future will
not be material. Even if the Company is Year 2000 ready, failures by
significant third parties to address their Year 2000 readiness may disrupt the
Company's operations and cause it to incur financial losses. These third parties
include financial counterparties, telecommunications companies, vendors, and
utilities.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
During the three months ended September 30, 1998, the Company recorded
negative revenues of $317,488 primarily as a result of the recording of a $7.8
million net unrealized loss on the Company's trading securities which are in the
form of interest-only and residual mortgage securities. This represents a $25.1
million increase in revenues from the three months ended September 30, 1997
primarily as a result of a lower net unrealized loss of $7.8 million recorded on
the Company's trading securities during the third quarter of 1998 as compared to
an unrealized loss of $72.1 million for the same quarter in 1997.
For the three months ended September 30, 1998, the Company recorded a gain
on sale of loans totaling $2.2 million. This gain was due primarily to the sale
of $75.2 million of whole loans at an average net premium received of 3.6% as
compared to the average premium paid on such loans of 0.7%. Additionally,
included in the gain on sale during the third quarter is approximately $347,000
of gain representing the profit participation realized during the quarter on
$14.6 million of loans sold during the first quarter of 1998 into the Company's
purchase facility. For the three months ended September 30, 1997, 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. During the third quarter of 1997, the Company
recognized $20.1 million of gain on sale of loans representing a weighted
average gain of 4.5% on $445.1 million of loans sold into securitizations. The
Company expects that it will continue to sell the majority of loans through
whole loan sales and therefore expects to continue to recognize lower net
margins as compared to the margins recognized in 1997. The Company expects that
gain on sale of loans will be further negatively impacted in the future as a
result of its decision to suspend indefinitely the origination and purchase of
its Sav*-A-Loan(R) products. The Company expects that such suspension will
negatively impact the Company's originations and, therefore, in term reduce the
volume of loan sales in future periods.
In the third quarter of 1998, the Company recorded a unrealized loss on
valuation of residuals of $7.8 million, consisting of a $5.5 million unrealized
loss on its home equity residuals and $2.3 million on its Sav*-A-Loan(R)
residuals. This unrealized loss was primarily a result of the Company increasing
the
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weighted average discount rate used to value its residuals to 17% at September
30, 1998 from 15% at June 30, 1998 for both its home equity and Sav*-A-Loan(R)
residuals. The increase in the discount rate reflects the changes in market
conditions experienced in the mortgage-backed securities markets since the
second quarter of 1998 (see "-- Liquidity Concerns"). In addition to the
discount rate noted above, as of September 30, 1998 the assumptions used to
value the Company's home equity residuals included a weighted average loss rate
of 4.95% per annum and a weighted average constant prepayment speed of 34.8%.
For the Company's Sav*-A-Loan(R) residuals, the Company used a weighted average
loss rate of 3.3% and a weighted average constant prepayment speed of 16.8% for
the periods ended September 30, 1998 and December 31, 1997.
Interest income decreased $18.3 million or 82.4% to $3.9 million for the
three months ended September 30, 1998 from $22.2 million for the comparable
period in 1997. This decrease was due primarily to the cessation of the
recognition of accreted interest on the Company's residuals in the second
quarter of 1998 as a result of the devaluation of the residuals, as well as
lower weighted average coupons on the loans originated during 1998. The Company
expects that the interest income related to its securitizations will continue to
be lower than interest recognized in the comparable periods in 1997.
Additionally, the Company expects to record lower interest income due to
expected lower weighted average coupons on the loans originated.
Mortgage origination income decreased $797,182 or 57.3% to $593,325 for
the three months ended September 30, 1998 from $1.4 million for the comparable
period in 1997. This decrease was due primarily to a lower volume of loan
originations for the three months ended September 30, 1998 as compared to the
same period in 1997.
Other income decreased $2.3 million or 74.2% to $728,270 for the three
months ended September 30, 1998 from $3.1 million for the comparable period in
1997. This decrease was due primarily to decreased servicing income 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." The Company expects that servicing revenues will be
lower in the future as a result of the subservicing agreements entered into with
Fairbanks.
Total expenses decreased $7.1 million or 13.4% to $46.1 million for the
three months ended September 30, 1998 from $53.2 million for the comparable
period in 1997. This decrease was due primarily to decreased salaries and
benefits due to a lower number of employees, decreased interest expense due to
the discontinuance of the Company's interest rate management strategy, and
decreased provision for loan losses due to a lower balance of mortgages held for
investment resulting from lower originations for the three months ended
September 30, 1998 as compared to the same period in 1997.
Salaries and employee benefits decreased $3.7 million or 30.1% to $8.6
million for the three months ended September 30, 1998 from $12.3 million for the
comparable period in 1997. This decrease was due primarily to decreased staffing
levels to 471 employees at September 30, 1998, as compared to 916 employees as
of September 30, 1997. This decrease was primarily a result of the Company's
restructuring and streamlining efforts as well as employee attrition. The
Company expects salaries and employee benefits to decrease in the future due to
the recent reduction in staffing levels to 211 employees in October 1998 and
expected additional reductions in staffing levels during the fourth quarter of
1998 as a result of the Company's decision to suspend indefinitely the
origination and purchase of its Sav*-A-Loan(R) products.
Interest expense decreased $3.0 million or 16.6% to $15.1 million for the
three months ended September 30, 1998 from $18.1 million for the comparable
period in 1997. This decrease was due primarily to the discontinuance during
1998 of the Company's interest rate management strategy.
Selling and other expenses increased $6.8 million or 62.4% to $17.7
million for the three months ended September 30, 1998 from $10.9 million for the
comparable period in 1997. This increase was due primarily to increased
professional fees as a result of the Company's restructuring and streamlining
efforts.
