-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZZuKpbclHBvkPiN0PxWpfcnX5xQwIYSWyO7Zag/z292CGzS39o4sBuY3zSWQ+Q1 h+UREBB0F/WM3YyyJfajJA== 0000950123-99-004840.txt : 19990518 0000950123-99-004840.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950123-99-004840 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITYSCAPE FINANCIAL CORP CENTRAL INDEX KEY: 0000866253 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 112994671 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27314 FILM NUMBER: 99627155 BUSINESS ADDRESS: STREET 1: 565 TAXTER RD CITY: ELMSFORD STATE: NY ZIP: 10523-5200 BUSINESS PHONE: 9145926677 MAIL ADDRESS: STREET 1: 565 TAXTER RD CITY: ELMSFORD STATE: NY ZIP: 10523-5200 FORMER COMPANY: FORMER CONFORMED NAME: MANDI OF ESSEX LTD DATE OF NAME CHANGE: 19930328 10-Q 1 CITYSCAPE FINANCIAL CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [ ] 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 MAY 12, 1999 2 CITYSCAPE FINANCIAL CORP. (DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1999
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Statements of Financial Condition at March 31, 1999 and December 31, 1998 2 Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 3 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 4 Notes to Consolidated Financial Statements 5-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 11-22 AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 PART II - OTHER INFORMATION 24-29
3 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)
MARCH 31, DECEMBER 31, 1999 1998 ---- ---- ASSETS Cash and cash equivalents $ 20,651,655 $ 18,405,426 Cash held in escrow 3,478,716 3,768,695 Trading securities 33,402,777 33,660,930 Mortgage loans held for sale, net 32,699,781 123,345,783 Investment in discontinued operations, net 13,008,401 13,008,401 Income taxes receivable 1,361,043 1,550,107 Other assets 24,980,382 15,598,619 ------------- ------------- Total assets $ 129,582,755 $ 209,337,961 ============= ============= LIABILITIES Warehouse financing facilities $ 22,289,772 $ 105,969,355 Accounts payable and other liabilities 24,151,398 23,519,199 Liabilities subject to compromise 477,365,590 477,424,358 ------------- ------------- Total liabilities 523,806,760 606,912,912 ------------- ------------- STOCKHOLDERS' 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 March 31, 1999; 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 52 Common stock, $.01 par value, 100,000,000 shares authorized; 64,948,969 issued and outstanding at March 31, 1999 and December 31, 1998 649,489 649,489 Treasury stock, 70,000 shares at March 31, 1999 and December 31, 1998, at cost (175,000) (175,000) Additional paid-in capital 175,304,103 175,304,103 Accumulated deficit (570,002,649) (573,353,595) ------------- ------------- Total stockholders' deficit (394,224,005) (397,574,951) ------------- ------------- COMMITMENTS AND CONTINGENCIES ------------- ------------- Total liabilities and stockholders' deficit $ 129,582,755 $ 209,337,961 ============= =============
See accompanying notes to consolidated financial statements. 2 4 CITYSCAPE FINANCIAL CORP. (DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Revenues Gain (loss) on sale of loans $ 5,568,012 $ (4,425,047) Net unrealized loss on valuation of residuals -- (7,100,000) Interest 2,282,083 3,201,928 Mortgage origination income -- 899,308 Other 1,415,906 233,012 ------------ ------------ Total revenues 9,266,001 (7,190,799) ------------ ------------ EXPENSES Salaries and employee benefits 1,429,045 9,771,879 Interest expense 1,289,059 14,181,530 Selling expenses 140,926 969,903 Other operating expenses 2,394,293 15,684,469 Restructuring charge -- 3,233,760 ------------ ------------ Total expenses 5,253,323 43,841,541 ------------ ------------ Earnings (loss) before income taxes and reorganization items 4,012,678 (51,032,340) Reorganization items 654,059 -- ------------ ------------ Earnings (loss) before income taxes 3,358,619 (51,032,340) Income tax provision 7,673 150,059 ------------ ------------ Net earnings (loss) 3,350,946 (51,182,399) Preferred stock dividends - increase in liquidation preference -- 1,570,356 Preferred stock - default payments -- 3,016,774 ------------ ------------ NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 3,350,946 $(55,769,529) ============ ============ NET EARNINGS (LOSS) PER COMMON SHARE: Basic $ 0.05 $ (1.17) ============ ============ Diluted NMF(1) $ (1.17)(2) ============ ============ Weighted average number of common shares outstanding: Basic 64,878,969 47,578,738 ============ ============ Diluted NMF(1) 47,578,738(2) ============ ============
(1) Not Meaningful Figure. See Note 6, "Earnings Per Share". (2) For the three months ended March 31, 1998, 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. 3 5 CITYSCAPE FINANCIAL CORP. (DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Cash flows from operating activities: Earnings (loss) from continuing operations $ 3,350,946 $ (51,182,399) Adjustments to reconcile net earnings (loss) from continuing operations to net cash used in continuing operating activities: Depreciation and amortization 3,471 635,747 Income taxes payable 173,713 2,127,711 Decrease in mortgage servicing receivables -- 2,186,288 Decrease in trading securities 258,153 30,112,612 Proceeds from sale of mortgages 87,926,600 251,232,531 Mortgage origination funds disbursed -- (185,812,768) Other, net (5,787,071) 26,145,939 ------------- ------------- Net cash provided by continuing operating activities 85,925,812 75,445,661 ------------- ------------- Net cash used in discontinued operating activities -- (10,923,892) ------------- ------------- Net cash provided by operating activities 85,925,812 64,521,769 ------------- ------------- Cash flows from investing activities: Purchases of equipment -- (286,877) Proceeds from sale of mortgages held for investment -- 1,496,796 ------------- ------------- Net cash provided by investing activities -- 1,209,919 ------------- ------------- Cash flows from financing activities: Decrease in warehouse financings (83,679,583) (65,221,486) ------------- ------------- Net cash used in financing activities (83,679,583) (65,221,486) ------------- ------------- Net increase in cash and cash equivalents 2,246,229 510,202 Cash and cash equivalents at beginning of period 18,405,426 2,594,163 ------------- ------------- Cash and cash equivalents at end of period $ 20,651,655 $ 3,104,365 ============= ============= Supplemental disclosure of cash flow information: Income taxes paid during the period: Continuing operations $ -- $ 1,200 ============= ============= Discontinued operations $ -- $ -- ============= ============= Interest paid during the period: Continuing operations $ 1,568,366 $ 2,145,176 ============= ============= Discontinued operations $ -- $ -- ============= =============
