<PAGE>
UNITED STATES
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, 1998
[_] 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)
2 Ada, Suite 100, Irvine, CA 92618
- ---------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 790-8000
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 May 31, 1998, there were 5,091,300 shares of common stock, $.10 par value
per share, of the registrant outstanding.
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ ---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 4,605 $ 3,620
Restricted cash 4,951 3,655
Receivables:
Construction loans, net 65,105 69,052
Residential mortgage loans held for sale 63,155 45,472
Commercial loans held for investment, net 3,875 3,677
Other receivables 1,117 1,024
Property and equipment, net 1,142 1,151
Costs in excess of net assets acquired, net 574 584
Other assets 987 884
-------- --------
Total assets $145,511 $129,119
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Warehouse lines of credit 104,407 95,716
Notes payable to affiliates 16,300 16,300
Drafts payable 11,181 5,425
Accounts payable and accrued expenses 4,188 2,914
Deferred income 801 609
-------- --------
Total liabilities 136,877 120,964
-------- --------
Minority interest 539 316
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
March 31, 1998 and December 31, 1997 509 509
Additional paid-in capital 7,217 7,217
Retained earnings 369 113
-------- --------
Total shareholders' equity 8,095 7,839
-------- --------
$145,511 $129,119
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Gains on sales of loans $ 4,331 $ 1,370
Interest income 2,892 525
Origination and other fee income 2,290 119
---------- ----------
Total revenues: 9,513 2,014
---------- ----------
Costs and expenses:
Compensation and benefits 4,656 1,221
Interest expense 2,648 269
General and administrative 1,796 521
Minority interest in earnings 157 18
---------- ----------
Total costs and expenses 9,257 2,029
---------- ----------
Net earnings (loss) from continuing operations 256 (15)
Net (loss) from discontinued retail automotive
sales operations, net of income taxes - (207)
---------- ----------
Net earnings (loss) $ 256 $ (222)
========== ==========
Basic and diluted earnings (loss) per share
from continuing operations $ 0.05 $ -
========== ==========
Basic and diluted earnings (loss) per share $ 0.05 $ (0.04)
========== ==========
Weighted average number of common and common
equivalent shares outstanding 5,091,300 5,091,300
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) from continuing operations $ 256 $ (15)
Adjustments to reconcile net earnings (loss) to net cash
from (used by) operating activities:
Depreciation and amortization 114 71
Minority interest 223 18
Provision for credit losses 73 -
Net changes in:
Residential mortgage loans originated, purchased and sold (17,683) 1,504
Other receivables (93) 127
Drafts payable 5,756 -
Deferred income 192 126
Other assets (103) 402
Accounts payable and accrued expenses 1,274 52
-------- -------
Net cash from (used by) operating activities (9,991) 2,285
Cash flows from investing activities:
Construction loans originated (42,328) -
Principal collections on construction loans 46,213 -
Commercial loans purchased and originated (458) (1,390)
Principal collections on commercial loans 249 119
Purchases of property and equipment (95) (107)
-------- -------
Net cash from (used by) investing activities 3,581 (1,378)
Cash flows from financing activities:
Net borrowings under warehouse lines of credit 8,691 (1,734)
-------- -------
Net cash from (used by) financing activities 8,691 (1,734)
-------- -------
Net increase (decrease) in cash and cash equivalents 2,281 (827)
Cash and cash equivalents at beginning of period 7,275 3,139
-------- -------
Cash and cash equivalents at end of period $ 9,556 $ 2,312
======== =======
Supplement disclosure of cash flow information:
Cash paid during the period
Interest $ 1,826 $ 44
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
Notes to the Unaudited Consolidated Financial Statements
(1) Description of Business
NAB Asset Corporation, a Texas Corporation (the "Company" or "NAB") is
primarily engaged in the residential lending business. As discussed below the
Company disposed of its retail automotive sales business in June, 1997. Prior
to June 5, 1996 the Company's business consisted of the acquisition, ownership,
management and disposition of loans and real estate for its own account and the
account of others.
The Company was organized on March 31, 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. The Company acquired substantially all of the assets of the Bank
in consideration of the issuance by the Company of shares of its 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 to the holders of the Bank's common stock, (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 the Company was formed for the purpose of effecting the
acquisition of substantially all of the Bank's assets, the Company had only
limited operating activities prior to such acquisition.
