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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19391
NAB ASSET CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Texas 76-0332056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23361 Madero, Suite 200 92679
Mission Viejo, CA (Zip Code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: (949) 465-0244
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2000 was $1,114,000 based upon the closing price as
of such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
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<S> <C>
Title of Class Outstanding at March 15, 2000
Common Stock 5,091,300
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 10, 11, 12 and 13, will be
included in a definitive proxy statement to be filed on or before April 30, 2000
pursuant to Regulation 14A and is incorporated herein by reference.
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PART 1
ITEM 1. BUSINESS
THE COMPANY
NAB Asset Corporation, (the "Company" or "NAB") is a financial services
company engaged in the residential lending business. The Company commenced
operations in July 1991 following its acquisition and assumption of
substantially all the assets and liabilities of National Asset Bank (a bank in
liquidation) (the "Bank"). The Bank was formed in 1988 in connection with the
merger of Allied Bancshares, Inc. ("Allied") with a subsidiary of First
Interstate Bancorp ("First Interstate") for the purpose of liquidating various
non-performing loan and real estate assets held by Allied and its subsidiaries
for the benefit of the prior Allied stockholders. 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 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 Internal Revenue Code of 1986 (Section 382), as
amended. Section 382 provides in general that if a corporation undergoes an
ownership change, the amount of taxable income that the corporation may offset
after the date of such ownership change with NOLs and certain built-in losses
existing at the date of such ownership change will be subject to an annual
limitation. The Company's NOL's could become subject to certain limitations on
utilization in the event the Company undergoes an ownership change within the
meaning of Section 382.
On July 10, 1996 the Company acquired from CPS 84% of the outstanding
common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase price
of $300,000. The Company also acquired all of the outstanding shares of MPS
preferred stock for $2.25 million, through conversion of debt to equity, and
contributed $249,000 to the additional paid-in capital of MPS.
MPS, which was organized in October 1995 and began business operations
in April 1996, is a Dallas, Texas based mortgage lender whose customers are
typically home purchasers and owners who cannot access traditional lending
institutions for financing because of job stability, credit problems or type of
property (sub-prime).
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On August 31, 1997, MPS acquired the fixed assets and employed the
personnel of the single-family mortgage lending division of Pacific Southwest
Bank ("PSB"), a Dallas based savings and loan. A premium of $200,000 was paid
for the operation. In 1999 and 1998, the Company incurred additional purchase
premiums of $18,000 and $195,000 respectively based on 1999 and 1998 production
levels. The division, Pacific American Mortgage Company ("PAMCO") is primarily
engaged in mortgage lending through eleven retail branches in seven states.
Substantially all PAMCO mortgage loan originations are conventional conforming,
non-conforming and government insured mortgages (prime).
THE BUSINESS
Through MPS, the Company originates, acquires, warehouses and sells
residential mortgage loans. MPS originates both conventional and government
insured mortgages (prime originations) and originates non-conforming residential
mortgage loans that are not salable to the government-sponsored entities or the
government agencies. These loans are commonly referred to as sub-prime loans.
MPS also has a division that services construction loans that are made
to consumers. These loans are originated through the PAMCO retail branches. The
construction loans are originated in conjunction with the customer's permanent
mortgage (one-time closings). Originations of these loans in 1999 and 1998
totaled $22 and $24 million, respectively. This amount represents the total
commitment of funds not necessarily the ultimate amount disbursed. Amounts
outstanding at December 31, 1999 and 1998 totaled $3,330,000 and $9,465,000,
respectively. Originations of this product has declined over the past two years
as financial institutions in the areas where PAMCO originates these loans,
principally northern California, have begun to offer the product at more
competitive rates.
Origination Strategies
Retail Originations
PAMCO originates loans through thirteen branches in six states using
account executives that solicit loans through real estate agents, homebuilders
and referrals from previous customers. PAMCO has 28 account executives
soliciting loans in this manner. PAMCO retail originations totaled $444 million
in 1999 and $549 million in 1998. Retail prime originations totaled $433 million
in 1999 and $534 million in 1998. Retail sub-prime originations totaled $11
million in 1999 and $15 million in 1998.