See accompanying notes to consolidated financial statements. 4 6 CITYSCAPE FINANCIAL CORP. (DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. Organization Cityscape Financial Corp. (the "Company") is a consumer finance company which, through its wholly-owned subsidiary Cityscape Corp. ("CSC"), in the business of selling and servicing mortgage loans secured primarily by one- to four-family residences. CSC is licensed or registered to do business in 42 states and the District of Columbia. Until the Company suspended indefinitely such business in November 1998, the Company also had been in the business of originating and purchasing mortgage loans. 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 is currently operating under the protection of chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). 2. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals, considered necessary for a fair presentation of the results for the interim period have been included. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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'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 Petitions (see Note 3), related circumstances, significant losses from operations and net capital deficiency at March 31, 1999 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, 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. The accompanying consolidated financial statements reflect adjustments resulting from the adoption of 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") with respect to financial reporting requirements during reorganization proceedings and do not include any adjustments in the event the Amended Plan (as defined in Note 3) is not confirmed. Should the Amended Plan be confirmed, the Company will adopt fresh-start accounting in accordance with SOP 90-7. The consolidated financial statements do not include any adjustments relating to the Company's ability to continue as a going concern. The consolidated financial statements of the Company include the accounts of CSC and its wholly-owned subsidiaries. The operating results of CSC-UK are presented 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 1999 classifications. 5 7 3. Chapter 11 Proceedings The Company determined during 1998 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 was through a prepackaged plan of reorganization for the Company and CSC, pursuant to the Bankruptcy Code. On October 6, 1998, the Company and CSC filed voluntary petitions (the "Petitions") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). During the second and third quarters of 1998, the Company engaged in negotiations, first, with holders of a majority of the Notes (as defined below) and, second, with holders of a majority of the Convertible Debentures (as defined below). Those negotiations had resulted in acceptance by both groups by the requisite majorities of the terms of a plan of reorganization (the "Original Plan"). The Company had then solicited acceptances of the Original Plan from the holders of its Notes, Convertible Debentures and Preferred Stock (as such terms are defined below). The Original Plan received the requisite approval from all classes except for the holders of the Company's Series B Preferred Stock (as defined below). Although the Debtors and other parties with an economic stake in the reorganization anticipated that the Original Plan would be confirmed at the originally scheduled confirmation hearing, the Original Plan was not confirmed due primarily to deteriorating market conditions and the Debtors' inability to obtain necessary post-reorganization loan warehouse financing to allow them to emerge from chapter 11. As a result, the Debtors have revised the Original Plan (the "Amended Plan"). On November 17, 1998, the Company decided to suspend indefinitely all of its loan origination and purchase activities. The Company notified its brokers that it had ceased funding mortgage loans, other than loans that were in its origination pipeline for which it had issued commitments. 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. With no adequate sources of such financing, the Company determined that it was unable to continue to originate and purchase mortgage loans. 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. The Amended Plan provides for substantive consolidation of the assets of the Company and CSC and for distributions to creditors as summarized below. Estimated recoveries are based upon (i) principal and accrued and unpaid interest as of the chapter 11 petition date and (ii) an estimated, aggregate amount of allowed general unsecured claims of $10.0 million. In summary, the Amended Plan, if confirmed by the Bankruptcy Court, would provide that: (i) administrative claims, priority tax claims, bank claims, other secured claims and priority claims will 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 (or 97.91% if the holders of the Convertible Debentures vote to reject the plan); (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 (or 0% if the holders of the Convertible Debentures vote to reject the plan); (iv) holders of general unsecured claims would receive 2.09% of the new common stock of the reorganized company; and (v) existing Common Stock (as defined below), Preferred Stock and warrants of the Company would be extinguished and holders thereof would receive no distributions under the Amended Plan. The Bankruptcy Court has scheduled a hearing to consider confirmation of the Amended Plan for June 9, 1999. There can be no assurance: (i) as to when, if ever, the Company's loan origination and purchase activities will resume; (ii) that the terms of the Amended Plan will not change; (iii) that the Bankruptcy Court will confirm the Amended Plan on June 9, 1999, if at all; or (iv) that such plan will be consummated (even if it is confirmed). The Company and CSC are currently operating their business as debtors-in-possession. In October 1998, the Bankruptcy Court entered final orders approving debtor-in-possession financing arrangements. The Company and CSC have now repaid all of their indebtedness under their debtor-in-possession financing arrangements. Under the Bankruptcy Code, the Company and CSC may elect to assume or reject real estate leases and other prepetition 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 6 8 the earlier of the date of the bankruptcy filing or the date on which the property is returned to the landlord. On December 23, 1998 and April 27, 1999, the Bankruptcy Court granted orders approving the rejection of certain executory contracts and real estate leases. The Company and CSC are continuing to review their remaining leases and executory contracts to determine which, if any, additional leases and contracts, should be rejected. Liabilities subject to compromise as of March 31, 1999, pursuant to the Amended Plan are summarized as follows:
12 3/4% Senior Notes $ 300,000,000 6% Convertible Subordinated Debentures 129,620,000 Accrued interest related to Senior Notes and Convertible Debentures 39,771,220 Accounts payable 7,974,370 ------------- Total $ 477,365,590 =============
Other potential consequences of reorganization under chapter 11 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. Pursuant to an order of the Bankruptcy Court signed in October 1998, prepetition amounts owed to trade creditors may be paid in the ordinary course of business. In connection with the Company's restructuring efforts, the Company deferred and continues to defer the interest payments on its Notes and Convertible Debentures since June 1, 1998 and May 1, 1998, respectively. The continued deferral of the interest payments on the Notes and Convertible Debentures constitutes an "Event of Default" pursuant to the respective Indentures 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 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. As a result of liquidity constraints, the Company adopted a plan in March 1998, prior to the issuance of its 1997 financial statements, to sell the assets of CSC-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 was 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. During 1998, the Company received an additional $4.5 million from Ocwen related to the loan portfolio adjustments. On February 15, 1999, the Company entered into a settlement agreement (superseded by a revised agreement on April 30, 1999), subject to the approval of the 7 9 Bankruptcy Court, with Ocwen whereby the Company will receive an additional $3.3 million plus accrued interest in settlement of the assumed liabilities at the date of sale. 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. 5. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("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 and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not completed its analysis of SFAS No. 133. 6. 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. 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 reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three months ended March 31, 1999 and 1998 is as follows: 8 10
