<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
------------------------------------------------
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19391
NAB ASSET CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Ada, Suite 100 92618
Irvine, CA (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (714) 790-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
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 [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998, was $15,273,900 based upon the closing price as
of such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Class Outstanding at March 20, 1998
-------------- -----------------------------
Common Stock............... 5,091,300
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 10, 11, 12 and 13, will be
included in a definitive proxy statement to be filed on or before April 30, 1998
pursuant to Regulation 14A and is incorporated herein by reference.
<PAGE>
PART 1
Item 1. Business
The Company
NAB Asset Corporation, (the "Company" or "NAB") is a financial services
company primarily engaged in the residential lending business. The Company
commenced operations in July 1991 following its acquisition and assumption of
substantially all the assets and liabilities of National Asset Bank (a bank in
liquidation) (the "Bank"). The Bank was formed in 1988 in connection with the
merger of Allied Bancshares, Inc. ("Allied") with a subsidiary of First
Interstate Bancorp ("First Interstate") for the purpose of liquidating various
non-performing loan and real estate assets held by Allied and its subsidiaries
for the benefit of the prior Allied stockholders.
On June 5, 1996, pursuant to a 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.
Simultaneously with the merger, the Company amended its Articles of
Incorporation and By-laws to remove the previous operating restrictions on NAB
and, in order to preserve the Company's large net operating loss ("NOL") for tax
purposes, to restrict the acquisition of 5% or more of the outstanding shares of
New Common Stock of the Company so as to prevent the occurrence of an ownership
change under Section 382 of the federal income tax laws. Section 382 of the
Internal Revenue Code of 1986 (Section 382), as amended, provides in general
that if a corporation undergoes an ownership change, the amount of taxable
income that the corporation may offset after the date of such ownership change
with NOLs and certain built-in losses existing at the date of such ownership
change will be subject to an annual limitation. The Company's NOL's could
become subject to certain limitations on utilization in the event the Company
undergoes an ownership change within the meaning of Section 382.
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 accounts of others. The Company's business activities were
limited to the ownership, collection and sale of the assets acquired by the
Company from the Bank, the investment in and management of four privately held
limited partnerships formed for the purpose of acquiring non-performing and
other troubled loans.
The Company and its subsidiaries employ a total of 274 persons.
The Business
Mortgage Banking
On July 10, 1996 the Company acquired from CPS 84% of the outstanding
common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase price
of $300,000. The Company also acquired all of the outstanding shares of MPS
preferred stock for $2.25 million, through conversion of debt to equity, and
contributed $249,000 to the additional paid-in capital of MPS.
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MPS, which was organized in October 1995 and began business operations in
April 1996, is a Dallas, Texas based mortgage lender whose customers are
typically home purchasers and owners who cannot access traditional lending
institutions for financing because of job stability, credit problems or type of
property (sub-prime).
On August 31, 1997, MPS acquired the fixed assets and employed the
personnel of the single family mortgage lending division of Pacific Southwest
Bank ("PSB"), a Dallas based savings and loan. A premium of $200,000 was paid
for the operation. Additionally, amounts of up to $800,000 may be payable over
the two year period to August 31, 1999 depending on mortgage loan origination
volumes. The division, Pacific American Mortgage Company ("PAMCO") is primarily
engaged in mortgage lending through ten retail branches in six states.
Substantially all PAMCO mortgage loan originations are conventional conforming,
non-conforming and government insured mortgages (prime).
A summary of the PAMCO assets and liabilities acquired at fair value are as
follows (in thousands):
Property and equipment $ 560
Other assets 125
Accounts payable and accrued expenses (160)
-----
Net assets acquired 525
Purchase price paid 725
-----
Cost in excess of net assets acquired $ 200
=====
The mortgage loan production of MPS for 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- ---------
Prime Sub-Prime Total Total
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Retail
Originations obtained
from the consumer
through the branch
operations $150,621 $ 6,362 $156,983 $ -
Wholesale
Loans received from
mortgage brokers and
closed in MPS's name 11,096 145,305 156,401 28,752
Correspondent
Closed loans purchased
from other mortgage
originators - 59,567 59,567 6,747
-------- -------- -------- -------
$161,717 $211,234 $372,951 $35,499
======== ======== ======== =======
</TABLE>
Total 1997 and 1996 originations by state are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------- --------------------------------------
Total Originations Percent of Total Total Originations Percent of Total
------------------ ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Texas $136,222 37% $17,813 50%
Tennessee 36,953 10 1,546 4
California 36,326 10 511 1
Colorado 24,056 6 1,253 4
Florida 20,376 5 2,983 8
North Carolina 19,904 5 3,037 9
All others (30) 99,114 27 8,356 24
-------- --- ------- ---
$372,951 100% $35,499 100%
======== === ======= ===
</TABLE>
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MPS also has a division that services construction loans that are made to
consumers. These loans are originated through the PAMCO branches. The
construction loans are originated in conjunction with the customers permanent
mortgage (one-time closings). The outstanding principal balance of these loans
is $13,091,000 at December 31, 1997. Approximately 85% of the outstanding
balance are loans in which the collateral is located in Northern California.
MPS has 40 wholesale account executives in six states and 64 account
executives soliciting loans through its branch network in six states. As of
December 31, 1997 MPS had 257 employees. The wholesale operation originates
loans from 36 states and the retail operation originates mortgage loans in six
states. MPS sells all of its mortgage originations for cash on a servicing
released basis.
Competition and Other Risks
MPS faces competition from numerous other mortgage bankers, banks, savings
and loans and finance companies. Many of these competitors are larger and have
greater access to capital and other financial resources than MPS. The level of
gains realized from the sales of loans by MPS and its competitors may continue
to attract new competitors into the market.
MPS's originations have grown substantially since inception and the company
plans to continue its growth strategy. There can be no assurance that MPS will
be able to successfully expand and operate profitably.
As MPS continues to increase its origination capabilities it will be
required to expand its existing borrowing arrangements with financial
institutions or obtain new lines of credit. There can be no assurance that
additional financing can be obtained or that it can be obtained at favorable
terms.
In connection with financing MPS's mortgage loans receivable, most
financial institutions will not finance 100% of the loan amount. MPS will be
required to contribute, in addition to the normal costs of operating the
origination function, one to four percent of the loan amount. MPS must generate
sufficient cash flow from sales of mortgage loans to fund the negative cash flow
associated with the origination of its loans.
The contractual arrangements associated with the sale of loans require, for
a specified period of time, generally one to two years, indemnification for
loans that prepay or default. A significant increase in prepayments or defaults
related to the loans sold would have a significant negative impact on the
liquidity and financial condition of MPS.
The business of MPS could be negatively affected if there is a downturn in
the economy in the geographic areas served by MPS, which results in a decline
for consumer credit or in real estate values. If originations decline, sales of
mortgage loans, the main source of MPS's revenue will also decline. Declining
real estate values inhibit the borrower's ability to refinance and obtain cash
based on the value of his/her property.
Fluctuations in interest rates may adversely affect MPS's loan production.
Substantial increases in long term interest rates generally result in a decline
in mortgage originations. A large decline in interest rates may result in
unusually large prepayments which, under the terms of the contracts governing
MPS's sales of mortgage loans, could require MPS to reimburse the purchasers of
such loans for a portion of the servicing release premium paid by them for such
loans. Approximately 35% of MPS's loan production is at a fixed rate of
interest. If short-term interest rates rise, MPS's borrowing cost would
increase, resulting in a decline in the spread (the difference between interest
received on loans and paid on borrowings) MPS earns. Additionally, prices paid
for the Company's loans may be negatively impacted.
Several of MPS's competitors have announced substantial writedowns of their
residual interests in loans that have been securitized. The writedowns have
been incurred as a result of an incorrect assessment of prepayment risk. MPS
currently sells its mortgage production for cash and as a result does not have
residual interests recorded on its balance sheet. Additionally, MPS has
approximately $500,000 in deferred income and reserves to cover early
prepayments and defaults under its contracts to sell loans. As a result of
3
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the writedowns that have occurred, many of MPS's competitors have announced that
they will begin to sell a substantial portion of their loan production for cash
instead of securitizing the loans and recording non-cash gains. This could
result in a substantial increase in the quantity of loans that are sold in the
same manner that MPS sells its loans and negatively impact the prices MPS
receives for its mortgage loan production. Currently, MPS intends to continue to
sell its loan production for cash, however, if the prices paid for the loans do
not reflect the economic value of the mortgages, MPS may consider securitizing a
portion of its production.
During 1997, approximately $137,000,000 of the Company's $198,000,000 in
sub-prime loan sales were to two customers. The gains as a result of those
sales approximated $6,300,000 or 37% of the total revenues of the Company.