Provision for loan losses decreased $7.3 million or 60.8% to $4.7 million
for the three months ended September 30, 1998 from $12.0 million for the
comparable period in 1997. For the three months ended September 30, 1998, the
Company recorded a $3.1 million charge against the Company's Sav*-A-
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Loan(R) mortgages included in the mortgage loans held for sale portfolio. This
charge reflects the decreased market value of the Company's approximate $31.0
million of Sav*-A-Loan(R) mortgages with FICO scores of less than 640. While the
Company believes that the $3.1 million charge is adequate based on current
market conditions, there can be no assurance that future changes in market
conditions or other factors will not require additional charges against the
Company's Sav*-A-Loan(R) mortgage portfolio. (See "Liquidity Concerns"). In
October 1998, the Company has adjusted its underwriting guidelines regarding its
Sav*-A-Loan(R) mortgages to require a FICO score of above 640. During the third
quarter, the Company recorded an additional $1.6 million writedown on its
mortgages held for investment as compared to a $12.0 million writedown during
the comparable period in 1997. This decrease was due primarily to a decreased
balance of mortgages held for investment resulting from decreased loan
production volume during the third quarter of 1998.
For the three months ended September 30, 1998, the Company recorded an
income tax provision of $166,067 representing the recognition of state taxes for
the period as compared to an income tax benefit of $32.2 million recorded in the
comparable period in 1997. The $32.2 million income tax benefit recorded in 1997
reflects the losses incurred during the third quarter of 1997.
The Company recorded a net loss applicable to common stock of $54.8
million for the three months ended September 30, 1998 as compared to net loss
applicable to common stock of $70.7 million for the three months ended September
30, 1997. This loss was due primarily to a $46.6 million loss from continuing
operations as compared to a loss of $47.4 million from continuing operations for
the three months ended September 30, 1997. The loss recorded for the three
months ended September 30, 1998 was primarily due to decreased loan
originations, a net unrealized loss on valuation of residuals of $7.8 million,
as well as lower gain on sale of loans due to the Company's strategy of selling
loans through whole loan sales instead of through securitizations. Additionally,
the Company recorded a loss from discontinued operations $22.3 million during
the third quarter of 1997. An increase in the liquidation preference of the
preferred stock in lieu of dividends and default payments of $8.2 million was
recorded during the third quarter of 1998 further increasing the net loss
applicable to common stock.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
During the first nine months of 1998, the Company recorded negative
revenues of $12.1 million primarily as a result of the recording of a $26.3
million net unrealized loss on the Company's trading securities. This represents
a $87.0 million decrease from the first nine months of 1997 primarily as a
result of the lower gain recorded on its sale of loans.
For the first nine months of 1998, the Company recorded a net gain on sale
of loans totaling $926,772. This gain was primarily due to the sale of $370.3
million of whole loans at an average net premium received of 1.6% as compared to
the average premium paid on such loans of 1.4%. For the nine months ended
September 30, 1997, 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. During the
first nine months of 1997, the Company recognized $81.8 million of gain on sale
of loans representing a weighted average gain of 6.4% on $1.3 billion of loans
sold into securitizations. The Company expects that it will continue to sell the
majority of loans through whole loan sales and therefore expects to continue to
recognize lower net margins as compared to the margins recognized in 1997. The
Company expects that gain on sale of loans will be further negatively impacted
in the future as a result of its decision to suspend indefinitely the
origination and purchase of its Sav*-A-Loan(R) products. The Company expects
that such suspension will negatively impact the Company's originations and,
therefore, in term reduce the volume of loan sales in future periods.
The unrealized loss on valuation of residuals of $26.3 million recorded
for the nine months ended September 30, 1998 is a result of the Company
increasing its discount rate, prepayment speed and loss assumptions used to
calculate the value of the residuals, reflecting continued higher than expected
losses and increased prepayment speeds experienced on its home equity and
Sav*-A-Loan(R) securitized loans. As a result of a recent increase in the volume
of liquidations, and corresponding losses experienced on such liquidations, the
Company determined that the loss rates implied by the liquidation values at
December 31, 1997, should be revised from 1.7% per annum to 4.95% per annum for
home equity loans. Additionally, during the first nine months of 1998, the
Company experienced an increase in the prepayment speeds on its home equity
securitized loans and accordingly increased the prepayment speeds used to value
the home equity residuals to 34.8% per annum at September 30, 1998 from 31.8%
per annum at December 31, 1997. The $7.8 million loss on valuation of both the
home equity and Sav*-A-Loan(R) residuals during the third
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quarter of 1998 resulted from the Company increasing its weighted average
discount rate to 17% at September 30, 1998 from 15% at December 31, 1997. This
increase in the discount rate reflects the changes in market conditions
experienced in the mortgage-backed securities markets since the second quarter
of 1998 (see "--Liquidity Concerns").
Interest income decreased $46.3 million or 82.2% to $10.0 million for the
nine months ended September 30, 1998 from $56.3 million for the comparable
period in 1997. This decrease was due primarily to the cessation of the
recognition of accreted interest on the Company's residuals in the second
quarter of 1998 as a result of the devaluation of the residuals, as well as
lower weighted average coupons on the loans originated in 1998. The Company
expects that the interest income related to its securitizations will continue to
be lower than interest recognized in the comparable periods in 1997.
Additionally, the Company expects to record lower interest income due to
expected lower weighted average coupons on the loans originated.
Mortgage origination income decreased $1.6 million or 44.4% to $2.0
million for the nine months ended September 30, 1998 from $3.6 million for the
comparable period in 1997. This decrease was due primarily to a lower volume of
loan originations for the nine months ended September 30, 1998 as compared to
the same period in 1997.
Other income decreased $4.1 million or 77.4% to $1.2 million for the nine
months ended September 30, 1998 from $5.3 million for the comparable period in
1997. This decrease was due primarily to decreased servicing income mainly 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." The Company expects that servicing revenues will be lower in
the future as a result of the subservicing agreements entered into with
Fairbanks.
Total expenses decreased $5.1 million or 4.0% to $121.1 million for the
nine months ended September 30, 1998 from $126.2 million for the comparable
period in 1997. This decrease was due primarily to lower salaries and interest
expense offset by increased other operating expenses relating to increased
professional fees as well as $3.2 million of restructuring charges and $2.0
million relating to the settlement of a lawsuit.