1999 1998 ---------------------------------------- ------------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ Net earnings (loss) $3,350,946 ($51,182,399) Less: Preferred stock dividends - 1,570,356 Preferred stock - default payments - 3,016,774 ----------- ------------- BASIC EPS Net earnings (loss) applicable to Common Stock 3,350,946 64,878,969 $0.05 (55,769,529) 47,578,738 ($1.17) =========== =========== ====== ======= EFFECT OF DILUTIVE SECURITIES Warrants - Stock options - Convertible preferred stock - Convertible Debentures - ------------- ----------- DILUTED EPS Net earnings (loss) applicable to Common Stock + assumed conversions NMF(1) NMF(1) ($55,769,529) 47,578,738 ($1.17) =========== ====== ============= =========== =======
(1) Not Meaningful Figure. For the three months ended March 31, 1999, diluted EPS is not a meaningful figure because the number of shares computed on a diluted basis would exceed the number of shares authorized and if the Amended Plan is confirmed by the Bankruptcy Court as contemplated, the potential dilutive shares include convertible securities that under the terms of the Amended Plan would be extinguished. See Note 3, "Chapter 11 Procedures". Securities outstanding at March 31, 1999 that could potentially dilute basic EPS in the future are as follows: Convertible Debentures; Series A Preferred Stock (as defined below); Series B Preferred Stock; Series A Warrants (as defined below); and Series B Warrants (as defined below); and options to purchase the Company's Common Stock, par value $0.01 per share (the "Common Stock"). However, if the Amended Plan is confirmed by the Bankruptcy Court as contemplated, the Series A Preferred Stock, the Series B Preferred Stock, Series A Warrants and Series B Warrants would receive no distributions. For the three months ended March 31, 1998, 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. 7. 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 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). 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 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 9 11 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 trading securities by product type.
March 31, December 31, 1999 1998 ---- ---- Home Equity $ 6,232,304 $ 6,490,461 Sav*-A-Loan (R) 27,170,473 27,170,469 ------------ ------------- $33,402,777 $ 33,660,930 ============ =============
The key assumptions used to value the Company's trading securities at March 31, 1999 and December 31, 1998 are as follows:
March 31, December 31, 1999 1998 ---- ---- Home Equity Discount Rate 20.0% 20.0% Constant Prepayment Rate 30.0% 30.0% Loss Rate per Annum 7.5% 7.5% Sav*-A-Loan(R) Discount Rate 20.0% 20.0% Constant Prepayment Rate 16.8% 16.8% Loss Rate per Annum 4.5% 4.5%
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%. 10 12 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, the confirmation of the Amended Plan, the ability to access loan warehouse or purchase facilities in amounts, if at all, necessary to fund the Company's possible future loan production, 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 (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 which, through its wholly-owned subsidiary, CSC, is in the business of selling and servicing mortgage loans secured primarily by one- to four-family residences. CSC is licensed or registered to do business in 42 states and the District of Columbia. Until the Company indefinitely suspended such business in November 1998, the Company also had been in the business of originating and purchasing such mortgage loans. 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 is currently operating under the protection of the Bankruptcy Code. No assurance can be given that the Company will emerge from bankruptcy or that its loan origination or purchase activities will resume. CHAPTER 11 PROCEEDINGS The Company determined during 1998 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 was through a prepackaged plan of reorganization for the Company and CSC, pursuant to the Bankruptcy Code. On October 6, 1998, the Company and CSC filed the Petitions in the Bankruptcy Court. On November 17, 1998, the Company decided to suspend indefinitely all of its loan origination and purchase activities. The Company notified its brokers that it had ceased funding mortgage loans, other than loans that were in its origination pipeline for which it had issued commitments. The Company's decision was based upon its determination, following discussions with potential lenders regarding post-reorganization loan warehouse financing, that adequate sources of such financing were not available. With no adequate sources of such financing, the Company determined that it was unable to continue to originate and purchase mortgage loans. 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. The Amended Plan provides for substantive consolidation of the assets of the Company and CSC and for distributions to creditors. Estimated recoveries are based upon (i) principal and accrued and unpaid interest as of the chapter 11 petition date and (ii) an estimated, aggregate amount of allowed general unsecured claims of $10.0 million. In summary, the Amended Plan, if confirmed by the Bankruptcy Court, would provide that: (i) administrative claims, priority tax claims, bank claims, other secured claims and priority claims will 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 (or 97.91% if the holders of the Convertible Debentures vote to reject the plan); (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 (or 0% if the holders of the Convertible Debentures vote to reject the plan); (iv) holders of general unsecured claims would receive 2.09% of the new common stock of the reorganized company; and (v) existing 11 13 Common Stock, Preferred Stock and warrants of the Company would be extinguished and holders thereof would receive no distributions under the Amended Plan. The Bankruptcy Court has scheduled a hearing to consider confirmation of the Amended Plan for June 9, 1999. There can be no assurance: (i) as to when, if ever, the Company's loan origination and purchase activities will resume; (ii) that the terms of the Amended Plan will not change; (iii) that the Bankruptcy Court will confirm the Amended Plan on June 9, 1999, if at all; or (iv) that such plan will be consummated (even if it is confirmed). The Company and CSC are currently operating their business as debtors-in-possession. In October 1998, the Bankruptcy Court entered final orders approving debtor-in-possession financing arrangements (see " - Liquidity and Capital Resources"). The Company and CSC have now repaid all of their indebtedness under their debtor-in-possession financing arrangements. Under the Bankruptcy Code, the Company and CSC may elect to assume or reject real estate leases and other prepetition 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 bankruptcy filing or the date on which the property is returned to the landlord. On December 23, 1998 and April 27, 1999, the Bankruptcy Court granted orders approving the rejection of certain executory contracts and real estate leases. The Company and CSC are continuing to review their remaining leases and executory contracts to determine which, if any, additional leases and contracts, should be rejected. Liabilities subject to compromise as of March 31, 1999, pursuant to the Amended Plan are summarized as follows:
12 -3/4% Senior Notes $300,000,000 6% Convertible Subordinated Debentures 129,620,000 Accrued interest related to Senior Notes And Convertible Debentures 39,771,220 Accounts payable 7,974,370 ------------ Total $477,365,590 ============
Other potential consequences of reorganization under chapter 11 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. Pursuant to an order of the Bankruptcy Court signed in October 1998, prepetition amounts owed to trade creditors may be paid in the ordinary course of business. DOWNSIZING OF OPERATIONS US OPERATIONS During 1998, the Company significantly downsized its operations due to negative operating results, liquidity constraints and, as discussed above, the reorganization proceedings and indefinite suspension of its loan origination and purchase activities. In the US, the Company closed its branch operations in Georgia, Illinois, Virginia, California and New York and significantly reduced its number of employees, including servicing and corporate employees. As of May 5, 1999, the Company's workforce totaled 47 employees, all of whom were full-time employees. UK OPERATIONS As a result of liquidity constraints, the Company adopted a plan in March 1998 to sell the assets of CSC-UK. In April 1998, pursuant to the UK Sale Agreement, the Company completed the UK Sale. 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. 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 12 14 addition, net assets of CSC-UK have been reclassified on the Company's financial statements as investment in discontinued operations. As of March 31, 1999, the Company's net investment in discontinued operations totaled $13.0 million, representing cash on hand in the discontinued operation of approximately $9.1 million and net receivables (net of liabilities) due of approximately $3.9 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. 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 and fees earned on loans serviced. Historically, the Company also recognized gain on sale of loans sold through securitizations and origination fees received as part of the loan application process. During the fourth quarter of 1998, the Company decided to suspend indefinitely all of its loan origination and purchase activities. In addition, during 1998 the Company redirected its efforts to actively pursue the sale of its loans through whole loan sales with servicing released rather than through securitizations. By employing whole loan sales, the Company is better able to manage its cash flow as compared to disposition of loans through securitizations. Whole loan sales represented all of the Company's loan sales during 1998 and the first quarter of 1999, but with the Company's prior emphasis on the sale of loans through securitizations, had represented 31.7% and 22.2%, respectively, of all loan sales in 1997 and 1996. Prior to 1998, gain on sale of loans included the present value of the differential between the interest rate payable by an obligor on a loan over the interest rate passed through to the purchaser acquiring an interest in such loan, less applicable recurring fees, including the costs of credit enhancements and trustee fees. For the years ended 1997 and 1996, gain on sale of loans also included gain on securitization representing the fair value of the interest-only and residual certificates that the Company received upon the sale of loans through securitizations which are reflected as trading securities. The following table sets forth selected operating data for the Company for the periods indicated:
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- (DOLLARS IN THOUSANDS) Loans sold $ 89,956 $ 251,233 ========== ==========
13 15
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998 DOLLARS IN % OF SERVICED DOLLARS IN % OF SERVICED THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO --------- --------- --------- --------- Portfolio Data: Serviced portfolio(1) $1,022,785 100.0% $1,204,044 100.0% ========== ======= ========== ======= Delinquencies: 30-59 days delinquent $ 26,690 2.6% $ 42,706 3.6% 60-89 days delinquent 11,904 1.2% 17,129 1.4% 90 days or more delinquent 31,677 3.1% 37,683 3.1% ---------- ------- ---------- ------- Total delinquencies $ 70,271 6.9% $ 97,518 8.1% ========== ======= ========== ======= Defaults: Bankruptcies $ 34,368 3.4% $ 35,076 2.9% Foreclosures 81,312 7.9% 81,152 6.7% ---------- ------- ---------- ------- Total defaults $ 115,680 11.3% $ 116,228 9.6% ========== ======= ========== ======= REO property $ 22,078 2.2% $ 21,830 1.8% ========== ======= ========== ======= Charge-offs $ 18,919 1.8% $ 32,344 2.7% ========== ======= ========== =======
(1) Excludes loans serviced pursuant to contract servicing agreements. RESULTS OF OPERATIONS Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Revenues increased $16.5 million to $9.3 million for the three months ended March 31, 1999 from negative $7.2 million for the comparable period in 1998. This increase was due primarily to a gain recorded on its sale of loans of $5.6 million and interest income of $2.3 million during the first quarter of 1999 compared to a net loss on loan sales and a net unrealized loss on the valuation of residuals during the first quarter of 1998. Gain on sale of loans increased $10.0 million to $5.6 million for the three months ended March 31, 1999 from a loss on sale of loans of $4.4 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 $90.0 million of whole loans at a loss of $1.4 million. Under the terms of the purchase facility, the Company as seller/servicer would sell loans on a non-recourse basis into such facility and would retain a participation in future profits in the form of servicing rights. Due to the uncertainty of the market conditions, the Company did not attribute any value to the profit participation of such loans and correspondingly did not recognize any gain upon the initial sale into such facility. In April 1999, the Company terminated the purchase facility and received approximately $7.0 million, representing the proceeds from the Company's profit participation, which consisted of $5.0 million in cash and $2.0 million in fair value of mortgage loans (consisting of approximately $4.1 million in principal amount of loans valued by the Company at $2.0 million). The $7.0 million value attributable to this profit participation is presented as other assets on the Statements of Financial Condition as of March 31, 1999. For the three months ended March 31, 1998, the net loss on sale of loans was primarily due to the sale of $251.2 million of whole loans at an average net premium received of 0.7% as compared to the average premium paid on such loans of 2.4%. Approximately $151.0 million of such whole loan sales represented loans sold on a non-recourse basis into the Company's purchase facility without any gain recorded. No unrealized loss on valuation of residuals was recorded for the three months ended March 31, 1999. The unrealized loss on valuation of residuals of $7.1 million for the comparable period in 1998 14 16 reflected an increase in the expected default rate on the Company's home equity securitizations from 1.7% per annum at December 31, 1997 to 3.3% per annum at March 31, 1998. Interest income decreased $0.9 million or 28.1% to $2.3 million for the three months ended March 31, 1999 from $3.2 million for the comparable period in 1998. This decrease was due primarily to lower average balances of loans held for sale in the first quarter of 1999 as compared to the same period in 1998 primarily resulting from the Company's cessation of loan origination and purchase activity during the fourth quarter of 1998. No mortgage origination income was recorded for the three months ended March 31, 1999 as a result of the Company's decision in November 1998 to suspend indefinitely its loan origination activity. Mortgage origination income was $899,308 on loan originations of $151.2 million