<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ______________ to ______________
Commission file number 0-19391
NAB ASSET CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332956
- ------------------------------------------ ---------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
23361 Madero, Suite 200, Mission Viejo, CA 92691
- ------------------------------------------ ------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 465-0244
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1999, there were 5,091,300 shares of common stock, $.10 par
value per share, of the registrant outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAB ASSET CORPORATION and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ------------ ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,240 $ 946
Restricted cash 9,972 3,952
Receivables:
Construction loans, net 4,154 9,465
Residential mortgage loans held for sale 47,920 78,911
Loans to officers 3,040 3,040
Other receivables 1,375 1,085
Residual interest in securitization of mortgage loans 3,670 3,534
Property and equipment, net 704 1,038
Costs in excess of net assets acquired, net 494 630
Net assets of discontinued operations (Notes 3 and 6) 3,981 9,534
Other assets 2,191 1,180
------------ --------
Total assets $ 78,741 $113,315
============ ========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Warehouse lines of credit (Note 3) 46,549 74,117
Notes payable to affiliates (Note 4) 9,277 12,877
Drafts payable 13,254 11,681
Accounts payable and accrued expenses 5,390 5,528
------------ --------
Total liabilities 74,470 104,203
------------ --------
Minority interest 187 513
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
September 30, 1999 and December 31, 1998 509 509
Additional paid-in capital 7,815 7,815
Retained earnings (deficit) (4,240) 275
------------ --------
Total shareholders' equity 4,084 8,599
------------ --------
$ 78,741 $113,315
============ ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
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NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of loans $ 3,382 $ 5,651 $ 10,766 $14,760
Interest income 1,410 2,345 4,270 6,124
Origination and other fee income 2,069 2,758 6,647 7,105
------- ------- -------- -------
Total revenues: 6,861 10,754 21,683 27,989
Costs and expenses:
Compensation and benefits 4,693 5,400 15,148 14,794
Interest expense 979 1,495 3,037 4,384
Interest expense-affiliates 491 690 1,420 1,773
General and administrative 1,927 2,304 5,600 5,711
Minority interest (125) 195 (326) 446
------- ------- -------- -------
Total costs and expenses 7,965 10,084 24,875 27,108
------- ------- -------- -------
Earnings (loss) from continuing
operations before income taxes and
cumulative effect of change in
accounting principle (1,104) 670 (3,192) 881
Income tax expense 198 159 263 159
------- ------- -------- -------
Earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle (1,302) 511 (3,455) 722
Cumulative effect of change in
accounting principle, net of income taxes -- -- (155) --
Earnings (loss) from discontinued
operations, net of income taxes (185) 181 (905) 638
------- ------- -------- -------
Net earnings (loss) $(1,487) $ 692 $ (4,515) $ 1,360
======= ======= ======== =======
Basic and diluted earnings (loss) per share:
Continuing operations before
cumulative effect of change in
accounting principle $ (0.26) $ 0.10 $ (0.68) $ 0.14
Cumulative effect of change in
accounting principle, net of income taxes -- -- (0.03) --
Earnings (loss) per share from
discontinued operations, net
of income taxes (0.03) 0.04 (0.18) 0.13
------- ------- -------- -------
Earnings (loss) per share $ (0.29) $ 0.14 $ (0.89) $ 0.27
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (4,515) $ 1,360
Discontinued operations 905 (638)
Adjustments to reconcile net earnings (loss) to net
cash from (used by) operating activities:
Amortization of net interest receivable account 737 317
Deposits to overcollateralization account (873) (310)
Non-cash gain on securitization of mortgage loans -- (3,528)
Depreciation and amortization 784 420
Minority interest (326) 1,109
Net changes in:
Residential mortgage loans originated,
purchased and sold, net 30,991 (20,137)
Restricted cash (6,020) (16,128)
Other receivables (290) (1,631)
Drafts payable 1,573 9,934
Other assets (1,224) (240)
Accounts payable and accrued expenses (138) 1,363
-------- --------
Net cash from (used by) operating activities 21,604 (28,109)
Cash flows from investing activities:
Construction loan repayments, net 5,311 3,821
Purchases of property and equipment (101) (380)
-------- --------
Net cash from investing activities 5,210 3,441
Cash flows from financing activities:
Net borrowings under (repayments of) warehouse
lines of credit (27,568) 23,009
Principal payments on notes payable to affiliates (3,600) 494
-------- --------
Net cash from (used by) financing activities (31,168) 23,503
Cash provided by discontinued operations 4,648 676
-------- --------
Net increase (decrease) in cash and cash equivalents 294 (489)
Cash and cash equivalents at beginning of period 946 1,958
-------- --------
Cash and cash equivalents at end of period $ 1,240 $ 1,469
======== ========
Supplement disclosure of cash flow information:
Cash paid during the period for
Interest $ 4,660 $ 4,219
Taxes $ 145 $ 156
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
NAB ASSET CORPORATION and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
NAB Asset Corporation, (the "Company" or "NAB") is a financial services
company engaged in two reportable segments, sub-prime and prime residential
mortgage banking. The residential mortgage banking business is conducted through
a majority owned subsidiary, Mortgage Portfolio Services, Inc. ("MPS"). MPS
originates, acquires and sells prime and sub-prime mortgage loans. The prime
segment of MPS is operated as a division, Pacific American Mortgage ("PAMCO").
Previously, the Company had two additional segments, a residential construction
lending business, Construction Portfolio Funding, Inc. ("CPFI"), which
originates and holds for investment single family residential construction loans
to homebuilders and a commercial finance operation, NAFCO Inc. ("NAFCO"), which
provides financing to operators of rent-to-own or rental purchase retailers. In
the third quarter of 1999, the Company elected to dispose of CPFI and NAFCO.
The Company commenced operations in July 1991 following its acquisition
and assumption of substantially all of 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. Until
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.
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
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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 NOL's 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.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet of the Company as of September 30, 1999,
the related consolidated statements of operations for the three and nine months
ended September 30, 1999 and 1998 and the related statements of cash flows for
the nine month periods ended September 30, 1999 and 1998 are unaudited. These
statements reflect, in the opinion of management, all adjustments consisting
only of normal recurring accruals necessary for a fair presentation of the
consolidated balance sheet of the Company as of September 30, 1999, and results
of consolidated operations for the three and nine months ended September 30,
1999 and 1998 and the consolidated cash flows for the nine months ended
September 30, 1999 and 1998. The results of consolidated operations for the
unaudited periods are not necessarily indicative of the results of consolidated
operations to be expected for the entire year of 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and therefore do not include all information and
footnotes normally included in consolidated financial statements prepared in
conformity with generally accepted accounting principles. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on SEC form 10-K for the year ended December 31, 1998.
On January 1, 1999 the Company adopted Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 provides guidance on the financial reporting of start-up costs
and organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred and currently expense net
amounts previously capitalized. The Company wrote off $155,000 in organizational
costs effective January 1, 1999 as a cumulative effect of a change in accounting
principle as described in Accounting Principles Board (APB) Opinion No. 20,
Accounting Changes.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions
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are met, a derivative may be specifically designed as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. Under SFAS No. 133, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
SFAS No. 133 supercedes FASB Statements No. 80 "Accounting for
Futures Contracts", No. 105 "Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". It amends FASB
Statement No. 107 "Disclosures about the Fair Value of Financial Instruments" to
include in Statement 107 the disclosure provisions about concentration of credit
risk from Statement 105. This Statement also nullifies or modifies the consensus
reached in a number of issues addressed by the Emerging Issues Task Force. This
Statement was effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB deferred the effective date until fiscal
years beginning after June 15, 2000. Management is in the process of assessing
the future impact of the implementation of SFAS No. 133.
For the purpose of computing basic and diluted earnings (loss) per
share, the weighted average number of common and common equivalent shares
outstanding was 5,091,300 for all periods presented.
(3) WAREHOUSE LINES OF CREDIT
The Company has notified the MPS lenders that it does not meet the
guarantors net worth requirement under the MPS line of credit which totals
$46,549,000 at September 30, 1999. The Company's request for a waiver is
pending. Additionally, the NAFCO line of credit which totals $2,535,000 at
September 30, 1999, has matured and NAFCO has notified its lender, that due to
write-downs of the loans held for sale as part of the liquidation of NAFCO, it
does not meet its net worth requirement under the loan agreement. NAFCO has
requested a reduction in its net worth requirement and an extension of the line
of credit to March 31, 2000. This request is also pending. Failure to obtain the
requested waivers, extensions and modifications to these debt agreements could
have a material adverse effect on the Company's ability to continue its regular
business operations.
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<PAGE> 8
(4) NOTES PAYABLE TO AFFILIATES
At September 30, 1999, the Company has borrowed under notes and a line
of credit from Stanwich Financial Services Corp. ("SFSC") totaling $9,277,000
summarized as follows:
<TABLE>
<CAPTION>
Payee Type Original Date Maturity Balance Rate
- ----- ---- ------------- -------- ------- ----
<S> <C> <C> <C> <C> <C>
SFSC Line of Credit August 28, 1997 September 30, 2000 3,500,000 16%
SFSC Note December 30, 1997 January 3, 2000 4,000,000 13%
SFSC Note March 12, 1998 January 3, 2000 900,000 13%
SFSC Note March 13, 1998 January 3, 2000 877,000 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 is currently outstanding. 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 own a majority interest in
SFSC. Messrs. Bradley, Sr., Bradley, Jr., are officers and directors of CPS.
On March 29, 1999 NAB entered into a Payment Deferral Agreement with
SFSC in which SFSC agreed to extend the maturity dates on NAB's $5,777,000 in
notes payable to SFSC that were due June 30, 1999 to January 3, 2000.
Additionally, SFSC agreed to defer interest payments on all notes due from NAB
until January 3, 2000. The Company continues to pursue the refinancing of those
notes with third parties but to date has been unsuccessful. There can be no
assurance that such refinancing can be accomplished and, if no financing is
obtainable, that SFSC would agree to extend the maturity dates.
(5) SEGMENT REPORTING
The Company has two reportable segments, sub-prime and prime
mortgage banking. The sub-prime mortgage banking segment originates residential
mortgage loans to borrowers who are unable to obtain financing from conventional
mortgage sources due to credit problems or income qualification issues. The
prime mortgage banking segment originates conventional and government guaranteed
or insured mortgage loans. All of the business segments operate within the U.S.