In late 1998, MPS began a direct to consumer solicitation program
through the internet. Preliminary applications are completed on-line by
prospective customers. The applications are then processed underwritten and
closed by MPS personnel. In 1999 MPS discontinued this origination strategy. MPS
is currently developing a business to business internet site that will assist
its wholesale customers in the loan origination process. The internet site will
contain pricing and product information and allow the customer to track the
status of loans in the process of underwriting and closing.
In 1999 MPS began to enter into the retail sub-prime origination
market. At December 31, 1999 MPS had one branch in Virginia. This branch
originates both prime and sub-prime mortgage loans through direct contact with
the consumer. Since December 31, 1999 MPS has hired a senior level executive to
seek out additional branches. These branches are operated as "net branches". A
net branch manager or owner receives a portion of the profit of a branch. These
profits are calculated under various formulas, but generally are the revenues
relating to the loans produced by the branch less direct expenses and an charge
from MPS for providing support services. Retail originations in 1999 amounted to
less than $1 million.
Wholesale Originations
In 1999 MPS originated approximately 72% of its sub-prime mortgage
loans using a network of approved independent mortgage brokers. PAMCO also
originated approximately 11% of its mortgages in the same manner through a
branch in northern California. All loans are underwritten and closed centrally.
A fee is normally paid to the mortgage broker of up to 2% of the loan amount for
sub-prime loans and 3% of the loan amount for prime loans. Wholesale sub-prime
originations totaled $203 million in 1999 and $234 million in 1998. Wholesale
prime originations totaled $55 million in 1999 and $63 million in 1998.
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Correspondent Originations
In 1999 MPS originated approximately 20% of its sub-prime loans by
purchasing closed loans from other mortgage bankers. These loans are
underwritten by MPS prior to purchase. Correspondent sub-prime production was
$41 million in 1999 and $83 million in 1998.
Underwriting
Underwriting guidelines with respect to prime mortgage loans are based
upon the guidelines set forth by the Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") for conventional
loans. The guidelines of the Federal Housing Administration ("FHA") and Veterans
Administration ("VA") are utilized for government insured or guaranteed
mortgages. Prime mortgage loans that would be conforming if not for the size of
the loan are underwritten to specific mortgage investor guidelines and are
generally consistent with FNMA or FHLMC guidelines. In most cases PAMCO has been
approved to underwrite the mortgage loan on behalf of the investor. MPS is also
an approved FHLMC seller/servicer.
Underwriting guidelines for sub-prime mortgages are developed to
generally conform to the guidelines as set forth by mortgage loan investors that
have approved MPS as a seller of mortgage loans. MPS utilizes a grid that, based
upon a borrower's credit history and current financial situation (including debt
to income ratios, employment and cash on hand), assigns a grade, A through D, to
that borrower. The grading of the loan determines the rate charged to the
borrower and the maximum loan based on the appraised value of the collateral.
Loan Sales
Best Efforts Sales
The Company's originations of conventional and government insured or
guaranteed loans are sold to investors on a loan by loan basis. When the
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.
PAMCO represents to the investor that if the loan is closed within the time
allotted by the investor PAMCO will deliver that loan to that investor. If the
loan does not close within the allotted time period PAMCO is under no further
obligation to the investor. If the loan closes and upon receipt of the
appropriate executed legal documentation PAMCO will deliver the legal documents
and credit file to the investor. Upon satisfactory completion of the investor's
review of the documents the investor purchases the loan at the agreed upon
price. All of PAMCO's loans are sold on a servicing released basis, meaning a
portion of the price paid to PAMCO represents the value of the servicing rights
that PAMCO has released to the investor.
Bulk Sales
MPS has historically sold its sub-prime mortgage production on a
servicing released basis to investors in pools based on a bidding process.
Monthly, loans would be aggregated and summarized information regarding the
loans would be distributed to potential bidders. A winning bidder would be
selected who would then review the files and purchase the acceptable loans. In
late 1998, a severe liquidity strain in the sub-prime mortgage industry caused
many investors to exit the market for sub-prime mortgage pools. As a result MPS
is not currently selling a significant amount of loans on a bid basis.