Salaries and employee benefits decreased $7.9 million or 23.4% to $25.9
million for the nine months ended September 30, 1998 from $33.8 million for the
comparable period in 1997. This decrease was due primarily to decreased staffing
levels to 471 employees at September 30, 1998 as compared to 916 employees as of
September 30, 1997. This decrease was primarily a result of the Company's
restructuring and streamlining efforts as well as employee attrition. The
Company expects salaries and employee benefits to decrease in the future due to
the recent reduction in staffing levels to 211 employees in October 1998 and
expected additional staff reductions in staffing levels in the fourth quarter
of 1998 as a result of the Company's decision to suspend indefinitely the
origination and purchase of its Sav*-A-Loan(R) products.
Interest expense decreased $10.5 million or 19.5% to $43.3 million for the
nine months ended September 30, 1998 from $53.8 million for the comparable
period in 1997. This decrease was due primarily to the discontinuance during
1998 of the Company's interest rate management strategy. In addition, during
1997 a charge of $4.7 million was recorded related to the inducement of the
Convertible Debentures.
Selling and other expenses increased $17.3 million or 64.8% to $44.0
million for the nine months ended September 30, 1998 from $26.7 million for the
comparable period in 1997. This increase was due primarily to increased
operating costs of $16.8 million or 70.0% to $40.8 million for the nine months
ended September 30, 1998 from $24.0 million for the comparable period in 1997
from increased professional fees as a result of the Company's restructuring and
streamlining efforts as well as a $2.0 million charge due to the settlement of a
lawsuit.
Provision for loan losses decreased $7.3 million or 60.8% to $4.7 million
for the three months ended September 30, 1998 from $12.0 million for the
comparable period in 1997. For the three months ended September 30, 1998, the
Company recorded a $3.1 million charge against the Company's Sav*-A-Loan(R)
mortgages included in the mortgage loans held for sale portfolio. This charge
reflects the decreased market value of the Company's approximate $31.0 million
of Sav*-A-Loan(R) mortgages with FICO scores of less than 640. In October 1998,
the Company has adjusted its underwriting guidelines regarding its
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Sav*-A-Loan(R) mortgages to require a FICO score of above 640. While the
Company believes that the $3.1 million charge is adequate based on current
market conditions, there can be no assurance that future changes in market
conditions or other factors will not require additional charges against the
Company's Sav*-A-Loan(R) mortgage portfolio. (See "Liquidity Concerns"). During
the third quarter, the Company recorded an additional $1.6 million writedown on
its mortgages held for investment as compared to a $12.0 million writedown
during the comparable period in 1997. This decrease was due primarily to a
decreased balance of mortgages held for investment resulting from decreased loan
production volume during the third quarter of 1998.
During the nine months ended September 30, 1998, the Company recorded a
restructuring charge of $3.2 million. This charge was related to a restructuring
plan that includes streamlining and downsizing the Company's operations. During
the nine months ended September 30, 1998, the Company closed its branch
operation in Virginia and significantly reduced its correspondent originations
and exited its conventional lending business. Of the $3.2 million, $1.1 million
represents severance payments made to 142 former employees and $2.1 million
represents costs incurred with lease obligations and write-offs of assets no
longer in service. As part of its restructuring plan that includes streamlining
and downsizing its operations, on October 22, 1998, the Company reduced its
workforce by 243 employees (24 of which will remain employed for up to ten
weeks), representing 53.5% of its workforce, from 454 employees to 211
employees. In connection with this reduction, the Company has closed its branch
operations in California and Illinois, while maintaining its offices in New York
and Georgia. Accordingly, the Company anticipates that it will record a
restructuring charge of approximately $8 million to $10 million in the fourth
quarter of 1998. On November 13, 1998, the Company decided to suspend
indefinitely the origination and purchase of its Sav*-A-Loan(R) products. As a
result, the Company expects to further streamline and downsize its operations
and reduce its workforce and will record an additional restructuring charge in
the fourth quarter of 1998.
For the nine months ended September 30, 1998, the Company recorded an
income tax provision of $466,126 representing the recognition of state taxes for
the period as compared to an income tax benefit of $18.9 million recorded in the
comparable period in 1997. The $18.9 million income tax benefit recorded in 1997
reflects the losses incurred during the first nine months of 1997.
The Company recorded a net loss applicable to common stock of $153.3
million for the nine months ended September 30, 1998 as compared to net loss
applicable to common stock of $50.9 million for the nine months ended September
30, 1997. This loss was due primarily to a $133.6 million loss from continuing
operations due to decreased loan originations, as well as decreased gain on sale
of loans due to the Company's strategy of selling loans through whole loan sales
instead of through securitizations. Additionally, the Company recorded a loss
from discontinued operations of $16.4 million during the first nine months of
1997. An increase in the liquidation preference of the preferred stock in lieu
of dividends and default payments of $19.7 million was recorded during the first
nine months of 1998 further increasing the net loss applicable to common stock.
FINANCIAL CONDITION
September 30, 1998 Compared to December 31, 1997
Cash and cash equivalents increased $22.2 million to $24.8 million at
September 30, 1998 from $2.6 million at December 31, 1997. This increase was
primarily due to the cash proceeds from the sale of CSC-UK.
Mortgage servicing receivables decreased $2.0 million or 21.1% to $7.5
million at September 30, 1998 from $9.5 million at December 31, 1997. This
decrease was primarily the result of the sale of the mortgage servicing
receivables associated with the sale of the residuals in January 1998.
Trading securities, which consist of interest-only and residual
certificates, decreased $49.9 million or 39.4% to $76.6 million at September 30,
1998 from $126.5 million at December 31, 1997. This decrease was partially due
to the Company's sale of residual certificates and related mortgage servicing
receivables relating to certain of the Company's home equity loan products for
net proceeds of $26.5 million during the first quarter of 1998 to enhance the
Company's liquidity position. Additionally, the Company recorded a write-down of
$26.3 million during the first nine months of 1998 primarily resulting from an
increase in the expected loss rate used to value such residuals reflecting the
Company's recent increase in losses on liquidation of non-performing loans in
its home equity portfolio and Sav*-A-Loan(R) portfolios, as well as an increased
weighted average discount rate reflecting the changes in market conditions
experienced in the overall mortgage-backed securities market (see "-- Liquidity
Concerns").
