<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended September 30, 1996
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
----------- ----------
Commission file number 0-19391
NAB ASSET CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332956
- ------------------------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
19200 Von Karman Ave., Ste. 950,
Irvine, CA 92612
- ------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 475-4444
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of September 30, 1996, there were 5,091,300 shares of common stock, $.10
par value per share, of the registrant outstanding.
1
<PAGE>
Part I--Financial Information.
Item 1. Financial Statements
NAB ASSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
On June 5, 1996, the Company completed a merger with and into CPS Investing
Corp. ("CPS Sub"), a wholly-owned subsidiary of Consumer Portfolio Services,
Inc. ("CPS"). In the merger, the shareholders of the Company ("NAB") received on
a pro rata basis (i) an aggregate cash distribution of $15.3 million ($3.64 per
share), (ii) an undivided interest in a liquidating trust which holds $3.0
million in cash and all of the net non-cash assets of NAB (having a net book
value of approximately $3.7 million as of June 5, 1996), and (iii) 62% of the
outstanding shares of the new combined company ("New NAB"), which had a net
asset value of $7.6 million as of the merger date. The merger was approved at a
special meeting of the shareholders held on June 5, 1996. This transaction is
being accounted for by New NAB as a reclassification and distribution with
respect to the common stock followed by the issuance of the new common stock to
the CPS Sub. As a result, no gain or loss was recognized by NAB in the merger.
This transaction is discussed in further detail in Item 2 of this report.
For the purposes of clarity in this report, financial information has been
presented separately for NAB and New NAB, with balances shown at September 30,
1996 for New NAB and September 30, 1995 for Old NAB and activity for the three
months ended September 30, 1996 for new NAB and the three months ended September
30, 1995 for Old NAB.
2
<PAGE>
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
New NAB NAB
September 30, June 5, NAB
1996 1996 December 31,
Assets (unaudited) (unaudited) 1995
------ ------------- ------------- -------------
<S> <C> <C> <C>
Cash in banks $ 5,141 $ 3,615 $ 202
Interest-bearing demand deposits - 3 -
U.S. treasury bills - - 1,759
------------- ------------- -------------
Totals cash and cash equivalents 5,141 3,618 1,961
Investments in mortgage-backed
securities, available-for-sale - - 14,997
Accounts receivable 1,540
Inventory-automobiles 3,063
Mortgage loans held for sale 2,796
Loans - - 130
Loans classified as in-substance foreclosures - - 1,201
Real estate - - 3,183
Investment in limited partnership (note 2) - - 724
Property and equipment, net 294
Cost in excess of net assets acquired 529
Other assets 1,034 24 524
------------- ------------- -------------
Total assets $ 14,397 $ 3,642 $ 22,720
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Accrued ad valorem taxes - - 24
Accrued legal and professional fees - - 78
Accrued merger related expenses - - 500
Notes payable-automobile flooring line of credit 2,977
NOtes payable-mortgage warehouse line of credit 3,544
Other accounts payable and accrued expenses 791 118 142
------------- ------------- -------------
Total liabilities 7,312 118 744
------------- ------------- -------------
Minority interest 25
Shareholders' equity (note 1):
Common stock of Old NAB: $.01 par value; 20,000,000 authorized
shares; 4,208,835 shares issued and outstanding at June 5, 1996
and December 31, 1995 42 42
Commons stock of NEW NAB: $.10 par value, 30,000,000 authorized
shares, 5,091,300 issued and outstanding at September 30, 1996 509
Additional paid-in capital 7,217 3,684 25,567
Accumulated deficit (666) (202) (3,699)
Unrealized gains on securities
available-for-sale - - 70
Unearned compensation - - (34)
------------- ------------- -------------
Total shareholders' equity 7,060 3,524 21,976
------------- ------------- -------------
Total liabilities and shareholders' equity $ 14,397 $ 3,642 $ 22,720
============= ============= =============
Book value per share $ 1.39 $ 0.84 $ 5.22
============= ============= =============
Weighted average number of common and common
equivalent shares 5,091,300 4,208,835 4,208,835
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NAB ASSETS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
New NAB
For the Three NAB
Months Ended Three Months Ended
September 30, 1996 September 30 ,1995
------------------ ------------------
<S> <C> <C>
Operating revenues:
Sales of automobiles $ 2,193
Less: Cost of automobiles sold (1,794)
------------------
Gross profit on sale of automobiles 399
Gain on sale of loans 338
Loan fees 70
Gain on sale of assets - $ 117
Income from operating assets - 8
Interest income on loans 73 33
Management fees - 537
Equity in limited partnerships - 409
------------------ ------------------
Total operating revenues 880 1,104
------------------ ------------------
Direct operating expenses:
Loan collection expenses - 3
Interest expense 26
Real estate and other repossessed
assets expenses:
Ad valorem taxes - 30
Operating expenses - 16
------------------ ------------------
Total direct operating expenses 26 49
------------------ ------------------
Operating income 854 1,055
Provision for losses 31 -
------------------ ------------------
