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 JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
AMC FINANCIAL, INC.
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)
CITYSCAPE FINANCIAL CORP.
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF
CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK 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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES X NO
IN OCTOBER 1998, THE REGISTRANT AND ITS WHOLLY-OWNED SUBSIDIARY, EACH FILED
VOLUNTARY PETITIONS FOR RELIEF UNDER CHAPTER 11 OF TITLE 11 OF THE UNITED STATES
CODE WITH THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK. THE AMENDED PLAN OF REORGANIZATION BECAME EFFECTIVE ON JULY 1, 1999, AND
ON THAT DATE ALL OF ITS OLD EQUITY SECURITIES WERE CANCELLED AND NEW EQUITY
SECURITIES WERE ISSUED TO HOLDERS OF CLAIMS IN THE BANKRUPTCY.
APPLICABLE ONLY TO CORPORATE ISSUERS:
7,803,488 SHARES $.01 PAR VALUE,
OF NEW COMMON STOCK, WERE OUTSTANDING AS OF AUGUST 2, 1999
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AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition at June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the three months and
the six months ended June 30, 1999 and 1998 3
Consolidated Statements of Stockholders' Equity (Deficit) for the six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six months ended June 30,
1999 and 1998 5
Notes to Consolidated Financial Statements 6-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 13-19
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II - OTHER INFORMATION 21-26
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 30,893,014 $ 18,405,426
Interest-only and residual certificates 12,441,939 33,660,930
Mortgage loans held for sale, net 16,490,307 123,345,783
Investment in discontinued operations, net 13,008,401 13,008,401
Income taxes receivable 1,437,288 1,550,107
Other assets 2,543,004 15,598,619
------------- -------------
Total assets $ 76,813,953 $ 205,569,266
============= =============
LIABILITIES
Warehouse financing facilities $ - $ 105,969,355
Accounts payable and other liabilities 16,397,724 19,750,504
Liabilities subject to compromise - 477,424,358
------------- -------------
Total liabilities 16,397,724 603,144,217
------------- -------------
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,
$7,460,511; Series B Preferred
Stock, $65,239,541 at December 31, 1998 - 52
Common stock, $.01 par value, 25,000,000 shares authorized; 7,803,488
issued and outstanding at June 30, 1999; $.01 par value, 100,000,000
shares authorized; 64,948,969 issued and outstanding at
December 31, 1998 78,035 649,489
Treasury stock, 70,000 shares at December 31, 1998, at cost - (175,000)
Additional paid-in capital 60,338,194 175,304,103
Accumulated deficit - (573,353,595)
------------- -------------
Total stockholders' equity (deficit) 60,416,229 (397,574,951)
------------- -------------
COMMITMENTS AND CONTINGENCIES
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 76,813,953 $ 205,569,266
============= =============
See accompanying notes to consolidated financial statements.
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AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
PREDECESSOR COMPANY
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Revenues
(Loss) gain on sale of loans $ (958,717) $ 3,122,835 $ 4,609,295 $ (1,302,212)
Net unrealized loss on valuation of residuals (20,847,449) (11,386,803) (20,847,449) (18,486,803)
Interest 1,046,404 2,884,477 3,328,487 6,086,405
Mortgage origination income - 554,018 - 1,453,326
Other 6,243,867 266,306 7,659,773 499,318
------------- ------------- ------------- -------------
Total revenues (14,515,895) (4,559,167) (5,249,894) (11,749,966)
------------- ------------- ------------- -------------
EXPENSES
Salaries and employee benefits 1,427,944 7,534,494 2,856,989 17,306,373
Interest expense 112,571 13,972,347 1,401,630 28,153,877
Selling expenses 115,481 1,022,648 256,407 1,992,551
Other operating expenses 3,858,852 8,649,832 6,253,145 24,334,301
Restructuring charge 790,000 - 790,000 3,233,760
------------- ------------- ------------- -------------
Total expenses 6,304,848 31,179,321 11,558,171 75,020,862
------------- ------------- ------------- -------------
Loss before reorganization charges, income taxes and
extraordinary item (20,820,743) (35,738,488) (16,808,065) (86,770,828)
Reorganization charges 989,999 - 1,644,058 -
------------- ------------- ------------- -------------
Loss before income taxes and extraordinary item (21,810,742) (35,738,488) (18,452,123) (86,770,828)
Income tax provision 60,000 150,000 67,673 300,059
------------- ------------- ------------- -------------
Loss before extraordinary item (21,870,742) (35,888,488) (18,519,796) (87,070,887)
Gain from discharge of prepetition liabilities, net of taxes 416,094,747 - 416,094,747 -
------------- ------------- ------------- -------------
Net earnings (loss) 394,224,005 (35,888,488) 397,574,951 (87,070,887)
Preferred stock dividends - increase in liquidation preference - 2,090,723 - 3,661,079
Preferred stock - default payments - 4,805,442 - 7,822,216
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 394,224,005 $ (42,784,653) $ 397,574,951 $ (98,554,182)
============= ============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic NMF(1) NMF(1) NMF(1) NMF(1)
============= ============= ============= =============
Diluted NMF(1) NMF(1) NMF(1) NMF(1)
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic NMF(1) NMF(1) NMF(1) NMF(1)
============= ============= ============= =============
Diluted NMF(1) NMF(1) NMF(1) NMF(1)
============= ============= ============= =============
(1) Not Meaningful Figure. See Note 7, "Earnings Per Share".
See accompanying notes to consolidated financial statements.
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AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended June 30, 1999 and 1998
PREFERRED SHARES COMMON SHARES
------------------------------ ------------------------------ ADDITIONAL
NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 5,295 $ 53 47,648,738 $ 476,487 $ 175,477,104
Net loss - - - - -
Conversion of preferred stock (118) (1) 17,300,231 173,002 (173,001)
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1998 5,177 $ 52 64,948,969 $ 649,489 $ 175,304,103
============= ============= ============= ============= =============
Balance at December 31, 1998 5,177 $ 52 64,948,969 $ 649,489 $ 175,304,103
Net earnings - - - - -
Extinguishment of old stock (5,177) (52) (64,948,969) (649,489) (175,304,103)
Issuance of new common stock - - 7,803,488 78,035 60,338,194
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1999 0 $ - 7,803,488 $ 78,035 $ 60,338,194
============= ============= ============= ============= =============
RETAINED
EARNINGS
(ACCUMULATED TREASURY
DEFICIT) STOCK TOTAL
------------- ------------- -------------
Balance at December 31, 1997 $(352,603,652) $ (175,000) $(176,825,008)
Net loss (87,070,887) - (87,070,887)
Conversion of preferred stock - - -
------------- ------------- -------------
Balance at June 30, 1998 $(439,674,539) $ (175,000) $(263,895,895)
============= ============= =============
Balance at December 31, 1998 $(573,353,595) $ (175,000) $(397,574,951)
Net earnings 397,574,951 - 397,574,951
Extinguishment of old stock 175,778,644 175,000 -
Issuance of new common stock - - 60,416,229
------------- ------------- -------------
Balance at June 30, 1999 $ - $ - $ 60,416,229
============= ============= =============
See accompanying notes to consolidated financial statements.