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Mortgage loans held for sale, net increased $30.8 million or 33.0% to
$124.1 million at September 30, 1998 from $93.3 million at December 31, 1997.
This increase was due primarily to the volume of loans originated exceeding the
volume of loans sold during the first nine months of 1998.
Mortgage loans held for investment, net decreased $1.5 million or 23.1% to
$5.0 million at September 30, 1998 from $6.5 million at December 31, 1997. This
decrease was due primarily to $449,013 of loans reclassified from mortgages held
for investment, net to real estate owned, as well as $3.2 million of mortgage
loans held for investment, net sold during the first nine months of 1998 at a
price equated to the book value. This was partially offset by $2.7 million of
loans reclassified from mortgages held for sale to mortgages held for
investment, net due to the Company's inability to sell such loans. As a
percentage of total assets, mortgage loans held for investment, net at September
30, 1998 and at December 31, 1997 was 1.6%.
Investment in discontinued operations, net decreased by $59.4 million or
70.5% to $24.8 million at September 30, 1998 from $84.2 million at December 31,
1997. The decrease represented net cash proceeds from the sale of discontinued
operations during the first nine months of 1998. The balance at September 30,
1998 primarily consisted of cash on hand in the discontinued operation of
approximately $16.1 million and net receivables (net of liabilities) due of
approximately $8.7 million. The Company expects to maintain a balance of cash on
hand in the discontinued operation to cover existing and potential liabilities
and costs until the dissolution of the existing legal entities of CSC-UK and its
subsidiaries. Additionally, as of September 30, 1998, there were liabilities
related to the discontinued operations of approximately $555,000 included in
accounts payable and other liabilities.
Income taxes receivable decreased $16.7 million or 90.8% to $1.7 million
at September 30, 1998 from $18.4 million at December 31, 1997. This decrease was
due primarily to the receipt of a $15.8 million tax refund offset by
approximately $300,000 of state income taxes receivable recorded at September
30, 1998.
Other assets increased $2.6 million or 9.5% to $29.9 million at September
30, 1998 from $27.3 million at December 31, 1997. This increase was due
primarily to an increase in prepaid expenses and accounts receivable partially
offset by decreases in accrued interest receivable and deferred debt issuance
costs.
Warehouse financing facilities outstanding increased $33.4 million or
43.1% to $110.9 million at September 30, 1998 from $77.5 million at December 31,
1997. This increase was due primarily to the volume of loans originated
exceeding the volume of loans sold during the first nine months of 1998.
Accounts payable and other liabilities increased $3.0 or 4.7% to $66.4
million at September 30, 1998 from $63.4 million at December 31, 1997. This
increase was due primarily to the increased accrued interest payable relating to
the Notes and Convertible Debentures, partially offset by decreased accrued
liabilities relating to the UK Sale and decreased other accrued expenses.
Allowance for losses increased $2.9 million or 63.0% to $7.5 million at
September 30, 1998 from $4.6 million at December 31, 1997. This increase was due
primarily to an increase in the expected losses on the Company's home equity
loan pools and the costs associated with servicing such pools.
Income taxes payable increased $1.7 million to $2.0 million at September
30, 1998 from $300,000 at December 31, 1997. This increase was due primarily to
obligations related to alternative minimum taxes.
The stockholders' deficit increased $133.7 million or 75.6% to a deficit
of $310.5 million at September 30, 1998 as compared to a stockholders' deficit
of $176.8 million at December 31, 1997. This increase in the deficit was the
result of a net loss of $133.6 million for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
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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, loan origination
fees, processing fees, net interest income and borrowings under its loan
warehouse and purchase facilities to meet its working capital needs. 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. In April
1998, the Company completed the UK Sale and received proceeds, at the time of
the closing, of $83.8 million, net of closing costs and other fees. 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. The Company has concluded that
the best way to recapitalize the Company over the long-term and maximize the
recovery of creditors and senior equity interest holders of the Company is
through a prepackaged plan of reorganization for the Company and its
wholly-owned subsidiary, CSC. The Company believes that its future success is
dependent upon, among other things, confirmation of a plan of reorganization,
which hearing is scheduled for November 13, 1998, (see "-- Chapter 11
Proceedings"), the successful sale of loans in the whole loan sales market,
ability to access warehouse lines of credit and future profitable operations. No
assurance can be given that the Company will be able to achieve these results.
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.
The Company has operated, and expects to continue to operate, on a
negative cash flow basis. During the nine months ended September 30, 1998 and
1997, the Company used net cash of $72.6 million and $110.2 million from
continuing operations, respectively. Additionally, in the nine months ended
September 30, 1998 and 1997, the Company was provided $61.4 million and used
$602,163, respectively, in investing activities. During 1997, the Company's sale
of loans through securitizations resulted in a gain on sale of loans through
securitizations recognized by the Company. The recognition of this gain on sale
had a negative impact on the cash flow of the Company because significant costs
are incurred upon closing of the transactions giving rise to such gain and the
Company is required to pay income taxes on the gain on sale in the period
recognized, although the Company does not receive the cash representing the gain
until later periods as the related loans are repaid or otherwise collected.
During the nine months ended September 30, 1998 and 1997, the Company received
cash from financing activities of $33.4 million and $270.0 million,
respectively. During the nine months ended September 30, 1997, the Company used
net cash in discontinued operations of $108.7 million.