On June 5, 1996, pursuant to the Plan and Agreement of Merger, CPS
Investing Corp. ("CPS Sub"), a wholly owned subsidiary of Consumer Portfolio
Services, Inc. ("CPS"), was merged with and into NAB (the "Merger"). Under the
terms of the Plan and Agreement of Merger and in exchange for all of the
outstanding shares of NAB $.01 par value common stock, 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
("Liquidating Trust"), and (iii) 62% of the outstanding shares of common stock,
$.10 par value (the "New Common Stock") of the new combined company which had a
net asset value of $7.5 million as of the merger date. The Liquidating Trust
was established for the benefit of converting the trust assets to cash for the
NAB shareholders. On June 5, 1996 in connection with the Merger, NAB
contributed approximately $3.0 million in cash and all of the remaining non-cash
assets of NAB with a net book value of $3.7 million to the Liquidating Trust.
No gain or loss was recognized by NAB in connection with the merger. In
exchange for a $4 million contribution to NAB, CPS received 38% or 1,934,706
shares of the New Common Stock of NAB.
(2) Basis of Financial Statement Presentation
The consolidated balance sheet of the Company as of March 31, 1998, the
related consolidated statements of operations for the three month periods ended
March 31, 1998 and 1997 and the related statements of cash flows for the three
month periods ended March 31, 1998 and 1997 are unaudited. These statements
reflect, in the opinion of management, all material adjustments consisting only
of normal recurring accruals necessary for a fair presentation of the
5
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consolidated balance sheet of the Company as of March 31, 1998, and results of
consolidated operations for the three month ended March 31, 1998 and 1997 and
the consolidated cash flows for the three month period ended March 31, 1998 and
1997. The results of consolidated operations for the unaudited periods are not
necessarily indicative of the results of consolidated operations to be expected
for the entire year of 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and therefore do not include all information and
footnotes normally included in consolidated financial statements prepared in
conformity with generally accepted accounting principles. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on SEC form 10-K for the year ended December 31, 1997.
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income". SFAS 130
defines comprehensive income as the total of all components of comprehensive
income, including net income and other comprehensive income. The term "other
comprehensive income" refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income. Other comprehensive income items are classified
separately into foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. All components of comprehensive income shall be reported in the
financial statements in the period in which they are recognized; however, if
there are no items of other comprehensive income in any period presented, then
comprehensive income is not required to be reported in that period. The
adoption of SFAS No. 130 did not have any material impact on the Company's
financial statements. During the three months ended March 31, 1998 and 1997,
there were no items of other comprehensive income recognized.
(3) Acquisitions and Dispositions
On March 2, 1998 the Company entered into an agreement to acquire for a
minimum purchase price of $934,000, (payable in the form of the Company's
promissory notes) Stanwich Holdings, Inc. and Stanwich Financial Services
Corporation (SFSC). The Company filed a Form 8-K on March 17, 1998 disclosing
the transaction. The other parties to the transaction included, among others,
Charles E. Bradley, Sr. an officer and director of the Company, Charles E.
Bradley, Jr. a director of the Company, and CPS.
Subsequently the Company determined that certain SFSC gains recorded for
tax purposes may not be used to offset a portion of the Company's net operating
loss carryforwards (which totaled approximately $186,000,000 at December 31,
1997). As a result, the Company and the sellers agreed to a rescission after it
was determined that certain expected economic and tax benefits from the
acquisition and ownership of SFSC would not be available to the Company.
6
<PAGE>
Effective March 2, 1998 the Company entered into an agreement that
rescinded the acquisition of SFSC. As a result, the financial statements of the
Company do not reflect any results of operations of SFSC for any time period.
In March 1997, NAB entered into a definitive agreement to sell its interest
in CARS and on June 27, 1997 completed the transaction. The acquirer was a
newly formed company owned by Charles E. Bradley, Sr., the chief executive
officer and chairman of the board of NAB and Charles E. Bradley, Jr., a director
of NAB. The purchase price consisted of a $200,000 cash payment and a note for
$1,300,000. The note bears interest at 9% payable quarterly and is included in
Commercial loans on the Consolidated Balance Sheets. A principal payment of
$500,000 is due on June 27, 1998 with the remainder due on June 27, 1999.
As a result of NAB's decision to divest its retail automotive sales
operations, all related operating activity has been reported as discontinued
operations for financial reporting purposes.
Operating results of the discontinued retail automotive sales operation is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period from January 1,
1997 to March 31, 1997
(measurement date)
--------------------------
<S> <C>
Revenues $2,199
Expenses 2,406
------
Net Loss $ (207)
======
</TABLE>
Revenue and expenses for the discontinued automotive sales operation
consisted primarily of sales and cost of sales, respectively.