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AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PREDECESSOR COMPANY
SIX MONTHS ENDED JUNE 30,
1999 1998
------------- -------------
Cash flows from operating activities:
Net earnings (loss) $ 397,574,951 $ (87,070,887)
Adjustments to reconcile net earnings (loss) from continuing
operations to net cash provided by (used in) continuing
operating activities:
Depreciation and amortization 367,453 1,365,012
Income taxes payable 210,093 2,406,057
Gain from discharge of prepetition liabilities (416,094,747) -
Decrease in mortgage servicing receivables - 4,969,162
Decrease in interest-only and residual certificates 21,218,991 41,755,338
Proceeds from sale of mortgages 104,576,347 298,107,000
Mortgage origination funds disbursed - (315,435,183)
Other, net 10,582,414 11,905,045
------------- -------------
Net cash provided by (used in) operating activities 118,435,502 (41,998,456)
------------- -------------
Cash flows from investing activities:
Sale from discontinued operations, net - 58,808,583
Sales (purchases) of equipment 21,441 (568,073)
Proceeds from sale of mortgages held for investment - 2,997,382
------------- -------------
Net cash provided by investing activities 21,441 61,237,892
------------- -------------
Cash flows from financing activities:
(Decrease) increase in warehouse financings (105,969,355) 13,666,826
------------- -------------
Net cash (used in) provided by financing activities (105,969,355) 13,666,826
------------- -------------
Net increase in cash and cash equivalents 12,487,588 32,906,262
Cash and cash equivalents at beginning of period 18,405,426 2,594,163
------------- -------------
Cash and cash equivalents at end of period $ 30,893,014 $ 35,500,425
============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ - $ 1,200
============= =============
Interest paid during the period $ 1,693,980 $ 3,566,045
============= =============
Supplemental schedule of noncash investing and financing activities:
Cancellation of indebtedness $ 476,510,976 $ -
Extinguishment of old stock (175,778,644) -
Issuance of new common stock 60,416,229 -
See accompanying notes to consolidated financial statements.
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AMC FINANCIAL, INC.
(FORMERLY KNOWN AS CITYSCAPE FINANCIAL CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization
AMC Financial, Inc., formerly known as Cityscape Financial Corp. (the
"Company"), is a consumer finance company which, through its wholly-owned
subsidiary Cityscape Corp. ("CSC"), is in the business of selling and holding in
its portfolio mortgage loans secured primarily by one- to four-family
residences. The Company also had been in the business of originating and
purchasing mortgage loans until the Company suspended indefinitely such business
in November 1998. The majority of the Company's loans were 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 recently emerged from chapter 11 proceedings (see
Notes 2 and 3). As part of its current operating plan, the Company will be
relocating its operations from Elmsford, New York to Houston, Texas during the
third quarter of 1999.
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. 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, 1998.
The Company has been reorganized through a plan of reorganization under
chapter 11 of title 11 of the United States Code. Although the plan became
effective on July 1, 1999, the effective date of the plan for accounting
purposes is considered to be June 30, 1999, and accordingly, the Company has
adopted fresh start reporting as of June 30, 1999 (see Note 4). Adjustments were
recorded as of June 30, 1999 to reflect the effects of the consummation of the
plan of reorganization and the implementation of fresh start reporting.
The Company's emergence from chapter 11 proceedings has resulted in a
new reporting entity with no retained earnings or accumulated deficit as of June
30, 1999. Accordingly, the Company's consolidated financial statements for
periods prior to June 30, 1999 will not be comparable to consolidated financial
statements presented on or subsequent to June 30, 1999. A black line has been
drawn on the accompanying consolidated Statements of Financial Condition to
distinguish between the successor Company and the predecessor Company.
Operating results for the three and six months ended June 30, 1998 and
1999 are for the predecessor Company and are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. These
results will not be comparable to those of the successor Company.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and the liquidation of liabilities and commitments in the normal course
of business. The Company had incurred significant losses from operations for the
years ended December 31, 1998 and 1997. Additionally, the Company emerged from
chapter 11 proceedings on July 1, 1999 and has not had significant operations as
a restructured entity. While a plan for the use of the reorganized Company's
cash and other assets has not been formed, such assets will be available for
general corporate purposes as determined by the Board of Directors of the
reorganized Company, including investments, acquisitions and joint ventures, all
as determined by the
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Board of Directors to be in the best interests of the reorganized Company. It is
expected that the reorganized Company will reenter the mortgage loan origination
business at some time in the future, based on prevailing industry conditions and
the general business climate.
The consolidated financial statements of the Company include the
accounts of CSC and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain amounts in the statements have been reclassified to conform
with the 1999 classifications.
3. Chapter 11 Proceedings
On October 6, 1998, the Company and CSC filed voluntary petitions in
the United States Bankruptcy Court for the Southern District of New York and
thereafter operated their businesses as debtors-in-possession.
On November 17, 1998, the Company suspended indefinitely all of its
loan origination and purchase activities. The Company's decision was due to its
determination, following discussions with potential lenders regarding
post-reorganization loan warehouse financing, that adequate sources of such
financing were not available. On or about December 18, 1998, the Company funded
the last of the mortgage loans for which it had issued commitments as of
November 17, 1998.
On June 16, 1999, the Bankruptcy Court entered an order confirming the
reorganization plan, as amended. The effective date of the reorganization plan
was July 1, 1999. The reorganization plan provides for substantive consolidation
of the assets of the Company and CSC and for distributions to creditors as
summarized below (which estimated distributions are based upon the Company's and
CSC's estimate of $10.0 million in general unsecured claims that would
ultimately be allowed by the Bankruptcy Court). The reorganization plan provided
that: (i) administrative claims, priority tax claims, bank claims, other secured
claims and priority claims would be paid in full; (ii) holders of the 12 3/4%
Series A Senior Notes due 2004 (the "Notes") would receive in exchange for all
of their claims, in the aggregate 92.48% of the new common stock of the
reorganized company; (iii) holders of the 6% Convertible Subordinated Debentures
due 2006 (the "Convertible Debentures") would receive in exchange for all of
their claims, in the aggregate, 5.43% of the new common stock of the reorganized
company; (iv) holders of general unsecured claims would receive 2.09% of the new
common stock of the reorganized company; and (v) common stock, preferred stock
and warrants of the predecessor Company would be extinguished and holders
thereof would receive no distributions under the reorganization plan.
4. Fresh Start Reporting
As of June 30, 1999, the Company adopted fresh start reporting 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"). Fresh start reporting assumes that a new
reporting entity has been created and assets and liabilities should be reported
at their fair values as of the effective date.
The reorganization value of $76.8 million was determined based upon the
Company's estimate of the fair value of its assets as defined in the plan of
reorganization which does not assume any future origination and loan sale
activity. Accordingly, the reorganization value approximates the fair value of
its assets before considering liabilities, which must be assumed and
extinguished pursuant to the terms of the reorganization plan, as amended, and
represents the Company's estimate of the amount a buyer would pay for the assets
after the restructuring.