The Company is required to comply with various operating covenants as
defined in the Greenwich DIP Facility and CIT DIP Facility. The covenants
include restrictions on, among other things, the ability to (i) modify, stay,
vacation or amend the bankruptcy court order, (ii) create, incur, assume or
suffer to exist any lien upon or with respect to any of the Company's
properties, (iii) create, incur, assume, or suffer to exist any debt, (iv) wind
up, liquidate or dissolve itself, reorganize, merge or consolidate with or into,
or convey, sell, assign, transfer, lease or otherwise dispose of all or
substantially all of their assets, (v) acquire all or substantially all of the
assets or the business of any Person, (vi) create, incur, assume, or suffer to
exist any obligation as lessee for the rental or hire of any real or personal
property, (vii) sell, transfer, or otherwise dispose of any real or personal
property to any Person and thereafter directly or indirectly leaseback the same
or similar property, (viii) pay any dividends or other distributions, (ix) sell,
lease, assign, transfer or otherwise dispose of any of the Company's now owned
or hereafter acquired assets, (x) sell any mortgage loans on a recourse basis,
(xi) make any loan or advance to any Person, or purchase or otherwise acquire
any capital stock, assets, obligations, or other securities of, make any capital
contribution to, or otherwise invest in or acquire any interest in any Person,
or participate as a partner or joint venturer with any other Person, (xii)
engage in derivatives or hedging transactions, (xiii) assume, guarantee or
become directly or contingently responsible for the obligations of another
Person, (xiv) enter into transactions with any affiliate, (xv) use any part of
the proceeds for the purpose of purchasing or carrying margin stock, (xvi)
purchase any subwarehouse mortgage loan, (xvii) make bulk purchases of mortgage
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loans and (xvii) make any payments of principal or interest on account of any
indebtedness or trade payable prior to the filing date with certain exceptions.
In May 1998, Moody's lowered its rating of the Company's Notes to Ca from
Caa3, as well as its ratings on the Company's Convertible Debentures to C from
Ca. Also, in May 1998, S&P withdrew its CCC counterparty credit rating on the
Company and placed its CCC rating on the Company's Notes on "CreditWatch". In
June 1998, S&P further lowered its rating on the Company's Notes to D/default.
These reductions in the ratings of the Company's debt increase the Company's
borrowing costs.
Credit Facilities
Greenwich Warehouse Facility. In January 1997, CSC 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 CSC borrowed funds on a short-term basis to support the accumulation of
loans prior to sale (as amended, the "Greenwich Facility"). Advances under the
Greenwich Facility bore interest at a rate of LIBOR plus 150 basis points. The
Greenwich Facility was guaranteed by the Company and was secured by the mortgage
loans and related assets financed under the Greenwich Facility and by a pledge
(on a pari passu basis with the CIT Facility of the capital stock of certain
subsidiaries of CSC holding certain residual securities, as well as by a reserve
fund (containing approximately $8.1 million as of July 31, 1998) to cover
certain losses of Greenwich under a related whole loan sale agreement. This
facility was scheduled to expire on December 31, 1997, at which time CSC and
Greenwich entered into an extension agreement through October 8, 1998 (as
amended, the "Extension Agreement"). The Extension Agreement provided for a
maximum credit line of $150.0 million, subject to adjustment by Greenwich, at an
interest rate of LIBOR plus 200 basis points (7.38% at September 30, 1998) and a
fee of 0.25% of the aggregate principal balance of loans to be paid to Greenwich
in connection with any sale or securitization or any other transfer to any third
party of loans funded under this agreement. As of September 30, 1998, $96.7
million was outstanding under the Extension Agreement.
Subsequent to the filing of the Petitions and pursuant to a final order of
the Bankruptcy Court dated October 27, 1998 authorizing the Company to obtain
post-petition financing, the Company paid Greenwich, as lender under the
Greenwich Facility which had provided commitments aggregating approximately $150
million, approximately $99 million to extinguish Greenwich's prepetition
security interest. The Greenwich Facility was replaced by the Greenwich DIP
Facility with Greenwich that is guaranteed by the Company and is secured by
substantially all of the assets of CSC and the capital stock of CSC, pari passu
with the lien granted to CIT under the CIT DIP Facility. The Greenwich DIP
Facility bears interest at a rate of LIBOR plus 2.75% and provides a $100.0
million commitment. The Greenwich DIP Facility terminates on the earlier of (i)
the date that the chapter 11 case has been confirmed by an order of the
Bankruptcy Court or (ii) March 1, 1999.
CIT Warehouse Facility. On February 3, 1998, CSC entered into a revolving
credit facility with the CIT Group/Equipment Financing, Inc. (as amended, the
"CIT Facility") to finance CSC's origination and purchase of mortgage loans, the
repayment of certain indebtedness and, subject to certain limitations, other
general corporate purposes. The CIT Facility was guaranteed by the Company, and
bore interest at the prime rate plus 50 basis points (8.75% at September 30,
1998). Pursuant to the CIT Facility, CSC had 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 was also subject to sub-limits
on the amount of certain varieties of mortgage loan products that may be used to
secure advances thereunder. In addition, the CIT Facility was secured by the
mortgage loans and related assets financed under the CIT Facility or self-funded
by CSC, by a pledge of 65% of the capital stock of CSC-UK, by a pledge (on a
pari passu basis with the Greenwich Facility) of the capital stock of certain
subsidiaries of CSC holding certain residual securities and by certain other
assets. As of September 30, 1998, the outstanding balance on the CIT Facility
was $14.2 million.
Subsequent to the filing of the Petitions and pursuant to an interim order of
the Bankruptcy Court dated October 13, 1998 authorizing the Company to obtain
post-petition financing, the Company paid CIT, as lender under the CIT Facility,
which had provided commitments aggregating $30 million, approximately
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$14 million to extinguish CIT's prepetition security interest. On October 27,
1998, a final order was granted by the Bankruptcy Court. The CIT Facility was
replaced by the CIT DIP Facility with CIT and Nomura Asset Capital Corporation
that is guaranteed by the Company and is secured by substantially all of the
assets of CSC and the capital stock of CSC, pari passu with the lien granted to
Greenwich under the Greenwich DIP Facility. The CIT DIP Facility bears interest
at a rate of LIBOR plus 2.75% or the Prime Rate and provides a $150.0 million
commitment. The CIT DIP Facility terminates on the earlier of (i) the date that
the chapter 11 case has been confirmed by an order of the Bankruptcy Court or
(ii) March 1, 1999.