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The following is a summary of the results of continuing operations,
before change in accounting principle by business line for the three months
ended September 30, 1999 as compared to September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Revenue
From Other
Business Line External Revenue Interest Expense Operating units Earnings (Loss)
- ------------- ------------------ ----------------- --------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------- ------ ------ ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $2,885 $ 5,225 $ 486 $ 908 $25 $25 $(1,112) $ 525
Residential mortgage
banking-prime 3,865 5,324 565 730 -- -- 180 1,017
Corporate and
intercompany
eliminations 86 180 419 547 -- -- (370) (1,031)
------ ------- ------ ------ --- --- ------- -------
Total $6,836 $10,729 $1,470 $2,185 $25 $25 $(1,302) $ 511
====== ======= ====== ====== === === ======= =======
</TABLE>
The following is a summary of the results of continuing operations
before change in accounting principle by business line for the nine months ended
September 30, 1999 as compared to September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Revenue
From Other
Business Line External Revenue Interest Expense Operating units Earnings (Loss)
- ------------- ------------------- ----------------- --------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------ ------ ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $ 8,376 $12,860 $1,305 $2,281 $75 $75 $(3,315) $ 1,513
Residential mortgage
banking-prime 13,060 14,564 2,040 2,416 -- -- 1,235 2,362
Corporate and
intercompany
eliminations 172 490 1,112 1,460 -- -- (1,375) (3,153)
------- ------- ------ ------ --- --- ------- -------
Total $21,608 $27,914 $4,457 $6,157 $75 $75 $(3,455) $ 722
======= ======= ====== ====== === === ======= =======
</TABLE>
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The following is a summary of total assets by business line for
September 30, 1999 as compared to December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Residential mortgage banking-sub-prime (1) $72,005 $100,680
Residential mortgage banking-prime (1) N/A N/A
Net assets of discontinued operations 3,981 9,534
Corporate and intercompany eliminations 2,755 3,101
------- --------
Total $78,741 $113,315
======= ========
</TABLE>
(1) The Company has not disclosed separate total asset information for the sub
prime and prime mortgage segments because that information is not produced
internally. The information provided for the sub prime segment includes the
prime segment.
(6) DISCONTINUED OPERATIONS
In the third quarter of 1999, the Company elected to dispose of its
investment in CPFI and NAFCO. In connection with the liquidations the Company
recorded approximately $150,000 in related severance costs. Net proceeds from
the liquidation will be used to reduce NAB's debt and to invest additional funds
in MPS. The disposition of these two operations is not expected to have a
material adverse effect on the ongoing financial results of the Company.
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Total assets (principally loans receivable) $14,957 $39,134
Total liabilities (principally lines of credit) 10,976 29,600
------- -------
Net assets of discontinued operations $ 3,981 $ 9,534
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues $ 1,151 $1,536 $ 3,357 $5,190
Expenses 1,336 1,355 4,262 4,552
------- ------ ------- ------
Earnings (loss) from discontinued
operations, net of income taxes $ (185) $ 181 $ (905) $ 638
======= ====== ======= ======
</TABLE>
The loss from discontinued operations for 1999 is primarily
attributable to write downs totaling $298,000 for the three months ended
September 30, 1999 and $1,377,000 for the nine months ended September 30, 1999
in order to reflect the fair market value of the commercial loan portfolio.
Additionally, the average balance of the loan portfolio has declined from the
same period in 1998 reducing the net interest income of the discontinued
operations.
On September 29, 1999 the Company sold approximately $23,400,000 in
construction loans to a financial institution. A loss of approximately $50,000
was recorded as a result of the transaction.
Management expects that the majority of the remaining assets,
consisting primarily of loans receivable, of the discontinued operations will be
disposed of by December 31, 1999, either through sale or maturity of the loans.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
RESIDENTIAL MORTGAGE BANKING
Beginning in September 1998, as a result of a number of factors, cash
prices for mortgages in the sub-prime mortgage market significantly
deteriorated. The Company, in response, entered into forward commitments for its
sub-prime production, lowered the prices it paid for its wholesale and
correspondent production and reduced its workforce in certain production related
departments. As a result of lowering its prices and reducing its workforce, the
Company's sub-prime loan production has declined. The reduced levels of gains
from loan sales and origination volume are currently insufficient to cover the
operating expenses of the sub-prime operation.
At September 30, 1999 and December 31, 1998 residential mortgage loans
held for sale totaled $47,920,000 and $78,911,000. Of these amounts $31,818,000
and $50,828,000, respectively, were conventional and government insured or
guaranteed loans (prime) and $16,102,000 and $28,083,000, respectively were
sub-prime loans.
The prime loans are sold individually to large mortgage bankers or
financial institutions. The Company represents and warrants to the investor that
the loans were underwritten to the appropriate guidelines. The Company's prime
originations are sold to investors on a loan by loan basis. When a customer
wishes to lock in an interest rate, PAMCO will grant the rate to the borrower
and in turn lock in a price on or about the same date with an investor. This
process mitigates the interest rate risk to PAMCO. The sub-prime loans are
currently sold through two forward commitments. These forward commitments reduce
the interest rate risk of MPS as the sales prices are specified in the
respective forward commitment. One of the forward commitments totals $20,000,000
and expires December 31, 1999 and the other forward commitment totals
$40,000,000 and expires January 31, 2000. As of September 30, 1999, $15,679,000
has been delivered on the commitments. The Company generally represents and
warrants to the investor that each sub-prime loan was underwritten to the
Company's guidelines and that the borrower's financial position is the same at
the date of delivery to the investor as the origination date. The Company also
agrees to reimburse the investor a portion of the sale premium if the loan pays
in full over a period of generally one year. The Company defers a portion of the
sale premium, which reduces the gain recorded on each loan sale, to cover the
potential liability resulting from the warranties given to the investor.
Included in accounts payable and accrued expenses at September 30, 1999
is the Company's liability under warranties given to the purchasers of the
Company's prime and sub-prime loans. The liability totaled $1,017,000 at
September 30, 1999 as compared to $830,000 at December 31, 1998. Additions to
the prepayment liability totaled $275,000 and $720,000 for the three and nine
months ended September 30, 1999 and $603,000 and $977,000 for the three and
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nine months ended September 30, 1998. Such additions are netted against the gain
at the time of the loan sale.
Construction loans to individuals (one-time closings) totaled
$4,154,000 and $9,465,000 at September 30, 1999 and December 31, 1998,
respectively. These loans are originated by the PAMCO operation and are included
in construction loans in the consolidated balance sheets. The decline is
attributable to increased competition for these types of loans in California
where a significant amount of this product type is originated for PAMCO.
Securitization
In June 1998 the Company, through MPS, securitized approximately
$51,000,000 of sub-prime mortgage loans. MPS retained the servicing
responsibilities for the loans. The performance of the loans underlying the
security through September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
---------- ---------------
<S> <C> <C>
Remaining principal $23,110,000 $16,870,000
Annualized prepayment rates 11.53% 20.23%
Cumulative losses -- --
Delinquencies (over 30 days) 10.27% 14.07%
Cumulative principal amount of loans
foreclosed or in foreclosure $ 999,000 $ 1,343,000
</TABLE>
The Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. The fee is .52% annually of the
unpaid principal of the loans. One claim is pending against the policy. The
policy excludes coverage for loans that were delinquent at the time of the
issuance of the policy. At that time, three loans with an unpaid principal
balance of $148,000 were delinquent. One of those loans has been repurchased by
MPS. No other repurchases have been made.
In addition, to facilitate the sale, the Company provided a credit
enhancement for the benefit of the investors in the form of additional
collateral held by the trust. The over-collateralization account (as described
below) is required by the servicing agreement to be maintained at 2.75% of the
original fixed rate balance and 4% of the original adjustable rate balance of
the loans.
The residual interests in the securitization of loans represents the
sum of 1) the net interest receivable (NIR) which is the present value of the
difference between the contractual interest rates on the loans and the rate paid
to the buyer or bondholder using various prepayment, discount rate and loss
assumptions and 2) the overcollateralization account, which is the excess
monthly cash flows, other than servicing revenues, that are required to be
maintained with the trustee until certain overcollateralization levels are met.
As of September 30, 1999 the overcollateralization levels have not been met. As
a result the excess monthly cash flows continue to be retained by the trustee.
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<PAGE> 13
The residual interest is accounted for as a trading security and as
such is recorded at its estimated fair value. The Company is not aware of an
active market for the purchase or sale of the residual interests. Accordingly,
the Company determines the estimated fair value of the residual interests by
discounting the expected cash flows released from the trust (the cash out
method) using a discount rate which the Company believes is commensurate with
the risks involved.
The residual interests in the securitization consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
NIR $2,163,000 $2,900,000
Overcollateralization account 1,507,000 634,000
---------- ----------
$3,670,000 $3,534,000
========== ==========
</TABLE>
At September 30, 1999 the assumptions used in the valuation of the
residual interests were as follows:
Discount rate 12%
Weighted average life of fixed rate loans 4.27 years
Weighted average life of adjustable rate loans 3.47 years
Prepayment speeds- fixed rate loans Ramp up to 20% CPR
Prepayment speeds- adjustable rate loans Ramp up to 25% CPR
Cumulative losses, net of losses covered by the pool policy 0.2%
Delinquencies (over 30 days) 10%
DISCONTINUED OPERATIONS
For financial statement purposes the operations of CPFI and NAFCO have
been classified as discontinued operations.
Summarized assets and liabilities of the discontinued operations as of
September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Loans receivable $ 12,910 $ 35,285
Reserve for loan losses (150) (337)
Mark to market reserve (1,349) (4,186)
Other assets 3,546 8,372
Warehouse lines of credit (8,071) (26,534)
Other liabilities (2,905) (3,066)
-------- --------
Net assets of discontinued operations $ 3,981 $ 9,534
======== ========
</TABLE>
On September 30, 1999 approximately $23,400,000 of construction loans
were sold to a financial institution. A loss of approximately $50,000 was
recorded as a result of the sale.