Forward Commitments
MPS enters into commitments with investors to sell sub-prime mortgage
loans at an agreed to price assuming certain criteria are met. The commitments
also contain formulas that would allow the investor to pay less than the maximum
price if those criteria were not met. These commitments generally provide for
maximum delivery amounts and specific time periods for delivery ranging from
three to six months
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Securitization
In June 1998 MPS completed its first securitization of approximately
$51,000,000 of sub-prime loans. In a securitization, the owner of loans sells
loans to a trust which in turn issues mortgage loan asset backed securities to
investors. The cash received is then distributed to the owner. The owner also
receives an interest in the excess cash flow generated from the sold loans which
is called a residual interest. The holder of the security then receives the
stated interest on the security and the principal repayments on the underlying
loans. The security that MPS issued was insured by a monoline insurance company
and the underlying mortgages were insured, as to credit losses, up to 5% of the
original principal balance of the loans sold to the trust under a pool policy
issued by a mortgage insurance company. Additionally a portion of the excess
cash flows accruing to MPS monthly are held in trust until certain minimum
levels of cash reserves are achieved.
MPS recorded a gain on sale of loans equal to the present value of the
cash flows to be received over the life of the securities. This gain was
calculated using prepayment and loss assumptions that affect the future cash
flows to be received. MPS is also the servicer of the loans and as a result
receives a portion of the monthly interest paid by the borrowers as a fee.
Hedging Activities
All of the Company's prime mortgage production is sold on a best
efforts basis as described above. The Company incurs no interest rate risk in
its sales strategy and therefore has no hedging activities. MPS's sub-prime
mortgage loans are generally sold within thirty days of origination and based
upon its history, short term fluctuations in interest rates have had little
impact on the prices that have been received for its mortgage loan production.
Additionally, the Company has determined that the cost of hedging its sub-prime
production outweighs any benefit that would be derived as a result.
Competition and Other Risks
MPS faces competition from numerous other mortgage bankers, banks,
savings and loans and finance companies. Many of these competitors are larger
and have greater access to capital and other financial resources than MPS.
In connection with financing MPS's mortgage loans receivable, most
financial institutions will not finance 100% of the loan amount. MPS will
generally be required to contribute, in addition to the normal costs of
operating the origination function, two percent of the principal amount of the
loan. MPS must generate sufficient cash flow from sales of mortgage loans to
fund the negative cash flow associated with the origination of its loans.
Additionally, the term of MPS's financing agreements is generally one year and
there can be no assurance that the financing can be renewed or replaced or if
renewed or replaced at the same or more favorable terms.
The contractual arrangements associated with the sale of sub-prime
loans require, for a specified period of time, generally one to two years,
indemnification for loans that prepay or default. Additionally MPS represents
and warrants to the investor that at the date of sale no material changes in the
borrowers condition since the origination date has occurred. A significant
increase in prepayments or defaults related to the loans sold would have a
significant negative impact on the liquidity and financial condition of MPS.
The business of MPS could be negatively affected if there is a downturn
in the economy in the geographic areas served by MPS, which results in a decline
for consumer credit or in real estate values. If originations decline, sales of
mortgage loans, the main source of MPS's revenue will also decline. Declining
real estate values inhibit the borrower's ability to refinance and obtain cash
based on the value of the borrowers property.
Fluctuations in interest rates may adversely affect MPS's loan
production. Substantial increases in long-term interest rates generally result
in a decline in mortgage originations. A large decline in interest rates may
result in unusually large prepayments which, under the terms of the contracts
governing MPS's sales of mortgage loans, could require MPS to reimburse the
purchasers of such loans for a portion of the
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servicing release premium paid by them for such loans. Approximately 66% of
MPS's loan production is at a fixed rate of interest. If short-term interest
rates rise, MPS's borrowing cost would increase, resulting in a decline in the
spread (the difference between interest received on loans and paid on
borrowings) MPS earns. Additionally, prices paid for the Company's loans may be
negatively impacted. An increase in short-term interest rates would also
negatively impact the value of MPS's residual interest in securitization as a
portion of the payments made to bondholders adjust based upon movements in the
LIBOR.
The Company's sub-prime mortgage loan production in 1999 represented
34% of the Company's total loan production and revenues through the sale of its
sub-prime loans totaled $7,405,000 or 27% of the Company's consolidated revenue.
The Company is highly dependent upon bulk sale and forward commitment deliveries
for its sub-prime revenue. The number of financial institutions purchasing
sub-prime mortgages has declined over the past two years. Competitors that have
greater capital and financial resources than the Company have access to the
financial markets to securitize their sub-prime production. If investors of the
Company's sub-prime mortgage loans continue to exit the market it would have a
material adverse effect on the Company. In 1999 two customers accounted for
$5,791,000 or 74% of the Company's gains on sales of sub-prime mortgage loans.