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9
The Company's emergence from chapter 11 proceedings and the adoption of
fresh start reporting resulted in the following adjustments to the Company's
consolidated Statement of Financial Condition as of June 30, 1999:
PREDECESSOR SUCCESSOR
COMPANY COMPANY
JUNE 30, FRESH START ADJUSTMENTS JUNE 30,
1999 DEBIT CREDIT 1999
------------- ------------- ------------- -------------
ASSETS
Cash and cash equivalents $ 30,893,014 $ - $ - $ 30,893,014
Interest-only and residual certificates 12,441,939 - - 12,441,939
Mortgage loans held for sale, net 16,490,307 - - 16,490,307
Investment in discontinued operations, net 13,008,401 - - 13,008,401
Income taxes receivable 1,437,288 - - 1,437,288
Other assets 2,543,004 - - 2,543,004
------------- ------------- ------------- -------------
Total assets $ 76,813,953 $ - $ - $ 76,813,953
============= ============= ============= =============
LIABILITIES
Accounts payable and other liabilities $ 16,397,724 $ - $ - $ 16,397,724
Liabilities subject to compromise 476,510,976 476,510,976 (1) - -
------------- ------------- ------------- -------------
Total liabilities 492,908,700 476,510,976 - 16,397,724
------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 52 52 (2) - -
Common stock 649,489 649,489 (2) 78,035 (3) 78,035
Treasury stock (175,000) - 175,000 (2) -
Additional paid-in capital 175,304,103 175,304,103 (2) 60,338,194 (3) 60,338,194
Accumulated deficit (591,873,391) - 175,778,644 (2) -
416,094,747 (4)
------------- ------------- ------------- -------------
Total stockholders' equity (deficit) (416,094,747) 175,953,644 652,464,620 60,416,229
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity (deficit) $ 76,813,953 $ 652,464,620 $ 652,464,620 $ 76,813,953
============= ============= ============= =============
(1) To record the discharge of the debt, related interest and other
liabilities as follows:
Discharge/extinguishment - Notes $300,000,000
Discharge/extinguishment - Convertible Debentures 129,620,000
Accrued interest on Notes and Convertible
Debentures 39,771,220
Other liabilities discharged 7,119,756
------------
$476,510,976
============
(2) To eliminate the predecessor Company's stockholder's deficit.
(3) To record the issuance of 7,803,488 shares of new common stock (par
value $0.01 per share).
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(4) To record the extraordinary gain resulting from the discharge of
indebtedness, calculated as follows:
Historical carrying value of
old debt securities $ 429,620,000
Historical carrying value of
related accrued interest 39,771,220
Historical carrying value of
other liabilities 7,119,756
New common stock (7.8 million shares to
creditors) (60,416,229)
-------------
$ 416,094,747
=============
5. Discontinued Operations
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. The Company adopted a plan in March 1998 to sell
the assets of CSC-UK and completed the sale in April 1998. As a result of the
sale, the Company received proceeds, at the time of closing, of $83.8 million,
net of closing costs and other fees. During 1998, the Company received an
additional $4.5 million related to the loan portfolio adjustments. During the
second quarter of 1999, the Company received $3.1 million in settlement of the
assumed liabilities at the date of sale.
The net assets of CSC-UK have been reclassified on the Company's
financial statements as investment in discontinued operations. As of June 30,
1999, the Company's net investment in discontinued operations totaled $13.0
million, representing cash on hand in the discontinued operation of
approximately $12.0 million and net receivables (net of liabilities) due of
approximately $1.0 million. The Company expects to maintain a balance of cash on
hand in the discontinued operations to cover existing and potential liabilities
and costs pending dissolution of CSC-UK and its subsidiaries.
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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 and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not completed its analysis of SFAS No. 133.
7. Earnings Per Share
Effective December 15, 1997, the Company adopted SFAS No. 128,
"Earnings per Share". SFAS No. 128 simplifies the standards for computing
earnings per share ("EPS") previously found in Accounting Principles Board
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.
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11
Basic EPS is computed by dividing net earnings applicable to Common
Stock by the weighted average number of Common Stock outstanding during the
period. Diluted EPS is based on the net earnings applicable to Common Stock
adjusted to add back the effect of assumed conversions (e.g., after-tax interest
expense of convertible debt) divided by the weighted average number of Common
Stock outstanding during the period plus the dilutive potential Common Stock
that were outstanding during the period.
The presentation of EPS for the three and six months ended June 30,
1999 and 1998 is not meaningful due to the Company's emergence from chapter 11
proceedings and the implementation of fresh start reporting.
8. Valuation of Residuals
The interests that the Company received upon loan sales through its
securitizations are in the form of interest-only and residual certificates. The
Company's interest-only and residual certificates 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).
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", the Company accounts for the interest-only and
residual certificates as "securities available for sale" and, as such, they are
recorded at their fair value. Fair value of these certificates is determined
based on various economic factors, including loan types, sizes, interest rates,
dates of origination, terms and geographic locations. The Company also uses
other available information such as reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. If the fair value of the interest-only and
residual certificates is different from the recorded value, the unrealized gain
or loss will be reflected on the Consolidated Statements of Operations.
The table below summarizes the value of the Company's interest-only and
residual certificates by product type:
June 30, December 31,
1999 1998
----------- ------------
Home Equity $ 18,838 $ 6,490,461
Sav*-A-Loan (R) 12,423,101 27,170,469
----------- -----------
$12,441,939 $33,660,930
=========== ===========
The key assumptions used to value the Company's interest-only and
residual certificates at June 30, 1999 and December 31, 1998 are as follows:
June 30, December 31,
1999 1999
---------- ------------
Home Equity
Discount Rate 20.0% 20.0%
Constant Prepayment Rate 30.0% 30.0%
Loss Rate Range per Annum 7.3 - 33.0% 7.5 - 7.5%
Sav*-A-Loan(R)
Discount Rate 20.0% 20.0%
Constant Prepayment Rate 19.0% 16.8%
Loss Rate Range per Annum 3.0 - 10.0% 4.5% - 7.0%
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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 of 1998 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.
For the three months ended June 30, 1999, the Company experienced
significant changes in the performance of the underlying pools of mortgages in
both the home equity and Sav*-A-Loan(R) securitizations. As a result of higher
than anticipated losses on all securitizations and higher prepayment speeds on
Sav*-A-Loan(R) securitizations, the Company recorded an unrealized loss on
valuation of residuals of $20.8 million. The Company's loss rate of 7.5% per
annum on its home equity securitizations at March 31, 1999 was increased to
reflect losses ranging from 7.3% to 33.0% per annum at June 30, 1999; the
discount rate of 20% and the weighted average prepayment speed of 30.0% remained
unchanged. The Company also increased its loss rates on the Sav*-A-Loan(R)
securitizations. As of June 30, 1999, the Sav*-A-Loan (R) loss rates range from
3.0% to 10.0% per annum as compared to loss rates ranging from 4.5% to 7.0% at
March 31, 1999; constant prepayment speed was increased from 16.8% to 19.0% and
the discount rate remained constant at 20%.