PART II - Other Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
NAB is a financial services company engaged in residential mortgage
banking, residential construction lending and commercial finance. The
residential mortgage banking business, acquired in July 1996, originates,
acquires and sells prime and sub-prime mortgage loans. The residential
construction lending business, begun in December, 1997, originates and holds for
investment single family residential construction loans to homebuilders and to a
lesser extent lots, model homes, and acquisition and development projects for
those homebuilders. The commercial finance operations, begun in January, 1997,
provides financing to operators of rent-to-own or rental purchase retailers. On
June 27, 1997 the Company sold its interest in its retail
7
<PAGE>
automobile sales business. Prior to the Merger on June 5, 1996, the Company's
primary operations consisted of the acquisition, ownership, management and
disposition of loans and real estate for its own account and the account of
others.
Results of Operations
The following discussion and analysis presents the significant changes in
financial condition and results of continuing operations of the Company by
primary business line for the quarters ended March 31, 1998 and 1997. The
results of operations of acquired businesses are included in the consolidated
financial statements from the date of acquisition. This discussion should be
read in conjunction with the consolidated financial statements and notes thereto
(in thousands, except per share data).
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Revenues:
Residential mortgage banking $ 7,733 $ 1,845
Residential construction lending 1,601 -
Commercial lending 176 157
Corporate and intercompany
eliminations 3 12
------- -------
Total revenues $ 9,513 $ 2,014
Costs and expenses:
Residential mortgage banking 6,869 1,616
Residential construction lending 1,483 -
Commercial lending 175 74
Corporate and intercompany
eliminations 730 339
------- -------
Total costs and expenses $ 9,257 $ 2,029
Operating profit (loss):
Residential mortgage banking 864 229
Residential construction lending 118 -
Commercial lending 1 83
Corporate and intercompany
eliminations (727) (327)
------- -------
Total operating profit (loss)
$ 256 $ (15)
======= =======
</TABLE>
8
<PAGE>
Residential Mortgage Banking
Revenues for the three months ended March 31, 1998 primarily consisted of
$4,331,000 in gains on sale of loans, $1,773,000 in fee income and $1,397,000 in
interest income. The $5,888,000 increase in revenues from $1,845,000 for the
three months ended March 31, 1997 primarily related to the additional revenues
generated by the acquisition of the assets and business of Pacific American
Mortgage Company (PAMCO) in August, 1997 and increased levels of loan
originations. The increase in revenues was primarily comprised of a $2,961,000
increase in gains on sale of loans, a $1,656,000 increase in fee income and a
$1,040,000 increase in interest income.
The increased gain on sale of loans was due primarily to the sale of $176.7
million in loans sold for the three months ended March 31, 1998 compared to
$35.3 million for the three months ended March 31, 1997. The increase in fee
income was primarily due to the increase in loan production to $199.1 million
for the three months ended March 31, 1998 compared to $36.3 million for the
three months ended March 31, 1997. The acquisition of PAMCO accounted for
$129.9 million of the increase in loan production and $107.5 million of the
increase in loan sales for the quarter ended March 31, 1998.
Operating expenses for the three months ended March 31, 1998 primarily
consisted of $1,228,000 in interest expense, $3,870,000 in compensation and
benefit expense, $441,000 in intercompany tax expense, and $1,330,000 in general
and administrative expense. Operating expenses increased by $5,253,000 from
$1,616,000 for the prior period to $6,869,000 for the three months ended March
31, 1998. This increase consisted of $957,000 in interest expense, $2,903,000
in compensation and benefit expense, $441,000 in intercompany tax expense and
$952,000 in general and administrative expense. In general, expenses increased
due to the PAMCO acquisition, which accounted for the majority of the increase
in interest expense related to the additional warehouse line necessary to fund
the additional production. Compensation and benefits and general and
administrative expenses also increased mainly due to the addition of PAMCO.
Residential Construction Lending
Revenues for the three months ended March 31, 1998 consisted of interest
income of $1,318,000 and fee income of $283,000.
Operating expenses for the three months ended March 31, 1998 consisted of
$1,103,000 of interest expense, $141,000 of compensation and benefit expense and
$239,000 of general and administrative expense.
New loan commitments for residential construction for the three months
ended March 31, 1998 totaled $39,800,000. New loan commitments approved for new
customers for the three months ended March 31, 1998 totaled $4,750,000.