Operating income after
provision for losses 823 1,055
------------------ ------------------
Other income:
Interest income on interest-bearing
deposits and mortgage-backed securities - 252
Loss on sale of mortgage-backed securities - -
------------------ ------------------
Total other income - 252
------------------ ------------------
General and administrative expenses:
Employee salaries and benefits 886 683
Occupancy expense 19 30
Directors fees 15 12
Legal and accounting fees 21 39
Insurance expense 24 55
Stock transfer and registrar fees 10 8
NAB liquidating trust expense - -
Other expenses 274 140
------------------ ------------------
Total general and
administrative expenses 1,249 967
------------------ ------------------
Net income (loss) $ (426) $ 340
================== ==================
Net income (loss) per share $ (.08) $ 0.08
================== ==================
Weighted average number of common
and common equivalent shares outstanding 5,091,300 4,208,835
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS JUNE 6, 1996 THROUGH SEPTEMBER 30, 1996, JANUARY 1, 1996 THROUGH
JUNE 5, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
New NAB NAB
For the Period For the Period NAB
June 6, 1996 January 1, 1996 Nine Months Ended
Through Sept. 30, 1996 Through June 5, 1996 September 30, 1996
---------------------- -------------------- ------------------
<S> <C> <C> <C>
Operating revenues:
Sales of automobiles $ 2,193
Less: Cost of automobiles sold (1,794)
------------------
Gross profit on sale of automobiles 399
Gain on sale of loans 338
Loan fees 70
Gain on sale of assets - $ 1,907 $ 1,272
Income form operating assets - 12 41
Revenue from increase in carrying value -
of account receivable - 780 -
Interest income on loans 83 8 372
Management fees - 759 1,654
Gain on sale of general partner's interest
in limited partnerships - 1,066 -
Equity in limited partnerships - 128 426
------------------ ---------------- ----------------
Total operating revenues 890 4,660 3,765
------------------ ---------------- ----------------
Direct operating expenses:
Loan collection expenses - 52 4
Interest expense 26
Real estate and other repossessed
asset expenses:
Ad valorem taxes - 32 98
Operating expenses - 3 34
------------------ ---------------- ----------------
Total direct operating expenses 26 87 136
------------------ ---------------- ----------------
Operating income 864 4,573 3,629
Provisions for losses 31 25 -
------------------ ---------------- ----------------
Operating income after
provision for losses 833 4,548 3,629
------------------ ---------------- ----------------
Other income:
Interest income on interest-bearing
deposits and mortgage-backed securities - 498 675
Loss on sale of mortgage-backed securities - (125) -
------------------ ---------------- ----------------
Total other income - 373 675
------------------ ---------------- ----------------
General and administrative expenses:
Employee salaries and benefits 913 802 1,702
Occupancy expense 32 65 89
Directors fees 15 20 37
Legal and accounting fees 21 44 157
Insurance expense 24 121 158
Stock transfer and register fees 10 13 27
Interest expense - 98
NAB liquidating trust expense - 173 -
Other expenses 282 216 415
------------------ ---------------- ----------------
Total general and
administrative expenses $ 1,297 $ 1,454 $ 2,683
------------------ ---------------- ----------------
Net income (loss) $ (464) $ 3,467 $ 1,621
================== ================ ================
Net income (loss) per share $ (0.09) $ 0.82 $ 0.39
================== ================ ================
Weighted average number of common
and common equivalent shares outstanding 5,091,300 4,208,835 4,208,835
================== ================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JUNE 6, 1996 THROUGH SEPTEMBER 30, 1996 AND
THE THREE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 5, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Additional on Securities
Common Stock Paid-in Accumulate Available-for- Unearned
Shares Amount Capital Deficit Sale Compensation Total
--------------------- ---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,208,835 42 25,567 (3,213) (520) (97) 21,779
Amortization of unearned compensation - - - - - 16 16
Unrealized gains on securities
available-for-sale - - - - 179 - 179
Net income - - - 912 - - 912
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, March 31, 1995 4,208,835 42 25,567 (2,301) (341) (81) 22,886
---------- -------- ---------- ---------- ------------- ------------ -------
Amortization of unearned compensation - - - - - 16 16
Unrealized gains on securities
available-for-sale - - - - 364 - 364
Net income - - - 369 - - 369
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, June 30, 1995 4,208,835 42 25,567 (1,932) 23 (65) 23,635
---------- -------- ---------- ---------- ------------- ------------ -------
Amortization of unearned compensation - - - - - 31 31
Unrealized gains on securities
available-for-sale - - - - 47 - 47
Net income - - - (1,737) - - (1,737)
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, December 31, 1995 4,208,835 42 25,567 (3,669) 70 (34) 21,967
---------- -------- ---------- ---------- ------------- ------------ -------
Amortization of unearned compensation - - - - - 15 15
Unrealized loss on securities
available-for-sale - - - - (116) - (116)
Net income - - - 891 - - 891
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, March 31, 1996 4,208,835 42 25,567 (2,778) (46) (19) 22,766
---------- -------- ---------- ---------- ------------- ------------ -------