MPS's business is subject to extensive regulation, supervision and
licensing by federal, state and local government authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. The Company's consumer
lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X, the Fair Housing Act, the
Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as
well as other federal and state statutes and regulations affecting the Company's
activities. The Company is also subject to the rules and regulations of and
examinations by the Department of Housing and Urban Development ("HUD") and
state regulatory authorities with respect to originating, processing,
underwriting and selling loans. These rules and regulations, among other
things, impose licensing obligations on the Company, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants, mandate
certain disclosures and notices to borrowers and, in some cases, fix maximum
interest rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, demands for indemnification or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
claims by mortgage borrowers and administrative enforcement actions.
Construction Lending
On December 30, 1997 the Company, through a newly formed 86% owned
subsidiary, Construction Portfolio Funding, Inc. ("CPFI") acquired approximately
$53,000,000 in single family construction loans from PSB. A premium of $250,000
was paid in addition to the principal balances acquired.
Additionally on December 30, 1997, CPFI acquired $2,000,000 in residential
lot loans from NAFCO, Inc., ("NAFCO") an 84% owned subsidiary of NAB that were
acquired from PSB in November, 1997.
CPFI is engaged in the business of providing financing to residential
homebuilders for the construction of single family residences and to a lesser
extent acquisition and development loans, lot loans and model home loans to
those homebuilders. As a part of the acquisition of loans from PSB and NAFCO,
CPFI acquired construction and lot loans to individuals. It is currently CPFI's
intent to discontinue lending to individuals. In connection with the acquisition
CPFI hired ten employees of PSB. A summary of CPFI's outstanding balances as of
December 31, 1997 are as follows (in thousands):
Residential Construction Loans $44,935
Acquisition and Development Loans 2,526
Lot Loans to Builders 2,614
Model Home Loans 3,221
Construction and lot loans to individuals 2,415
-------
Total $55,711
=======
4
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CPFI's total commitments under these loans, if fully funded, are
$96,963,000.
CPFI underwrites each individual homebuilder and determines a guidance
limit under which each homebuilder is limited as to the total commitment from
CPFI for individual construction loans, acquisition and development loans, lot
loans and model home loans. The homebuilder is also generally restricted as to
the amount of speculative or unsold homes that may be financed by CPFI.
Depending on the size of the guidance limit a senior officer and/or a credit
committee consisting of senior officers and members of the board of directors of
CPFI must approve the guidance limits. The specific terms of the guidance
limits, such as interest rates and terms, are determined by the homebuilder's
historical and projected sales volume, historical financial performance,
financial strength, inventory turnover and other qualitative information. At
December 31, 1997 the guidance limits range from $600,000 to $12,000,000. All
guidance lines provide for a variable interest rate based upon the prime rate.
CPFI currently has construction loans in six states, Texas, Arizona,
California, Colorado, Nevada, New Mexico and Georgia. There are 49 homebuilder
customers in those states.
A summary of the outstanding principal balances by state as of December 31,
1997 are as follows:
Principal Balance Number of
(in thousands) Homebuilders
----------------- ------------
Texas $29,048 25
Arizona 14,374 8
California 4,193 3
Nevada 4,193 4
Colorado 2,966 6
New Mexico 703 2
Georgia 234 1
------- --
Total: $55,711 49
======= ==
Competition and Other Risks
The competition CPFI faces comes from a number of different financial
institutions, generally local banks and savings and loans and, to a lesser
extent, large publicly held banks, savings and loans, consumer finance companies
and real estate investment trusts. Many of these competitors have a lower cost
of funds, greater financial resources and access to capital and a more developed
and sophisticated operational infrastructure. CPFI intends to compete with
these financial institutions by emphasizing customer service and providing funds
to smaller builders that may not attract the larger financial institutions.
CPFI assumes credit risk as a result of its investment in construction
loans. The company seeks to mitigate its risk by instituting strict operating
controls and underwriting guidelines. CPFI also limits its funding of
speculative construction (spec housing), acquisition and development loans and
lot loans depending on the homebuilders financial strength. Also, CPFI
evaluates and monitors its homebuilding customers and establishes allowances for
loan losses based on trends in the portfolio and economic conditions within the
markets in which it lends.
The earnings of CPFI are dependent on the spread between the interest it
receives on the loan portfolio and what it pays for the financing of the
portfolio. CPFI intends to grow the portfolio and the ability to do so is
dependent upon the expansion of its credit facilities at a reasonable cost.
Additionally, CPFI is required to fund a portion of each loan with its own
available cash. CPFI must generate sufficient cash flow from its operations in
order to fund growth in the portfolio.
The business of CPFI could be negatively impacted by a downturn in the
local economies of its customers. Typically slowdowns in the economy result in
falling demand for housing which would inhibit the portfolio growth and subject
CPFI to additional credit risk. An increase in long-term interest rates also
reduces demand, as mortgages become more expensive for the homebuyer. A large
increase in short-term interest rates will increase the cost of building homes
which, the builder, may or may not be able to pass
5
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through to the homebuyers. If interest costs cannot be passed through to the
homebuyers, the homebuilder's profit margins suffer and CPFI incurs additional
credit risk.
Most of CPFI's customers are small homebuilders with less capital than many
of their competitors. As a result, the CPFI customer has less pricing
flexibility and financial capability to compete with the large homebuilders. If
larger more financially secure homebuilders enter the local market of a CPFI
customer, CPFI could be subjected to additional credit risk.
Commercial Lending
In January 1997, the Company, through a newly formed 84% owned subsidiary
NAFCO, Inc., ("NAFCO") acquired a portfolio of loans of which the debtors are
the rent-to-own and rental purchase businesses. The principal balance of the
loans totaled $1,966,000 and was purchased for $1,292,000. The discount of
$674,000 is being amortized in proportion to and over the life of the portfolio.
Since the initial acquisition NAFCO has originated two additional loans
with a total commitment of $750,000.
The Company is currently reviewing alternatives for NAFCO that may include
a sale of the portfolio, diversification of NAFCO's lending capabilities or
continuation of NAFCO's focus on lending to rental purchase operators.
Disposition of CARS USA, Inc.
On June 27, 1997, the Company sold its interest in CARS USA, Inc. for
$1,500,000. The Company received a down payment of $200,000 and a note for
$1,300,000 of which $500,000 in principal is due on the first anniversary of the
purchase and sale agreement and $800,000 is due on the second anniversary of the
purchase and sale agreement. The note bears interest at 9% and is payable
quarterly. The acquiror was a newly formed company owned by Charles E. Bradley,
Sr. and Charles E. Bradley, Jr. Mr. Bradley, Sr. is the Chairman of the Board
and Chief Executive Officer of the Company, and Mr. Bradley, Jr. is a director
of NAB.
For the period from January 1, 1997 to June 27, 1997 the Company incurred a
$271,000 loss related to the discontinued operation. As a result of the sale,
the Company recorded a $1,384,000 gain.
Acquisition of Stanwich Financial Services Corp.
On March 2, 1998 the Company acquired Stanwich Financial Services Corp.
("SFSC"). Mr. Bradley, Sr., and Mr. Bradley, Jr., together owned 85% of the
outstanding common stock of SFSC.
The purchase price totals $3,700,000 of which $2,766,000 is payable upon
achievement of certain earnings levels through January 2003. The purchase price
is payable in the form of notes to the individual owners. A portion of the
purchase price ($531,000) is due to CPS, which had an option to acquire SFSC
that was cancelled as of the acquisition date. The minimum purchase price of
$934,000 is due March 2003. The notes payable for the acquisition bear interest
at 7% per annum which is payable quarterly. Interest on the contingent portion
of the purchase price is due upon realization of the required earnings levels.
Item 2. Properties
The Company's executive offices, totaling 2,000 square feet and located in
Irvine, California, are sub-leased from CPS on a month-to-month basis.
The Company through its subsidiaries also leases 38,000 square feet in
Dallas for administrative and sales functions relating to its mortgage banking,
construction lending and commercial lending operations. MPS leases office space
in Arizona, California, Colorado, Florida, Georgia, Illinois, Nevada,
6
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Tennessee and Texas. MPS has 16 wholesale and retail branch offices in those
states. The offices vary in size depending on the origination volume in each
location.
Item 3. Legal Proceedings
The Company is subject to lawsuits which arise in the ordinary course of
its business. Management is of the opinion, based in part upon consultation
with its counsel, that the liability of the Company, if any, arising from
existing and threatened lawsuits would not have a material adverse effect on the
Company's financial position and results of operations.
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of Shareholders was held on November 4, 1997, in Irvine,
California. Four incumbent directors were re-elected without opposition to
serve until the next annual meeting of shareholders. The results of this
election were as follows:
Name of Director Votes for Votes withheld
- -------------------------- --------- --------------
Charles E. Bradley, Sr. 3,694,676 82,406
Charles E. Bradley, Jr. 3,701,557 75,525
Michael W. Caton 3,701,671 75,411
James B. Gardner 3,701,654 75,428
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"NABC". The following table sets forth the quarterly high and low sale prices
for the Common Stock as reported by The Nasdaq Stock Market.