13
<PAGE> 14
RESULTS OF OPERATIONS
For the three months ended September 30, 1999 the Company reported a
net loss of $1,487,000, as compared to net earnings of $692,000 for the three
months ended September 30, 1998. For the nine months ended September 30, 1999
the Company reported a net loss of $4,515,000, as compared to net earnings of
$1,360,000 for the nine months ended September 30, 1998. Operations for those
periods were impacted by the following factors:
1) Beginning in September 1998, as a result of a number of factors,
cash prices in the sub-prime mortgage market significantly deteriorated. The
Company, in response, entered into forward commitments for its production,
lowered the prices it paid for its wholesale and correspondent production and
reduced operating expenses in the sub-prime operation. As a result of lowering
its prices, the Company's loan production declined. The decline in sales prices
and the reduced levels of originations of sub-prime mortgages resulted in losses
in the first and second quarters of 1999.
2) In 1997, the Company entered into agreements with the executives of
MPS that granted options to the executives, exercisable only if certain
conditions are satisfied, to acquire up to 20% of the authorized common shares
of MPS. The number of shares to be issued pursuant to the agreements was
dependent upon several factors, including the future earnings and value of MPS.
On June 26, 1998 the Company, MPS and the executives entered into a
Restructure Agreement, which terminated the options. In exchange for the
termination of the options the Company entered into a deferred compensation
arrangement with the executives that requires the Company to pay annual
installments of approximately $1,100,000 to the executives over the three year
period beginning June 26, 1999, as long as the executive continues employment
with the Company. If the executive is terminated without cause all remaining
amounts due under the deferred compensation arrangement become immediately due
to the executive.
The Company also granted loans totaling $3,040,000 to the executives
repayable in three equal annual installments, plus interest at 5.7% per annum.
The loans are secured by the stock that each executive owns, which aggregates
approximately 19% of the outstanding shares of MPS. If the executive terminates
for any reason prior to the end of the three year period, all remaining amounts
under the note become immediately payable.
Included in the Restructure Agreement is an additional provision that
requires the Company to pay to one of the executives $93,334 every six months,
beginning June 30, 1998, over the next three years, contingent upon continued
employment.
For the three and nine months ended September 30, 1999 compensation
expense totaling $327,000 and $921,000, respectively was recorded in the
financial statements as a result of these agreements, as compared to $0 for the
three and nine months ended September 30, 1998.
3) In April 1998, the board of directors authorized the Company to make
payments to officers and directors in lieu of stock options that were originally
granted under stock option
14
<PAGE> 15
plans that were never presented to shareholders for approval. The Company
recorded a charge to earnings of $0 and $91,000 for the three months and nine
months ended September 30, 1999 and a charge to earnings of $77,000 and $585,000
for the three and nine months ended September 30, 1998.
4) Average mortgage rates have steadily increased from the third
quarter of 1998 throughout 1999. Prime originations have declined 22% from the
same quarter of 1998 and 9% on a year to date basis as compared to 1998. As a
result, revenues have declined and the contribution from the prime mortgage
lending has decreased.
5) In connection with the disposal of NAFCO's commercial loan
portfolio, write-downs totaling $298,000 and $1,377,000 have been recorded for
the three and nine months ended September 30, 1999.
6) On January 1, 1999 the Company adopted Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires costs of start-up activities and organizational costs
to be expensed as incurred. In accordance with SOP 98-5, the Company wrote off
approximately $155,000 in previously capitalized organizational costs.
Results of Continuing Operations
The following discussion and analysis presents the significant changes
in financial condition and results of continuing operations of the Company's
operating segments for the three months and nine months ended September 30, 1999
and 1998. A summary of the operating profits and losses by the Company's
operating segments is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Residential mortgage banking
sub-prime $ 2,910 $ 5,250 $ 8,451 $ 12,935
Residential mortgage banking
prime 3,865 5,324 13,060 14,564
Corporate and intercompany
eliminations 86 180 172 490
------- -------- -------- --------
Total revenues: 6,861 10,754 21,683 27,989
Costs and expenses:
Residential mortgage banking
sub-prime 4,022 4,725 11,766 11,422
Residential mortgage banking
prime 3,685 4,307 11,825 12,202
Corporate and intercompany
eliminations 456 1,211 1,547 3,643
------- -------- -------- --------
Total costs, expenses and taxes 8,163 10,243 25,138 27,267
------- -------- -------- --------
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle:
Residential mortgage banking
sub-prime (1,112) 525 (3,315) 1,513
Residential mortgage banking
Prime 180 1,017 1,235 2,362
Corporate and intercompany
eliminations (370) (1,031) (1,375) (3,153)
------- -------- -------- --------
Earnings (loss) from continuing
operations before cumulative
effect of change in
accounting principle $(1,302) $ 511 $ (3,455) $ 722
======= ======== ======== ========
</TABLE>
Results of Continuing Operations for the Three Months Ended September 30, 1999
and 1998
Residential Mortgage Banking
The Company operates its mortgage banking activities through its 81%
owned subsidiary MPS. The mortgage banking operations has two primary divisions,
sub-prime and prime. The prime origination function operates as Pacific American
Mortgage Company or PAMCO.
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
MPS (principally sub-prime)
- ---------------------------
Gains on sales of loans
and other fee income $ 2,163 $ 3,928
Interest income 747 1,322
Compensation and benefits 2,387 2,331
Interest expense 486 908
Other expenses 1,149 1,486
Loans originated $ 65,181 $ 89,504
Loans sold $ 70,563 $ 92,632
Gains on sales of loans and other fee
income as a percent of loans originated 3.32% 4.39%
Compensation and benefits
as a percent of originations 3.66% 2.60%
Other expenses as a percent
of originations 1.76% 1.66%
Net interest income as a
percent of originations .40% .46%
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
PAMCO (principally prime)
- -------------------------
Gains on sales of loans
and other fee income $ 3,288 $ 4,480
Interest income 577 844
Compensation and benefits 2,254 2,783
Interest expense 565 730
Other expenses 866 794
Loans originated $126,086 $162,696
Loans sold (1) $114,907 $153,684
Gains on sales of loans and other fee
income as a percent of loans originated 2.60% 2.75%
Compensation and benefits
as a percent of originations 1.79% 1.71%
Other expenses as a percent
of originations .69% .49%
Net interest income as a percent of
originations .01% .07%
</TABLE>
(1) Includes loans totaling $8,117,000 for the quarter ended September 30,
1999 and $14,365,000 for the quarter ended September 30, 1998 that were
closed in the name of a third party (brokered-out).
MPS operations
For the three months ended September 30, 1999 the loss from the MPS
mortgage operation totaled $1,112,000 as compared to earnings of $525,000 for
the same period in 1998. Revenues declined $2,340,000 or 45% over 1998 and
expenses decreased $703,000 or 15% over 1998. Net gains on loan sales and other
fees declined from 4.39% as a percent of loans originated in the third quarter
of 1998 to 3.32% as a percent of loans originated in the third quarter of 1999.
Compensation expenses as a percent of production increased to 3.66% in
1999 from 2.60% in 1998. The increase is attributable to the decline in mortgage
production and additional processing and underwriting costs incurred as the
Company continues to emphasize customer service and strengthen its underwriting
standards. Additionally deferred compensation expense totaled $327,000 or .50%
of originations as compared to $0 for the same period of 1998. Other expenses
increased slightly to 1.76% of production for the quarter ended September 30,
1999 from 1.66% of production for the three months ended September 30, 1998.
Net interest spread as a percentage of production decreased from .46%
for the three months ended September 30, 1998 to .40% for the three months ended
September 30, 1999 as a result of a slightly lower spread between the rates
charged to borrowers and the LIBOR based borrowings of MPS.
17
<PAGE> 18
PAMCO operations
For the three months ended September 30, 1999, MPS's principally prime
production operation, PAMCO, earned $180,000 as compared to $1,017,000 for the
three months ended September 30, 1998. Operating revenues totaled $3,865,000 as
compared to $5,324,000 for 1998 and expenses totaled $3,685,000 as compared to
$4,307,000 for 1998.
Gains on sales of loans and other loan fees as a percent of production
was 2.60% for the three months ended September 30, 1999 as compared to 2.75% for
the three months ended September 30, 1998. Compensation expenses as a percent of
production increased to 1.79% from 1.71% for the three months ended September
30, 1998 resulting from compensation increases for support personnel offset
partially by reduced benefit costs. Other expenses as a percent of originations
increased from .49% for the three months ended September 30, 1998 to .69% for
the three months ended September 30, 1999 due principally to increased
advertising expenses and direct loan processing expenses.
Net interest spread as a percent of production was .01% for the three
months ended September 30, 1999 as compared to .07% for the same period in 1998.
Corporate and Intercompany Eliminations
Corporate revenues and expenses represent interest income and
unallocated compensation, interest expense, minority interest and other general
and administrative expenses.
Compensation expense totaled $52,000 for the three months ended
September 30, 1999 as compared to $286,000 for the same period in 1998. The
decrease was attributable to option termination related charges totaling $91,000
in 1998 as compared to $0 in 1999 and a reduction in incentive compensation
expense and personnel in 1999.
Interest expense was $419,000 for the three months ended September 30,
1999, a decrease of $128,000 over 1998. The decrease is attributable to the
Company's partial repayment of debt to SFSC and Consumer Portfolio Services,
Inc. ("CPS").
Corporate income tax expense totaled $175,000 and $15,000 for the three
months ended September 30, 1999 and 1998. The expense represents the amount of
taxes due as a result of the excess inclusion interest resulting from the
securitization of the Company's loans in June, 1998. The Company's net operating
loss carryforward cannot be used to reduce the tax liability resulting from
excess inclusion interest.
Results of Continuing Operations for the Nine Months Ended September 30, 1999
and 1998
Residential Mortgage Banking
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
18
<PAGE> 19
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
MPS (principally sub-prime)
- ---------------------------
Gains on sales of loans
and other fee income $ 6,416 $ 9.709
Interest income 2,035 3,227
Compensation and benefits 7,357 5,875
Interest expense 1,305 2,281
Other expenses 3,104 3,266
Loans originated $188,955 $245,509
Loans sold $198,366 $232,809
Gains on sales of loans and other fee
income as a percent of loans originated 3.40% 3.95%
Compensation and benefits
as a percent of originations 3.89% 2.39%
Other expenses as a percent
of originations 1.64% 1.33%
Net interest income as a
percent of originations .39% .39%
PAMCO (principally prime)
- -------------------------
Gains on sales of loans
and other fee income $ 10,997 $ 12,156
Interest income 2,063 2,409
Compensation and benefits 7,347 7,712
Interest expense 2,040 2,416
Other expenses 2,438 2,074
Loans originated $402,833 $441,695
Loans sold (2) $366,672 $363,785
Gains on sales of loans and other fee
Income as a percent of loans originated 2.73% 2.75%
Compensation and benefits
as a percent of originations 1.82% 1.75%
Other expenses as a percent
of originations .61% .47%
Net interest income (expense) as a
percent of originations .01% .00%
</TABLE>
(2) Includes loans totaling $27,766,000 in 1999 and $36,699,000 in 1998
that were closed in the name of a third party (brokered-out).