Amortization of unearned compensation - - - - - 19 19
Unrealized gains on securities
available-for-sale - - - - 46 - 46
Refund of small shareholder program - - 22 - - - 22
Transfer to NAB liquidating trust - - (6,585) - - - (6,585)
Distributions - - (15,320) - - - (15,320)
Net income - - - 2,576 - - 2,576
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, June 5, 1996 4,208,835 42 3,684 (202) - $ - $ 3,524
---------- -------- ---------- ---------- ------------- ------------ -------
Surrender of Old Stock in Merger
(Note 1) (4,208,835) (42) 42 - - -
Issuance of New Stock in Merger-
62% to Shareholders of Old NAB
(Note 1) 3,156,594 316 (316) - - (0)
Contribution of Capital by CPS
in Merger 38% of Common Stock -
to CPS (Note 1) 1,934,706 193 3,807 - 4,000
Net Loss - - - (464) - - (464)
---------- -------- ---------- ---------- ------------- ------------ -------
Balance, September 30, 1996 5,091,300 509 7,217 (666) - - $ 7,060
========== ======== ========== ========== ============= ============ =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS JANUARY 1, 1996 THROUGH JUNE 5, 1996 THROUGH SEPTEMBER 30,1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
New NAB Old NAB Old NAB
For the Period For the Period Nine Months
June 6, 1996- January 1, 1996- Ended
Sept 30, 1996 June 5, 1996 Sept 30, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from (used by) operating activities:
Net income (loss) $ (464) $ 3,467 $ 1,621
Adjustments to reconcile net income to
net cash from (used by) operating activities:
Provision for losses 31 25 -
Depreciation and amortization 65 75 122
Minority interest 25 - -
Increase in carrying value of account receivable - (780) -
Equity in limited partnerships - (128) (426)
Net (increase) decrease in other assets (681) 364 (164)
Net (increase) decrease in accounts receivable (1,500) - -
Net increase (decrease) in accounts payable
and accrued expenses 481 (133) 20
---------------- ---------------- ----------------
Net cash from (used by) operating activities (2,043) 2,890 1,173
---------------- ---------------- ----------------
Cash flows from (used by) investing activities:
Originations of mortgage loans held for sale (8,515) - -
Sales of mortgage loans held for sale 7,081 - -
Collections applied against loan balances - 748 8,429
Collections applied against real estate and
other repossessed asset balances - 450 361
Purchases of mortgage-backed securities - - (3,735)
Principal repayment of mortgage-backed securities - 661 757
Loan to Mortgage Portfolio Services (note 5) (2,999) - -
Proceeds from sale of mortgage-backed securities - 14,265 -
Proceeds from sale of general partners interest
in limited partnerships - 404 1,483
Distributions received from investment in
limited partnerships - 448 -
Investment in limited partnerships - - (193)
Net purchases of vehicle inventory (3,063) - -
Proceeds from the sale of fixed assets - 68 -
Purchases of fixed assets (144) - -
Acquisition of businesses, net of cash acquired 685 - -
Advances on loans - - (48)
---------------- ---------------- ----------------
Net cash from (used by) investing activities (6,955) 17,044 7,054
---------------- ---------------- ----------------
Cash flows from (used by) financing activities:
Contribution of capital by CPS in merger 4,000 - -
Liquidating distribution - (15,320) -
Payment to liquidating trust - (2,979) -
Refund of small shareholder program - 22 -
Net borrowings under warehouse line of credit 3,544 - -
Net borrowings under flooring line of credit 2,977 - -
Proceeds from short-term borrowings - - 2,137
Repayment of short-term borrowing - - (8,824)
---------------- ---------------- ----------------
Net cash (used by) financing activities 10,521 (18,277) (6,687)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,523 1,657 1,540
Cash and cash equivalents at beginning of period 3,618 1,961 125
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 5,141 $ 3,618 $ 1,665
================ ================ ================
Supplemental Disclosure of
Noncash investing activities:
Conversion of loan to MPS to equity in MPS $ 2,499 $ - $ -
================ ================ ================
Supplemental Disclosure of
Noncash collection activities:
Cash paid for interest $ 26 $ - $ 98
================ ================ ================
Transfer to liquidating trust:
Loans $ - $ 129 -
In-substance foreclosed loans - 454 -
Real estate - 2,733 -
Other assets - 781 -
Other liabilities - (493) -
---------------- ---------------- ----------------
Net Noncash Transfers to Liquidating Trust $ - $ 3,604 $ -
================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD JULY 1, 1996 THROUGH SEPTEMBER 30, 1996
(UNAUDITED)
NOTES TO THE FINANCIAL STATEMENTS
(1) GENERAL
NAB Asset Corporation, a Texas corporation ("NAB"), was organized on March
13, 1991, by National Asset Bank (a bank in liquidation) (the "Bank") as a
wholly-owned subsidiary of the Bank for the purpose of acquiring substantially
all of the assets of the Bank through a series of transactions and agreements
intended to effect the final liquidation of the Bank. On July 17, 1991, the
shareholders of the Bank approved such transactions and the Acquisition
Agreement and Plan of Reorganization (the "Acquisition Agreement"). As a
result, NAB acquired substantially all of the assets of the Bank in
consideration for the issuance by NAB to the Bank of 4,146,266 shares (including
the payment for 5,431 fractional shares) of NAB's common stock, $.01 par value
(the "Common Stock"), and the assumption of all the Bank's liabilities.