Price
------------------------------
High Low
----------- ---------
Year ended December 31, 1996
First Quarter 5 3/4 4 3/8
Second Quarter 5 15/16 5/8
Third Quarter 2 5/16 1 15/16
Fourth Quarter 3 7/8 2 1/16
Year ended December 31, 1997
First Quarter 3 9/16 2 7/8
Second Quarter 3 1/8 2
Third Quarter 3 3/16 2 1/2
Fourth Quarter 3 1/8 1 7/8
As of February 28, 1998, there were approximately 7,500 shareholders of
record.
Prior to June 5, 1996, as the Company had liquidated its loan and real estate
portfolios for cash, periodic distributions to shareholders were made. It is
anticipated that for the foreseeable future, all earnings will be retained to
provide for the future growth of the Company.
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Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
As of and for the year ended December 31,
(all amounts in thousands, except per share data)
---------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993(1)
-------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues from continuing operations $ 16,855 $ 1,414 $ - $ - $ -
Net earnings (loss) from continuing 1,121 (796)
operations
Net earnings (loss) from discontinued
operations, net of income taxes 1,113 2,344 (456) 780 (925)
Net earnings (loss) 2,234 1,548 (456) 780 (925)
Basic earnings (loss) per share from
continuing operations 0.22 (0.16) - - -
Basic earnings (loss) per share 0.44 0.30 (0.11) 0.19 (0.22)
Weighted average number common shares
outstanding 5,091 5,091 4,209 4,209 4,210
Balance Sheet:
Residential mortgage loans 45,472 12,648 - - -
Construction loans 69,052 - - - -
Total assets 129,119 17,904 22,720 28,886 29,413
Total debt 112,016 11,819 - - -
Total liabilities 120,964 12,298 744 7,107 1,662
Shareholders' equity (net assets) 7,839 5,605 21,976 21,779 27,751
Distributions - 21,883 - 6,313 6,313
Book value per share 1.54 1.10
Cash distributions per share (2) - 3.64 - 1.50 1.50
Transfer to liquidating trust per share (3) - 1.56 - - -
</TABLE>
(1) Amounts relate to discontinued operations.
(2) Paid on 4,208,835, 4,208,835, and 4,214,835 shares of Common Stock
outstanding for the Company during 1996, 1994 and 1993 respectively.
(3) Paid on 4,208,835 shares of Common Stock outstanding on June 5, 1996.
Reference is made to Item 1. Business, for discussion of the merger between the
Company and CPS Sub and the resulting distribution of cash and other assets to
the shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
NAB is a financial services company engaged in residential mortgage banking,
residential construction lending and commercial finance. In addition, on March
2, 1998 the Company acquired Stanwich Financial Services Corp. (see Item 1.)
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. As
discussed in Item 1. Business, on June 27, 1997 the Company sold its interest in
its retail 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.
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Results of Operations
Year ended December 31, 1997 compared to the year ended December 31, 1996
For the year ended December 31, 1997 the Company reported earnings from
continuing operations of $1,121,000 as compared to a loss of $(796,000) for the
year ended December 31, 1996. In 1997 the Company disposed of its retail
automotive sales segment resulting in a gain of $1,384,000. Prior to the sale
the operation incurred a loss of $271,000 for the period from January 1 to June
27, 1997 (the sale date). The earnings from continuing operations benefited
from a full years operating results of the mortgage banking subsidiary, MPS, and
the earnings from the commercial loan portfolio at NAFCO. The construction
lending operations began December 30, 1997 and as a result did not contribute
significantly to the earnings of the Company.
Operating revenues from continuing operations increased to $16,855,000 in 1997
from $1,414,000 for 1996. The increase reflects the full year results of the
mortgage banking operations and the added revenues resulting from the PAMCO
acquisition on August 31, 1997. Total revenues from the mortgage banking
operations increased to $16,101,000 in 1997 as compared to $1,349,000 for 1996.
Gains on sale of mortgage loans were $10,153,000 in 1997 as compared to $962,000
for 1996. The increases were attributable to additional loan sales of
$296,247,000 over 1996. The relationship between mortgage loan production and
gains on sales of loans are summarized as follows (in thousands):
1997 1996
-------- -------
MPS Loan Sales $197,855 $24,174
MPS Gains 8,379 962
PAMCO Loan Sales 122,566 N/A
PAMCO Gains 1,774 N/A
Other revenues increased from $129,000 in 1996 to $3,211,000 in 1997 primarily
as a result of fee income that is collected from the customers of the PAMCO
retail loan origination branches. The increase is also a result of the full
year of operations at MPS as compared to six months in 1996.
Interest income totaled $3,491,000 for 1997 as compared to $323,000 for 1996.
The increase is a result of the increased loan production at MPS and the loan
portfolio at NAFCO, which was acquired in January 1997. Interest expense
totaled $2,591,000 for 1997 compared to $104,000 for 1996. Net spread, the
difference between interest income and interest expense, totaled $900,000 for
the year ended December 31, 1997 as compared to $219,000 for the year ended
December 31, 1996. The increase in net spread was attributable to several
factors, including increased loan production and a lower cost of funds on MPS's
line of credit, offset by PAMCO's prime mortgage loan production which bears a
lower rate of interest and the Company's borrowings from affiliates.
Compensation and benefits increased from $1,357,000 in 1996 to $8,750,000 for
1997. Other operating expenses increased from $749,000 in 1996 to $4,384,000 in
1997. The increases were primarily attributable to the mortgage banking
operations.
9
<PAGE>
A summary of compensation and benefits and other operating expense for the
mortgage banking operations are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Mortgage loan production $ 372,951 $ 35,499
Compensation and Benefits - MPS 7,688 1,026
Other Operating Expenses - MPS 3,083 555
Compensation and Benefits as a
percentage of mortgage loan production 2.06% 2.89%
Operating Expenses as a
percentage of production 0.83% 1.56%
</TABLE>
Expenses in 1996 as a percentage of production were higher as a result of
start-up costs incurred by MPS. Non mortgage banking compensation and benefit
expenses increased $731,000 from $331,000 in 1996 to $1,062,000 in 1997
resulting from a full year of corporate and NAFCO expenses. Similarly, other
non-mortgage banking operating expenses increased $665,000 from $194,000 in 1996
to $859,000 in 1997.
Year ended December 31, 1996 compared to the year ended December 31,1995
For the year ended December 31, 1996, the Company reported net earnings of
$1,548,000, which was comprised of a net loss from continuing operations of
$796,000 and net earnings from discontinued operations of $2,344,000.
Operating income for the period from January 1, 1996 to June 5, 1996 (the
discontinued real estate operations) was $3,467,000 due to several liquidating
transactions, including a $1,066,000 net gain on the sale of the Company's
partnerships and a $1,791,000 recovery on the settlement of an in-substance
foreclosure. Additionally, the Company incurred a loss of $(1,123,000) from the
discontinued retail automotive sales business. The Company's continuing
operations were negatively affected by the start-up expenses of MPS which
incurred losses for the period from its acquisition to December 31, 1996 of
$404,000.
Revenues from continuing operations totaled $1,414,000 for the year ended
December 31, 1996. Included in revenues were the gains on sales of loans of
$962,000 relating to MPS which was included in the financial statements of the
Company from their acquisition in July, 1996. Other operating revenue,
including interest, was $452,000 for the year ended December 31, 1996.
Operating expenses relating to continuing operations totaled $2,210,000 for
the year ended December 31, 1996, and consist primarily of costs and expenses
associated with the mortgage banking operation ($1,753,000). The costs and
expenses were comprised primarily of compensation and benefits and for the
mortgage banking operation.
Liquidity and Capital Resources
As of December 31, 1997 the Company has approximately $7,275,000 in cash as
compared to $3,139,000 at December 31, 1996. Of the $7,275,000 in cash at
December 31, 1997, $3,655,000 was restricted to usage for mortgage loan fundings
and repayments under the Company's residential warehouse line of credit.
Total assets have increased to $129,119,000 at December 31, 1997 from
$17,904,000 at December 31, 1996. The increase is attributable to the growth in
mortgage loan production at MPS and the acquisition and origination of
construction loans at CPFI and the acquisition and origination of commercial
loans at NAFCO. This growth was financed primarily by borrowings from banks
under lines of credit.
On August 28, 1997 MPS increased its line of credit with Guaranty Federal
Bank, F.S.B. and other lenders to $75,000,000 from $35,000,000. Outstanding
borrowings bear interest at a spread over LIBOR or prime. The line of credit
matures August 29, 1998. The mortgage loans receivable of MPS are
10
<PAGE>
pledged as collateral for the line of credit. At December 31, 1997, $50,002,000
was borrowed under the line.