LOAN SALES
The Company disposes of all of its loan production through whole loan
sales where the Company receives a cash premium at the time of sale. In the
first nine months of 1998 and in the years 1997, 1996 and 1995, the Company sold
$370.3 million, $518.4 million, $73.5 million and $105.8 million, respectively,
in whole loan sales, accounting for 100.0%, 31.7%, 5.6% and 24.8% of all loan
sales in the respective periods. As a result of the Company's financial
condition, the Company is currently unable to sell its loans through
securitizations and expects to sell its loans only through whole loan sales
during 1998.
Historically, the Company used 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.
Prior to adopting a whole loan sales strategy for liquidity purposes, the
Company 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 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 that
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 receivables based on their fair value. 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 loss 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 of an independent third party purchaser of
the interest-only and residual certificates or mortgage servicing receivables.
As of September 30, 1998, the Company's balance sheet reflected the fair value
of interest-only and residual certificates and mortgage servicing receivables of
$76.6 million and $7.5 million less an allowance for losses of $7.5 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
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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.
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 of 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. The Company deferred the May 1, 1998 interest
payment as part of its plan to reorganize the business. The continued deferral
of the interest payment on the Convertible Debentures constitutes an "Event of
Default" pursuant to the Indenture under which such securities were issued. As
of October 6, 1998, due to the filing of the Petitions, the Company stopped
accruing interest on the Convertible Debentures. As of November 6, 1998, there
were $129.6 million of Convertible Debentures outstanding. If the Plan is
confirmed by the Bankruptcy Court, holders of the Convertible Debentures will
receive in exchange for all their claims, in the aggregate, 9.5% of the new
common stock of the reorganized company and warrants to purchase additional
common stock representing 5% of the new common stock of the reorganized company
on a fully diluted basis, which warrants would be exercisable if and when the
enterprise value of the reorganized company reached $300 million.
SENIOR NOTES
In May 1997, the Company issued $300.0 million aggregate principal amount
of 12-3/4% Senior Notes due 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. In connection
with its restructuring efforts, the Company determined to defer the June 1, 1998
interest payment on the Notes. The continued deferral of the interest payment on
the Notes constitutes an "Event of Default" pursuant to the Indenture under
which such securities were issued. As of October 6, 1998, due to the filing of
the Petitions, the Company stopped accruing interest on the Notes. If the Plan
is confirmed by the Bankruptcy Court, the holders of the Notes will receive in
exchange for all of their claims, in the aggregate, 90.5% of the new common
stock or the reorganized company and $75 million in initial principal amount of
10-year senior notes (on which interest could be paid in kind, at the
reorganized company's option).
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.
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In March, June and September 1998, the Company elected to add an amount
equal to the dividend to the Liquidation Preference of the Series A Preferred
Stock in lieu of payment of such dividend. In addition, amounts equal to 3% of
the Liquidation Preference for each 30-day period (prorated for shorter periods)
was added to the Liquidation Preference due to the delisting of the Company's
Common Stock from the Nasdaq National Market on January 29, 1998 (as discussed
below). As of September 30, 1998, the new Liquidation Preference varies up to
$14,212 per share.
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 July 24,
1998, 187 calendar days) immediately preceding such conversion, discounted by up
to 4% and subject to certain adjustments.
As of November 6, 1998, an aggregate of 4,374 shares of the Series A
Preferred Stock had been converted (626 shares remain outstanding) into an
aggregate of 12,681,270 shares of Common Stock. As of November 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.
In March, June and September 1998, 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. In addition, amounts equal to 3% of
the Liquidation Preference for each 30-day period (prorated for shorter periods)
was added to the Liquidation Preference due to the delisting of the Company's
Common Stock from the Nasdaq National Market on January 29, 1998. As of
September 30, 1998, the new Liquidation Preference is $14,250 per share.
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 November 6, 1998, an aggregate of 449 shares of Series B Preferred
Stock had been converted (4,551 shares remain outstanding) into an aggregate of
21,470,375 shares of Common Stock. As of November 6, 1998, all Series B Warrants
were outstanding.
As of November 6, 1998, if all of the outstanding shares of the Series A
Preferred Stock and Series B Preferred Stock were converted into Common Stock,
the Company would not have sufficient authorized shares of Common Stock to
satisfy such conversions.
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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, (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.
The Plan, if confirmed by the Bankruptcy Court, would provide that holders
of the Series A Preferred Stock would receive in exchange for their interests in
the Company, in the aggregate, 10.5% of the warrants to purchase common stock
representing 10% of the new common stock of the reorganized company on a fully
diluted basis, all of which warrants would be exercisable if and when the
enterprise value of the reorganized company reached $430 million and the holders
of Series B Preferred Stock will receive or retain no property.
SALE OF RESIDUAL CERTIFICATES AND MORTGAGE SERVICING RECEIVABLES
In order to enhance the Company's liquidity position, 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 $26.5 million (which equated to the book value at December 31, 1997).
The description above of the covenants contained in the Company's credit
facilities and other sources of funding does not purport to be complete and is
qualified in its entirety by reference to the actual agreements, which are filed
by the Company with the Commission and can be obtained from the Commission. The
continued availability of funds provided to the Company under these agreements
is subject to the Company's continued compliance with these covenants. In
addition, the Notes, the Convertible Debentures, the Series A Preferred Stock
and the Series B Preferred Stock permit the holders of such securities to
require the Company to purchase such securities upon a change of control (as
defined in the respective Indenture or Certificate of Designations, as the case
may be).
All references herein to "$" are to United States dollars; all references
to "pound sterling" are to British Pounds Sterling. Unless otherwise specified,
translation of amounts from British Pounds Sterling to United States dollars has
been made herein using exchange rates at the end of the period for which the
relevant statements are prepared for balance sheet items and the weighted
average exchange rates for the relevant period for statement of operations
items, each based on the noon buying rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 Section 20(a) of the Exchange Act. Plaintiffs
seek unspecified damages, including pre-judgment interest, attorneys' and
accountants' fees and court costs.
On December 5, 1997, the Eastern District plaintiffs filed a motion for
appointment of lead plaintiffs and approval of co-lead counsel. On September 23,
1998, the court granted this motion. On March 25, 1998, the Company and its
defendant officers and directors filed a motion with the federal Judicial Panel
for Multidistrict Litigation ("JPML"), seeking consolidation of all current and
future securities actions, including the New Jersey Action, for pre-trial
purposes before Judge Sterling Johnson in the Eastern District. On June 12,
1998, the JPML granted this motion.