Immediately following such acquisition, the Bank distributed the shares of
Common Stock received by it to the holders of the Bank's common stock, $.01 par
value (the "Bank Common Stock"), on the basis of one share of Common Stock for
each ten shares of the Bank Common Stock held of record as of the close of
business on July 17, 1991. Because NAB was formed for the purpose of effecting
the acquisition of substantially all of the Bank's assets, NAB had only limited
business operations prior to such acquisition.
On June 5, 1996, pursuant to a Plan and Agreement of Merger dated February
7, 1996, CPS Investing Corp. ("CPS Sub"), a wholly owned subsidiary of Consumer
Portfolio Services, Inc. ("CPS") was merged with and into NAB. In the merger,
the shareholders of NAB received on a pro rata basis (i) an aggregate cash
distribution of $15.3 million ($3.64 per share), (ii) an undivided interest in a
liquidating trust, and (iii) 62% of the outstanding shares of common stock, $.10
par value (the "New Common Stock") of the new combined company ("New NAB") which
had a net asset value of $7.5 million as of the merger date. The merger was
approved at a special meeting of the shareholders held on June 5, 1996. The
liquidating trust received $2.4 million in cash, subject to certain
contingencies, and all of the non-cash assets of NAB. This transaction is being
accounted for by New NAB as a reclassification and distribution with respect to
the Common Stock followed by the issuance of the New Common Stock to CPS. As a
result, no gain or loss was recognized by NAB in connection with the merger.
In an effort to protect New NAB's large net operating loss carryforwards,
the New Common Stock issued to the shareholders of NAB and CPS in the merger
generally restrict the acquisition of 5% or more of the outstanding shares of
common stock of New NAB so as to prevent the occurrence of an ownership change
under the Federal income tax laws.
8
<PAGE>
In the opinion of management, all adjustments (consisting of normal,
recurring accruals) considered necessary for fair presentation have been
included in the unaudited consolidated financial statements for the three months
ended September 30, 1996 and 1995 the period from June 6, 1996 through September
30, 1996 and September 30, 1996 and September 30, 1995. Operating results for
the periods ended June 5 and September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
(2) INVESTMENT IN PARTNERSHIPS
On June 5, 1996 immediately prior to the merger and liquidating trust
transfer described in Note (1), pursuant to the Partnership Sale Agreement dated
February 7, 1996 by and among NAB and certain of its subsidiaries and Michael A.
Hrebenar and Richard A. Durham, former officers of NAB, (collectively, the
"Purchaser"). NAB sold to the Purchaser its general partner interest in four
limited partnerships and certain tangible assets used in the collection of loans
(carried at $68,000 book value) for $1.538 million in cash. NAB's investment in
these partnerships was carried at a book value of $404,000 at March 31, 1996.
This sale resulted in a gain of $1.066 million, and the proceeds have been
included in the cash distribution to shareholders described in Note (1). This
transaction is described in more detail in Management's Discussion and Analysis
of Operations--General--NAB, Partnership Sale.
(3) FEDERAL INCOME TAXES
New NAB has not recorded a Federal income tax expense or benefit for the
three-month period ended September 30, 1996. At December 31, 1995, for
Federal income tax purposes, NAB had regular tax and alternative minimum tax net
operating loss carryforwards of approximately $180 million, which will expire
beginning in 2001 if not utilized to offset future taxable or alternative
minimum taxable income.