9. Other Revenues
In the second quarter of 1999, the Company recorded other revenue
totaling $6.1 million representing gain on the sale of its servicer advances
(i.e., claims against securitization trusts for reimbursement of advances made
to such trusts by the Company as servicer). The sale of the Company's servicer
advances was in connection with a consensual resolution of claims asserted by
Harris Trust and Savings Bank, U.S. Bank National Association, Financial
Security Assurance Inc., MBIA Insurance Corporation, The Chase Manhattan Bank
and Financial Guaranty Insurance (collectively, the "Trustees"). Under the terms
of the consensual resolution, the Company transferred a portion of its servicing
rights to Ocwen Federal Bank FSB ("Ocwen FSB") on its home equity
securitizations (95-1, 95-2, 95-3, 96-1, 96-2, 96-3 and 96-4). In June 1999, the
Company transferred these servicing rights, except for the 95-1 trust, to Ocwen
FSB and received a net amount of $14.4 million in cash, resulting in a gain of
$6.1 million, representing net funds received in excess of the Company's
carrying value of servicer advances. In July 1999, the Company transferred the
servicing on the 95-1 trust at an amount equal to the Company's carrying value
of servicer advances. The Company expects to receive the funds from this
transaction in August 1999. Additionally, as stipulated in the agreements, the
securitization trusts established reserve funds to cover existing and potential
legal and other costs to be incurred by the Trustees.
10. Restructuring
In June 1999, the Company announced a restructuring plan that included
the elimination of its servicing function and the relocation of its corporate
office from Elmsford, New York to Houston, Texas. The relocation plan is
expected to be completed during the third quarter of 1999. Accordingly, the
Company has recorded a restructuring charge totaling $790,000 in the second
quarter of 1999. Restructuring charges primarily represent severance obligations
and future lease obligations.
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11. Income Taxes
In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards is limited in
years following a change in the Company's ownership. The net operating loss
limitation is computed by applying a percentage (approximately 5%, as determined
by the Internal Revenue Code; i.e., the long-term tax-exempt rate determined
under Internal Revenue Code Section 382(f)) to the value of the Company on the
date of the change. The Section 382 limitation limits the use of the net
operating loss carryforward as computed on the date of the change in ownership.
Net operating losses incurred after the date of the change of ownership are not
limited unless another change in ownership occurs. A change in ownership
occurred in October 1997 primarily as a result of conversions of the Company's
6% Convertible Preferred Stock, Series A into the Company's common stock.
Additionally, a change in ownership occurred upon the Company's emergence from
bankruptcy. Accordingly, the Company's use of pre-ownership change net operating
losses and certain other tax attributes (if any), to the extent remaining after
the reduction thereof as a result of the cancellation of indebtedness of the
Company, is limited and generally will not exceed each year the product of the
long-term tax-exempt rate and the value of the Company's stock increased to
reflect the cancellation of indebtedness pursuant to the reorganization plan.
For accounting purposes, the Company established a valuation allowance to offset
the value, if any, of the net operating loss carryforwards.
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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 successful sale of
loans in the whole loan sales market, legal proceedings and other matters,
adverse economic conditions, competition and other risks detailed from time to
time in the Company's Securities and Exchange 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 which, through its
wholly-owned subsidiary, CSC, is in the business of selling and holding in its
portfolio mortgage loans secured primarily by one- to four-family residences.
The Company also had been in the business of originating and purchasing such
mortgage loans until the Company indefinitely suspended such business in
November 1998. The majority of the Company's loans were 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. As part of its current operating plan, the Company will be
relocating its operations from Elmsford, New York to Houston, Texas during the
third quarter of 1999. While a plan for the use of the reorganized Company's
cash and other assets has not been formed, such assets will be available for
general corporate purposes as determined by the Board of Directors of the
reorganized Company, including investments, acquisitions and joint ventures, all
as determined by the Board of Directors to be in the best interests of the
reorganized Company. It is expected that the reorganized Company will reenter
the mortgage loan origination business at some time in the future, based on
prevailing industry conditions and the general business climate. Additionally,
management is currently pursuing plans to re-list the Company on NASDAQ.
The Company primarily generates revenue from gain on sale of loans
recognized from premiums on loans sold through whole loan sales to institutional
purchasers, and interest earned on loans held for sale. Historically, the
Company also recognized gain on sale of loans sold through securitizations,
excess mortgage servicing receivables and fees earned on loans serviced and
origination fees received as part of the loan application process.
As a result of the Company's reorganization efforts and corresponding
bankruptcy filing, during the second quarter of 1999, the Company entered into
agreements to transfer all its servicing rights. The Company's servicing rights
were transferred in July 1999.
CHAPTER 11 PROCEEDINGS
On October 6, 1998, the Company and CSC filed voluntary petitions in
the Bankruptcy Court and thereafter operated their businesses as
debtors-in-possession.
On November 17, 1998, the Company suspended indefinitely all of its
loan origination and purchase activities. The Company's decision was due to its
determination, following discussions with potential lenders regarding
post-reorganization loan warehouse financing, that adequate sources of such
financing were not available. On or about December 18, 1998, the Company funded
the last of the mortgage loans for which it had issued commitments as of
November 17, 1998.
On June 16, 1999, the Bankruptcy Court entered an order confirming the
reorganization plan, as amended. The effective date of the reorganization plan
was July 1, 1999. The reorganization plan provides for substantive consolidation
of the assets of the Company and CSC and for distributions to creditors as
summarized below (which estimated distributions are based upon the Company's and
CSC's estimate of $10.0 million in general unsecured claims that would
ultimately be allowed by the Bankruptcy Court). The reorganization plan provided
that: (i) administrative claims, priority tax claims, bank claims,
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other secured claims and priority claims would be paid in full; (ii) holders of
Notes would receive in exchange for all of their claims, in the aggregate 92.48%
of the new common stock of the reorganized company; (iii) holders of the
Convertible Debentures would receive in exchange for all of their claims, in the
aggregate, 5.43% of the new common stock of the reorganized company; (iv)
holders of general unsecured claims would receive 2.09% of the new common stock
of the reorganized company; and (v) common stock, preferred stock and warrants
of the predecessor Company would be extinguished and holders thereof would
receive no distributions under the reorganization plan.
Under the plan of reorganization, as of July 1, 1999, three new
directors were deemed elected to the board of directors of AMC Financial, Inc.
The three directors, which now constitute the board of directors, are D. Richard
Thompson, who will also serve as the Chief Executive Officer and President, Mark
Lasry and Mark A. Neporent.
DISCONTINUED OPERATIONS
The Company adopted a plan in March 1998 to sell the assets of CSC-UK
and completed the sale in April 1998. As a result of the sale, the Company
received proceeds, at the time of closing, of $83.8 million, net of closing
costs and other fees.