During 1999, approximately $9,469,000 or 71% of the Company's gain on
sale of loans were as a result of loan sales to three customers.
MPS's business is subject to extensive regulation, supervision and
licensing by federal, state and local government authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. The Company's consumer
lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X, the Fair Housing Act, the
Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as
well as other federal and state statutes and regulations affecting the Company's
activities. The Company is also subject to the rules and regulations of and
examinations by the Department of Housing and Urban Development ("HUD") and
state regulatory authorities with respect to originating, processing,
underwriting and selling loans. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on loan applicants, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, demands for indemnification or mortgage
loan repurchases, certain rights of rescission for mortgage loans, claims by
mortgage borrowers and administrative enforcement actions.
DISCONTINUED OPERATIONS
In the third quarter of 1999 the Company elected to dispose of two of
its operating segments, Construction Portfolio Funding, Inc. ("CPFI") and NAFCO,
Inc. ("NAFCO").
CPFI began operations in December 1997 and was engaged in the business
of providing financing and servicing to residential homebuilders for the
construction of single family residences and, to a lesser extent, acquisition
and development loans, lot loans and model home loans to those homebuilders.
NAFCO began operations in January 1997 and was a lender to companies in
the rent-to-own and rental purchase business.
EMPLOYEES
At December 31, 1999 the Company and its subsidiaries employed 237
persons. Of that total MPS employed 119 persons, PAMCO employed 113 persons and
NAB employed 3 persons at the corporate level. Two persons were employed by the
discontinued operations.
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ITEM 2. PROPERTIES
The Company's executive offices, totaling 888 square feet and located
in Mission Viejo, California, are leased at an annual base rent of $17,000. The
lease expires in April of 2001.
The Company through its subsidiaries also leases 55,000 square feet and
occupies 38,000 square feet in Dallas for administrative and sales functions
relating to its mortgage banking operations. One lease representing 14,000
square feet expires in August 2000 and will not be renewed. MPS leases office
space for its branches in Arizona, California, Colorado, Florida, Nevada,
Tennessee and Texas. The offices vary in size depending on the origination
volume in each location.
The Company believes that its facilities are adequate for its immediate
needs and that additional space is available at a comparable cost if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to lawsuits which arise in the ordinary course
of its business. Management is of the opinion, based in part upon consultation
with its counsel, that the liability of the Company, if any, arising from
existing and threatened lawsuits would not have a material adverse effect on the
Company's consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fiscal quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on The OTC Bulletin Board under the
symbol "NABC.OB". The following table sets forth the quarterly high and low sale
prices for the common stock.
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PRICE
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HIGH LOW
---------- ----------
Year ended December 31, 1998
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First Quarter 3-1/4 2-1/8
Second Quarter 4 2-3/8
Third Quarter 2-7/8 1-3/8
Fourth Quarter 2-1/4 1-1/4
Year ended December 31, 1999
First Quarter 1-5/8 1-1/32
Second Quarter 1-1/4 13/16
Third Quarter 1 5/16
Fourth Quarter 5/8 3/16
</TABLE>
As of February 29, 2000, there were approximately 7,200 shareholders of
record.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
As of and for the year ended December 31,
(all amounts in thousands, except share data)
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<CAPTION>
1999 1998 1997 1996 1995(1)
---- ---- ---- ---- -------
STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Revenues from continuing operations ....... $ 27,210 $ 35,676 $ 16,213 $ 1,414 $-
Earnings (loss) from continuing operations (5,000) (634) 1,053 (796) --
Earnings (loss) from discontinued
operations, net of income taxes .......... (1,553) 796 1,181 2,344 (456)
Net earnings (loss) ....................... (6,553) 162 2,234 1,548 (456)
Basic and diluted earnings (loss) per share
from continuing operations before
cumulative change in accounting
principle .............................. (0.95) (0.13) 0.21 (0.16) --
Basic and diluted earnings (loss) per share (1.29) 0.03 0.44 0.30 (0.11)
Weighted average number common shares
outstanding .............................. 5,091 5,091 5,091 5,091 4,209
BALANCE SHEET:
Residential mortgage loans ................ 46,029 78,911 45,472 12,648 --
Construction loans ........................ 3,330 9,465 13,091 -- --
Total assets .............................. 64,406 113,317 83,235 17,904 22,720
Total debt ................................ 49,495 86,994 66,302 11,819 --
Total liabilities ......................... 62,313 104,203 75,080 12,298 744
Shareholders' equity (net assets) ......... 2,046 8,599 7,839 5,605 21,976
Distributions ............................. -- -- -- 21,883 --
Book value per share ...................... 0.40 1.69 1.54 1.10 --
Cash distributions per share (2) .......... -- -- -- 3.64 --
Transfer to liquidating trust per share (2) -- -- -- 1.56 --
</TABLE>
(1) All amounts relate to discontinued operations.