(4) CERTAIN TRANSACTIONS AND RELATED PARTIES
In July of 1996, CARS USA entered into an $800,000 used automobile
flooring line of credit with CPS. The line of credit is available for the use of
CARS USA to purchase vehicles from CPS's repossession inventory at a price equal
to the fair market value of the inventory, or for CARS USA to purchase other
used vehicles from third parties. The line of credit is specifically
subordinated to CARS USA flooring line of credit. The line of credit will bear
interest at a fixed rate of 11%. There was approximately $600,000 advanced to
CARS USA under this line of credit at September 30, 1996. Interest is payable
monthly in arrears. The term of the line is three (3) years and will renew
annually thereafter.
In July of 1996, CARS USA entered into an $2,800,000 automobile flooring
line of credit with Mitsubishi Motor Sales of America ("MMSA"). The line of
credit is available for the use of CARS USA to purchase vehicles from MMSA at a
price not to exceed 100% of the purchase stated on the manufacturer or
distributor invoice. The line of credit will bear interest at a rate of Bank of
America's prime rate plus 1%. There was approximately $2,400,000 advanced to
CARS USA under this line of credit at September 30, 1996.
In August of 1996, MPS entered into a $10,000,000 line of credit with
Guaranty Federal Bank, F.S.B. which is secured by mortgage loans held for sale
by MPS. Borrowings under the warehouse line of credit bear interest at a rate of
prime plus 1/2% per annum. The interest rate on borrowings may be reduced
through the utilization of compensating balances from MPS funds maintained at
the warehouse bank. In addition, the interest rate may also be lowered to the
LIBOR rate of interest plus 2.25% per annum to the extent that the applicable
rate election has been made for a portion of the unpaid principal balance of the
loan.
9
<PAGE>
(5) INVESTMENTS IN SUBSIDIARIES
INVESTMENT IN MORTGAGE PORTFOLIO SERVICES, INC. New NAB acquired 80
percent of the voting common stock of Mortgage Portfolio Services, Inc. ("MPS")
for a purchase price of $300,000 from CPS on July 10, 1996. The remaining
common stock of MPS is owned by its management. New NAB also acquired $2.25
million of MPS preferred stock through conversion of debt to equity and
contributed approximately $249,000 to the capital of MPS. The MPS preferred
stock acquired by New NAB provides for cumulative dividends at a rate of 10% per
annum and has a liquidation preference over the MPS common stock equal to the
purchase price of the MPS preferred stock plus any accrued and unpaid dividends.
MPS is a mortgage banking company with headquarters in Dallas that
specializes in the purchase, origination and servicing of residential mortgage
loans that do not meet traditional secondary market guidelines due to credit or
employment history of the borrower, debt-to-income ratios, or the nature of the
collateral. MPS began funding mortgages in May and closed $3.2 million in loans
through September 30, 1996.
MPS Funding Corporation ("MPSF") was incorporated August 8, 1996 and is a
wholly owned subsidiary of MPS and is located in Irvine, CA. MPSF specializes
in offering non-agency (B and C quality) mortgage banking products to
correspondent customers on a national basis. MPSF was just beginning to fund
mortgages as of September 30, 1996.
SUMMARIZED FINANCIAL DATA FOR MPS AT SEPTEMBER 30, 1996 AND
FROM MAY 13, 1996 (INCEPTION DATE) THROUGH SEPTEMBER 30, 1996
(INCLUDING PRE-INCEPTION COSTS):
Assets $5,744,000
Liabilities 3,660,000
Equity 2,084,000
Total Revenue $ 460,000
Total Expenses (870,000)
----------
Net Income (Loss) (410,000)
----------
10
<PAGE>
INVESTMENT IN CARS USA, INC. New NAB acquired preferred stock and 80
percent of the voting common stock of CARS USA, Inc. ("CARS") on July 10, 1996
for an aggregate purchase price of $500,000. The CARS preferred stock acquired
by New NAB provides for cumulative dividends at a rate of 6% per annum and has a
liquidation preference over the CARS common stock equal to the purchase price of
the CARS preferred stock plus any accrued and unpaid dividends.
CARS is a newly-formed company that will acquire and operate franchised
automobile dealerships for both new and used vehicles. CARS will utilize the
extensive experience of its executive team in sub-prime automobile lending to
serve the dealerships in reaching a broad market of purchasers. On July 31,
1996, CARS completed negotiations for the purchase of its first dealership,
Riverside Mitsubishi located in Riverside, CA. For the three months ended
September 30, 1996, the company sold 137 automobiles.
SUMMARIZED FINANCIAL DATA FOR CARS AT SEPTEMBER 30, 1996
(INCLUDING PRE-INCEPTION COSTS):
Assets $ 4,959,000
Liabilities 4,536,000
Equity 423,000
Total Revenue $ 2,197,000
Total Expenses (2,324,000)
-----------
Net Income (Loss) (127,000)
-----------
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding of the
Company's financial position as of September 30, 1996, and results of operations
for the periods from June 6 through September 30, 1996 and from July through
September 30, 1996 compared to the quarter ended September 30, 1995. To clarify
events described herein, separate Management Discussions and Analysis of
Financial Condition and Results of Operations for the Company before the merger,
that is before June 6, 1996 ("NAB") and for the surviving corporation after the
merger ("New NAB") will be presented. The notes to the Company's consolidated
financial statements included in this report, the Proxy Statement and Prospectus
dated April 23, 1996, as well as the Company's annual Report on Form 10-K for
the year ended December 31, 1995 and the notes thereto, should be read in
conjunction with this discussion.