for the comparable period in 1998. Other income increased $1.2 million or 507.7% to $1.4 million for the three months ended March 31, 1999 from $233,012 for the comparable period in 1998. During 1998, the Company determined that as a result of the chapter 11 proceedings and the likelihood that all servicing rights will be transferred to a servicer acceptable to the respective trustee on each of the securitizations, there was no value assigned to such servicing rights. Therefore, during the fourth quarter of 1998, the Company wrote down the value of the mortgage servicing receivables and the corresponding allowance for losses to zero. Accordingly due to the continued uncertainty of the Company's ability to retain the servicing rights on its servicing portfolio, the Company accounts for any servicing revenues as income when collected and costs as expense when incurred. As a result of this change, the Company recorded servicing revenues of $1.4 million during the first quarter of 1999 as compared to approximately $228,000 during the first quarter of 1998. Total expenses decreased $38.5 million or 87.9% to $5.3 million for the three months ended March 31, 1999 from $43.8 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 556 employees at March 31, 1998 to 52 at March 31, 1999 along with the closing of its four branch offices subsequent to the first quarter of 1998. Salaries and employee benefits decreased $8.4 million or 85.7% to $1.4 million for the three months ended March 31, 1999 from $9.8 million for the comparable period in 1998. This decrease was due primarily to decreased staffing levels to 52 employees at March 31, 1999 as compared to 556 employees at March 31, 1998 as a result of the Company's reorganization efforts and the Company's decision in November 1998 to suspend indefinitely all loan origination and purchase activities as well as employee attrition. Interest expense decreased $12.9 million or 90.8% to $1.3 million for the three months ended March 31, 1999 from $14.2 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. Selling and other expenses decreased $14.2 million or 85.0% to $2.5 million for the three months ended March 31, 1999 from $16.7 million for the comparable period in 1998. This decrease was due primarily to a decrease in operating costs of $13.3 million or 84.7% to $2.4 million for the three months ended March 31, 1999 from $15.7 million for the comparable period in 1998 reflecting the Company's downsizing and streamlining efforts during 1998 along with its decision to suspend indefinitely all loan origination and purchase activities during the fourth quarter of 1998. These actions resulted in significantly lower number of employees and the closing of the Company's four branch offices and correspondingly significantly lower operating costs. No restructuring charges were recorded during the three months ended March 31, 1999. Restructuring charges were $3.2 million for the comparable period in 1998. This charge was related to a restructuring plan that includes 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 15 17 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 $3.4 million for the three months ended March 31, 1999 from a net loss applicable to common stock of $55.8 million for the comparable period in 1998. This increase 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 first quarter 1998 loss was due primarily to decreased loan originations, as well as decreased gain on sale of loans as a result of the Company's strategy of selling loans through whole loan sales instead of through securitizations. An increase in the liquidation preference of the preferred stock in lieu of dividends and default payments of $4.6 million was recorded during the first quarter of 1998, further increasing the net loss applicable to common stock. FINANCIAL CONDITION March 31, 1999 Compared to December 31, 1998 Cash and cash equivalents increased $2.3 million or 12.5% to $20.7 million at March 31, 1999 from $18.4 million at December 31, 1998. Trading securities, which consist of interest-only and residual certificates, decreased $0.3 million or 0.9% to $33.4 million at March 31, 1999 from $33.7 million at December 31, 1998. This decrease was due primarily to cash received on the home equity certificates. Mortgage loans held for sale, net decreased $90.6 million or 73.5% to $32.7 million at March 31, 1999 from $123.3 million at December 31, 1998. This decrease was due primarily to no loan origination or purchase activity during the first quarter of 1999 and the volume of loans sold. Investment in discontinued operations, net was $13.0 million at March 31, 1999, unchanged from the balance at December 31, 1998. This balance primarily consisted of cash on hand of approximately $9.1 million and net receivables (net of liabilities) due of approximately $3.9 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 $0.2 million or 12.5% to $1.4 million at March 31, 1999 from $1.6 million at December 31, 1998. This decrease was due primarily to the receipt of state tax refunds. Other assets increased $9.4 million or 60.3% to $25.0 million at March 31, 1999 from $15.6 million at December 31, 1998. This increase was due primarily to the recognition of $7.0 million related to the Company's profit participation on loans previously sold into the Company's purchase facility. In April 1999, the Company terminated the purchase facility and received approximately $7.0 million, representing the proceeds of the Company's profit participation, which consisted of $5.0 million in cash and $2.0 million in fair value of mortgage loans (consisting of approximately $4.1 million in principal amount of loans valued by the Company at $2.0 million). Warehouse financing facilities outstanding decreased $83.7 million or 79.0% to $22.3 million at March 31, 1999 from $106.0 million at December 31, 1998. This decrease was due primarily to the volume of loans sold and no origination or purchase activity during the first quarter of 1999. Accounts payable and other liabilities increased $0.7 million or 3.0% to $24.2 million at March 31, 1999 from $23.5 million at December 31, 1998. This increase was due to deposits received during the first quarter of 1999 on loan sales that closed during April 1999. Such deposits when received are classified as accounts payable until such time that the sale transaction is completed. Stockholders' deficit decreased $3.4 million or 0.9% to a deficit of $394.2 million at March 31, 1999 from $397.6 million at December 31, 1998. This decrease was due to net earnings of $3.4 million for the three months ended March 31, 1999. 16 18 LIQUIDITY AND CAPITAL RESOURCES The Company's business requires substantial cash to support its operating activities. The Company's principal cash requirements include the payment of interest expenses, operating expenses and income taxes and prior to the indefinite suspension of its loan origination and purchase activities, the funding of loan production. The Company uses its cash flow from the sale of assets, whole loan sales, net interest income and borrowings under its loan warehouse facility to meet its working capital needs. There can be no assurance that funds generated from operations will be sufficient to satisfy such obligations. The Company's liquidity is dependent upon favorable conditions in the whole loan sale market and the Company's ability to sell certain assets. The Company's liquidity in the future is dependent upon its ability to access funding sources. No assurances can be given as to such access or the occurrence of such conditions (see "Credit Facilities" Below). Historically, the Company has operated on a negative cash flow basis. During the three months ended March 31, 1999 and 1998, the Company provided net cash of $85.9 million and $75.4 million from continuing