19
<PAGE> 20
MPS operations
For the nine months ended September 30, 1999 the loss from the MPS
mortgage operation totaled $3,315,000 as compared to earnings of $1,513,000 for
the same period in 1998. Revenues declined $4,484,000 or 35% over 1998 and
expenses increased $344,000 or 3% over 1998. Net gains on loan sales and other
fees declined from 3.95% as a percent of loans originated in the first nine
months of 1998 to 3.40% as a percent of loans originated in first nine months of
1999.
Compensation expenses as a percent of production increased to 3.89% in
1999 from 2.39% in 1998. The increase is attributable to deferred compensation
expense of $921,000 or .49% of production, as compared to $0 in 1998 and
increased processing and underwriting costs in addition to the decline in its
production.
Other expenses increased to 1.64% of production for the nine months
ended September 30, 1999 from 1.33% of production for the nine months ended
September 30, 1998. The increase was attributable to increased processing and
underwriting costs discussed above and the decline in loan originations.
Net interest spread as a percentage of production remained at .39% for
the nine months ended September 30, 1999 as compared to 1998.
PAMCO operations
For the nine months ended September 30, 1999, PAMCO, earned $1,235,000
as compared to $2,362,000 for the nine months ended September 30, 1998.
Operating revenues totaled $13,060,000 as compared to $14,564,000 for 1998 and
expenses totaled $11,825,000 as compared to $12,202,000 for 1998.
Gains on sales of loans and other loan fees as a percent of production
was 2.73% for the nine months ended September 30, 1999 as compared to 2.75% for
the nine months ended September 30, 1998. Compensation expenses as a percent of
production increased to 1.82% from 1.75% for the nine months ended September 30,
1998 resulting from compensation increases for support personnel offset
partially by reduced benefit costs. Other expenses as a percent of originations
increased from .47% for the nine months ended September 30, 1998 to .61% for the
nine months ended September 30, 1999 as a result of increased expenditures for
advertising and increased loan processing costs.
Net interest income as a percent of production was .01% for the nine
months ended September 30, 1999 to as compared to .00% for the same period in
1998.
Corporate and Intercompany Eliminations
Corporate revenues and expenses represent interest income and
unallocated compensation, interest expense, minority interest and other general
and administrative expenses.
20
<PAGE> 21
Compensation expense totaled $445,000 for the first nine months of 1999
as compared to $1,207,000 in 1998. The decrease was attributable to option
termination related charges totaling $585,000 in 1998 as compared to $91,000 in
1999 and a reduction in incentive compensation expense and personnel in 1999.
Interest expense totaled $1,112,000 in 1999, a decrease of $348,000
over 1998. The decrease is attributable to the Company's repayments of debt to
SFSC and CPS.
Corporate income tax expense totaled $175,000 and $15,000 for the three
months ended September 30, 1999 and 1998. The expense represents the amount of
taxes due as a result of the excess inclusion interest resulting from the
securitization of the Company's loans in June, 1998.
DISCONTINUED OPERATIONS
Discontinued operations consists of the CPFI and NAFCO lending
activities.
A summary of the operating results of the discontinued operations are
as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues, principally interest $ 1,151 $1,536 $ 3,357 $5,190
Provision for losses 63 81 173 278
Provision for marked losses 298 -- 1,377 --
Expenses 975 1,274 2,712 4,274
------- ------ ------- ------
Earnings (loss) from discontinued
operations $ (185) $ 181 $ (905) $ 638
======= ====== ======= ======
</TABLE>
The loss from discontinued operations for 1999 is primarily
attributable to write downs totaling $298,000 for the three months ended
September 30, 1999 and $1,377,000 for the nine months ended September 30, 1999
in order to reflect the fair market value of the commercial loan portfolio.
Additionally, the average balances of the loan portfolio has declined from the
same period in 1998 which reduced the net interest income of the discontinued
operations.
On September 29, 1999 the Company sold approximately $23,400,000 in
construction loans to a financial institution. A loss of approximately $50,000
was recorded as a result of the transaction.
Management expects that the majority of the remaining assets consisting
primarily of loans receivable, of the discontinued operations will be disposed
of by December 31, 1999, either through sale or maturity of the loans.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had approximately $11,212,000 in
cash as compared to $4,898,000 at December 31, 1998. Of those amounts $9,972,000
and $3,952,000 as of September 30, 1999 and December 31, 1998, respectively, was
restricted to usage for
21
<PAGE> 22
mortgage loan fundings and repayments under the Company's residential warehouse
line of credit.
Total assets have decreased to $78,741,000 at September 30, 1999 from
$113,315,000 at December 31, 1998. The decrease is principally attributable to
the decline in the mortgage loan production at MPS and, as a result of
increasing interest rates, a decline in mortgage loan production at PAMCO.
In October 1999 MPS entered into an amendment of its line of credit
agreement with Bank United in Houston, Texas. The amended line of credit totals
$80,000,000. Outstanding borrowings bear interest at various spreads (ranging
from 1.25% to 2.25%) over the one-month LIBOR. The line of credit matures June
15, 2000. The mortgage loans receivable of MPS (including PAMCO) are pledged as
collateral for the line of credit. At September 30, 1999, $46,549,000 was
borrowed under the line.
CPFI has received an extension of its line of credit with Bank United
to December 31, 1999 along with a reduction in total borrowing availability to
$10,000,000. The line of credit is secured by CPFI's construction loans
receivable. As of September 30, 1999, $5,536,000 was outstanding under the line
bearing interest at various spreads (ranging from 2.00% to 3.75%) over the one
month LIBOR depending on the collateral.
NAFCO's line of credit totals $6,500,000. The line bears interest at
the prime rate and matured on October 30, 1999. As of September 30, 1999,
$2,535,000 was borrowed. Substantially all of the assets of NAFCO are pledged as
collateral for the line.
As discussed in Item 3 of Part II below the Company has notified the
MPS lenders that it does not meet the guarantors net worth requirement under the
MPS line of credit. The Company's request for a waiver is pending. Additionally,
the NAFCO line of credit has matured and NAFCO has notified its lender, that due
to write-downs of the loans held for sale as part of the liquidation of NAFCO,
it does not meet its net worth requirement under the loan agreement. NAFCO has
requested a reduction in its net worth requirement and an extension of the line
of credit to March 31, 2000. This request is also pending. Failure to obtain the
requested waivers, extensions and modifications to these debt agreements could
have a material adverse effect on the Company's ability to continue its regular
business operations.
At September 30, 1999, the Company has borrowed under notes and a line
of credit from SFSC totaling $9,277,000 summarized as follows:
<TABLE>
<CAPTION>
Payee Type Original Date Maturity Balance Rate
- ----- ---- ------------- -------- ------- ----
<S> <C> <C> <C> <C> <C>
SFSC Line of Credit August 28, 1997 September 30, 2000 3,500,000 16%
SFSC Note December 30, 1997 January 3, 2000 4,000,000 13%
SFSC Note March 12, 1998 January 3, 2000 900,000 13%
SFSC Note March 13, 1998 January 3, 2000 877,000 13%
</TABLE>
22
<PAGE> 23
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 is currently outstanding. 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 own a majority interest in
SFSC. Messrs. Bradley, Sr., Bradley, Jr., are officers and directors of CPS.
On March 29, 1999 NAB entered into a Payment Deferral Agreement with
SFSC in which SFSC agreed to extend the maturity dates on NAB's $5,777,000 in
notes payable to SFSC that were due June 30, 1999 to January 3, 2000.
Additionally, SFSC agreed to defer interest payments on all notes due from NAB
until January 3, 2000. The Company continues to pursue the refinancing of those
notes with third parties but to date has been unsuccessful. There can be no
assurance that such refinancing can be accomplished and, if no financing is
obtainable, that SFSC would agree to extend the maturity dates.
On May 12, 1999 the Company advanced SFSC $921,000 pursuant to a
promissory note. The note bears interest at 16%, payable quarterly. The
principal is due and payable on September 30, 2000. As of September 30, 1999
$644,000 has been repaid.
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. The Company anticipates no
additional funding from SFSC or CPS, therefore must rely on internally generated
funds or additional borrowings from third parties. Current credit agreements in
place are sufficient to provide the Company funds to operate its business lines
as currently structured.
23
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk profile has not significantly changed since
December 31, 1998. For a discussion of the Company's market risk, read Item 7A
of the Company's 10K for the year ended December 31, 1998.
YEAR 2000 UPDATE
In order to be year 2000 compliant, the Company has addressed and will
continue to address the year 2000 issue as it relates to the Company's systems
and its business operations. To be year 2000 compliant means that (1)
significant computer systems in use by the Company demonstrate performance and
functionality that is not materially affected by processing dates on or after
January 1, 2000, (2) customers and collateral included in the Company's
portfolio of business are year 2000 compliant, and (3) vendors of services
critical to the Company's business processes are year 2000 compliant.
The Company has determined that the following actions are necessary to
assess year 2000 compliance:
1) Identification of each computer area that could be materially affected
and the proper action necessary to eliminate any material adverse
effects caused by the turn of the century.
2) Testing the systems and switching to year 2000 compliance where
necessary.
3) Making inquiries of key vendors and customers regarding year 2000
compliance.
Progress report
Identification
The Company has identified all of its hardware systems and software (IT
systems) critical to the business and whose failure to process transaction and
information in the Year 2000 would have a material impact on the Company. The
Company commenced its current business segments beginning in mid-1996. As a
result substantially all of its hardware and software were Year 2000 compliant
when purchased.
The Company also identified non-information technology systems (non-IT
systems) critical to the business operation such as telephone and paging
systems. Substantially, all of these systems were purchased subsequent to mid-
1996 and were Year 2000 compliant when purchased.