(2) Paid on 4,208,835 shares of common stock
Reference is made to Item 1. Business, for discussion of the merger
between the Company and CPS Sub and the resulting distribution of cash and other
assets to the shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company for the three years ended December 31, 1999.
GENERAL
NAB is a financial services company engaged in two reportable segments,
sub-prime and prime residential mortgage banking. The sub-prime residential
mortgage banking segment (MPS) was acquired in July 1996 and the prime
residential mortgage banking segment (PAMCO) was acquired in August of 1997.
PAMCO is a division of MPS. In the third quarter of 1999, the Company began
disposition efforts related to two other segments, residential construction
lending (CPFI) and commercial lending (NAFCO). The residential construction
lending business, begun in December, 1997, originated and held for investment
single family residential construction loans to homebuilders and to a lesser
extent lots, model homes and acquisition and development projects for those
homebuilders. The commercial finance operations, begun in January, 1997,
provided financing to operators of rent-to-own or rental purchase retailers. In
1997 the Company sold its interest in its retail automobile sales business.
Prior to the Merger on June 5, 1996, the Company's primary operations consisted
of the acquisition, ownership, management and disposition of loans and real
estate for its own account and the account of others.
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FINANCIAL CONDITION
Beginning in September 1998, as a result of a number of factors, cash
prices in the sub-prime mortgage market significantly deteriorated. Prices paid
for the Company's sub-prime production declined in excess of 200 basis points.
The Company, in response, entered into forward commitments to protect itself
from any continued deterioration in sales prices, lowered the prices it paid for
its wholesale and correspondent production and reduced its workforce in certain
areas. As a result of lowering its prices, the Company's sub-prime loan
production has declined. The decline in sales prices and the reduced levels of
originations of sub-prime mortgages has resulted in losses in the sub prime
segment.
Increases in long term interest rates over the past twelve months have
severely reduced the mortgage banking industry's level of prime originations,
particularly the refinancing of borrower existing indebtedness to a lower rate.
Although historically PAMCO has not relied on the refinance business, the
Company's origination of prime mortgages has declined. On a reportable segment
basis, the prime origination segment of the Company was profitable but at levels
below 1998.
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 has
relied on borrowings to grow its operations. Historically the Company has relied
on Stanwich Financial Services Corp. ("SFSC") and CPS to provide funds to
support the additional growth of the Company. 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.
Operating income from the two reportable segments has been insufficient
to cover the corporate expenses and interest to date. The Company continues to
minimize, to the extent possible, expenses for the ongoing operation and to
expand its origination network without requiring any capital.
In order to reduce the debt to SFSC and CPS, the Company elected to
dispose of its investment in CPFI and NAFCO. Proceeds from the disposal have
been and will continue to be used, as funds become available, to reduce the
outstanding indebtedness to SFSC. The notes payable to CPS were paid in full
during 1999.
Loans Held For Sale
The Company's mortgage loan production and its originations of
construction loans to individuals (one-time closings) are financed under a
$80,000,000 line of credit with a federal savings bank of which $40,218,000 was
outstanding at December 31, 1999. The interest rates charged on the line of
credit vary based on the type of loan, such as prime, sub-prime and
construction. Generally the Company must fund 2% of the mortgage loan amount and
10% of the outstanding balance of the construction loan. The interest rate
charged the Company is based upon a spread over the one month London Inter Bank
Offering Rate ("LIBOR") ranging from 1.25% to 2.50%.