operations, respectively. Additionally, in the three months ended March 31, 1998, the Company was provided $1.2 million from investing activities. During the three months ended March 31, 1999 and 1998, the Company used cash from financing activities of $83.7 million and $65.2 million, respectively. In addition, during the three months ended March 31, 1998, the Company used net cash in discontinued operations of $10.9 million. The Company is required to comply with various operating covenants as defined in the Greenwich DIP Facility (as defined below). The covenants include restrictions on, among other things, the ability to (i) modify, stay, vacate or amend the bankruptcy court orders approving such facilities, (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, merger or consolidate with or into, or convey, sell, assign, transfer, lease or otherwise dispose of all or substantially all of its 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 therefore 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 purchase of mortgage loans and (xviii) make any payments of principal or interest on account of any indebtedness or trade payable prior to the filing date with certain exceptions. CREDIT FACILITIES Greenwich Warehouse Facility. Prior to the filing of the Petitions, Greenwich Capital Financial Products, Inc., an affiliate of Greenwich Capital Markets, Inc. (referred to herein, including any affiliates as "Greenwich") provided a warehouse credit facility under which CSC borrowed funds on a short-term basis to support the accumulation of loans by CSC prior to sale (the "Greenwich Facility"). Subsequent to the filing of the Petitions and pursuant to an order of the Bankruptcy Court dated October 27, 1998, the Company and CSC obtained a $100 million post-petition warehouse facility from Greenwich (the "Greenwich DIP Facility") which repaid in full amounts due under the Greenwich Facility. The Greenwich DIP Facility is secured by substantially all of the assets of CSC and the capital stock of CSC and is guaranteed by the Company. The Greenwich DIP Facility originally bore interest at an interest rate of LIBOR plus 2.75%. The Greenwich DIP Facility was scheduled to terminate on February 28, 1999; however, the parties agreed by amendment to the Greenwich DIP Facility (the "Greenwich DIP Facility Amendment") to extend the termination of such facility until April 30, 1999. The Greenwich DIP Facility Amendment was approved by an order of the Bankruptcy Court dated March 24, 1999. Under the 17 19 Greenwich DIP Facility Amendment, the interest rate was changed to the prime rate plus 2.50% (10.25% at March 31, 1999). As of May 12, 1999, there was no balance outstanding under the Greenwich DIP Facility Amendment, and the facility size has been reduced to $1 million. In addition, Greenwich has consented to an extension of the termination date until the earlier of June 30, 1999 or the confirmation of a plan of reorganization or liquidation of CSC. CIT Warehouse Facility. Prior to the filing of the Petitions, The CIT Group/Equipment Financing, Inc. ("CIT") provided a warehouse credit facility under which CSC borrowed funds on a short-term basis to support the accumulation of loans by CSC prior to sale (the "CIT Facility"). Subsequent to the filing of the Petitions and pursuant to an order of the Bankruptcy Court dated October 27, 1998, the Company and CSC obtained a $150 million post-petition warehouse facility (the "CIT/Nomura DIP Facility") from CIT and Nomura Asset Capital Corporation ("Nomura") which repaid in full amounts due under the CIT Facility. The CIT/Nomura DIP Facility was secured by substantially all of the assets of CSC and the capital stock of CSC and was guaranteed by the Company. As of May 12, 1999, there was no balance outstanding under the CIT/Nomura DIP Facility, and such facility had been terminated during April 1999. LOAN SALES The Company disposes all of its loan production through whole loan sales where the Company receives a cash premium at the time of a profitable sale. During 1998, 1997, 1996 and the first quarter of 1999, the Company sold $414.2 million, $518.4 million, $283.9 million and $90.0 million respectively, in whole loan sales, accounting for 100.0%, 31.7%, 22.2% and 100.0% 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 1999. 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 the principal collected and the investor pass-through interest rate on the principal balance, while the Company recognizes as current revenue the fair value of the interest-only and residual certificates. Since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" in October 1995, the Company recognized as an asset the capitalized value of mortgage servicing rights (including normal servicing and other ancillary fees) as a mortgage servicing receivable based on their fair values. The fair value of these assets is determined based on various economic factors, including loan types, sizes, interest rates, dates of origination, terms and geographic locations. The Company also uses other available information applicable to the types of loans the Company originated and purchased (giving consideration to such risks as default and collection) such as reports on prepayment rates, interest rates, collateral value, economic forecasts and historical default and prepayment rates of the portfolio under review. The Company estimates the expected cash flows that it will receive over the life of a portfolio of loans. These expected cash flows constitute the excess of the interest rate payable by the obligors of loans over the interest rate passed through to the purchaser, less applicable recurring fees and credit losses. The Company discounts the expected cash flows at a discount rate that it believes is consistent with the required risk-adjusted rate of return to an independent third party purchaser of the interest-only and residual certificates or mortgage servicing receivables. As of March 31, 1999, the Company's balance sheet reflected the fair value of interest-only and residual certificates of $33.4 million. During 1998, the Company determined that as a result of the chapter 11 proceedings and the likelihood that all servicing rights will be transferred to a servicer acceptable to the trustee on the securitization, there is no value assigned to such servicing rights. Accordingly, during the fourth quarter the Company wrote down the value of the mortgage servicing receivables and the corresponding allowance 18 20 for losses to zero. Accordingly, the Company will account for any future servicing revenues as income when collected and costs as expenses when incurred. Realization of the value of interest-only and residual certificates and mortgage servicing receivables in cash is subject to the prepayment and loss characteristics of the underlying loans and to the timing and ultimate realization of the stream of cash flows associated with such loans. If actual experience differs from the assumptions used in the determination of the asset value, future cash flows and earnings could be negatively affected and the Company could be required to write down the value of its interest-only and residual certificates. 