24
<PAGE> 25
Testing
The Company has completed testing of its IT systems and has made
modifications where necessary.
IT and Non-IT Vendor Inquiries
The Company continues to communicate with customers, vendors, and
others to determine if their applications are year 2000 compliant and assess the
potential impact on the Company. The responses from the Company's major vendors
indicate that they are all expected to be year 2000 compliant by year end 1999
or are already compliant as it relates to the relevant system the Company relies
on.
Costs
The costs incurred to bring the Company's internal systems into year
2000 compliance and the costs of equipment acquisitions are not expected to have
a material impact on the Company's financial position. The Company has incurred
approximately $135,000 in costs to date primarily related to software upgrades.
The Company expects continuing costs related to internal resources to monitor
vendor progress towards being Year 2000 compliant and to purchase software or
software upgrades for non-critical systems. The cost of these internal resources
and software is estimated to be $15,000.
Contingency Planning
Based upon the progress of the Company's material vendors in becoming
Year 2000 compliant, the Company will continually assess the need for
contingency plans.
Risks
The primary risk to the Company of the Year 2000 issue is that one or
more of the Company's outside vendors is not Year 2000 compliant. The Company
cannot assure that all systems of other companies and government agencies which
reliance is placed upon will be year 2000 compliant on a timely basis,
regardless of the assurances that the company receives from them. The failure of
significant customers and vendors to be year 2000 compliant could possibly have
a material adverse effect on the Company's results of operations and financial
condition.
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 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.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
The Company has notified the MPS lenders that it does not meet the
guarantors net worth requirement under the MPS line of credit. The Company's
request for a waiver is pending. Additionally, the NAFCO line of credit has
matured and NAFCO has notified its lender, that due to write-downs of the loans
held for sale as part of the liquidation of NAFCO, it does not meet its net
worth requirement under the loan agreement. NAFCO has requested a reduction in
its net worth requirement and an extension of the line of credit to March 31,
2000. This request is also pending. Failure to obtain the requested waivers,
extensions and modifications to these debt agreements could have a material
adverse effect on the Company's ability to continue its regular business
operations.
ITEM 5: OTHER INFORMATION
Effective at the close of business on November 5, 1999 the Company was
delisted from NASDAQ trading due to the price of the Company's common stock
falling below the $1 minimum. On November 8, 1999 the Company began trading on
the OTC Bulletin Board.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1) EX-10.22 First Amendment to Credit Agreement between
Mortgage Portfolio Services, Inc., and Bank United
dated June 15, 1999
2) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated September 29, 1999 reporting the sale of
approximately 23,400,000 of construction loans
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 15, 1999
By: /s/ Charles E. Bradley, Sr.
-------------------------------------------------
Charles E. Bradley, Sr.
Chairman of the Board and Chief Executive Officer
By: /s/ Alan Ferree
-------------------------------------------------
Alan Ferree
Senior Vice President and Chief Financial Officer
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
10.22 First Amendment to Credit Agreement between Mortgage Portfolio
Services, Inc., and Bank United dated June 15, 1999
27 Financial Data Schedule
</TABLE>
<PAGE> 1
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Amendment"), is entered
into effective as of the 13th day of October, 1999 by and among MORTGAGE
PORTFOLIO SERVICES, INC. a Delaware corporation ("Borrower"), NAB ASSET
CORPORATION, a Texas corporation ("Guarantor"), and BANK UNITED, as Agent
("Agent") and the lenders party to the Original Agreement, as defined below
("Lenders").
Section 1. Recitals. Borrower, Guarantor, Agent, and Lenders have
entered into that certain Credit Agreement dated June 15, 1999 ("Original
Agreement") for the purposes and consideration therein expressed, pursuant to
which Lenders have agreed to make loans to Borrower as therein provided.
Borrower, Guarantor, Agent, and Lenders desire to amend the Original Agreement
for the purposes expressed herein. Therefore, Borrower, Guarantor, Agent, and
Lenders hereby agree as follows, intending to be legally bound:
Section 2. Definitions and References. Unless the context otherwise
requires or unless otherwise expressly defined herein, the terms in the Original
Amendment shall have the same meanings whenever used in this Amendment. Unless
the context otherwise requires, the following terms when used in this Amendment
shall have the meanings assigned to them as follows:
(a) "Amendment" means this First Amendment to the Credit Agreement.
(b) "Credit Agreement" means the Original Agreement as amended hereby.
Section 3. Amendments. The Original Agreement is hereby amended, as
follows:
(a) The following definitions in Section 1.01 of the Original Agreement
are hereby restated as follows:
"Commitment" means the obligation of Lenders to make Tranche A
Loans, Tranche B Loans, Tranche C Loans and Tranche D Loans to Borrower
pursuant to Section 2.01 hereof in an aggregate amount not to exceed
$80,000,000 at any time outstanding.
"Eligible Manufactured Housing Mortgage Loan" means a Mortgage
Loan with respect to which each of the following statements is accurate
and complete (and Borrower by including such Mortgage Loan in any
computation of the Collateral Value of the Tranche A Borrowing Base or
of the Collateral Value of the Tranche B Borrowing Base shall be deemed
to so represent to Agent and Lenders at and as of the date of such
computation):
(i) Such Mortgage Loan is an Eligible Mortgage Loan;
(ii) Such Mortgage Loan is secured by a first
priority deed of trust (or mortgage) on the related Property;
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<PAGE> 2
(iii) The proceeds of said Mortgage Loan are utilized
by the Obligor to facilitate the permanent attachment of a new
Manufactured Home on the related Property;
(iv) The Property securing such Mortgage Loan is
located in an Acceptable Manufactured Housing State;
(v) Upon completion and attachment of the related
Manufactured Home to the related Property, such Mortgage Loan
will meet all underwriting and other criteria for purchase by
an Investor under the Take-Out Commitment relating to such
Mortgage Loan;
(vi) The Manufactured Home financed with the proceeds
of such Mortgage Loan is a new Manufactured Home which has not
previously been financed;
(vii) All actions required to create a valid and
enforceable first priority perfected security interest in and
lien upon the related Manufactured Home and the related
Property in favor of Borrower shall have been taken; and
(viii) The Unit Collateral Value of such Mortgage
Loan, when added to the Unit Collateral Value of all other
Eligible Manufactured Housing Mortgage Loans included in the
computation of the Collateral Value of the Tranche A Borrowing
Base and the Collateral Value of the Tranche B Borrowing Base
does not exceed Two Million Four Hundred Thousand Dollars
($2,400,000.00).
"Eligible Mortgage Loan" means a Mortgage Loan with respect to which
each of the following statements is accurate and complete (and the Borrower by
including such Mortgage Loan in any computation of the Aggregate Collateral
Value of the Borrowing Base shall be deemed to so represent to Agent and Lenders
at and as of the date of such computation):
(i) Such Mortgage Loan is a binding and valid
obligation of the Obligor thereon, in full force and effect
and enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar terms affecting creditor's
rights in general and by general principles of equity;f
(ii) Such Mortgage Loan is genuine in all respects as
appearing on its face and as represented in the books and
records of Borrower, and all information set forth therein is
true and correct;
(iii) To the best knowledge of Borrower, such
Mortgage Loan is free of any default (other than as permitted
by subparagraph (iv) below) of any party thereto (including
Borrower), counterclaims, offsets and defenses, including the
defense of usury, and from any rescission, cancellation or
avoidance, and all right thereof, whether by operation of law
or otherwise;
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<PAGE> 3
(iv) No payment under such Mortgage Loan is more than
thirty (30) days past due the payment due date set forth in
the underlying Mortgage Note and Mortgage;
(v) Such Mortgage Loan contains the entire agreement
of the parties thereto with respect to the subject matter
thereof, has not been modified or amended in any respect not
expressed in writing therein and is free of concessions or
understandings with the Obligor thereon of any kind not
expressed in writing therein;
(vi) Such Mortgage Loan is in all respects in
accordance with all Requirements of Law applicable thereto,
including, without limitation, the federal Consumer Credit
Protection Act and the regulations promulgated thereunder and
all applicable usury laws and restrictions, and all notices,
disclosures and other statements or information required by
law or regulation to be given, and any other act required by
law or regulation to be performed, in connection with such
Mortgage Loan have been given and performed as required;
(vii) All advance payments and other deposits on such
Mortgage Loan have been paid in cash, and no part of said sums
has been loaned, directly or indirectly, by Borrower to the
Obligor, and, other than as disclosed to Agent in writing,
there have been no prepayments;
(viii) At all times such Mortgage Loan will be free
and clear of all Liens, except in favor of Agent for the
benefit of the Lenders;
(ix) The Property covered by such Mortgage Loan is
insured against loss or damage by fire and all other hazards
normally included within standard extended coverage in
accordance with the provisions of such Mortgage Loan with
Borrower named as a loss payee thereon;
(x) The Required Mortgage Documents have been
delivered to Agent prior to the inclusion of such Mortgage
Loan in any computation of the Aggregate Collateral Value of
the Borrowing Base or, if such items have not been delivered
to Agent on or prior to the date such Mortgage Loan is first
included in any computation of the Aggregate Collateral Value
of the Borrowing Base, (1) an Agreement to Pledge and a copy
of the unexecuted Mortgage Note for such Mortgage Loan has
been delivered to Agent prior to such inclusion, and (2) the
Unit Collateral Value of such Mortgage Loan when added to the
Unit Collateral Value of all other Mortgage Loans for which
Agent has not received the Required Mortgage Documents does
not exceed Thirty-three Million Six Hundred Thousand Dollars
($33,600,000.00), provided that, all Required Documents with
respect to such Mortgage Loan shall be delivered to Agent
within seven (7) Business Days after the date of the Agreement
to Pledge with respect thereto, provided further that, as to
any Eligible Tranche C Mortgage Loan, an Agreement to Pledge
can be delivered to Agent only for the first Loan made with
respect to such Eligible Tranche C Mortgage Loan, and all
Required Documents for any subsequent Loan with respect to
such Eligible Tranche C Mortgage Loan must be delivered to
Agent not later than one (1) Business Day after such
subsequent Loan;
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<PAGE> 4
(xi) If such Mortgage Loan is included in the Tranche
A Borrowing Base, the Tranche B Borrowing Base or the Tranche
C Borrowing Base and has been withdrawn from the possession of
the Agent on terms and subject to conditions set forth in the
Security Agreement:
(1) If such Mortgage Loan was withdrawn by
Borrower for purposes of correcting clerical or other
non-substantive documentation problems, the
promissory note and other documents relating to such
Mortgage Loan are returned to the Agent within twelve
(12) calendar days from the date of withdrawal; and
the Unit Collateral Value of such Mortgage Loan when
added to the Unit Collateral Value of other Mortgage
Loans which have been similarly released to Borrower
and have not been returned does not exceed
$4,000,000;
(2) If such Mortgage Loan was shipped by the
Agent directly to a permanent investor for purchase
or to a custodian for the formation of a pool, the
full purchase price therefor has been received by the
Agent (or such Mortgage Loan has been returned to the
Agent) within thirty (30) days from the date of
shipment by the Agent.