On December 30, 1997 CPFI entered into a line of credit borrowing arrangement
with Bank United. The line of credit provides for advances up to $75,000,000
secured by CPFI's construction loans receivable. As of December 31, 1997
$45,714,000 was outstanding under the line bearing interest at various spreads
over LIBOR depending on the collateral. The line of credit matures December 29,
1998.
At December 31, 1997, NAFCO had a line of credit totaling $5,000,000 with a
savings bank. The line bears interest at a spread above prime and matures April
30, 1998. No borrowings under this line were made during 1997. Substantially
all of the assets of NAFCO were pledged as collateral for the line.
During 1997, the Company borrowed, under notes and a line of credit from
Stanwich Financial Services Corp. ("SFSC") and CPS, a total of $16,300,000
summarized as follows:
<TABLE>
<CAPTION>
Payee Type Date Maturity Amount Rate
----- --- ---- -------- ------ ----
<S> <C> <C> <C> <C> <C>
SFSC Note June 27, 1997 June 30, 1998 $ 800,000 14%
SFSC Note September 30, 1997 September 30, 2000 2,500,000 14%
SFSC Line of Credit August 28, 1997 September 30, 2000 3,500,000 16%
SFSC Note December 30, 1997 June 30, 1998 4,000,000 13%
CPS Note December 30, 1997 June 30, 1998 5,500,000 13%
</TABLE>
Proceeds from the borrowings were used to invest in the Company's
subsidiaries. All loans require the payment of interest quarterly with principal
due at maturity. The proceeds from the line of credit executed on August 28,
1997 are limited to usage at MPS. The total commitment is $5,000,000 of which
$3,500,000 has been drawn. Each note may be prepaid, partially or in
full, without penalty at any time. Any partial repayment may not be re-
borrowed. Charles E. Bradley, Sr., who is an officer and director of NAB, and
Charles E. Bradley, Jr., who is a director of NAB together owned a majority
interest in SFSC at December 31, 1997. As discussed in Item 1. Business and
Note (13) (unaudited) to the Consolidated Financial Statements, on March 2, 1998
the Company acquired SFSC.
Mr. Bradley, Sr., is a director of CPS and Mr. Bradley, Jr., is an officer
and director of CPS.
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.
In the next twelve months the Company intends to continue the expansion of the
current operations through its subsidiaries and acquire additional operations
complimentary to its core consumer and commercial lending businesses. The
ability of the Company to acquire additional compatible operations is dependent
upon the availability of financing.
Year 2000
The Company utilizes a number of software systems to manage its mortgage,
construction and commercial lending operations and to process financial
transactions. The Company has made and will continue to make investments in its
software systems and applications to ensure the Company is Year 2000 compliant.
The financial impact of becoming Year 2000 compliant has not been and is not
expected to be material to the Company or results of operations.
Private Litigation Securities Reform Act of 1995
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. The forward-looking
statements are made pursuant to safe harbor
11
<PAGE>
provisions of the Private Litigation Securities Reform Act of 1995. The factors
that could cause actual results to differ materiality include competition,
interest rates, availability of additional or alternative financing and other
risks described elsewhere in the Company's filings with the Securities and
Exchange Commission.
Item 8. Consolidated Financial Statements and Supplementary Data
12
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
NAB Asset Corporation
We have audited the accompanying consolidated balance sheets of NAB Asset
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAB Asset
Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
February 27, 1998
13
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 3,620 $ 3,139
Restricted cash 3,655 -
Receivables:
Construction loans, net 69,052 -
Residential mortgage loans held for sale 45,472 12,648
Commercial loans, net 3,677 -
Other receivables 1,024 186
Property and equipment, net 1,151 309
Costs in excess of net assets acquired, net 584 478
Net assets of discontinued operations - 377
Other assets 884 767
-------- -------
$129,119 $17,904
======== =======
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Warehouse lines of credit $ 95,716 $11,819
Notes payable to affiliates 16,300 -
Drafts payable 5,425 -
Accounts payable and accrued expenses 2,914 359
Deferred income 609 120
-------- -------
Total Liabilities 120,964 12,298
-------- -------
Minority interest 316 1
Shareholders' equity :
Common stock: $.10 par value, 30,000,000
authorized shares; 5,091,300 issued and outstanding at
December 31, 1997 and 1996 509 509
Additional paid-in capital 7,217 7,217
Retained earnings (accumulated deficit) 113 (2,121)
-------- -------
Total shareholders' equity 7,839 5,605
Commitments and contingencies -------- -------
$129,119 $17,904
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans $ 10,153 $ 962 $ -
Interest income 3,491 323 -
Origination and other fee income 3,211 129 -
---------- ---------- ------------
Total revenues 16,855 1,414 -
---------- ---------- ------------
Costs and expenses:
Compensation and benefits 8,750 1,357 -
Interest expense 2,591 104 -
General and administrative 4,069 749 -
---------- ---------- ------------
Total costs and expenses 15,410 2,210 -
---------- ---------- ------------
Net earnings (loss) from continuing operations before
minority interest and income taxes 1,445 (796) -
Minority interest 315 - -
Income taxes 9 - -
---------- ---------- -----------
Net earnings (loss) from continuing operations 1,121 (796) -
Net earnings (loss) from discontinued operations, net
of income taxes:
Retail automobile sales (271) (1,123) -
Real estate services - 3,467 (456)
Gain on disposal of CARS USA 1,384 - -
---------- ---------- -----------
Net earnings (loss) $ 2,234 $ 1,548 $ (456)
========== ========== ==========
Basic earnings (loss) per share from continuing
operations $ 0.22 $ (0.16) $ -
========== ========== ==========
Basic earnings (loss) per share $ 0.44 $ 0.30 $ (0.11)
========== ========== ==========
Weighted average number of common shares
outstanding 5,091,300 5,091,300 4,208,835
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1997, 1996, and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Retained Gains (Losses)
Common Stock Additional Earnings on Securities
-------------------- Paid-in (Accumulated 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 -- -- -- -- -- 63 63
Securities valuation allowance, net -- -- -- -- 590 -- 590
Net loss -- -- -- (456) -- -- (456)
----------- ---- -------- ------- ----- ---- --------
Balance, December 31, 1995 4,208,835 42 25,567 (3,669) 70 (34) 21,976
----------- ---- -------- ------- ----- ---- --------
Amortization of unearned compensation -- -- -- -- -- 34 34
Securities valuation allowance, net -- -- -- -- (70) -- (70)
Refund of small shareholder program -- -- 22 -- -- -- 22
Transfer to NAB liquidating trust -- -- (6,585) -- -- -- (6,585)
Distributions -- -- (15,320) -- -- -- (15,320)
Surrender of Old Stock in Merger (4,208,835) (42) 42 -- -- -- --
Issuance of New Stock in Merger-62%
to Shareholders of Old NAB 3,156,594 316 (316) -- -- -- --
Contribution of Capital by CPS in
Merger
38% of Common Stock to CPS 1,934,706 193 3,807 -- -- -- 4,000
Net earnings -- -- -- 1,548 -- -- 1,548
----------- ---- -------- ------- ----- ---- --------
Balance, December 31, 1996 5,091,300 509 7,217 (2,121) -- -- 5,605
Net earnings -- -- -- 2,234 -- -- 2,234
----------- ---- -------- ------- ----- ---- --------
Balance, December 31, 1997 5,091,300 $509 $ 7,217 $ 113 $ -- $-- $ 7,839
=========== ==== ======== ======= ===== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) from continuing operations $ 1,121 $ (796) $ -
Adjustments to reconcile net earnings (loss) to net cash
from operating activities:
Cash provided by discontinued operations - real
estate operations - 1,657 1,836
Cash used in discontinued operations - retail
automotive sales (176) (1,500) -
Proceeds from sale of CARS USA 200 - -
Depreciation and amortization 434 117 -
Minority interest 315 - -
Provision for credit losses 28 - -
Net changes in:
Residential mortgage loans originated, purchased
and sold (32,824) (11,287) -
Other receivables (838) (709) -
Deferred income, net 489 120 -
Other assets (117) 5 -
Drafts payable 5,425 - -
Accounts payable and accrued expenses 2,554 205 -
-------- -------- ------
Net cash provided by (used in) operating activities (23,389) (12,188) 1,836
-------- -------- ------
Cash flows from investing activities:
Loan to Mortgage Portfolio Services, Inc. - (2,499) -
Commercial loans purchased and originated (2,691) - -
Construction loans purchased and originated (69,052) - -
Principal collections on commercial loans 314 - -
Acquisition of businesses, net of cash acquired (725) 684 -
Purchases of property and equipment (518) (138) -
-------- -------- ------
Net cash used in investing activities (72,672) (1,953) -
-------- -------- ------
Cash flows from financing activities:
Contribution of capital by CPS in merger - 4,000 -
Net borrowings under warehouse lines of credit 83,897 11,319 -
Borrowings under notes payable to affiliates 16,300 - -
-------- ------- ------
Net cash provided by financing activities 100,197 15,319 -
-------- -------- -----
Net increase in cash and cash equivalents 4,136 1,178 1,836
Cash and cash equivalents at beginning of year 3,139 1,961 125
------- -------- ------
Cash and cash equivalents at end of year $ 7,275 $ 3,139 $1,961
======== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Discontinued Operations
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.