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. CONVERTIBLE DEBENTURES In May 1996, the Company issued $143.8 million of 6% Convertible Subordinated Debentures due 2006 (the "Convertible Debentures"), convertible at any time prior to redemption or maturity, at the holder's option, into shares of the Company's Common Stock at a conversion price of $26.25, subject to adjustment. The Convertible Debentures may be redeemed, at the option of the Company, in whole or in part, at any time after May 15, 1999 at predetermined redemption prices together with accrued and unpaid interest to the date fixed for redemption. The coupon at 6% per annum, is payable semi-annually on each May 1 and November 1 which commenced November 1, 1996. The terms of the Indenture governing the Convertible Debentures do not limit the incurrence of additional indebtedness by the Company, nor do they limit the Company's ability to make payments such as dividends. Since May 1, 1998, the Company has deferred the interest payments on the Convertible Debentures as part of its plan to reorganize the business. The continued deferral of the interest payments 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. At March 31, 1999, there were $129.6 million of Convertible Debentures outstanding and they are included in the classification liabilities subject to compromise on the Statements of Financial Condition. SENIOR NOTES In May 1997, the Company issued $300.0 million aggregate principal amount of 12 3/4% Senior Notes due September 1, 2004 in a private placement. Such Notes are not redeemable prior to maturity except in limited circumstances. The coupon at 12 3/4% per annum, is payable semi-annually on each June 1 and December 1 which commenced December 1, 1997. In September 1997, the Company completed the exchange of such Notes for a like principal amount of 12 3/4% Series A Senior Notes due 2004 (the "Notes") which have the same terms as the Notes in all material respects, except for certain transfer restrictions and registration rights. Since June 1, 1998, the Company has deferred the interest payments on the Notes as part of its plan to reorganize the business. The continued deferral of the interest payments 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. At March 31, 1999, the Notes are included in the classification liabilities subject to compromise on the Statements of Financial Condition. Convertible Preferred Stock In April 1997, the Company completed the private placement of 5,000 shares of 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 19 21 Stock valued at the closing price on the day immediately preceding the dividend payment date or (iii) by increasing the Liquidation Preference in an amount equal to and in lieu of the cash dividend payment. During 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 October 6, 1998, due to the filing of the Petitions, the Company stopped accruing and paying dividends on the Series A Preferred Stock. As of October 6, 1998, the Liquidation Preference varies up to $14,298 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 immediately preceding such conversion, discounted by up to 4% and subject to certain adjustments. As of March 31, 1999, 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 March 31, 1999, 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. During 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 October 6, 1998, due to the filing of the Petitions, the Company stopped accruing and paying dividends on the Series B Preferred Stock. As of October 6, 1998, the Liquidation Preference is $14,335 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 125% of the Liquidation Preference upon notice of, or the announcement of the Company's intent to engage in a change of control event. The Series B Preferred Stock is convertible into shares of Common Stock, subject to certain redemption rights and restrictions, at a conversion price equal to the lowest daily sales price of the Common Stock during the four consecutive trading days immediately preceding such conversion, discounted up to 4% and subject to certain adjustments. As of March 31, 1999, 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 March 31, 1999, all Series B Warrants were outstanding. As of March 31, 1999, if all of the outstanding shares of the Series A Preferred Stock and the Series B Preferred Stock were converted into Common Stock, the Company would not have sufficient authorized shares of Common Stock to satisfy all of these conversions. 20 22 In addition, pursuant to the terms of the Company's Series A Preferred Stock and the Company's Series B Preferred Stock (together the "Preferred Stock"), the Company is required to continue the listing or trading of the Common Stock on Nasdaq or certain other securities exchanges. As a result of the delisting of the Common Stock from the Nasdaq National Market, (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 description above of the covenants contained in the Company's credit facility 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). 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. As previously discussed, on October 6, 1998, the Company filed a bankruptcy case under chapter 11 of the Bankruptcy Code. As a result of changes in circumstances, including deteriorating market conditions and the Company's inability to obtain the necessary financing, on November 17, 1998, the Company suspended indefinitely all of its loan origination and purchase activities. Therefore, the Company no longer needs software that relates to the origination and purchase of mortgage loans. Should the Company resume origination and purchase activity, the Company believes that it will be able to purchase, install and implement a Year 2000 ready "off the shelf" origination system, although there can be no assurance that the Company will be able to obtain and implement such system. The Company's loan servicing computer operations are performed by CPI/Alltel. CPI/Alltel provides the Company with quarterly updates regarding its progress and schedule for Year 2000 readiness. CPI/Alltel has publicly announced that it will be Year 2000 ready by year-end. If CPI/Alltel 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 currently uses the Oracle General Ledger System for accounting purposes. Oracle states that it is Year 2000 ready. The Company is in the process of implementing a new accounting and financial reporting system which is stated to be Year 2000 ready. 21 23 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, subservicers, telecommunications companies, vendors and utilities. 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. 22 24 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 foreign currency exchange risk or 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 upon loan sales through its securitizations are in the form of interest-only and residual certificates which are classified as trading securities. Trading securities 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 trading securities using a weighted average discount rate of 20%. 23 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the normal course of business, aside from the matters discussed below, the Company is subject to various legal proceedings and claims, the resolution of which, in management's opinion, will not have a material adverse effect on the consolidated financial position or the results of operations of the Company. 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 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 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 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. As a result of the Company's chapter 11 proceedings, the action against the Company has been stayed. 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 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 24 26 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. Other Matters. 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, but, as a result of the Company's chapter 11 proceedings, has not been required to file a response and has not been required to participate formally in any discovery. In September 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 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 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. 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. 