At December 31, 1999 residential mortgage loans held for sale totaled
$46,029,000. Of this amount $25,525,000 was conventional and government insured
or guaranteed loans (prime) and $20,504,000 was 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 sub-prime loans
held for sale at December 31,1999 are generally being sold through forward
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
borrowers 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 purchase premium if the loan pays in full over a period of up to
one year. The Company defers a portion of the purchase premium, which reduces
the gain recorded on each loan sale, to cover the potential liability resulting
from the warranties given to the investor.
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At December 31, 1999 the liability as a result of the warranties given
to the purchasers of the Company's loans totaled $956,000. Additions to the
liability totaled $1,141,000 in 1999, $1,555,000 in 1998 and $617,000 in 1997.
Such additions are charged to gains on sales of loans.
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. MPS recorded a net gain of $1,908,000 or 3.74%
of the principal balance of the loans sold, which is the excess of the cash
received and fair value of the assets retained by the Company over the relative
fair value of the loans sold, less transaction costs.
The performance of the loans underlying the security through December
31, 1999 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
<S> <C> <C>
Remaining Principal $21,925,000 $15,479,000
Annualized prepayment rates 12.2% 20.9%
Cumulative losses $28,000 -
Delinquency percentages
30-59 days .43% 2.46%
60-89 days .54% 2.17%
Over 90 days .81% 1.25%
Delinquent bankruptcies 1.79% .98%
Loans in foreclosure 3.53% 4.25%
Foreclosed loans .86% 4.43%
Total delinquencies 7.96% 15.54%
</TABLE>
The Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. Total loss coverage under the pool
insurance policy is $2,569,000. The fee is .52% annually of the unpaid principal
of the loans. The pool insurance policy stipulates that the loans covered must
be current at the date of the policy. Three loans were delinquent at that date
and subsequently were foreclosed upon and sold. Two loans were repurchased by
the Company and the remaining loan incurred a loss of approximately $28,000.
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 is required by
the servicing agreement to be maintained at 2.75% of the fixed rate balance and
4% of the adjustable rate balance of the securities. The Company has met the
original minimum over-collateralization requirement as set forth by the bond
insurer. One of the requirements set forth by the bond insurer is that the
interest rate spread between the adjustable rate loans and the underlying bonds,
after expenses must be 2.5%. At December 31, 1999 this requirement was not met.
A formula is used to calculate the new required over-collateralization based
upon the extent of the spread deficiency. Based on the formula, assuming the
deposits to the over-collateralization account continue at present levels and
there is not a significant increase in the underlying bond rates, the Company
expects to begin receiving cash flow from the security in the second quarter of
2000.
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 over-collateralization account which is the excess
monthly cash flows, other than servicing revenues, that are required to be
maintained with the trustee until certain over-collateralization levels are met.
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.
9
<PAGE> 11
At December 31, 1999 and 1998 the residual interests in the
securitization consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NIR $1,978,000 $2,900,000
Over-collateralization account 1,700,000 634,000
--------- -------
$3,678,000 $3,534,000
========== ==========
</TABLE>
At December 31, 1999 the assumptions used in the valuation of the
residual interests were as follows:
The assumptions used in the valuation of the residual interests were as
follows:
<TABLE>
<CAPTION>
December 31, 1999 Original Assumptions
---------------------------- ---------------------------
Fixed Adjustable Fixed Adjustable
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Weighted average life 4.58 years 2.77 years 3.94 years 3.16 years
Prepayment speeds-ramp up to 17%CPR 35%CPR 24%CPR 25%CPR
Cumulative defaults 15.50% 18.00% 8.00% 10.00%
Cumulative losses, net of losses
covered by pool insurance .62% .71% .40% .50%
Delinquencies (over 30 days) 13.00% 13.00% 8.00% 8.00%
</TABLE>
Upon reaching the required over-collateralization levels, the Company is
entitled to receive the cash flows that represent collections on the mortgage
loans in excess of the amounts required to be paid to the bondholders. If the
actual performance of the mortgage loans differs significantly from the original
assumed performance, the cash the Company is entitled to receive will vary from
the NIR calculated using the assumptions above.
Escrow balances on securitized loans serviced by the Company are not
included in the accompanying consolidated balance sheets and totaled $27,000 and
$109,000 at December 31, 1999 and 1998, respectively.
Discontinued Operations
In the third quarter of 1999 the Company elected to dispose of two of
its operating segments, CPFI and NAFCO.