The net assets of CSC-UK have been reclassified on the Company's
financial statements as investment in discontinued operations. As of June 30,
1999, the Company's net investment in discontinued operations totaled $13.0
million, representing cash on hand in the discontinued operation of
approximately $12.0 million and net receivables (net of liabilities) due of
approximately $1.0 million. The Company expects to maintain a balance of cash on
hand in the discontinued operations to cover existing and potential liabilities
and costs pending dissolution of CSC-UK and its subsidiaries.
RESULTS OF OPERATIONS
THE RESULTS OF OPERATIONS SHOWN IN THE ACCOMPANYING FINANCIAL STATEMENTS ARE FOR
THE PREDECESSOR COMPANY. AMC FINANCIAL, INC. ADOPTED FRESH START REPORTING IN
ACCORDANCE WITH SOP 90-7 EFFECTIVE JUNE 30, 1999.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues decreased $9.9 million to negative $14.5 million for the three
months ended June 30, 1999 from negative $4.6 million for the comparable period
in 1998. This decrease was due primarily to an increase in the net unrealized
loss on valuation of residuals of $9.4 million over the prior year's loss and a
$4.1 million decrease in the gain on sale of loans, partially offset by a $6.1
million gain recognized on the transfer of the Company's servicing rights and
related servicer advances during the second quarter of 1999.
For the three months ended June 30, 1999, the Company recorded a loss
on sale of loans totaling $958,717. This loss was primarily due to a reserve of
$1 million established on amounts due from loans sold in 1999 partially offset
by a gain of $43,216 on the sale of $16.6 million of whole loans at an average
net premium of 0.3%. For the three months ended June 30, 1998, the Company
recorded a gain on sale of loans totaling $3.1 million. This gain was primarily
due to the sale of $46.9 million of whole loans at an average net premium
received of 2.6% as compared to the average premium paid on such loans of 1.1%.
Additionally, included in the gain on sale during the second quarter of 1998 was
approximately $2.4 million of gain representing the profit participation
realized during the quarter on $111.1 million of loans sold during the first
quarter of 1998 into the Company's purchase facility. Approximately $19.8
million of the whole loan sales during the second quarter represented loans sold
on a non-recourse basis into the Company's purchase facility. The Company
retained a participation in future profits on these loans but did not record any
gain related to this profit participation during the second quarter of 1998.
For the three months ended June 30, 1999, the Company recorded an
unrealized loss on the valuation of residuals of $20.8 million. The Company's
loss rate of 7.5% per annum at March 31, 1999 on its home equity securitizations
was increased at June 30, 1999 to reflect loss rates ranging from 7.3% to
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33.0% per annum. The Company also increased its loss rates on the Sav*-A-Loan
securitizations. As of June 30, 1999, the Sav*-A-Loan loss rates range from 3.0%
to 10.0% per annum as compared to loss rates ranging from 4.5% to 7.0% at March
31, 1999 and constant prepayment speed was increased from 16.8% to 19.0%. The
unrealized loss on valuation of residuals of $11.4 million for the comparable
period in 1998 reflected an increase in its weighted average loss rate to 4.35%
per annum at June 30, 1998 from 3.3% per annum at March 31, 1998 and an increase
in its weighted average prepayment speed to 34.8% per annum at June 30, 1998
from 31.8% per annum at March 31, 1998 for its home equity securitized loans.
Interest income decreased $1.8 million or 63.7% to $1.0 million for the
three months ended June 30, 1999 from $2.9 million for the comparable period in
1998. This decrease was due primarily to lower average balances of mortgage
loans held for sale in the second quarter of 1999 as compared to the same period
in 1998 primarily resulting from the Company's cessation of loan originations
and purchase activity during the fourth quarter of 1998.
No mortgage origination income was recorded for the three months ended
June 30, 1999 as a result of the Company's decision in November 1998 to suspend
indefinitely its loan origination activity. Mortgage origination income was
$554,018 on loan originations of $119.7 million for the comparable period in
1998.
Other income increased $5.9 million to $6.2 million for the three
months ended June 30, 1999 from $266,306 for the comparable period in 1998.
During the second quarter of 1999, the Company entered into agreements to
transfer its servicing rights on all of its home equity securitizations to Ocwen
FSB and received net cash of $14.4 million (on the transfer of its 95-2, 95-3,
96-1, 96-2, 96-3 and 96-4 home equity securitizations) resulting in a net gain
of $6.1 million, representing amounts received in excess of the Company's
carrying value of servicer advances. These servicer advances represent claims
against the securitization trusts for reimbursement of advances made to such
trusts by the Company as servicer.
Total expenses decreased $24.9 million or 79.8% to $6.3 million for the
three months ended June 30, 1999 from $31.2 million for the comparable period in
1998. This decrease was due primarily to the Company's suspension of origination
and purchase activities and the corresponding reduction of its workforce.
Salaries and employee benefits decreased $6.1 million or 81.0% to $1.4
million for the three months ended June 30, 1999 from $7.5 million for the
comparable period in 1998. This decrease was due primarily to decreased staffing
levels to 42 employees at June 30, 1999 as compared to 507 employees at June 30,
1998.
Interest expense decreased $13.9 million or 99.2% to $112,571 for the
three months ended June 30, 1999 from $14.0 million for the comparable period in
1998. This decrease was due primarily to the Company ceasing to accrue interest
on the Convertible Debentures and Notes as of October 6, 1998 due to the filing
of the Petitions and a lower average balance of loans on the warehouse finance
lines as a result of the Company's decision in November 1998 to suspend
indefinitely all loan origination and purchase activities and the Company's
payoff of all warehouse related financing in April 1999.
Selling and other expenses decreased $5.7 million or 58.9% to $4.0
million for the three months ended June 30, 1999 from $9.7 million for the
comparable period in 1998. This decrease was due primarily to a decrease in
operating costs of $4.7 million or 54.4% to $3.9 million for the three months
ended June 30, 1999 from $8.6 million for the comparable period in 1998
reflecting the Company's restructuring efforts, including the suspension of its
origination and purchase activities, closing of its branch operations and
related reduction in its workforce.
Restructuring charges of $790,000 were recorded during the three months
ended June 30, 1999 as a result of the Company's plan to move its operations
from Elmsford, New York to Houston, Texas. Restructuring charges primarily
represent severance obligations and future lease obligations. There were no
restructuring charges recorded during the comparable period in 1998.
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Net earnings applicable to common stock increased to $394.2 million for
the three months ended June 30, 1999 from a net loss applicable to common stock
of $42.8 million for the comparable period in 1998. Included in the net earnings
applicable to common stock is an extraordinary item reflecting the gain from the
discharge of prepetition liabilities, net of taxes, totaling $416.1 million.