Discontinued Real Estate Operations
Operating results of the discontinued real estate operation is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
For the period from
For the period from January 1, 1996 to
April 24, 1996 to April 23, 1996 For the year ended
June 5, 1996 (measurement date) December 31, 1995
------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues $3,013 $1,995 $6,017
Expenses 564 977 6,473
------ ------ -------
Net earnings (loss) $2,449 $1,018 $ (456)
====== ====== =======
</TABLE>
Revenue for the discontinued real estate operations consisted of gain on
sale of assets and interest income. Expenses consisted primarily of
compensation and benefits.
18
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Discontinued Retail Automotive Sales Operations
On July 8, 1996 the Company acquired 80% of CARS USA, Inc. ("CARS") for a
purchase price of $100,000. Additionally, the Company invested $400,000 in
preferred stock of CARS and made a $1,000,000 subordinated loan to CARS. At the
time of acquisition, Charles E. Bradley, Jr., a director of the Company owned
50% of the outstanding shares of CARS. For the period from July 8, 1996 to
December 31, 1996 CARS incurred a net loss of $1,123,000.
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 Sheet. A principal payment of
$500,000 is due on June 27, 1998 with the remainder due on June 27, 1999. The
Company recorded a $1,384,000 gain as a result of the sale.
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
Period from April 1, 1997 to March 31, 1997 Period from July 8, 1996
to June 27, 1997 (measurement date) to December 31, 1996
------------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Revenues $3,185 $2,199 $ 5,167
Expenses 3,249 2,406 6,290
------ ------ -------
Net loss $ (64) $ (207) $(1,123)
====== ====== =======
</TABLE>
Revenue and expenses for the discontinued automotive sales operation consisted
primarily of sales and cost of sales, respectively.
Acquisitions
On July 10, 1996 the Company acquired from CPS 84% percent of the outstanding
voting common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase
price of $300,000. The Company also acquired $2.25 million of MPS preferred
stock through conversion of debt to equity and contributed approximately
$249,000 to the additional paid-in capital of MPS. The MPS preferred stock
acquired by the Company provides cumulative dividends at a rate of 10% per annum
and has 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 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.
19
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
A summary of the assets and liabilities acquired at fair value are as follows
(in thousands):
<TABLE>
<S> <C>
Mortgage Loans $ 1,362
Other Assets 1,386
Warehouse Line of Credit (500)
Other Liabilities (2,547)
-------
Net Assets Acquired (299)
Purchase Price Paid 300
-------
Costs in excess of Net Assets Acquired $ (599)
=======
</TABLE>
Selected unaudited pro forma combined results of operations for the year ended
December 31, 1996, assuming the acquisition of MPS had occurred on January 1,
1996 are presented as follows (in thousands, except share data):
<TABLE>
<S> <C>
Net loss from continuing operations $ 916
========
Basic loss per share from continuing operations $ 0.18
========
</TABLE>
The increase in pro forma loss from continuing operations and pro forma net
loss per share from continuing operations gives effect to additional
amortization of cost in excess of net assets acquired totaling $77,000 which
would have been incurred assuming MPS was acquired on January 1, 1996.
On August 31, 1997, MPS acquired the fixed assets and employed the personnel
of the single family mortgage lending division of Pacific Southwest Bank
("PSB"), a Dallas based savings and loan. A premium of $200,000 was paid for the
operation. Additionally amounts of up to $800,000 may be payable over the two
year period to August 31, 1999 depending on mortgage loan origination volumes.
The division, Pacific American Mortgage Company ("PAMCO") is primarily engaged
in mortgage lending through ten retail branches in six states. Substantially all
PAMCO mortgage loan originations are conventional conforming, non-conforming and
government insured mortgages.
A summary of the PAMCO assets and liabilities acquired by MPS at fair value
are as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment $560
Other assets 125
Accounts payable and accrued expenses
-----
(160)
-----
Net assets acquired 525
Purchase price paid 725
-----
Cost in excess of net assets acquired $200
=====
</TABLE>
Total accumulated amortization of the costs in excess of net assets
acquired totaled $187,000 and $53,000 at December 31, 1997 and 1996,
respectively.
In January 1997, the Company, through a newly formed 84% owned subsidiary,
NAFCO, Inc., acquired a $1,966,000 portfolio of loans made to rent-to-own and
rental purchase retail operations. The purchase price for these loans was
$1,292,000, representing a discount of $674,000. The discount is being
amortized over the contractual life of the loans using the interest method.
NAFCO, Inc. is a commercial finance company that specializes in providing
financing and consulting services to small independently owned rent-to-own
retailers.
On December 30, 1997 the Company, through a newly formed 86% owned subsidiary,
Construction Portfolio Funding, Inc. ("CPFI") acquired approximately $53,000,000
in single family construction loans. A cash premium of $250,000 was paid in
addition to the principal balances acquired.
20
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In connection with the acquisition, the Company recorded a $291,000
allowance for loan losses based on the seller's loan loss history.
CPFI is engaged in the business of providing financing to residential
homebuilders for the construction of single family residences and to a lesser
extent acquisition and development loans, lot loans and model home loans to
those homebuilders.
As discussed in Note (13) the Company acquired Stanwich Financial Services
Corp. on March 2, 1998.
(2) Summary of Significant Accounting Policies
The following is a description of the Company's significant accounting and
financial reporting policies:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, with all significant inter-company
transactions being eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Construction Loans Receivable
Construction loans receivable are carried at the outstanding principal
balance, net of unamortized purchase discounts or premiums and net of allowance
for loan losses. Purchase discounts or premiums are amortized to income over
the contractual life of the loans based upon the interest method.
Residential Mortgage Loans Held for Sale
Residential mortgage loans are stated at the lower of cost or market in the
aggregate as determined by outstanding commitments from investors or current
investor yield requirements.
Commercial Loans Receivable
Commercial loans receivable are carried at the outstanding principal
balance, net of unamortized purchase discounts or premiums and net of allowance
for loan losses. Purchase discounts or premiums are amortized to income over
the contractual life of the loans based upon the interest method.
Allowance for Loan Losses
The Company maintains an allowance for losses at an amount which it
believes is sufficient to provide adequate protection against future losses in
the loan portfolios. The allowance for losses is determined primarily on the
basis of management's judgment of net loss potential, including specific
allowances for known impaired loans and other factors such as changes in the
nature and volume of the portfolio, value of the collateral and current economic
conditions that may affect the borrowers' ability to pay. A loan is impaired
when it is "probable" that a creditor will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. The measurement of impairment may be based on (1) the present
value of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (2) the observable market price of the
impaired loan
21
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
or (3) the fair value of the collateral of a collateral-dependent loan. The
amount by which the recorded investment of the loan exceeds the measure of the
impaired loan is recognized by recording a valuation allowance with a
corresponding charge to provision for loan losses.
Loans are continually evaluated for collectibility and, if appropriate, the loan
may be placed on non accrual status, generally if 90 days past due, and
previously accrued interest is reversed from income. As of December 31, 1997,
there were no loans on non accrual status.
Property and Equipment, Net
Property and Equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized and depreciated.
Repairs and maintenance are expensed as incurred. Depreciation is provided on a
straight line basis over the estimated useful lives of depreciable assets. Cost
and accumulated depreciation applicable to assets retired or sold are eliminated
from the accounts and any resulting gains or losses are recognized at such time.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired which represents the excess of
purchase price over fair value of net assets acquired, is amortized on a
straight-line basis over five years. The Company reviews costs in excess of net
assets acquired for impairment when changes in events or circumstances may
effect the underlying basis of the asset.
Drafts Payable
The Company issues checks or initiates wire transfers in connection with
the origination of its residential mortgage loans. Drafts payable represents
checks or wire transfers on originated loans which have not been presented for
payment to the bank. Upon presentment, the Company either funds the loans with
operating cash or borrowings under its warehouse line of credit.
Revenue Recognition
Gains on sales of loans are recognized to the extent the selling price
exceeds the carrying value of the loans sold based on the estimated relative
fair values of the assets transferred, assets obtained and liabilities incurred.
A portion of the sales price is recorded as deferred income and represents
management's estimate of amounts reimbursable to the purchaser of the loans in
the event of a loan prepayment prior to a period specified in the loan sales
agreement, generally one to two years. Non-refundable fees and direct costs
associated with the origination of loans are deferred and included in the
carrying value until the related loan is sold. Interest is recognized as revenue
when earned according to the terms of the security instruments and when, in the
opinion of management, it is collectable.