At December 31, 1999 CPFI had $5,409,000 in remaining assets of which
$5,122,000 were loans receivable. The allowance for losses totaled $164,000 at
that date. The remaining loans receivable which represent loans to six customers
are expected to be paid either through maturity or sale of the collateral by the
end of the second quarter of 2000. At December 31, 1999, CPFI had outstanding
bank borrowings of $2,914,000 secured by loans receivable. The borrowings were
repaid in the first quarter of 2000.
At December 31, 1999 NAFCO had two loans remaining totaling $974,000,
net of allowance for losses. These two loans were disposed of in January 2000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998
For the year ended December 31, 1999 the Company reported a loss from
continuing operations, before cumulative change in accounting principle of
$(4,845,000), compared to a loss from continuing operations of $(634,000) for
the year ended December 31, 1998. In 1999 the Company disposed of its
construction and commercial lending operations. Including discontinued
operations the Company reported a net loss of $(6,553,000) in 1999 as compared
to net earnings of $162,000 in 1998.
10
<PAGE> 12
The 1999 loss was principally due to three factors: the continued
losses associated with the Company's sub prime mortgage lending operation, MPS;
a decline in PAMCO's originations resulting from an increase in long-term
interest rates; and the losses associated with disposal of the Company's
commercial lending operation, NAFCO.
PAMCO's mortgage production declined approximately 18% over 1998.
Rising long-term interest rates have reduced originations in general in the
prime mortgage banking industry as a whole. Although still profitable, the PAMCO
segment contributed less earnings than in prior periods.
The Company recorded $1,962,000 in losses in 1999 for the discontinued
operations of NAFCO, which was primarily a result of the disposal of the
commercial loan portfolio.
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 years ended December 31, 1999, 1998 and 1997. The
results of operations include acquired operations and businesses since the
acquisition date. A summary of the operating profits and losses by the Company's
operating segments is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Residential mortgage banking-sub-prime... $ 10,663 $ 15,427 $ 10,856
Residential mortgage banking-prime ...... 16,329 19,634 5,245
Corporate and intercompany eliminations.. 218 615 112
-------- -------- --------
Total revenues: .................... 27,210 35,676 16,213
Costs and expenses:
Residential mortgage banking-sub-prime... 14,842 15,308 8,475
Residential mortgage banking-prime ...... 15,026 16,997 4,690
Corporate and intercompany eliminations.. 2,187 4,005 1,995
-------- -------- --------
Total costs and expenses ........... 32,055 36,310 15,160
-------- -------- --------
Operating profit (loss):
Residential mortgage banking-sub-prime... (4,179) 119 2,381
Residential mortgage banking-prime ...... 1,303 2,637 555
Corporate and intercompany eliminations.. (1,969) (3,390) (1,883)
-------- -------- --------
Earnings (loss) from continuing operations...
before cumulative effect of change
in accounting principle .................... $ (4,845) $ (634) $ 1,053
======== ======== ========
</TABLE>
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, which was acquired in August of 1997. MPS and PAMCO
originate loans in 42 states.
Residential mortgage loan production for 1999, 1998 and 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Prime (1) Sub-prime
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Retail:
Originations
obtained from the
consumer $433,156 $534,497 $150,621 $ 11,497 $ 14,785 $ 6,362
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
Prime (1) Sub-prime
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Wholesale:
Loans received
from mortgage
brokers and closed
in MPS's name 55,086 63,181 11,096 202,714 234,999 145,305
Correspondent:
Closed loans
purchased from
other mortgage
originators -- -- -- 41,472 83,144 59,567
-------- -------- -------- -------- -------- --------
$488,242 $597,678 $161,717 $255,683 $332,928 $211,234
======== ======== ======== ======== ======== ========
</TABLE>
Total combined 1999, 1998 and 1997 originations by state are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Originations Percent Originations Percent Originations Percent
<S> <C> <C> <C> <C> <C> <C>
Texas $323,600 43% $365,667 39% $136,222 37%
California 160,876 22 154,631 16 36,326 10
Tennessee 65,947 9 98,772 11 36,953 10
Colorado 43,624 6 71,072 8 24,056 6
All others (38) 149,878 20 240,464 26 139,394 37
------- -- ------- -- ------- --
$743,925 100% $930,606 100% $372,951 100%
======== ==== ======== ==== ======== ====
</TABLE>
Mortgage banking revenues consist of primarily gains from the sales of
loans, fees collected from the borrower or mortgage broker/banker and interest
earned on mortgage loans held for sale. Expenses consist primarily of
compensation and benefits and interest expense.