(xii) If such Mortgage Loan is a Jumbo Loan or a
Super-Jumbo Loan, the Unit Collateral Value of such Mortgage
Loan when added to the Unit Collateral Value of all other
Jumbo Loans and Super-Jumbo Loans does not exceed thirty
percent (30%) of the Commitment;
(xiii) If such Mortgage Loan is a Super-Jumbo Loan,
the Unit Collateral Value of such Mortgage Loan when added to
the Unit Collateral Value of all other Super-Jumbo Loans does
not exceed five percent (5%) of the Commitment; and
(xiv) The face amount of the Mortgage Note underlying
such Mortgage Loan does not exceed $1,000,000.
In determining the eligibility of any Mortgage Loan, any of the
requirements for eligibility (other than the requirements contained in clauses
(i), (viii) and (ix) above) may be waived by Agent, provided, that any Mortgage
Loan which is accepted by Agent as an Eligible Mortgage Loan pursuant to such
waiver (an "Eligible Waiver Mortgage Loan") shall cease to be an Eligible Waiver
Mortgage Loan upon written notice of the retraction of such waiver given to
Borrower by Agent unless at the time of giving such notice the deficiency which
originally required such waiver has been cured and such Eligible Waiver Mortgage
Loan meets all other requirements for an Eligible Mortgage Loan; and provided
further, that the Unit Collateral Value of any Mortgage Loan accepted by Agent
as an Eligible Waiver Mortgage Loan when added to the Unit Collateral Value of
all other Eligible Waiver Mortgage Loans included in the Aggregate Collateral
Value of the Borrowing Base at anytime, does not exceed $4,000,000.
"Eligible Sub-Prime Mortgage Loan" means an Eligible Mortgage Loan that
has a Risk Rating of A-1, B or C and is eligible for sale to a Tranche B
Investor (and the Borrower by including such Mortgage Loan in any computation)
of the Aggregate Collateral Value of the Borrowing Base shall be deemed to so
represent to Agent and Lenders at and as of the date of such computation and
Page 4
<PAGE> 5
the Unit Collateral Value of such Eligible Mortgage Loan, when added to the Unit
Collateral Value of all Eligible Subprime Mortgage Loans included in the Tranche
B Borrowing Base does not exceed Thirty-two Million Dollars ($32,000,000.00).
"Eligible Tranche A Mortgage Loan" means an Eligible Agency Mortgage
Loan or Eligible Manufactured Housing Mortgage Loan owned by Borrower with
respect to which each of the following statements shall be accurate and complete
(and Borrower by including such Eligible Mortgage Loan in any computation of the
Collateral Value of the Tranche A Borrowing Base shall be deemed to so represent
to Agent and Lenders at and as of the date of such computation):
(i) Such Mortgage Loan has not been included in the Tranche A
Borrowing Base for more than 120 days; provided, however, that such
Mortgage Loan may be included in the Tranche A Borrowing Base for up to
a maximum aggregate period of 270 days so long as the Unit Collateral
Value of such Mortgage Loan when added to the Unit Collateral Value of
all other Eligible Tranche A Mortgage Loans and Eligible Tranche B
Mortgage Loans included in the Tranche A Borrowing Base and the Tranche
B Borrowing Base for more than 120 days does not exceed One Million Six
Hundred Thousand Dollars ($1,600,000.00).
(ii) Such Mortgage Loan is covered by a Take-Out Commitment
which is in full force and effect, and Borrower and such Mortgage Loan
are in full compliance therewith;
(iii) Such Mortgage Loan is secured by a first or second
priority Mortgage on Property consisting of a completed one-to-four
unit single family residence, including a condominium, planned unit
development or townhouse; provided, however, that if such Mortgage Loan
is a Second Mortgage Loan, such Mortgage Loan may be included in the
Tranche A Borrowing Base only if the Unit Collateral Value of such
Second Mortgage Loan when added to the Unit Collateral Value of all
other Second Mortgage Loans then included in the Tranche A Borrowing
Base and the Tranche B Borrowing Base and all Eligible High LTV Loans
then included in the Tranche B Borrowing Base does not exceed Four
Million Dollars ($4,000,000.00).
(iv) For any Mortgage Loan which was originally included in
the Tranche C Borrowing Base, Agent has received the Required Mortgage
Documents set forth in Section 3 of SCHEDULE A to the Security
Agreement;
(v) If such Mortgage Loan is an Eligible Manufactured Housing
Mortgage Loan, such Mortgage Loan has a Risk Rating of A; and
(vi) Such Mortgage Loan is not included in the Tranche C
Borrowing Base.
"Tranche C Sublimit" means Nine Million Six Hundred Thousand Dollars
($9,600,000.00).
"Tranche D Sublimit" means Two Million Dollars ($2,000,000.00).
(b) Section 6.09. Net Worth of the Original Agreement is hereby
restated as follows:
"Section 6.09. Net Worth. Borrower's Consolidated
Tangible Net Worth shall never be less than Seven Million
Dollars
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<PAGE> 6
($7,000,000.00), computed as of the end of each month. As of
the end of each Fiscal Quarter, Guarantor's Consolidated Net
Worth shall not be less than Five Million Dollars
($5,000,000.00)."
(c) Section 6.10. Total Liabilities to Tangible Net Worth Ratio is
hereby restated as follows:
"Section 6.10. Total Liabilities to Tangible Net Worth Ratio.
The ratio of Borrower's Total Liabilities to Borrower's Consolidated
Tangible Net Worth shall never be more than 10.0 to 1.0, computed as of
the end of each calendar month."
(d) EXHIBITS "A-1", "A-2", "C", and "D" to the Original Agreement are
hereby amended in their entirety to read as set forth in EXHIBITS "A-1", "A-2",
"C", and "D" attached hereto.
(e) Section 5.11 of the Original Agreement is hereby restated effective
as of June 15, 1999 as follows:
"Section 5.11. Use of Proceeds; Margin Stock. The proceeds of
the first Borrowing shall be used to repay Borrower's obligations under
that certain third restated credit agreement dated August 31, 1998 by
and among Borrower, Guarantor, Guaranty Federal Bank, F.S.B. as Agent
and the lenders party thereto, as amended and the proceeds of all other
Borrowings shall be used by Borrower solely for the origination or
acquisition of Mortgage Loans in the ordinary course of Borrower's
business. None of such proceeds shall be used for the purpose of
purchasing or carrying any "margin stock" as defined in Regulation U,
or for the purpose of reducing or retiring any Indebtedness which was
originally incurred to purchase or carry margin stock or for any other
purpose which might constitute this transaction a "purpose credit"
within the meaning of such Regulation U. Neither Borrower nor any
Person acting on behalf of Borrower shall take any action in violation
of Regulation U or Regulation X or shall violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder,
in each case as now in effect or as the same may hereafter be in
effect."
(f) Section 10.18 of the Original Agreement is hereby deleted in its
entirety effective as of June 15, 1999.
(g) Section 6.15. Dividends is hereby added to Article VI of the
Original Agreement for all purposes:
"Section 6.15. Dividends. Neither Borrower nor its Affiliates
shall pay, make, or declare any Dividends unless, after each payment
thereof, the Borrower's Consolidated Tangible Net Worth is equal to or
more than Eight Million Dollars ($8,000,000.00)."
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<PAGE> 7
(h) The following subsection (n) is hereby added to Section 7.01 Nature
of Event of the Original Agreement for all purposes:
"(n) Guarantor shall fail to pay to Borrower additional paid
in capital of One Million Dollars ($1,000,000.00) on the date
liquidation of Construction Portfolio Funding, Inc. is completed."
(i) EXHIBITS "A-1" and "A-2" to the Original Agreement are hereby
replaced with EXHIBITS "A-1" and "A-2" to this Amendment.
Section 4. Representations. Borrower represents and warrants that all
of the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.
Section 5. Consent and Ratification by Guarantor. Guarantor (i)
consents to the terms and provisions of this Amendment and the transactions
contemplated herein, (ii) ratifies and confirms its Guaranty dated as of June
15, 1999 is in full force and effect in accordance with its terms and, without
limiting the provisions thereof in any manner, applies to the Notes of even date
herewith given by Borrower to each of the Lenders and (iii) acknowledges that
its Guaranty is not subject to any claims, offsets, defenses, or counterclaims
of any nature whatsoever.
Section 6. Severability. In the event any one or more provisions
contained in the Credit Agreement or this Amendment should be held to be
invalid, illegal or unenforceable in any respect, the validity, enforceability
and legality of the remaining provisions contained herein and therein shall not
be affected in any way or impaired thereby and shall be enforceable in
accordance with their respective terms.
Section 7. Expenses. Borrower agrees to pay all out-of-pocket costs and
expenses of Agent in connection with the preparation, operation, administration
and enforcement of this Amendment.
Section 8. Ratification of Agreements. Except as amended hereby,
Borrower ratifies and confirms that Original Agreement, the Security
Instruments, and all other Loan Documents are and remain in full force and
effect in accordance with their respective terms and that all Collateral is
unimpaired by this Amendment and secures the payment and performance of all
indebtedness and obligations of Borrower under the Notes, the Original
Agreement, and all other Loan Documents, as modified hereby. Any reference to
the Original Agreement in any Loan Document shall be deemed to be references to
the Original Agreement as amended hereby. Each of the undersigned officers of
Borrower and Guarantor executing this Amendment represent and warrant that he
has full power and authority to execute and deliver this Amendment on behalf of
Borrower and Guarantor, respectively, that such execution and delivery has been
duly authorized, and that the resolutions and affidavits previously delivered to
Agent, in connection with the execution and delivery of the Original Agreement,
are and remain in full force and effect and have not been altered, amended or
repealed in anywise.