Construction and commercial related lending revenues consist primarily of
interest income on loans and loan commitment fees. Interest is recognized as
revenue when earned according to the terms of the loan and when, in the opinion
of management, it is collectable. Non-refundable fees are deferred and income
is recognized over the life of the loan commitment using the interest method.
During 1997, approximately 37% of the total revenues of the Company were
derived from loan sales to two customers.
Statement of Financial Accounting Standards (SFAS) No. 125, issued in
June 1996, established standards for resolving issues relating to the accounting
for continuing involvement arising from the transfer of financial assets. Under
SFAS No. 125, an entity that undertakes an obligation to service financial
assets recognizes a financial asset or servicing liability for that servicing
contract and amortizes this servicing asset or liability in proportion to and
over the period of
22
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
the estimated net servicing income or loss. The servicing asset or liability is
periodically reviewed for impairment or increased obligation based on its fair
value. This Statement is effective for transfers and servicing of financial
assets occurring after December 31, 1996. The actual effects of implementing
SFAS No. 125 did not have a material effect on the Company's financial position
or results of operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
base. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
Earnings (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings per Share" ("FAS 128") on December 31, 1997. FAS 128 changes the
requirements for the calculation and disclosure of earnings per share. This
statement eliminates the calculation of primary earnings per share and fully
diluted earnings per share and requires the disclosure of basic earnings per
share and diluted earnings per share. All per share amounts for all periods
presented have been restated to conform to the SFAS 128 requirements where
appropriate.
Basic earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during the period. Dilutive earnings (loss)
per share is computed based on the weighted average number of common shares and
dilutive common share equivalents outstanding during the period. For the years
ended December 31, 1997, 1996 and 1995 there were no common share equivalents.
Restricted Cash
Restricted cash primarily represents amounts required to be used to fund
loans and repay amounts outstanding under the residential mortgage warehouse
line of credit.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash in banks, restricted cash, interest bearing demand deposits and U.S.
Treasury bills with an original maturity of 90 days or less.
Statement of Cash Flows-Supplemental Disclosure (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------ ------
<S> <C> <C>
Interest paid-continuing operations $1,950 $ 104
====== ======
Taxes paid $ 116 $ -
====== ======
Non-cash activities:
Conversion of MPS loan to equity in MPS $ - $2,499
====== ======
Note received from sale of CARS USA $1,300 $ -
====== ======
</TABLE>
23
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Transfer to Liquidating Trust (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31, 1996
-----------------
<S> <C>
Loans $ 129
In-substance foreclosure loans 454
Real Estate 2,733
Other Assets 781
Other Liabilities (493)
-------
Net non-cash transfer to liquidating trust $3,604
=======
</TABLE>
Recent Accounting Pronouncements
During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("FAS 130"). FAS 130 states that all items that are required to be recognized
under accounting standards as components of comprehensive income are to be
disclosed in a separate statement of income. FAS 130 is effective beginning
January 1, 1998, and management believes it will have no material impact on
NAB's financial statements.
During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers. FAS 131 is effective for the year ending 1998 and
management believes it will have no material impact on NAB's financial
statements.
Reclassifications
Certain amounts for the prior periods have been reclassified to conform to
the current presentation.
(3) Construction Loans Receivable
Construction loans consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Residential Construction Loans $44,935
Acquisition and Development Loans 2,526
Lot Loans to Builders 2,614
Model Home Loans 3,221
Construction and lot loans to individuals 15,506
-------
68,802
Purchase Premium 541
Allowance for Loan Losses (291)
-------
Total $69,052
=======
</TABLE>
The Company's total commitments under these loans, if fully funded, are
$96,963,000.
Approximately 44%, 22% and 21%, respectively of construction loans receivable
are secured by properties located in Texas, California and Arizona.
24
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(4) Residential Mortgage Loans Held for Sale
Residential mortgage loans originated by the Company are fixed-rate or
adjustable-rate, 15 to 30-year fully amortizing loans, secured by first liens on
single-family residential properties. Loans held for sale were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- -------- --------
<S> <C> <C> <C> <C>
Adjustable-rate $ 5,351 6.93% $ 4,999 9.99%
Fixed-rate 39,349 8.81% 7,398 11.47%
------- -------
44,700 12,397
Deferred loan
fees (net) 772 251
------- -------
$45,472 $12,648
======= =======
</TABLE>
(5) Property and Equipment, net
Property and equipment, stated at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996
-------------------- ------------------
<S> <C> <C>
Furniture and Equipment $ 794 $ 110
Computer Equipment and Software 631 237
Accumulated Depreciation (274) (38)
------ -----
$1,151 $ 309
====== =====
</TABLE>
(6) Warehouse Lines of Credit
Warehouse lines of credit were comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996
-------------------- ------------------
<S> <C> <C>
Warehouse line-of-credit, commitment of $75,000,000, secured by
residential mortgage loans, interest at a spread above prime or
libor at the Company's option (7.5% and 8.25% at December 31, 1997
and 1996, respectively), expiring August 29, 1998 $50,002 $11,819
Warehouse line-of-credit, commitment of $75,000,000, secured by
residential construction loans, interest at a spread above libor,
(7.625% to 8.375% at December 31, 1997), expiring December 29, 1998 45,714 -
------- -------
$95,716 $11,819
======= =======
</TABLE>
At December 31, 1997, the Company had a line of credit totaling
$5,000,000 with a savings bank. The line bears interest at spread above prime
and matures April 30, 1998. No borrowings under this line were made during 1997.
Commercial loans were pledged as collateral for the line.
25
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The warehouse lines of credit provide for various financial covenants
including limitations on indebtedness, investments, transactions with
affiliates, minimum levels of net worth and restricts the payment of dividends
and material changes in ownership. At December 31, 1997 and 1996, the Company
complied with these covenants. Management believes its warehouse lines of credit
will be renewed in the normal course of business.
7) Notes Payable to Affiliates
Notes payable to affiliates were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable to Stanwich Financial Services, Corp., unsecured,
interest at 13% payable quarterly, principal due June 30, 1998 $ 4,000 $ -
Line of credit commitment of $5,000 payable to Stanwich Financial
Services Corp., unsecured, interest at 16% payable quarterly,
payable in full on September 30, 2000 3,500 -
Note payable to Stanwich Financial Services Corp., unsecured,
interest at 14% payable quarterly, due September 30, 2000 2,500 -
Note payable to Stanwich Financial Services Corp., unsecured,
interest at 14% payable quarterly, due June 30, 1998 800 -
Note payable to Consumer Portfolio Services, Inc., unsecured,
interest at 13% payable quarterly, principal due June 30, 1998 5,500 -
------- --------
$16,300 $ -
======= ========
</TABLE>
(8) Shareholder and Option Agreements
The Company owns 80% of the authorized shares of common stock of MPS.
Certain key employees of MPS (the "MPS Managers") own or have options to acquire
from MPS 20% of MPS's authorized shares under agreements with variable features.
In addition, the MPS Managers have options, exercisable only if certain
conditions are satisfied, to acquire from the Company up to 20% of such
authorized shares. Pursuant to agreements entered into in 1997, if certain
conditions are satisfied, from March 2001 (or earlier under certain
circumstances) to December 2005, such shares owned or acquired by the MPS
Managers are subject to put and call options which if exercised, will obligate
MPS, or will give MPS the right, to purchase such shares. The put and call
options are exercisable at various times during the period. The purchase price
payable for these shares depends upon several factors, including the future
earnings and value of MPS, but in no event will the aggregate price result in a
gain for the MPS Managers in an amount that is more than 40% of the total value
of MPS as of the applicable determination date, and such price may be
substantially less than that amount or even nominal. Under certain conditions,
the Company has the right under the agreements to assume MPS's obligation to
purchase the MPS Managers' shares and if it does so, the Company may pay the
purchase price in cash or in shares of the Company's Common Stock.
No compensation expense has been recorded in the accompanying
consolidated financial statements for the year ended December 31, 1997. Any
future compensation expense, if any, as a result of these agreements will be
accrued over the period in which the services are rendered.
26
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In June 1996 the Board of Directors adopted, subject to shareholder
approval, the 1996 Incentive Stock Option Plan (the "Incentive Plan") and the
1996 Non-Employee Director Stock Option Plan (the "Director Plan"). The
Incentive Plan provided for, among other things, the grant to key employees of
the Company options to purchase shares of NAB Common Stock. The Director Plan
provided for, among other things, the grant of options to purchase shares of NAB
Common Stock to directors of the Company who were not also employees of the
Company.
The Plans were not presented to the shareholders for approval. The Company
currently has no employee or director stock option plans, and there are no
currently outstanding stock options held by any employee or director.
(9) Income Taxes
The Company's effective tax expense from continuing operations of less than
1% differs from the amount determined by applying the statutory Federal rate of
34% to earnings from continuing operations before income taxes. This difference
results primarily from the utilization of the Company's net operating loss
("NOL") carryforward of approximately 33%.