NAB
GENERAL
NAB collected on, or sold the remainder of, the assets acquired by NAB from
National Asset Bank (a bank in liquidation) (the "Bank") in July 1991 ("Bank
Assets") during the period from April 1 through June 5, 1996 such that the
assets at June 5, 1995 consisted primarily of cash.
On June 5, 1996, NAB consummated the merger of CPS Sub with and into NAB,
after approval at the annual meeting of shareholders of NAB held June 5, 1996.
Under the terms of the merger, (i) each outstanding share of NAB's Common Stock
was converted into the right to receive .75 of a share of common stock of New
NAB ("New Common Stock"); $3.64 per share in cash, and a unit in the liquidating
trust (discussed below); and (ii) each outstanding share of CPS Sub common stock
was converted into 1,934,706 shares of New Common Stock. The shares of New
Common Stock issued to NAB's shareholders represent 62% of the outstanding
shares of New Common Stock and the shares to be issued to CPS represent 38% of
the outstanding shares.
CPS Sub was a newly formed entity that had $4 million in cash and no
liabilities as of the date of the merger so that New NAB was initially
capitalized with $7.5 million in cash (plus $118,000 necessary to satisfy
certain retained liabilities) and is no longer subject to the various
restrictions previously existing in NAB's article of incorporation that limited
its operations.
LIQUIDATING TRUST. Immediately prior to the merger, all of NAB's remaining
net non-cash assets plus $2,973,000 cash were transferred to a liquidating trust
for the benefit of shareholder of NAB as of the effective time of the merger.
The objective of the trust is to liquidate of otherwise realize on those assets
within one year. The assets transferred primarily
12
<PAGE>
consisted of one large loan, the guarantor of which is currently in bankruptcy,
and four larger pieces of undeveloped real estate in Texas and Louisiana which
together have a book value of approximately $4.1 million. In addition, certain
liabilities totaling $443,000 were transferred to the trust. The liquidating
trust had net assets at June 5, 1996 of $6,627,000 or $1.57 per share of NAB
common stock. The interests in the liquidating trust are non-transferable and no
distributions are expected to be made therefrom until after December 31, 1996.
PARTNERSHIP SALE. Immediately prior to the merger and the transfer of
assets to the liquidating trust, pursuant to the Partnership Sale Agreement
dated February 7, 1996 by and among NAB, certain of its subsidiaries and the
Purchaser. NAB transferred on June 5, 1996, for $1,538,000 subject to
adjustment, its general partner interest in four limited partnerships and
certain tangible assets used in the collection of loans. The partnerships held
an aggregate of $19,300,000 in non-performing or other loans and $5,700,000 in
real estate as of December 31, 1995. The partnership interest range from 2% to
20% and provided NAB with the right to receive 20% of distributions from the
partnerships once certain payouts were received by the limited partners. The
Purchaser assumed NAB's obligations with respect to managing the partnerships
and with respect to the bonus pools established by NAB related to each
partnership for the benefit of employees of NAB.
The partnership sale was consummated immediately prior to the effective
time of the merger and the proceeds from the sale were included in NAB's cash
and cash equivalents available for distribution to NAB. NAB recognized a gain
of $1,066,000 from the sale of this partnership interest.
NEW NAB
GENERAL
New NAB began its operations on June 6, 1996 after the consummation of the
merger of CPS Sub with and into NAB. Under the terms of the merger, which is
described above, New NAB was initially capitalized with approximately $7.5
million in cash and approximately $118,000 to cover certain existing liabilities
of NAB, as well as $24,000 in various prepaid expenses.
In connection with the merger, the board of directors of NAB was
reconstituted to consist of Charles E. Bradley, Sr., Michael W. Caton, Charles
E. Bradley, Jr., Emil A. Nakfoor and Robert A. Bettigole. Michael W. Caton will
serve as President and Chief Operating Officer and Charles E. Bradley, Sr. will
serve as Chairman and Chief Executive Officer. On July 30, 1996, the board of
directors was expanded by one seat which James Gardner was elected to fill until
the next election of one or more directors by shareholders of the company.
The company's principal executive offices were relocated on June 6, 1996 to
Dallas, TX where it shared office space with MPS.