Section 9. No Waiver. Borrower agrees that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by Agent,
and any such Default or Event
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<PAGE> 8
of Default heretofore arising and currently continuing shall continue after the
execution and delivery hereof.
Section 10. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 11. Counterparts and Gender. This Amendment may be executed in
any number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. Each gender used herein shall
include and apply to all genders, including the neuter.
SECTION 12. NO ORAL AGREEMENTS. THIS AMENDMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED this 13th day of October, 1999.
BORROWER:
MORTGAGE PORTFOLIO SERVICES, INC.,
a Delaware corporation
By:
----------------------------------------
James E. Hinton, President
GUARANTOR:
NAB ASSET CORPORATION,
a Texas corporation
By:
----------------------------------------
Alan K. Ferree, Senior Vice President
AGENT:
BANK UNITED
By:
----------------------------------------
Francis S. Hattemer, Managing Director
Mortgage Banker Finance
Page 8
<PAGE> 9
LENDERS:
BANK UNITED
By:
----------------------------------------
Francis S. Hattemer, Managing Director
Mortgage Banker Finance
RESIDENTIAL FUNDING CORPORATION
By:
----------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
U.S. BANK NATIONAL ASSOCIATION
By:
----------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
Page 9
<PAGE> 10
EXHIBIT A-1
PROMISSORY NOTE
$__________________ Dallas, Texas ____________, 199____
FOR VALUE RECEIVED, the undersigned, Mortgage Portfolio Services, Inc.
(herein called "Borrower"), hereby promises to pay to the order of
___________________ (herein called "Lender"), the principal sum of
________________ Dollars ($___________________) or, if less, the aggregate
unpaid principal amount of the Loans made under this Note by Lender to Borrower
pursuant to the terms of the Credit Agreement (as hereinafter defined), together
with interest on the unpaid principal balance thereof as hereinafter set forth,
both principal and interest payable as herein provided in lawful money of the
United States of America at the offices of the Agent under the Credit Agreement,
3200 Southwest Freeway, Suite 2700, Houston, Texas 77027 or at such other place
within Dallas County, Texas, as from time to time may be designated by the
holder of this Note.
This Note (a) is issued and delivered under that certain Credit
Agreement dated as of June 15, 1999 among Borrower, NAB Asset Corporation, Bank
United, as Agent and the lenders (including Lender) referred to therein (herein,
as from time to time supplemented, amended or restated, called the "Credit
Agreement"), and is a Note as defined therein, (b) is subject to the terms and
provisions of the Credit Agreement, which contains provisions for payments and
prepayments hereunder and acceleration of the maturity hereof upon the happening
of certain stated events, and (c) is secured by and entitled to the benefits of
certain Security Instruments (as identified and defined in the Credit
Agreement). Payments on this Note shall be made and applied as provided herein
and in the Credit Agreement. Reference is hereby made to the Credit Agreement
for a description of certain rights, limitations of rights, obligations and
duties of the parties hereto and for the meanings assigned to terms used and not
defined herein and to the Security Instruments for a description of the nature
and extent of the security thereby provided and the rights of the parties
thereto. [This Note is given in renewal, increase and extension (but not in
extinguishment or novation) of that certain Promissory Note dated _____________
executed by Borrower payable to the order of the Lender in the original
principal sum of $_________________.]
On the fifteenth (15) day of each calendar month, beginning
________________, 199___, Borrower shall pay to the holder hereof all unpaid
interest which has accrued on the Loans made under this Note through and
including the last day of the immediately preceding calendar month. The
principal amount of this Note, together with all interest accrued hereon, shall
be due and payable in full on the Drawdown Termination Date.
The Loans made under this Note (exclusive of any past due principal or
interest) from time to time outstanding shall bear interest on each day
outstanding at the Applicable Rate in effect on such day; provided, however,
that interest on the part of the Loans equal to the Balance Funded Amount for
the immediately preceding Balance Calculation Period shall bear interest on each
day outstanding at the Balance Funded Rate. All past due principal of and past
due interest on the Loans made under this Note shall bear interest on each day
outstanding at the Late Payment Rate in effect on such day, and such interest
shall be due and payable immediately as it accrues. Notwithstanding the
foregoing provisions of this paragraph, if at any time the rate at which
interest is payable on this Note (considering together all portions of the Loans
and the interest payable thereon) exceeds the Maximum Rate, this Note shall bear
interest at the Maximum Rate only but shall continue to bear
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<PAGE> 11
interest at the Maximum Rate until such time as the total amount of interest
accrued hereon equals (but does not exceed) the total amount of interest which
would have accrued hereon had there been no Maximum Rate applicable hereto.
Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum amount of interest which, under applicable
law, may be charged on this Note, and this Note is expressly made subject to the
provisions of the Credit Agreement which more fully set out the limitations on
how interest accrues hereon. In the event applicable law provides for a ceiling
under Section 303 of the Texas Finance Code, that ceiling shall be the weekly
rate ceiling and shall be used in this Note for calculating the Maximum Rate and
for all other purposes. The term "applicable law" as used in this Note shall
mean the laws of the State of Texas or the laws of the United States, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum interest which, under applicable law, may be
charged on this Note, and this Note is expressly made subject to the provisions
of the Credit Agreement which more fully set out the limitations on how interest
accrues hereon.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, Borrower and all endorsers, sureties
and guarantors of this Note jointly and severally agree to pay reasonable
attorneys' fees and collection costs to the holder hereof in addition to the
principal and interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment, notice of demand and of dishonor and
nonpayment of this Note, protest, notice of protest, notice of intention to
accelerate the maturity of this Note, declaration or notice of acceleration of
the maturity of this Note, diligence in collecting, the bringing of any suit
against any party and any notice of or defense on account of any extensions,
renewals, partial payments or changes in any manner of or in this Note or in any
of its terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any holder
hereof, whether before or after maturity.
No waiver by Lender of any of its rights or remedies hereunder or under
any other document evidencing or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of Lender; no delay
or omission in the exercise or enforcement by Lender of any rights or remedies
shall ever by construed as a waiver of any right or remedy of Lender; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Lender.
Borrower reserves the right to prepay the outstanding principal balance
of this Note, in whole or in part at any time and from time to time without
premium or penalty, in accordance with the terms of the Credit Agreement.
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<PAGE> 12
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THE SAME ARE
GOVERNED BY APPLICABLE FEDERAL LAW.
MORTGAGE PORTFOLIO SERVICES, INC.
By:
--------------------------------------
Name:
Title:
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<PAGE> 13
EXHIBIT "A-2"
SWING-LINE NOTE
$9,000,000.00 Houston, Texas June 15, 1999
FOR VALUE RECEIVED, the undersigned, Mortgage Portfolio Services, Inc.
(herein called "Borrower"), hereby promises to pay to the order of Bank United
(herein called "Lender"), the principal sum of Nine Million Dollars ($9,000,000)
or, if less, the aggregate unpaid principal amount of the Swing-Line Loans made
under this Note by Lender to Borrower pursuant to the terms of the Credit
Agreement (as hereinafter defined), together with interest on the unpaid
principal balance thereof as hereinafter set forth, both principal and interest
payable as herein provided in lawful money of the United States of America at
the offices of the Agent under the Credit Agreement, 3200 Southwest Freeway,
Suite 2700, Houston, Texas 77027 or at such other place within Harris County,
Texas, as from time to time may be designated by the holder of this Note.
This Note (a) is issued and delivered under that certain Credit
Agreement dated as of June 15, 1999 among Borrower, NAB Asset Corporation, Bank
United, as Agent and the lenders (including Lender) referred to therein (herein,
as from time to time supplemented, amended or restated, called the "Credit
Agreement"), and is the Swing-Line Note as defined therein, (b) is subject to
the terms and provisions of the Credit Agreement, which contains provisions for
payments and prepayments hereunder and acceleration of the maturity hereof upon
the happening of certain stated events, and (c) is secured by and entitled to
the benefits of certain Security Instruments (as identified and defined in the
Credit Agreement). Payments on this Note shall be made and applied as provided
herein and in the Credit Agreement. Reference is hereby made to the Credit
Agreement for a description of certain rights, limitations of rights,
obligations and duties of the parties hereto and for the meanings assigned to
terms used and not defined herein and to the Security Instruments for a
description of the nature and extent of the security thereby provided and the
rights of the parties thereto.
On the fifteenth (15) day of each calendar month, beginning July 15,
1999, Borrower shall pay to the holder hereof all unpaid interest which has
accrued on the Swing-Line Loans made under this Note through and including the
last day of the immediately preceding calendar month. The principal amount of
this Note, together with all interest accrued hereon, shall be due and payable
in full on the Drawdown Termination Date.
The Swing-Line Loans made under this Note (exclusive of any past due
principal or interest) from time to time outstanding shall bear interest on each
day outstanding at the Applicable Rate in effect on such day. All past due
principal of and past due interest on the Swing-Line Loans made under this Note
shall bear interest on each day outstanding at the Late Payment Rate in effect
on such day, and such interest shall be due and payable immediately as it
accrues. Notwithstanding the foregoing provisions of this paragraph, if at any
time the rate at which interest is payable on this Note (considering together
all portions of the Loans and the interest payable thereon) exceeds the Maximum
Rate, this Note shall bear interest at the Maximum Rate only but shall continue
to bear interest at the Maximum Rate until such time as the total amount of
interest accrued hereon equals (but does not exceed) the total amount of
interest which would have accrued hereon had there been no Maximum Rate
applicable hereto.