Net deferred tax assets totaled $63.7 million and $65.4 million at December
31, 1997 and 1996, respectively with corresponding valuation allowances of $63.7
million and $65.4 million, respectively. No deferred tax assets have been
recognized in the 1997 or 1996 consolidated financial statements due to the fact
that, based on the weight of available evidence, it is more likely than not that
the deferred tax assets will not be realized.
At December 31, 1997, for federal income tax purposes, the Company had
regular tax and alternative minimum tax net operating loss carryforwards of
approximately $186 million expiring as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2004 $ 52,777
2005 42,120
2006 28,004
2007 11,091
Thereafter 52,104
--------
$186,096
========
</TABLE>
In addition, the Company has a $4.7 million State of California net
operating loss carryforward which expires in 2000.
Simultaneously with the Merger, the Company amended its Articles of
Incorporation and By-laws to restrict the acquisition of 5% or more of the
outstanding shares of New Common Stock of the Company so as to prevent the
occurrence of an ownership change under Section 382 of the federal income tax
laws. Section 382 of the Internal Revenue Code of 1986 (Section 382), as
amended, provides in general that if a corporation undergoes an ownership
change, the amount of taxable income that the corporation may offset after the
date of such ownership change will be subject to an annual limitation. The
Company's NOL's could become subject to certain limitations on utilization in
the event the Company undergoes an ownership change within the meaning of
Section 382.
(10) Commitments and Contingencies
MPS is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate and sell loans and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated financial statements.
27
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Commitments to originate mortgage loans are agreements to provide
financing at a fixed or variable interest rate subject to specific terms and a
customer's creditworthiness on a case-by-case basis. These commitments have
fixed expiration dates and other termination clauses and may require payment of
a fee. At December 31, 1997 and 1996 MPS had commitments to originate mortgage
loans of approximately $60,500,000 and $3,700,000, respectively. This does not
necessarily represent future cash requirements, as some portion of the
commitments will expire without being drawn upon or will be declined for credit
or other reasons. At December 31, 1997 and 1996, MPS had no outstanding firm
commitments to purchase or sell loans.
MPS has entered into loan sale agreements with investors in the normal
course of business which includes standard representations and warranties
customary to the mortgage banking industry. Violations of these representations
and warranties may require MPS to repurchase loans previously sold. As of
December 31, 1997, MPS had no repurchase requests outstanding. In the opinion of
management, the potential exposure related to MPS's loan sale agreements will
not have a material adverse effect on the consolidated financial position and
operating results of the Company.
The Company is subject to lawsuits which arise in the ordinary course of
its business. Management is of the opinion, based in part upon consultation with
its counsel, that the liability of the Company, if any, arising from existing
and threatened lawsuits would not have a material adverse effect on the
Company's financial position and results of operations.
The Company conducts its business from leased facilities. Rent expense of
approximately $470,000, $126,000 and $120,000 have been recorded for the years
ending December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, minimum rental commitments under all noncancelable
leases with terms exceeding one year were as follows (in thousands):
Year ending
December 31,
------------
1998 $ 994
1999 763
2000 601
2001 251
2002 237
------
$2,846
======
(11) Related Party Transactions
As discussed in Note (1), the Company sold its Retail Automotive Sales
Segment in June, 1997 to Charles E. Bradley, Sr., the Chief Executive Officer
and Chairman of NAB and Charles E. Bradley, Jr., a director of NAB, for
$1,500,000. The purchase price consisted of a $200,000 cash payment and a note
for $1,300,000.
In August, 1997 the Company borrowed $3,500,000 under a $5,000,000
unsecured loan from Stanwich Financial Services Corp. (SFSC). The line is to be
used to fund additional investments in MPS. the line bears interest at 16% per
year payable quarterly. The principal amount of the loan is due in September
2000 but may be prepaid at anytime without penalty.
In June, 1997 the Company borrowed $800,000 from SFSC pursuant to an
unsecured promissory note. The loan bears interest at 14% per year payable
quarterly. The note matures June 30, 1998. The loan may be prepaid at any time
without penalty.
28
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In September, 1997 the Company borrowed $2,500,000 from SFSC pursuant to an
unsecured promissory note. The note bears interest at 14% per year payable
quarterly. The principal is due September 30, 2000 and may be prepaid at
anytime without penalty.
In December, 1997 the Company borrowed $4,000,000 from SFSC pursuant to an
unsecured promissory note. The loan bears interest at 13% per year payable
quarterly. The principal is due June 30, 1998.
Charles E. Bradley, Sr., who is an officer and director of NAB, and Charles E.
Bradley, Jr., who is a director of NAB, together owned a majority interest in
SFSC at December 31, 1997. As discussed in Note (13) the Company acquired all
of the outstanding shares of SFSC on March 2, 1998.
In December, 1997 the Company borrowed $5,500,000 from CPS pursuant to an
unsecured promissory note. The loan bears interest at 13% per year payable
quarterly. The principal is due June 30, 1998. Mr. Bradley, Sr., is a director
of CPS and Mr. Bradley, Jr., is an officer and director of CPS.
Included in other assets is an unsecured note receivable for $55,000 from
an officer of the Company. The note is due on July 1, 1999, bears no interest
and may be prepaid at any time.
(12) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made using estimated fair value amounts that have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market date to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The estimated fair value of the Company's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
-------------------------- -------------------------
Carrying Carrying
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, restricted cash and cash $ 7,275 $ 7,275 $ 3,139 $ 3,139
equivalents
Construction loans 69,052 69,052 - -
Residential loans held for sale 45,472 46,707 12,648 13,300
Commercial loans 3,677 3,677 - -
Commitments to originate loans - - - -
Financial liabilities:
Notes payable 112,016 112,016 11,819 11,819
</TABLE>
The following methods and assumptions were used in estimating the Company's
fair value disclosures for financial instruments:
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Construction loans: The carrying value reported in the balance sheet
approximates fair value as the construction loans are short term and bear
interest at a rate that approximates current market interest rates for similar
types of credit.
29
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Residential mortgage loans held for sale: The fair value of loans receivable
held for sale is determined in the aggregate based on current investor yield
requirements.
Commercial loans: The fair value of commercial loans approximates the
carrying value reported in the balance sheet based upon the present value of
estimated cash flows using current interest rates applicable for similar types
of credit.
Warehouse lines of credit: The carrying value reported in the balance sheet
approximates fair value as the warehouse lines of credit are due upon demand and
bear interest at a rate that approximates current market interest rates for
similar type lines of credit.
Notes payable to affiliates: The carrying value reported in the balance sheet
approximates current value based upon current investor yield requirements for
similar instruments.
Commitments to originate: The fair value is based on fees paid by the
borrowers to obtain the loan and is not considered material.
(13) Subsequent Events (Unaudited)
On March 2, 1998 the Company acquired all of the outstanding common stock
of Stanwich Holdings, Inc. and its wholly owned subsidiary, Stanwich Financial
Services Corp. ("SFSC"). Mr. Bradley, Sr., and Mr. Bradley, Jr. together owned
85% of such stock.
The purchase price totals $3,700,000, of which $2,766,000 is payable upon
achievement of certain earnings levels through January 2003. The purchase price
is payable in the form of notes to the individual owners. A portion of the
purchase price ($531,000) is due to CPS, which had an option to acquire SFSC
that was cancelled as of the acquisition date. The minimum purchase price of
$934,000 is due March 2003.
The notes payable for the acquisition bear interest at 7% per annum which is
payable quarterly. Interest on the contingent portion of the purchase price is
due upon realization of the required earnings levels. Total assets of SFSC
approximated $200 million at the acquisition date. The Company has not yet made
a final determination of the fair values of the assets acquired and liabilities
assumed.
The acquired company is in the structured settlement business, providing
tax advantaged funding of defendants' obligations under legal settlement of
various insurance claims.
Included in the assets of SFSC at March 2, 1998 were several loans and
investments with related parties and affiliates of related parties. The
amounts, terms and relationships to the Company are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Asset Type Amount Interest Rate Maturity Maker/Issuer
- ---------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Notes Receivable $10,800 13%-16% Various NAB
Note Receivable (A) $19,081 12% December 1999 Stanwich Partners, Inc.
Note Receivable (B) $15,000 9% June 2004 CPS
Notes Receivable (A) $13,500 15% March 1999 King Way Material Handling
Notes Receivable (C) $ 2,500 14% October 1998 Tactical Retail Solutions
Common Stock shares (D) $ 1,050 -0- - CPS
Common Stock shares (D) $ 617 -0- - Devlieg-Bullard, Inc.
Preferred Stock shares (A) $ 5,000 15% - King Way Material Handling
</TABLE>
30
<PAGE>
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(A) Mr. Bradley, Sr. is an officer, director and shareholder of this
Maker/Issuer.
(B) At maturity or repayment, the holder will have the option to convert 20% of
the principal amount into common stock of CPS at a conversion rate of
$11.86 per share.