Excluding the extraordinary gain, the decreased loss was due primarily to
significantly lower operating costs resulting from the Company's downsizing
efforts partially offset by an increase in the net unrealized loss on valuation
of residuals. The second quarter 1998 loss was due primarily to decreased loan
originations, 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 prior to the reduction of these operating costs. An increase in
the liquidation preference of the preferred stock in lieu of dividends and
default payments of $6.9 million was recorded during the second quarter of 1998
further increasing the net loss applicable to common stock.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues increased $6.5 million to negative $5.2 million for the six
months ended June 30, 1999 from negative $11.7 million for the comparable period
in 1998. This increase was due primarily to a gain recorded on its sale of loans
of $4.6 million and the Company's recognition of $6.1 million of revenues
related to the transfer of its home equity servicing rights and related servicer
advances during the first six months of 1999 compared to a net loss on loan
sales of $1.3 million during the first six months of 1998.
Gain on sale of loans increased $5.9 million to $4.6 million for the
six months ended June 30, 1999 from a loss on sale of loans of $1.3 million for
the comparable period in 1998. This increase was primarily due to the
recognition of $7.0 million related to the Company's profit participation on
loans previously sold into the Company's purchase facility, offset by the sale
of $106.6 million of loans sold at a net loss of $2.4 million. For the six
months ended June 30, 1998, the net loss on sale of loans was primarily due to
the sale of $285.2 million of whole loans at an average net premium received of
1.5% as compared to the average premium paid on such loans of 2.4%.
Approximately $45.0 million of such whole loan sales represented loans sold on a
non-recourse basis into the Company's purchase facility without any gain
recorded during the first six months of 1998.
For the six months ended June 30, 1999, the Company recorded an
unrealized loss on the valuation of residuals of $20.8 million. The Company's
loss rate of 7.5% per annum at March 31, 1999 on its home equity securitizations
was increased at June 30, 1999 to reflect loss rates ranging from 7.3% to 33.0%
per annum. The Company also increased its loss rates on the Sav*-A-Loan (R)
securitizations. As of June 30, 1999, the Sav*-A-Loan (R) loss rates range from
3.0% to 10.0% per annum as compared to loss rates ranging from 4.5% to 7.0% at
March 31, 1999 and constant prepayment speed was increased from 16.8% to 19.0%.
The unrealized loss on valuation of residuals of $18.5 million recorded for the
comparable period in 1998 reflected an increase in its weighted average loss
rate to 4.35% per annum at June 30, 1998 from 1.7% per annum at December 31,
1997 and an increase in its weighted average prepayment speed to 34.8% per annum
at June 30, 1998 from 31.8% per annum at December 31, 1997 for its home equity
securitized loans.
Interest income decreased $2.8 million or 45.3% to $3.3 million for the
six months ended June 30, 1999 from $6.1 million for the comparable period in
1998. This decrease was due primarily to lower average balances of mortgage
loans held for sale during the first six months of 1999 as compared to the same
period in 1998 primarily resulting from the Company's cessation of loan
originations and purchase activity during the fourth quarter of 1998.
No mortgage origination income was recorded for the six months ended
June 30, 1999 as a result of the Company's decision in November 1998 to suspend
indefinitely its loan origination activity. Mortgage origination income was $1.5
million on loan originations of $270.9 million for the comparable period in
1998.
Other income increased $7.2 million to $7.7 million for the six months
ended June 30, 1999 from $499,318 for the comparable period in 1998. During the
second quarter of 1999, the Company entered into agreements to transfer its
servicing rights on all of its home equity securitizations to Ocwen FSB and
received net cash of $14.4 million (on the transfer of its 95-2, 95-3, 96-1,
96-2, 96-3 and 96-4 home equity
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securitizations) resulting in a net gain of $6.1 million, representing amounts
received in excess of the Company's carrying value of servicer advances. These
servicer advances represent claims against the securitization trusts for
reimbursement of advances made to such trusts by the Company as servicer.
Total expenses decreased $63.4 million or 84.6% to $11.6 million for
the six months ended June 30, 1999 from $75.0 million for the comparable period
in 1998. This decrease was due primarily to the Company's suspension of
origination and purchase activities and the corresponding reduction of its
workforce from 507 employees at June 30, 1998 to 42 at June 30, 1999.
Salaries and employee benefits decreased $14.4 million or 83.5% to $2.9
million for the six months ended June 30, 1999 from $17.3 million for the
comparable period in 1998. This decrease was due primarily to decreased staffing
levels to 42 employees at June 30, 1999 as compared to 507 employees at June 30,
1998.
Interest expense decreased $26.8 million or 95.0% to $1.4 million for
the six months ended June 30, 1999 from $28.2 million for the comparable period
in 1998. This decrease was due primarily to the Company ceasing to accrue
interest on the Convertible Debentures and Notes as of October 6, 1998 due to
the filing of the Petitions and a lower average balance of loans on the
warehouse finance lines as a result of the Company's decision in November 1998
to suspend indefinitely all loan origination and purchase activities and the
Company's payoff of all warehouse related financing in April 1999.
Selling and other expenses decreased $19.8 million or 75.3% to $6.5
million for the six months ended June 30, 1999 from $26.3 million for the
comparable period in 1998. This decrease was due primarily to decreased
operating costs of $18.0 million or 74.3% to $6.3 million for the six months
ended June 30, 1999 from $24.3 million for the comparable period in 1998
reflecting the Company's restructuring efforts, including the suspension of its
origination and purchase activities, closing of its branch operations and
related reduction in its workforce.
Restructuring charges of $790,000 were recorded during the six months
ended June 30, 1999 as a result of the Company's plan to move its operations
from Elmsford, New York to Houston, Texas. Restructuring charges primarily
represent severance obligations and future lease obligations. Restructuring
charges were $3.2 million for the comparable period in 1998. This charge was
related to a restructuring plan that included streamlining and downsizing the
Company's operations. 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 represented severance
payments made to 142 former employees and $2.1 million represented costs
incurred in connection with lease obligations and write-offs of assets no longer
in service.
Net earnings applicable to common stock increased to $397.6 million for
the six months ended June 30, 1999 from a net loss applicable to common stock of
$98.6 million for the comparable period in 1998. Included in the net earnings
applicable to common stock is an extraordinary item reflecting the gain from the
discharge of prepetition liabilities, net of taxes, totaling $416.1 million.
Excluding the extraordinary gain, the decreased loss was due primarily to
greater revenues from gains recognized on loans sold into the Company's purchase
facility as well as significantly lower operating costs resulting from the
Company's downsizing efforts. The loss during the first six months of 1998 was
due primarily to decreased loan originations, 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 prior to the reduction of these operating
costs. An increase in the liquidation preference of the preferred stock in lieu
of dividends and default payments of $11.5 million was recorded during the first
six months of 1998 further increasing the net loss applicable to common stock.
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FINANCIAL CONDITION
June 30, 1999 Compared to December 31, 1998
The Company's emergence from chapter 11 proceedings has resulted in a
new reporting entity with no retained earnings or accumulated deficit as of June
30, 1999. A black line has been drawn on the accompanying consolidated
Statements of Financial Condition to distinguish between the successor Company
and the predecessor Company.