Page 13
<PAGE> 14
Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum amount of interest which, under applicable
law, may be charged on this Note, and this Note is expressly made subject to the
provisions of the Credit Agreement which more fully set out the limitations on
how interest accrues hereon. In the event applicable law provides for a ceiling
under Section 303 of the Texas Finance Code, that ceiling shall be the weekly
rate ceiling and shall be used in this Note for calculating the Maximum Rate and
for all other purposes. The term "applicable law" as used in this Note shall
mean the laws of the State of Texas or the laws of the United States, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum interest which, under applicable law, may be
charged on this Note, and this Note is expressly made subject to the provisions
of the Credit Agreement which more fully set out the limitations on how interest
accrues hereon.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, Borrower and all endorsers, sureties
and guarantors of this Note jointly and severally agree to pay reasonable
attorneys' fees and collection costs to the holder hereof in addition to the
principal and interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment, notice of demand and of dishonor and
nonpayment of this Note, protest, notice of protest, notice of intention to
accelerate the maturity of this Note, declaration or notice of acceleration of
the maturity of this Note, diligence in collecting, the bringing of any suit
against any party and any notice of or defense on account of any extensions,
renewals, partial payments or changes in any manner of or in this Note or in any
of its terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any holder
hereof, whether before or after maturity.
No waiver by Lender of any of its rights or remedies hereunder or under
any other document evidencing or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of Lender; no delay
or omission in the exercise or enforcement by Lender bf any rights or remedies
shall ever by construed as a waiver of any right or remedy of Lender; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Lender.
Borrower reserves the right to prepay the outstanding principal balance
of this Note, in whole or in part at any time and from time to time without
premium or penalty, in accordance with the terms of the Credit Agreement.
Page 14
<PAGE> 15
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THE SAME ARE
GOVERNED BY APPLICABLE FEDERAL LAW.
BORROWER:
MORTGAGE PORTFOLIO SERVICES, INC.,
a Delaware corporation
By:
----------------------------------------
JAMES E. HINTON, President
Page 15
<PAGE> 16
EXHIBIT "C"
BORROWING BASE CERTIFICATE
[Date]
Reference is made to that certain Credit Agreement dated as of June 15,
1999 (as from time to time amended, the "Agreement") by and among Mortgage
Portfolio Services, Inc. ("Borrower"), NAB Asset Corporation, as Guarantor, Bank
United, as Agent ("Agent"), and the lenders named therein ("Lenders"). Terms
which are defined in the Agreement are used herein with the meanings given them
in the Agreement.
This Certificate is being furnished pursuant to Section 5.01(a)(vi) of
the Agreement. Borrower hereby certifies to Agent and Lenders as follows:
(a) the officer of Borrower signing this instrument is the duly
elected, qualified and acting ___________________ of Borrower
and as such is authorized to submit this Certificate on behalf
of Borrower;
(b) as of the close of business on ___________________:
(i) The Aggregate Collateral Value of the Borrowing Base was
computed as follows:
<TABLE>
<S> <C>
A. Collateral Value of Tranche A Borrowing Base: $__________
B. Collateral Value of Tranche B Borrowing Base: $__________
C0 Collateral Value of Tranche C Borrowing Base: $__________
D0 Collateral Value of Tranche D Borrowing Base: $__________
E0 Aggregate Collateral Value of the Borrowing Base: $__________
(A+B+C+D)
(ii) Sublimits:
A0 Aggregate Unit Collateral Value of all Eligible
Mortgage Loans for which an Agreement to Pledge
has been delivered to Agent: $__________
Maximum Allowable $33,600,000
</TABLE>
Page 16
<PAGE> 17
<TABLE>
<S> <C>
B0 Aggregate Unit Collateral Value of all Eligible
Subprime Loans included in the Tranche B
Borrowing Base: $__________
Maximum Allowable $32,000,000
C0 Aggregate Unit Collateral Value of Jumbo Mortgage
Loans and Super Jumbo Mortgage Loans: $__________
Maximum Allowable (30% of the Commitment): $__________
D0 Aggregate Unit Collateral Value of Super Jumbo
Mortgage Loans: $__________
Maximum Allowable (5% of the Commitment): $__________
E0 Aggregate Unit Collateral Value of Eligible
Tranche A Mortgage Loans and Eligible Tranche B
Mortgage Loans included in the Tranche A
Borrowing Base or the Tranche B Borrowing
Base for more than 120 days but less than 271
days: $__________
Maximum Allowable: $ 1,600,000
F0 Aggregate Unit Collateral Value of Eligible
Manufactured Housing Loans: $__________
Maximum Allowable $ 2,400,000
G0 Aggregate Unit Collateral of Mortgage Loans
withdrawn by Borrower for non-substantive
documentation problems: $__________
Maximum Allowable: $ 4,000,000
H0 Aggregate Unit Collateral Value of Second
Mortgage Loans included in the Tranche A
Borrowing Base or the Tranche B Borrowing
Base and Eligible High LTV Loans included
in the Tranche B Borrowing Base: $__________
Maximum Allowable $ 4,000,000
(iii) Mortgage Loans which have ceased to be Eligible
Mortgage Loans are described in Schedule 1 attached
hereto.
</TABLE>
Page 17
<PAGE> 18
<TABLE>
<S> <C>
(iv) The aggregate principal amount outstanding under
the Tranche A Loans is: $__________
(v) The aggregate principal amount outstanding under
the Tranche B Loans is: $__________
(vi) The aggregate principal amount outstanding under
the Tranche C Loans is: $__________
Tranche C Sublimit $ 9,600,000
(vii) The aggregate principal amount outstanding under
the Tranche D Loans is: $__________
Tranche D Sublimit $ 2,000,000
</TABLE>
The officer of Borrower signing this instrument certifies that, to the
best of his knowledge after due inquiry, the above certifications of Borrower
are true, correct and complete.
IN WITNESS WHEREOF, the instrument is executed as of _________________.
MORTGAGE PORTFOLIO SERVICES, INC.
By:
-----------------------------------
Name:
----------------------------
Title:
----------------------------
Page 18
<PAGE> 19
EXHIBIT "D"
CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS
Reference is made to that certain Credit Agreement dated as of June 15,
1999 (as from time to time amended, the "Agreement"), by and among MORTGAGE
PORTFOLIO SERVICES, INC. ("Borrower"), NAB ASSET CORPORATION, Bank United, as
Agent ("Agent"), and the lenders named therein ("Lenders") which Agreement is in
full force and effect on the date hereof. Terms which are defined in the
Agreement are used herein with the meanings given them in the Agreement.
This Certificate is furnished pursuant to Section 5.01(a)(v) of the
Agreement. Together herewith Borrower is furnishing to Agent and each Lender
Borrower's audited annual financial statements or monthly financial statements
(the "Financial Statements") dated _________________ (the "Reporting Date").
Borrower hereby represents, warrants, and acknowledges to Agent and each Lender
that:
(a) the officer of Borrower signing this instrument is
the duly elected, qualified and acting
______________________ of Borrower and as such is
Borrower's [president, chief financial officer or
other executive officer of Borrower];
(b) the Financial Statements are prepared in accordance
with GAAP;
(c) attached hereto is Schedule D-1 showing Borrower's
compliance as of the Reporting Date with the
requirements of Sections 6.09, and 6.10 of the
Agreement and Borrower's non-compliance as of such
date with the requirements of Section(s) of the
Agreement;
(d) on the Reporting Date Borrower was, and on the date
hereof Borrower is, in full compliance with the
disclosure requirements of Article V of the
Agreement, and no Default otherwise existed on the
Reporting Date or otherwise exists on the date of
this instrument [except for Default(s) under
Section(s) ___________________ of the Agreement,
which (is/are] more fully described on a schedule
attached hereto).
The officer of Borrower signing this instrument hereby certifies that
he has reviewed the Loan Documents and the Financial Statements and has
otherwise undertaken such inquiry as is in his opinion necessary to enable him
to express an informed opinion with respect to the above representations,
warranties and acknowledgments of Borrower and, to the best of his knowledge,
such representations, warranties, and acknowledgments are true, correct and
complete.
Page 19
<PAGE> 20
IN WITNESS WHEREOF, this instrument is executed as of ________________,
19____.
MORTGAGE PORTFOLIO SERVICES, INC.
By:
-----------------------------------
Name:
----------------------------
Title:
----------------------------
STATE OF __________________)
)
COUNTY OF _________________)
This instrument was ACKNOWLEDGED before me the ____ day of ___________,
19__, by _____________________, ___________________ of MORTGAGE PORTFOLIO
SERVICES, INC., a Delaware corporation, on behalf of said corporation.
----------------------------------------
Notary Public - State of
----------------
My Commission expires: ----------------------------------------
Printed Name of Notary
[SEAL]
Page 20
<PAGE> 21
SCHEDULE D-1
<TABLE>
<CAPTION>
Actual [or in
Financial Covenants Required compliance]
- ------------------- -------- -------------
<S> <C> <C>
(1) Minimum Tangible Net
Worth [6.09] $7,000,000 ______________________
Guarantor's Tangible
Net Worth $5,000,000 ______________________
(2) Debt to Tangible Net
Worth [6.10] not more than 10.0 to 1.0 ______________________
</TABLE>
MORTGAGE PORTFOLIO SERVICES, INC.,
a Delaware corporation
By:
-------------------------------
Name:
----------------------------
Title:
----------------------------
(Date)
Page 21
<PAGE> 22
STATE OF __________________)
)
COUNTY OF _________________)
This instrument was ACKNOWLEDGED before me the _____ day of
________________, 19____, by ___________________, ____________________ of
MORTGAGE PORTFOLIO SERVICES, INC., a Delaware corporation, on behalf of said
corporation.
----------------------------------------
Notary Public - State of
----------------
My Commission expires: ----------------------------------------
Printed Name of Notary
[SEAL]
Page 22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 11,212 4,898
<SECURITIES> 0 0
<RECEIVABLES> 56,489 92,501
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,886 1,790
<DEPRECIATION> 1,182 752
<TOTAL-ASSETS> 78,741 113,315
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 3,575 8,090
<TOTAL-LIABILITY-AND-EQUITY> 78,741 113,315
<SALES> 3,382 10,766
<TOTAL-REVENUES> 6,861 21,683
<CGS> 0 0
<TOTAL-COSTS> 6,495 23,455
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,470 4,457
<INCOME-PRETAX> (1,302) (3,455)
<INCOME-TAX> 198 263
<INCOME-CONTINUING> (1,302) (3,455)
<DISCONTINUED> (185) (905)
<EXTRAORDINARY> 0 0
<CHANGES> 0 (155)
<NET-INCOME> (1,487) (4,515)
<EPS-BASIC> (0.29) (0.89)
<EPS-DILUTED> (0.29) (0.89)
</TABLE>