9
<PAGE>
Commercial Lending
Revenues for the three months ended March 31, 1998 primarily consisted of
interest income of $174,000. The $19,000 increase in revenues from the three
months ended March 31, 1997 relates to the increase in loans receivable.
Operating expenses for the three months ended March 31, 1998 primarily
consisted of $64,000 in compensation and benefit expense and $86,000 in general
and administrative expense. The $101,000 increase in operating expenses from
the three months ended March 31, 1997 was due primarily to an increase of
$10,000 in compensation and benefit expense and an increase of $66,000 in
general and administrative expense.
New loan commitments approved for the three months ended March 31, 1998
totaled $1,350,000 compared to $0 for the three months ended March 31, 1997.
Corporate and Intercompany Eliminations
Corporate expenses for the three months ended March 31, 1998 increased
$391,000 primarily as a result of increased compensation expense.
In April 1998, the Board of Directors authorized the Company to make
payments to officers and Directors in lieu of stock options that were originally
granted under stock option plans that were never presented to shareholders for
approval. As a result, the Company recorded a charge of $376,000 which is
recorded in compensation expense for the quarter ended March 31, 1998, and is
obligated to pay certain officers of the Company a total of $364,000 over the
period to January, 2000, contingent on continued employment. The company will
record compensation expense as these amounts become due.
Liquidity and Capital Resources
As of March 31, 1998 the Company has approximately $9,556,000 in cash as
compared to $7,275,000 at December 31, 1997. Of the $9,556,000 in cash at March
31, 1998, $4,951,000 was restricted to usage for mortgage loan fundings and
repayments under the Company's residential warehouse line of credit. Of the
$7,275,000 in cash at December 31, 1997, $3,655,000 was restricted.
Total assets have increased to $145,511,000 at March 31, 1998 from
$129,119,000 at December 31, 1997. The increase is principally attributable to
the growth in mortgage loan production. This growth was financed primarily by
borrowings from banks under lines of credit.
During the quarter the Company temporarily increased its warehouse line of
credit, secured by residential mortgage loans, to $100,000,000. The increase
from $75,000,000 expires June 30, 1998. The Company is currently negotiating an
increase to $120,000,000 which will expire August 30, 1999. At March 31, 1998,
$59,883,000 was borrowed under the line.
10
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Outstanding borrowings bear interest at a spread over LIBOR or prime. The line
of credit matures August 29, 1998.
On December 30, 1997 the Company entered into a line of credit borrowing
arrangement providing for advances up to $75,000,000 secured by construction
loans receivable. As of March 31, 1998, $43,724,000 was outstanding under the
line.
On April 30, 1998 the Company renewed its line of credit totaling
$5,000,000 secured by commercial loans. The line matures April 30, 1999. At
March 31, 1998, $800,000 was borrowed under the line which bears interest at a
spread over the prime rate.
In order to maintain its net operating loss carryforwards the Company is
limited under Section 382 of the Internal Revenue Code of 1986 as to issuance of
new common shares in order to raise additional capital. The Company must rely
on additional borrowings to grow its operations. In 1997, NAB relied on SFSC
and CPS to provide funds to support the additional growth of the Company.
11
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
1) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the
quarter ended March 31, 1998:
1) Form 8-K dated January 14, 1998 (reporting acquisition of
construction loans).
2) Form 8-K dated March 2, 1998 (reporting acquisition of
Stanwich Financial Services Corp. and Stanwich Holdings,
Inc.) as amended by Form 8-K/A dated June 3, 1998 (reporting
rescission of such acquisition).
12
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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: June 4, 1998
By: /s/ Michael W. Caton
-----------------------------
Michael W. Caton
President and Chief Operating Officer
By: /s/ Alan Ferree
------------------------------
Alan Ferree
Senior Vice President and Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 9,556 7,275
<SECURITIES> 0 0
<RECEIVABLES> 133,644 119,253
<ALLOWANCES> 392 28
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,524 1,425
<DEPRECIATION> 382 274
<TOTAL-ASSETS> 145,511 129,119
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 7,586 7,330
<TOTAL-LIABILITY-AND-EQUITY> 145,511 129,119
<SALES> 4,331 1,370
<TOTAL-REVENUES> 9,513 2,014
<CGS> 0 0
<TOTAL-COSTS> 6,536 1,760
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 73 0
<INTEREST-EXPENSE> 2,648 269
<INCOME-PRETAX> 256 (15)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 256 (15)
<DISCONTINUED> 0 (207)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 256 (222)
<EPS-PRIMARY> 0.05 (0.04)
<EPS-DILUTED> 0.05 (0.04)
</TABLE>