13
<PAGE>
Charles E. Bradley, Sr. has been the Chairman of the Board of CPS, a
publicly-held, nationwide sub-prime auto lender, since its formation in March,
1991. Mr. Bradley was a founder of Stanwich Partners, Inc., a Connecticut
investment firm which acquires controlling interests in companies in conjunction
with the existing operating management of such companies, and has been
President, and director of Reunion Industries, Inc., a publicly held company
which manufactures precision plastic products and provides engineered plastics
services. Mr. Bradley is also currently a director of DeVlieg-Bullard, Inc.,
Chatwins Group, Inc., Texon Energy Corp., General Housewares Corp., Zydeco
Exploration, Inc., Sanitas, Inc., and Triangle Corporation, all of which are
publicly-held corporations or are required to file periodic reports under
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Michael W. Caton has twenty-eight years of experience in banking and
finance, and was he organizing founder of Crescent Bank and Trust Company, where
he was the President and Chief Executive Officer from its inception in 1988
through 1995. He previously served as President and CEO of Timberbank, a
registered investment advisory firm, and held senior executive positions at
First National Bank of Atlanta and Security Pacific National Bank.
At December 31, 1995, NAB had regular tax and alternative minimum tax net
operating loss carryforwards ("NOLs") of approximately $180 million, which will
expire beginning in 2001 if not utilized to offset future taxable or alternative
minimum taxable income. These NOLs, to the extent of the balance remaining at
the time of the merger, can be used under certain circumstances by the New NAB
to offset future income tax liabilities. In an effort to protect these NOLs,
the Restated Articles of Incorporation of New NAB impose a transfer restriction
on the New Common Stock that, generally, restricts the ability of a person or
entity to accumulate 5% or more of the outstanding shares of common stock of New
NAB so as to prevent the occurrence of an ownership change under the Federal
income tax laws (Section 382 of the Internal Revenue Code of 1986, as amended).
Pursuant to Section 382, changes in the direct or indirect ownership of
corporations having tax losses can result in the application of limitations on
the use of such losses. The transfer restriction does not prevent the
acquisition of New Common Stock directly from New NAB. It is the intention of
New NAB's reconstituted Board of Directors that New NAB will seek to identify
opportunities for the investment of its available funds so as to maximize the
return to shareholders from such cash and New NAB's significant NOLs.
14
<PAGE>
RESULTS OF OPERATIONS
Results of operations for the three months ended September 30, 1996
reflected a net loss of $426,000, or $(.08) per share, compared to net income
of $340,000 for the three months ended September 30, 1995, or $.08 a share.
Operating income for the three months ended September 30, 1996, was
$880,000 compared to $1,104,000 for the three months ended September 30, 1995.
Other income was $0 for the three months ended September 30, 1996 compared to
$252,000 for the three months ended September 30, 1995.
Direct operating expenses of NAB for the three months ended September 30,
1996, were $26,000 compared to $49,000 for the three months ended September 30,
1995. The decrease was due primarily to the classification differences between
New NAB and Old NAB.
General and administrative expenses for the three months ended September
30, 1996 were approximately $1,258,000 compared to $967,000 for the three months
ended September 30, 1995. The increase in general and administrative expenses
is primarily attributable to start-up costs incurred by New NAB and the
classification differences between New NAB and Old NAB.
INVENTORY
CARS USA accounts for inventory at lower of cost or market and uses the
specific identification method in determining its cost of goods sold.
New NAB will seek to acquire businesses that are consistent with the core
business of CPS, its major shareholder, in automobile financing and loan
servicing. Several such alternatives have been considered by the New NAB Board
of Directors and pursued by New NAB. Two such investments were selected,
reviewed and approved during the second quarter of 1996. Mortgage Portfolio
Services, Inc. and CARS USA, both of which are considered by management to
represent excellent opportunities for New NAB to develop business units that are
focused on consumer needs for housing, automobiles, and related financial
services.
1. INVESTMENT IN MORTGAGE PORTFOLIO SERVICES, INC.
Mortgage Portfolio Services, Inc. ("MPS") is a mortgage banking company
based in Dallas, Texas that specializes in the purchase, origination and
servicing of residential mortgage loans that do not meet traditional secondary
market guidelines due to credit or employment history of the borrower, debt-to-
income ratios, or the nature or the collateral. MPS began funding mortgages in
May and has closed $10.6 million in loans through September 30, 1996. The
president of MPS has fifteen years experience as the president of two mortgage
banking companies, with twenty-five years in the industry.
New NAB acquired 80 percent of the voting common stock of MPS from CPS for
a purchase price of $300,000 on July 10, 1996. The remaining common stock of
MPS is owned by its management. New NAB also acquired $2.25 million of MPS
preferred stock through conversion of debt to equity and contributed
approximately $250,000 to the capital of MPS. The MPS preferred stock acquired
by New NAB provides for cumulative dividends at a rate of 10% per annum and has
a liquidation preference over the MPS common stock equal to the purchase price
of the MPS preferred stock plus any accrued and unpaid dividends.