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 case is in the discovery stage, with a trial date currently set for November 1999. 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, 25 27 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. 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 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 has supplied 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 negative operating results, the Company 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 in 1998 and 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. UK Sale Agreement. On September 4, 1998, CSC-UK commenced proceedings in the High Court of Justice, London against Ocwen for the payment of certain sums due under the UK Sale Agreement (the "Proceedings"). Although Ocwen initially informed CSC-UK that it would defend the Proceedings, Ocwen then satisfied CSC-UK's claim by paying CSC-UK pound sterling 1.7 million ($2.8 million) on November 24, 1998. Prior to CSC-UK initiating the Proceedings, Ocwen informed CSC-UK that it would defend the (then proposed) Proceedings on the basis that any sums owed by Ocwen to CSC-UK, should be set off or extinguished against a sum which Ocwen claimed was due or, alternatively, was recoverable by it from CSC-UK on the grounds of CSC-UK's alleged breach of warranty or misrepresentation with respect to matters concerning loans of Greyfriars (the "Alleged Loan Liabilities"). With respect to the Alleged Loan Liabilities, Ocwen's attorneys claimed that CSC-UK had breached certain provisions of loan agreements with borrowers whose loans had been sold to Ocwen. Ocwen claimed that these liabilities totaled approximately pound sterling 13.0 million ($21.2 million). Additionally, pursuant to the UK Sale Agreement, Ocwen held back a sum of pound sterling 3.5 million ($5.7 million) with respect to the purchase price, pending the determination of certain other figures under the UK Sale Agreement (the "Holdback"), which sum was paid into a Holdback account at the time of the UK Sale Agreement. 26 28 On February 15, 1999, the Company, Ocwen and certain of their subsidiaries entered into a settlement agreement (superseded by a revised agreement on April 30, 1999), in full and final settlement of all causes of action, claims, demands, liabilities, damages, costs, charges and expenses that the Company, CSC-UK and Ocwen and their respective subsidiaries may have against each other. Such claims include Ocwen's alleged claim against the Company and/or CSC-UK with respect to the Alleged Loan Liabilities. Under the settlement agreement, CSC-UK will be paid pound sterling 2.0 million ($3.3 million) plus interest from the Holdback account, and Ocwen will be paid the remaining pound sterling 1.5 million ($2.4 million) plus interest from the Holdback account. The above settlement is contemplated in the Company's recorded investment in discontinued operations at March 31, 1999. The approval of the Bankruptcy Court is a condition to the effectiveness of the settlement agreement. As requested by the Company, Ocwen has agreed to substitute itself for the Company or its subsidiaries where appropriate, as the party to related legal proceedings with borrowers. Chapter 11 Proceedings. On October 6, 1998, the Company and CSC filed the Petitions in the Bankruptcy Court. See "Chapter 11 Proceedings". ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Since May 1, 1998, the Company has deferred the interest payments on its 6% Convertible Subordinated Debentures due 2006 (the "Convertible Debentures") 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. The amount of accrued interest on the Convertible Debentures is $7.8 million Since June 1, 1998, the Company has deferred the interest payments on its $300.0 million aggregate principal amount of 12 3/4% Series A Senior Notes due 2004 (the "Notes") as part of its plan to reorganize the business. The continued deferral of the interest payments 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. The amount of accrued interest on the Notes is $32.0 million. As of October 6, 1998, due to the filing of the Petitions, the Company stopped accruing and paying dividends on its 6% Convertible Preferred Stock, Series A (the "Series A Preferred Stock"). The amount of accrued dividends on the Series A Preferred Stock is $18,541. As of October 6, 1998, due to the filing of the Petitions, the Company stopped accruing and paying dividends on its 6% Convertible Preferred Stock, Series B (the "Series B Preferred Stock"). The amount of accrued dividends on the Series B Preferred Stock is $162,107. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 29
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. 11.1* Computation of Earnings Per Share 27.1* Financial Data Schedule
- --------------------------- * Filed herewith (b) Reports on Form 8-K None. 28 30 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: May 17, 1999 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) 29 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 CITYSCAPE FINANCIAL CORP. Exhibit 11.1 COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1999 1998 (1) ---- -------- Net earnings (loss) $ 3,350,946 ($51,182,399) Less: Preferred stock dividends -- 1,570,356 Less: Preferred stock default payments -- 3,016,774 ------------ ------------ NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK 3,350,946 (55,769,529) ADJUSTMENT TO NET EARNINGS (LOSS): Add: After-tax interest expense from Convertible Debentures -- -- Preferred stock dividends -- -- ------------ ------------ TOTAL ADJUSTMENTS -- -- ------------ ------------ ADJUSTED NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 3,350,946 ($55,769,529) ============ ============ WEIGHTED AVERAGE COMMON SHARES 64,878,969 47,578,738 Effect of dilutive securities: Warrants -- Stock options -- Convertible preferred stock -- Convertible Debentures -- ------------ ------------ ADJUSTED WEIGHTED AVERAGE COMMON SHARES NMF(2) 47,578,738 ============ ============ NET EARNINGS (LOSS) PER COMMON SHARE: BASIC $ 0.05 ($ 1.17) ============ ============ DILUTED NMF(2) ($ 1.17) ============ ============
(1) For the three months ended March 31, 1998, the incremental shares from assumed conversions are not included in computing the diluted share amounts because their effect would be antidilutive since an increase in the number of shares would reduce the amount of loss per share. (2) For the three months ended March 31, 1999, diluted EPS is not a meaningful figure ("NMF") due to the fact that the number of shares computed on a diluted basis would exceed the shares authorized and if the Amended Plan is confirmed by the Bankruptcy Court as contemplated, the potential dilutive shares include convertible securities that under the terms of the Amended Plan would be extinguished. See Note 3, "Chapter 11 Proceedings". EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1 3-MOS DEC-31-1999 MAR-31-1999 20,651,655 33,402,777 0 0 32,699,781 0 35,215 0 129,582,755 0 0 0 52 649,489 (394,873,546) 129,582,755 0 9,266,001 0 0 3,964,264 0 1,289,059 3,358,619 7,673 3,350,946 0 0 0 3,350,946 0.05 0 The Company makes use of an unclassified balance sheet style due to the nature of its business. Current Assets and Current Liabilities are therefore reflected as zero in accordance with the instructions of Appendix E to the EDGAR Filer Manual. Net income represents net earnings applicable to common stock. Diluted EPS is not a meaningful figure due to the fact that the number of shares computed on a diluted basis would exceed the shares authorized and if the Amended Plan is confirmed by the Bankruptcy Court as contemplated, the potential dilutive shares include convertible securities that under the terms of the Amended Plan would be extinguished. See Note 3, "Chapter 11 Proceedings".
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