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, 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, and shortly
thereafter, set in a memorandum of decision his reasons for granting the motion
to dismiss. Plaintiffs did not file an appeal of the order of dismissal.
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 seeking $60 million
in purported damages, injunctive relief, treble damages and punitive damages in
an unspecified sum.
In March 1998, plaintiffs sought a preliminary injunction to prevent the
Company and CSC 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 the present. The
New York Court signed a temporary restraining order that required the Company
and CSC to refrain from the specified sales.
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Settlement discussions commenced after plaintiffs' motion for preliminary
injunction was fully submitted. Settlement negotiations were concluded and the
litigation was settled shortly after the New York Court issued a decision in
plaintiffs' favor. The Company paid and expensed $2.04 million to plaintiffs,
and the Company, CSC and the defendant officers and directors gave releases in
favor of the plaintiffs. Plaintiffs agreed to discontinue their claims with
prejudice, withdraw as moot their motion for injunctive relief, consent to
vacatur of injunctive relief in the litigation and gave releases in favor of the
Company, CSC and the defendant officers and directors.
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 the Company. In connection with the financing, the Company 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 the Company through mortgage
brokers from an unspecified period to date (claims under Section 8 of RESPA are
governed by a one year statute of limitations) and (b) whose mortgage brokers
received a fee from the Company. Plaintiff is seeking to recover compensatory
damages, on behalf of the putative class, which is alleged to be "numerous," for
the amounts that "the interest rates and points charges were inflated" in
connection with each class member's mortgage loan transaction. The Company
answered the complaint and plaintiff has not yet moved for class certification.
To date, there has not been a ruling on the merits of either plaintiff's
individual claim or the claims of the putative class.
In April 1998, the Company was named as a defendant in an Amended
Complaint filed against 59 separate defendants in the Circuit Court for
Baltimore City entitled Peaks v. A Home of Your Own, Inc. et al. This action is
styled as a class action and alleges various causes of action (including
Conspiracy to Defraud, Fraud, Violation of Maryland Consumer Protection Act and
Unfair Trade Practices, Negligent Misrepresentation, and Negligence) against
multiple parties relating to 89 allegedly fraudulent mortgages made on
residential real estate in Baltimore, Maryland. The Company is alleged to have
purchased at least eight of the loans (and may have purchased 15 of the loans)
at issue in the Complaint. The Company has not yet been involved in any
discovery and has yet to file its response.
On or about September 14, 1998, Elliott Associates, L.P. and Westgate
International, L.P. filed a lawsuit against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of New York. In the complaint, plaintiffs describe the lawsuit as "an
action for securities fraud and breach of contract arising out of the private
placement, in September 1997, of the Series B Preferred Stock of Cityscape."
Plaintiffs allege violations of Section 10(b) of the Exchange Act (Count I);
Section 20(a) of the Exchange Act (Count II); and two breach of contract claims
against the Company (Counts III and IV). Plaintiffs allege to have purchased a
total of $20 million of such preferred stock. Plaintiffs seek unspecified
damages, including pre-judgement interest, attorneys' fees, other expenses and
court costs. The Company and its defendant officers and directors have moved to
dismiss this action.
Although no assurance can be given as to the outcome of the lawsuits
described above, 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
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dismiss or, alternatively, for summary judgement. On May 4, 1998, the Company
served papers that opposed Walsh's motion and moved for partial summary
judgement on certain of the loans.
On April 24, 1998, the Company filed an action in the US District Court
for the District of Maryland against multiple parties entitled Cityscape Corp.
vs. Global Mortgage Company, et al. The Company is in the process of serving the
complaint on the defendants. To date, the Company has yet to receive any
responsive pleadings. The complaint seeks damages of $4.0 million stemming from
a series of 145 allegedly fraudulent residential mortgages which the Company
previously acquired. The Company has previously reserved for losses against such
loans.
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 sterling 15.3 million ($23.3 million based on the Noon Buying Rate on the
date of such acquisition) in cash and 548,000 shares of Common Stock valued at
$9.8 million based upon the closing price of the Common Stock on the date of
such acquisition less a discount for restrictions on the resale of such stock
and incurred closing costs of $788,000 (the "J&J Acquisition").
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 sterling 41.8 million ($64.1 million based on the Noon
Buying Rate on the date of such acquisition) in cash and 99,362 shares of Common
Stock valued at $2.5 million based upon the closing price of the Common Stock on
the date of such acquisition and incurred closing costs of $2.3 million (the
"Greyfriars Acquisition").
In October 1996, the Company received a request from the staff of 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 acquisitions. The effect of this accounting change resulted in a
reduction in reported earnings of $26.5 million. Additionally, as a result of
this accounting change, the goodwill initially recorded in connection with such
acquisitions was reduced resulting in a reduction of goodwill amortization of
approximately $496,000 from the previously reported figure for the second
quarter. On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the
Greyfriars Acquisition should be made to the financial statements for the
quarter ended June 30, 1996. These adjustments reflect a change in the
accounting treatment with respect to restructuring charges and deferred taxes
recorded as a result of such acquisitions. This caused an increase in the amount
of goodwill recorded which resulted in an increase of amortization expense as
previously reported in the second quarter of 1996 of $170,692. The staff of the
Commission 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.
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Pursuant to the UK Sale Agreement, Ocwen is required to pay certain sums
to the Company. On August 5, 1998, the Company made formal demand on Ocwen for
payment of those sums which arise (i) from the Final Portfolio Completion
Statement and (ii) items deemed to be Excluded Assets, each as defined in the UK
Sale Agreement. Ocwen has failed to pay the sums owed to the Company and,
accordingly, on September 4, 1998, the Company commenced proceedings in the High
Court of Justice, London for the recovery of those sums (the "Proceedings"). The
Company pleads its claim on two alternative bases and claims the sum of $7.6
million on the first basis; alternatively $2.7 million on the second basis. The
Company has applied for an order for summary judgement (the "Application") of
the sums due and that Application is scheduled to be heard on December 11, 1998.