Cash and cash equivalents increased $12.5 million or 67.9% to $30.9
million at June 30, 1999 from $18.4 million at December 31, 1998.
Interest-only and residual certificates decreased $21.3 million or
63.0% to $12.4 million at June 30, 1999 from $33.7 million at December 31, 1998.
This decrease was due primarily to the write-down of $20.8 million recorded
during the six months ended June 30, 1999.
Mortgage loans held for sale, net decreased $106.8 million or 86.6% to
$16.5 million at June 30, 1999 from $123.3 million at December 31, 1998. This
decrease was due primarily to no loan origination or purchase activity during
the first six months of 1999 and the volume of loans sold.
Investment in discontinued operations, net was $13.0 million at June
30, 1999, unchanged from the balance at December 31, 1998. This balance
primarily consisted of cash on hand of approximately $12.0 million and net
receivables (net of liabilities) due of approximately $1.0 million. The Company
expects to maintain a balance of cash on hand in the discontinued operations to
cover existing and potential liabilities and costs pending dissolution of CSC-UK
and its subsidiaries.
Income taxes receivable decreased $112,819 or 7.3% to $1.4 million at
June 30, 1999 from $1.6 million at December 31, 1998. This decrease was due
primarily to the receipt of state tax refunds.
Other assets decreased $13.1 million or 83.7% to $2.5 million at June
30, 1999 from $15.6 million at December 31, 1998. This decrease was due
primarily to the sale of the Company's servicer advances totaling $8.3 million.
The Company did not have any warehouse financing facilities outstanding
at June 30, 1999 as compared to $106.0 million at December 31, 1998. This
decrease was due to the Company paying off all warehouse related financing in
April 1999.
Accounts payable and other liabilities decreased $3.4 million or 17.0%
to $16.4 million at June 30, 1999 from $19.8 million at December 31, 1998. This
decrease was due primarily to the settlement of reorganization expenses totaling
$2.4 million.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company was provided
$118.4 million from continuing operations and used $106.0 million in financing
activities. The Company's principal cash requirements include the payment of
operating expenses. The Company uses its cash flow from whole loan sales and net
interest income to meet its working capital needs. Should the full funding of
the over-collateralization accounts in connection with the Company's
securitizations occur, the Company also may receive cash payments on its
residual certificates related to its securitizations, although no assurance can
be given as to when or whether this will occur. Based upon the current and
anticipated levels of operations, the Company believes that cash flow from
operations and available cash will be adequate to meet the Company's anticipated
requirements for working capital.
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CREDIT FACILITY
Greenwich Capital Financial Products, Inc. provided a $100 million
post-petition warehouse facility which repaid the full amounts due under their
prior facility. This facility was terminated in June 1999.
LOAN SALES
The Company disposes its loan inventory through whole loan sales where
the Company receives cash at the time of sale.
During 1996 and 1997, the Company sold loans through securitizations.
As of June 30, 1999, the Company's balance sheet reflected the fair value of
interest-only and residual certificates of $12.4 million resulting from these
securitizations. Realization of the value of interest-only and residual
certificates in cash is subject to the prepayment and loss characteristics of
the underlying loans and to the timing and ultimate realization of the stream of
cash flows associated with such loans. If actual experience differs from the
assumptions used in the determination of the asset value, future cash flows and
earnings could be negatively affected and the Company could be required to write
down the value of its interest-only and residual certificates. In addition, if
prevailing interest rates rise, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates.
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.
During the second quarter of 1999, the Company implemented Sage
BusinessWorks as its accounting and financial reporting system. BusinessWorks is
stated to be Year 2000 ready.
The costs incurred to date by the Company regarding its Year 2000
readiness have not been material; however, there can be 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 and subservicers.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
prices and interest rates. The Company's market risk arises from interest rate
risk inherent in its financial instruments. The Company is not currently subject
to commodity price risk. The Company does not make use of off-balance sheet
derivative instruments to control interest rate risk.
The interests that the Company received on loan sales through its
securitizations are in the form of interest-only and residual certificates which
are classified as securities available for sale. Securities available for sale
do not have a stated maturity or amortization period. The expected amount of the
cash flow as well as the timing is dependent on the performance of the
underlying collateral supporting each securitization. The actual cash flow of
these instruments could vary substantially if the performance is different from
the Company's assumptions. The Company generally develops its assumptions by
analyzing past portfolio performance, current loan characteristics and current
market conditions. The Company currently values the interest-only and residual
certificates using a discount rate of 20%.
The Company is exposed to foreign currency exchange risk related to the
dissolution of CSC-UK and its subsidiaries. Specifically, the exchange risk
relates to certain receivables and liabilities which will be satisfied in a
foreign currency. The Company deems this exposure to be immaterial, and
therefore, has not utilized any financial instrument to mitigate any potential
exchange risk.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Proceedings. On October 6, 1998, the Company and CSC filed
petitions in the Bankruptcy Court. The effective date of the reorganization plan
was July 1, 1999. See "Chapter 11 Proceedings". Prior to its bankruptcy filing,
the Company was named as a defendant in a variety of lawsuits. In two of these
lawsuits, former officers and directors of the Company were also named. These
actions against the Company were discharged when the Company's plan of
reorganization became effective on July 1, 1999. Under the plan of
reorganization, as of July 1, 1999, three new directors were deemed elected to
the board of directors of AMC Financial, Inc. The three directors, which now
constitute the board of directors, are D. Richard Thompson, who will also serve
as the Chief Executive Officer and President, Mark Lasry and Mark A. Neporent.
Ceasar Action. On or about September 29, 1997, a putative class action
lawsuit (the "Ceasar Action") was filed against the Company and two of its
former 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 former 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 former
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 former officers and directors in federal court in New Jersey (the
"New Jersey Action").
In these actions, plaintiffs allege that the Company and its former
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 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.
In December 1997, the Eastern District plaintiffs filed a motion for
appointment of lead plaintiffs and approval of co-lead counsel. On September 23,
1998, the court granted this motion. On March 25, 1998, the Company and its
former officers and directors who were defendants 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. As a result of
the Company's chapter 11 proceedings, the action against the Company was
discharged when the Company's plan of reorganization became effective on July 1,
1999. The action is still pending against the individual defendants.
Simpson Action. 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
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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 (i) 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 (ii) 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. The Company intends to proceed in Bankruptcy Court to assure that, like
other pre-chapter 11 petition claims, any claims allowed against the Company
resulting from such action would be satisfied in stock, rather than cash,
pursuant to the Company's reorganization plan.
Peaks Action. 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. In August 1998, the plaintiff filed
an amended complaint in which the class action allegations were dropped and
instead the complaint was joined by 80 individual plaintiffs. The Company
believes that eight of these plaintiffs may have claims that involve loans
acquired by the Company. The Company has continued to monitor the proceedings
and has participated informally in certain settlement discussion. The Company
intends to proceed in Bankruptcy Court to assure that, like other pre-chapter 11
petition claims, any claims allowed against the Company resulting from such
action would be satisfied in stock, rather than cash, pursuant to the Company's
reorganization plan.