(C) Mr. Bradley, Sr. is a director and shareholder of this Maker/Issuer.
(D) These shares are publicly traded. Mr. Bradley, Sr. is Chairman and a
shareholder of this Maker/Issuer. Mr. Bradley, Jr. is the President and a
director of CPS.
31
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) to Form 10-K, information on executive
compensation is incorporated by reference from the Registrant's definitive Proxy
Statement to be filed pursuant to Regulation 14A promulgated by the Securities
and Exchange Commission.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) to Form 10-K, information on executive
compensation is incorporated by reference from the Registrant's definitive Proxy
Statement to be filed pursuant to Regulation 14A promulgated by the Securities
and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) to Form 10-K, information on security
ownership of certain beneficial owners and management is incorporated by
reference from the Registrant's definitive Proxy Statement to be filed pursuant
to Regulation 14A promulgated by the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) to Form 10-K, information on certain
relationships and related transactions is incorporated be reference from the
Registrant's definitive Proxy Statement to filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Index to Financial Statements Page
Independent Auditors' Report 13
Consolidated Balance Sheets as of December 31, 1997 and 1996 14
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 15
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 17
Notes to Consolidated Financial Statements 18
Financial Statement Schedules
None
32
<PAGE>
3. Exhibits
<TABLE>
<C> <S>
2.1 Plan and Agreement of Merger dated February 7, 1996, by and among Consumer Portfolio Services, Inc.,
CPS Investing Corp., and NAB Asset Corporation (Incorporated by reference to Exhibit 2.1 to Form 8-K
dated February 28, 1996).
3.1 Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Appendix A to the
Company's Proxy Statement dated April 23, 1996).
3.2 Restated By-laws (Incorporated by reference to Exhibit B to Appendix A to the Company's Proxy
Statement dated April 23, 1996).
10.1 Partnership Sale Agreement dated as of February 7, 1996, by and among NAB Asset Corporation,
JNK-1, Inc., LB 2, Inc., CLMN, Inc., MAH I, Inc., Michael A. Hrebenar and Richard A. Durham
(Incorporated by reference to Exhibit 2.2 to Form 8-K dated February 28, 1996).
10.2 Subscription and Capital Contribution Agreement dated July 10, 1996, between NAB Asset
Corporation and Mortgage Portfolio Services, Inc. (Incorporated by reference to Exhibit 10.1 to
Form 8-K dated July 10, 1996.
10.3 Stock Sale Agreement dated July 10, 1996, between NAB Asset Corporation and Consumer Portfolio
Services, Inc. (Incorporated by reference to Exhibit 10.2 to Form 8-K dated July 10, 1996).
10.4 Subscription Agreement dated July 8, 1996 among CARS USA, Inc., NAB Asset Corporation, Charles
E. Bradley, Jr., Nicholas Carroll and Sandra C. Watt. (Incorporated by reference to Exhibit
10.3 to Form 8-K dated July 10, 1996).
10.5 Second Restated Credit Agreement between Mortgage Portfolio Services and Guaranty Federal Bank,
F.S.B. (Incorporated by reference to Exhibit 10.14 to Form 10Q dated September 30, 1997).
10.6 Employment Agreement dated December 1, 1996 between NAB Asset and Michael W. Caton
(Incorporated by reference to Exhibit 10.8 to Form 10K dated December 31, 1996).
10.7 Employment Agreement dated December 1, 1996 between James E. Hinton and Mortgage Portfolio
Services, Inc. (Incorporated by reference to Exhibit 10.9 to Form 10K dated December 31, 1996).
10.8 Stock Purchase Agreement dated March 27, 1997 between NAB Asset Corporation and CARS Holdings,
Inc. (Incorporated by reference to Exhibit 10.10 to Form 10K dated December 31, 1996).
10.9 $800,000 Promissory Note dated June 27, 1997 issued by NAB to SFSC (Incorporated by reference
to Exhibit 10.11 to Form 10Q dated September 30, 1997).
10.10 $5,000,000 Credit Line Note dated August 28, 1997 issued by NAB to SFSC. (Incorporated by
reference to Exhibit 10.12 to Form 10Q dated September 30, 1997).
10.11 $2,500,000 Promissory Note dated September 30, 1997 issued by NAB to SFSC. (Incorporated by
reference to Exhibit 10.13 to Form 10Q dated September 30, 1997).
10.12 Revolving Warehouse Line of Credit Agreement between NAFCO, Inc. and First American Bank, SSB.
(Incorporated by reference to Exhibit 10.15 to Form 10Q dated September 30, 1997).
10.13 Stockholders Agreement dated as of May 1, 1997 between MPS, NAB and Executives. (Incorporated
by reference to Exhibit 10.16 to Form 10Q dated September 30, 1997).
10.14 Option Agreement dated as of May 1, 1997 between MPS, NAB and Manager. (Incorporated by
reference to Exhibit 10.17 to Form 10Q dated September 30, 1997).
10.15 Asset Sale and Purchase Agreement dated as of December 23, 1997 between Pacific Southwest Bank
and Construction Portfolio Funding, Inc. (Incorporated by reference to Exhibit 2.1 to Form 8K
filed January 14, 1998).
10.16 Loan and Security Agreement dated as of December 30, 1997 between Construction Portfolio
Funding, a Texas corporation and Bank United, a federal savings bank. (Incorporated by
reference to Exhibit 10.18 to Form 8K filed January 14, 1998).
10.17 Stock Purchase Agreement dated February 24, 1998 among the Registrant, Bradley, Sr., Bradley,
Jr., and Poole. (Incorporated by reference to Exhibit 2.1 to Form 8K dated March 2, 1998).
10.18 Option Termination Agreement dated March 2, 1998 between the Registrant and CPS, Bradley, Sr.,
Bradley, Jr., Poole and Junkin. (Incorporated by reference to Exhibit 2.2 to Form 8K dated
March 2, 1998).
10.19 $1,456,103 Promissory Note dated March 2,1998 issued by the Registrant to Bradley, Sr.
(Incorporated by reference to Exhibit 10.19 to Form 8K dated March 2, 1998).
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
10.20 $1,456,103 Promissory Note dated March 2,1998 issued by the Registrant to Bradley, Jr.
(Incorporated by reference to Exhibit 10.20 to Form 8K dated March 2, 1998).
10.21 $256,959 Promissory Note dated March 2, 1998 issued by the Registrant to Poole. (Incorporated
by reference to Exhibit 10.21 to Form 8K dated March 2, 1998).
10.22 $530,825 Promissory Note dated March 2, 1998 issued by the Registrant to CPS. (Incorporated by
reference to Exhibit 10.22 to Form 8K dated March 2, 1998).
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule.
</TABLE>
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(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.
NAB ASSET CORPORATION
By: /s/ Charles E. Bradley, Sr.
---------------------------------------------
Charles E. Bradley, Sr.
Chairman of the Board/Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board March 27, 1998
/s/ Charles E. Bradley, Sr. Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
Charles E. Bradley, Sr.
/s/ Michael W. Caton President March 27, 1998
- ------------------------------------ Chief Operating Officer and
Michael W. Caton Director
/s/ Alan Ferree Senior Vice President March 27, 1998
- ------------------------------------ Chief Financial Officer
Alan Ferree (Principal Financial Officer)
/s/ Timothy G. Hanson Controller March 27, 1998
- ------------------------------------ (Principal Accounting Officer)
Timothy G. Hanson
/s/ Charles E. Bradley, Jr. Director March 27, 1998
- ------------------------------------
Charles E. Bradley, Jr.
/s/ James B. Gardner Director March 27, 1998
- ------------------------------------
James B. Gardner
/s/ Jeffrey W. Kramer Director March 27, 1998
- ------------------------------------
Jeffrey W. Kramer
</TABLE>
35
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Mortgage Portfolio Services, Inc. Delaware
NAFCO, Inc. Delaware
Construction Portfolio Funding, Inc. Texas
Stanwich Holdings, Inc.* Delaware
Stanwich Financial Services Corp.* Rhode Island
*Since March 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 7,275 3,139
<SECURITIES> 0 0
<RECEIVABLES> 119,253 12,834
<ALLOWANCES> 28 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,425 347
<DEPRECIATION> 274 38
<TOTAL-ASSETS> 129,119 17,904
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 7,330 5,096
<TOTAL-LIABILITY-AND-EQUITY> 129,119 17,904
<SALES> 10,153 962
<TOTAL-REVENUES> 16,855 1,414
<CGS> 0 0
<TOTAL-COSTS> 15,410 2,210
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 28 0
<INTEREST-EXPENSE> 2,591 104
<INCOME-PRETAX> 1,130 (796)
<INCOME-TAX> 9 0
<INCOME-CONTINUING> 1,121 (796)
<DISCONTINUED> 1,113 2,344
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,234 1,548
<EPS-PRIMARY> 0.44 0.30
<EPS-DILUTED> 0.44 0.30
</TABLE>