2. INVESTMENT IN CARS USA, INC.
New NAB also acquired preferred stock and 80 percent of the voting common
stock of CARS USA, Inc. ("CARS") for an aggregate purchase price of $500,000 on
July 10, 1996. The CARS preferred stock acquired by New NAB for $400,000
provides for cumulative dividends at a rate of 6% per annum and has a
liquidation preference over the CARS common stock equal to the purchase price of
the CARS preferred stock plus any accrued and unpaid dividends.
15
<PAGE>
CARS is a newly formed company that will acquire and operate franchised
automobile dealerships for both new and used vehicles. CARS will utilize the
extensive experience of his executive team in sub-prime automobile lending to
serve the dealerships in reaching a broad market or purchasers. On July 31,
1996, CARS completed negotiations for the purchase of its first dealership,
which it began operating at the end of July, 1996. Through September 30, 1996
CARS sold 137 new and used automobiles, generating revenue of $2,200,000.
Although it is the current intention of management and the Board that New
NAB pursue new opportunities in the financial services sector, there can be no
assurance as to the type of transaction that may be pursued, the timing of any
such transactions or the potential profitability of any such transactions. The
activities of New NAB are significantly different from those of NAB, and
therefore the results of operations of New NAB will not be comparable to the
results of operations of New NAB for periods prior to the merger.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, New NAB had approximately $5.1 million in cash and
cash equivalents. As discussed above, New NAB was initially capitalized with
$7.5 million in cash (plus $118,000 necessary to satisfy certain retained
liabilities).
As of June 30, 1996, New NAB had advanced $2,499,000 to MPS in anticipation
of acquiring 80% of the voting common stock of MPS, $2,250,000 of preferred
stock and making a $249,000 contribution to the paid-in capital of MPS. This
advance was made under an interest-bearing note which was exchanged for the
preferred stock and the contribution to paid-in capital on July 10, 1996.
On July 10, 1996, New NAB invested $100,000 in the common stock and
$400,000 in preferred stock of CARS. Also on July 10, 1996, New NAB advanced
$1,000,000 to CARS under a ten-year subordinated note agreement being interest
at an annual rate of 10 percent. New NAB does not intend to advance additional
funds, in excess of the total $1.5 million investment, to CARS.
As noted above, on June 5, 1996, NAB consummated the merger of CPS Sub with
and into NAB. Under the terms of the merger, the shareholders of NAB received
on a pro rata basis (i) an amount of cash equal to $15,320,000 or $3.64 per
share, (ii) an undivided interest in a liquidating trust into which the assets
of NAB not converted into cash prior to the merger were transferred for
liquidation (with a book value of $1.57 per share) and (iii) 62% of the
outstanding shares of New NAB, which had at the time of the merger a new asset
value of approximately $7.5 million ($1.10 book value per share, based on 62%
ownership distributed among the NAB shares outstanding of 4,208,835).
16
<PAGE>
NAB also entered into an agreement to sell NAB's general partner interests
in certain limited partnerships, together with certain tangible assets used in
the collection of loans, to its former management for approximately $1,538,000,
subject to adjustment, which resulted in a gain of $1,066,000. The proceeds from
this sale were included in the cash distribution to shareholders in connection
with the merger, which totaled $15,320,000 for the 4,208,835 shares of Common
Stock of NAB ($3.64 per share).
New NAB will seek to establish or acquire new business, which
opportunities may require additional financing through the issuance of debt or
equity. Because of the limitations imposed on New NAB with respect the amount of
additional stock that it may issue without triggering a charge of control that
would limit its ability to fully utilize its NOLs (discussed further above), it
is likely that such financing would be in the form of either debt or non-
convertible preferred stock. Such financing might also be effected through
equity issuance by subsidiaries to be formed by New NAB or through joint
ventures and special purpose entities. There can be no assurance that such
financings will be completed.
From July 17, 1991 (inception) through June 5, 1996 NAB made cash
distributions with respect to the Common Stock aggregating $5.00 per share,
excluding the merger transaction discussed herein.
NAB relocated its corporate offices from Dallas, TX to its present location in
Irvine, CA during the third quarter of 1996.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On June 20, 1996, New NAB filed a Current Report on Form 8-K,
reporting under Item 2 the completion of the merger with CPS Sub on
June 5, 1996.
On July 26, 1996, New NAB filed a Current Report on Form 8-K,
reporting the acquisition of CARS USA and Mortgage Portfolio Services.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) 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.
Dated: November 12, 1996
NAB ASSET CORPORATION
By: /s/ CHARLES BRADLEY, SR.
--------------------------------------
Charles Bradley, Sr.
Chairman and Chief Executive Officer
By: /s/ MICHAEL W. CATON
--------------------------------------
Michael W. Caton
President and Chief Operating Officer
18
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<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
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