Elliott Action. In September 1998, Elliott Associates, L.P. and
Westgate International, L.P. filed a lawsuit against the Company and certain of
its former officers and directors in the Southern District. 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 approximately $20 million of such
preferred stock. Plaintiffs seek unspecified damages, including pre-judgment
interest, attorneys' fees, other expenses and court costs. The Company and its
former officers and directors who were defendants have moved to dismiss this
action. The action against the Company was discharged when the Company's plan of
reorganization became effective on July 1, 1999. The action against the
remaining defendants has been settled and dismissed.
Walsh Action. 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. In
March 1998, Walsh filed a motion to dismiss, or, alternatively, for summary
judgment. In May 1998, the Company served papers that opposed Walsh's motion and
moved for summary judgment on certain of the loans. In December 1998, Judge
Stein of the Southern District denied Walsh's motion to dismiss, or,
alternatively, for summary judgment with respect to all but 69 of the loans at
issue in the litigation. With respect to those 69 loans, Judge Stein granted
Walsh's motion and dismissed the loans from the litigation. At that time, Judge
Stein also denied the Company's motion for summary judgment. On February 1,
1999, Judge Stein denied the Company's motion for reconsideration of that part
of his December 1998 order which granted Walsh's motion to dismiss with respect
to 69 of the loans at issue. The case has currently entered a pre-trial
discovery phase.
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Global Mortgage Action. In August 1998, the Company filed a lawsuit in
the Circuit Court for Baltimore City Maryland, entitled Cityscape and Atlas v.
Global Mortgage, et al., against various defendants seeking damages resulting
from the Company's acquisition in 1995 and 1996 of 145 fraudulent residential
mortgages. The Complaint, as amended on March 19, 1999, seeks $5.5 million in
compensatory damages, plus unspecified punitive damages, against the mortgage
broker, title company, closing agent, settlement attorney, and appraisers
involved in the fraudulent loans based on theories of negligence, malpractice,
conspiracy and fraud. The parties are engaged in the discovery phase of the
case, a pre-trial conference is set for November 8, 1999 and a trial has been
scheduled for the March 2000 term.
Wilshire Action. In March 1999, the Company commenced an adversary
proceeding before Judge Adlai S. Hardin, Jr. in the Bankruptcy Court against
Wilshire Funding Corp. and Wilshire Servicing Corporation, subsidiaries of the
Wilshire Financial Services Group, Inc. The adversary proceeding alleges breach
by Wilshire Funding Corp. of contractual obligations arising out of a January 8,
1998 Asset Purchase Agreement between Wilshire Funding Corp. and Cityscape
Funding Corporation IV and the Company, and breach by Wilshire Servicing
Corporation of contractual obligations arising out of related Assignment
Agreements. CSC seeks damages of approximately $3.7 million, plus interest,
attorneys' fees and costs. In July 1999, the parties entered into a settlement
agreement that provided for the immediate payment by Wilshire of $269,888, and
an acknowledgement by Wilshire that it was liable to repay to the Company an
additional $1.0 million in advances made by the Company, as those advances were
recovered from applicable borrowers. In accordance with the terms of the
settlement agreement, the Company filed a stipulation with the Bankruptcy Court
for the Southern District of New York discontinuing the adversary proceeding
against Wilshire.
Regulatory Matters. In April and June 1996, CSC-UK acquired J&J
Securities Limited (the "J&J Acquisition") and Greyfriars Group Limited
(formerly known as Heritable Finance Limited) (the "Greyfriars Acquisition"),
respectively. In October 1996, the Company received a request from the staff of
the SEC 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
SEC has requested additional information from the Company in connection with the
accounting related to the J&J Acquisition and the Greyfriars Acquisition. The
Company has supplied such requested information. In mid-October 1997, the SEC
authorized its staff to conduct a formal investigation which, to date, has
continued to focus on the issues surrounding the restatement of the financial
statements for the quarter ended June 30, 1996. The Company is continuing to
cooperate fully in this matter.
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.
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ITEM 2. CHANGES IN SECURITIES
Pursuant to the plan of reorganization, all of the predecessor
Company's common stock, preferred stock and warrants were extinguished on July
1, 1999. The reorganization plan provided that: (i) administrative claims,
priority tax claims, bank claims, other secured claims and priority claims would
be paid in full; (ii) holders of senior notes would receive in exchange for all
of their claims, in the aggregate 92.48% of the new common stock of the
reorganized company; (iii) holders of subordinated debentures would receive in
exchange for all of their claims, in the aggregate, 5.43% of the new common
stock of the reorganized company; and (iv) holders of general unsecured claims
would receive 2.09% of the new common stock of the reorganized company. As a
result of the above, in July 1999, 7,803,448 shares of the new common stock of
the reorganized company were issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Cityscape Financial Corp.'s Form 10-Q for the quarter ended March
31, 1999, which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The deadline for indicating acceptance or rejection of the plan of
reorganization was set at 5:00 p.m., New York City Time, on June 1, 1999.
Below are the results of the plan solicitation:
- -------------------------------------------------------------------------------------------------------------
VOTING RESULTS
- -------------------------------------------------------------------------------------------------------------
% OF DOLLAR AMOUNT OF % OF NUMBER OF HOLDERS
CLASS DESCRIPTION CLAIMS VOTING TO ACCEPT VOTING TO ACCEPT
- -------------------------------------------------------------------------------------------------------------
4 Senior Note Claims 99.75% 95.09%
- -------------------------------------------------------------------------------------------------------------
4a Small Senior Note Claims 96.22% 92.22%
- -------------------------------------------------------------------------------------------------------------
5 General Unsecured Claims 91.06% 66.67%
- -------------------------------------------------------------------------------------------------------------
5a Small General Unsecured 100% 100%
Claims
- -------------------------------------------------------------------------------------------------------------
6 Subordinated Debenture 99.63% 98.72%
Claims
- -------------------------------------------------------------------------------------------------------------
6a Small Subordinated 98.15% 97.8%
Debenture Claims
- -------------------------------------------------------------------------------------------------------------
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
3.2* Bylaws of the Company
11.1+ Computation of Earnings Per Share
27.1* Financial Data Schedule
* Filed herewith.
+ Not filed since it would not be meaningful as a result of the
reorganization.
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(b) Reports on Form 8-K
1. Form 8-K dated June 16, 1999 reporting that the bankruptcy court
entered the order confirming the reorganization plan.
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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.
AMC Financial, Inc.
-------------------------------
(Registrant)
Date: August 16 1999 By: /s/ D. Richard Thompson
-------------- ---------------------------
D. Richard Thompson
Title: Chief Executive
Officer and President
Date: August 16 1999 By: /s/ Michael L. Kennemer
-------------- ---------------------------
Michael L. Kennemer
Title: Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1* Certificate of Incorporation of the Company
3.2* Bylaws of the Company
11.1+ Computation of Earnings Per Share
27.1* Financial Data Schedule
- -----
* Filed herewith.
+ Not filed since it would not be meaningful as a result of the
reorganization.