Ocwen has informed the Company that they will defend the Proceedings and the
Application and it is anticipated that they will outline the basis of their
defense by late November 1998. Prior to the Company initiating the Proceedings,
Ocwen informed the Company that it would be defending any proceedings commenced
by the Company on the basis that any sums owed by Ocwen to the Company should be
set off and extinguished against the sum which Ocwen claims is due or
alternatively, is recoverable by it from the Company on the grounds of the
Company's breach of warranty or misrepresentation. The sum which Ocwen claims is
due to it from the Company is approximately $21.4 million. (the "Liabilities
Figure") of which $5.7 million is being held by Ocwen in a bank account pursuant
to the terms of the UK Sale Agreement. With respect to the Liabilities Figure,
Ocwen claims that approximately $21.2 million relates to matters concerning the
loans of Greyfriars, including the Company's alleged excessive charging to
borrowers, alleged failure to notify borrowers of interest rate rises and
alleged failure to advise borrowers of increased repayment. The Company denies
that any sum is due Ocwen whether under the UK Sale Agreement or as a result of
a breach of warranty or misrepresentation or otherwise. The Company believes
that the total amount payable to Ocwen in respect to the Liabilities Figure is
approximately $74,000. Pursuant to the UK Sale Agreement, the Company and Ocwen
are required, in the event that they cannot agree upon the Liabilities Figure,
to refer the matter to a firm of Chartered Accountants to make final
determination on the matter. Arthur Andersen has been appointed as experts for
the purpose of determining the Liabilities Figure, and the Company has now
proposed the directions to be followed by it and Ocwen for the purpose of the
determination. Although there can be no assurance of the outcome of the
determination, the Company believes the Ocwen claim regarding the Liabilities
Figure is without merit.
In the normal course of business, aside from the matters discussed above,
the Company is subject to various legal proceedings and claims, the resolution
of which, in management's opinion, will not have a material adverse effect on
the consolidated financial position or the results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company deferred the May 1, 1998 interest payment on its 6%
Convertible Subordinated Debentures due 2006 (the "Convertible Debentures"). The
continued deferral of the interest payment on the Convertible Debentures
constitutes an "Event of Default" pursuant to the Indenture under which such
securities were issued. The interest payment due on May 1, 1998 was in the
amount of $3.9 million. The Company stopped accruing interest on the Convertible
Debentures on October 6, 1998, the date the Company filed the Petitions in the
Bankruptcy Court.
The Company deferred the June 1, 1998 interest payment on its $300.0
million aggregate principal amount of 12-3/4% Series A Senior Notes due 2004
(the "Notes"). The continued deferral of the interest payment on the Notes
constitutes an "Event of Default" pursuant to the Indenture under which such
securities were issued. The interest payment due on June 1, 1998 was in the
amount of $19.1 million. The Company stopped accruing interest on the Notes on
October 6, 1998, the date the Company filed the Petitions in the Bankruptcy
Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 29, 1998, the Company and CSC distributed their Solicitation and
Disclosure Statement dated August 28, 1998 and related materials (the
"Disclosure Statement") to the holders as of
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August 28, 1998 of the Company's Notes, Convertible Debentures, Series A
Preferred Stock and Series B Preferred Stock. The Disclosure Statement was
distributed in connection with the prepetition solicitation of votes with
respect to a proposed restructuring of the Company and CSC, the terms of which
are embodied in a joint prepackaged Chapter 11 Plan of Reorganization. The
solicitation expired on September 30, 1998.
Accepting Rejecting Not Voting
--------- --------- ----------
Class A4 Senior Notes ($) $249,077,000 $ 11,167,000 $39,756,000
Class B4 Senior Notes Guarantee ($) $247,345,000 $ 11,152,000 $41,503,000
Class A6 Subordinated Debentures ($) $ 95,856,000 $ 6,115,000 $27,649,000
Class A8 Series A Preferred Stock (# of shares) 549 0 77
Class A10 Series B Preferred Stock (# of shares) 2,171 1,590 790
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
3.1 Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on December 20,
1995.
4.1 Indenture, dated as of May 7, 1996, between the
Company and The Chase Manhattan Bank, N.A.,
incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996.
4.2 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.
4.3 Certificate of Designation of 6% Convertible Preferred
Stock, Series A, incorporated by reference to Exhibit
4.1 to the Company's Form 8-K filed with the
Commission on April 11, 1997.
4.4 Certificate of Designation of 6% Convertible Preferred Stock,
Series B, incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on September 17,
1997.
10.1* Post-Petition Loan and Security Agreement, dated as of
October 12, 1998, between CSC and Greenwich Capital
Financial Products, Inc.
10.2* Revolving Credit and Security Agreement dated as of
October 12, 1998, between the Company and The CIT
Group/Equipment Financing, Inc.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
99.1 Solicitation and Disclosure Statement dated August 28,
1998, incorporated by reference to Exhibit 99.1 to the
Company's Form 8-K filed with the Commission on September 4,
1998.
- - ---------------------------
* Filed herewith
(b) Reports on Form 8-K
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1. Form 8-K dated September 4, 1998 reporting that the Company distributed their
Solicitation and Disclosure Statement and related materials to the holders of
the Company's Senior Notes, Convertible Debentures and Preferred Stock.
2. Form 8-K dated September 23, 1998 reporting that Elliott Associates, L.P. and
Westgate International, L.P. filed a lawsuit against the Company and certain
of its officers and directors.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cityscape Financial Corp.
(Registrant)
Date: November 16, 1998 By: /s/ Tim S. Ledwick
------------------- -------------------------------------
Tim S. Ledwick
Title: Vice President and
Chief Financial Officer
(as chief accounting officer and
on behalf of the registrant)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
10.1* Post-Petition Loan and Security Agreement, dated as of
October 12, 1998, between CSC and Greenwich Capital
Financial Products, Inc.
10.2* Revolving Credit and Security Agreement dated as of
October 12, 1998, between the Company and The CIT
Group/Equipment Financing, Inc.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
- - ---------------------------
* Filed herewith