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $8,062 $11,630 $8,847
Interest income 2,601 3,797 2,009
Compensation and benefits 9,475 8,609 4,717
Interest expense 1,657 2,769 1,531
Other expenses 3,710 3,930 2,227
Loans originated $244,197 $318,240 $204,872
Loans sold $250,489 $305,652 $197,855
Gains on sales of loans and
other fee income as a percent
of loan sales 3.22% 3.80% 4.47%
Compensation and benefits
as a percent of originations 3.88% 2.71% 2.30%
Other expenses as a percent
of originations 1.52% 1.23% 1.09%
Net interest income as a
percent of originations .39% .32% .23%
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
PAMCO (principally prime) (1)
Gains on sales of loans
and other fee income $13,773 $16,459 $4,516
Interest income 2,556 3,175 729
Compensation and benefits 9,189 10,520 2,971
Interest expense 2,522 3,383 863
Other expenses 3,315 3,094 856
Loans originated $499,728 $612,366 $168,079
Loans sold (2) $524,071 $595,209 $140,733
Gains on sales of loans and
other fee income as a percent
of loan sales 2.63% 2.77% 3.21%
Compensation and benefits
as a percent of originations 1.84% 1.72% 1.77%
Other expenses as a percent
of originations .66% .51% .51%
Net interest income (expense)
as a percent of originations .01% (.03%) (.08%)
</TABLE>
(1) PAMCO operations are shown from date of acquisition, August 31,1997.
(2) Includes loans totaling $39,123,000 in 1999, $53,911,000 in 1998 and
$18,167,000 in 1997 that were closed in the name of a third party
(brokered-out).
MPS operations
For the year ended December 31, 1999 the MPS mortgage operation
incurred losses totaling $(4,179,000) as compared to earnings of $119,000 in
1998. Revenues decreased $4,764,000 or 31% over 1998 and expenses decreased
$466,000 or 3% over 1998.
In late 1998 severe turmoil in the credit markets resulted in a credit
crunch for the larger sub-prime lenders. Many of the larger lenders cut back
production or eliminated entirely their loan production facilities.
Additionally, spreads on sub-prime backed securities widened considerably,
reducing the profitability of MPS's larger competitors and many of the firms
that MPS sold loans to. In reaction to the turmoil the investors that continued
to purchase loans reduced the price paid for such loans which negatively
impacted MPS's spreads between the prices received upon the sale of the loans
and the price or brokerage premiums paid to acquire the loans. As a result the
net gain on loan sales declined from 3.80% as a percent of loans sold to 3.22%.
MPS also tightened its underwriting standards which had a negative impact on
origination volumes.
Compensation expenses as a percent of production increased to 3.88% in
1999 from 2.71% in 1998. The increase is partially attributable to deferred
compensation expense of $1,278,000 or .52% of production as compared to $778,000
or .24% of production in 1998. Additionally, processing and underwriting costs
at MPS have remained higher as a percentage of loan production as the Company
has increased its underwriting procedures and cost savings from staffing
reductions have not completely offset the lower production levels.
Other expenses increased in 1999 to 1.52% from 1.23% of production in
1998. The increase was attributable to the increased processing and underwriting
costs discussed above.
Net interest spread as a percentage of production increased from .32%
in 1998 to .39% in 1999 as a result of higher rates charged borrowers.
13
<PAGE> 15
PAMCO operations
For the year ended December 31, 1999, MPS's principally prime
production operation, PAMCO, earned $1,303,000. For the year ended December 31,
1998 PAMCO earned $2,637,000. Operating revenues totaled $16,329,000 as compared
to $19,634,000 for 1998 and expenses totaled $15,026,000 as compared to
$16,997,000 for 1998.
Gains on sales of loans and other loan fees as a percent of loans sold
was 2.63% in 1999 as compared to 2.77% in 1998. In periods of increasing
interest rates the Company's competitors generally reduce rates relative to the
sales prices that can be received. In order to maintain production levels, PAMCO
will reduce prices or fees charged to borrowers. Compensation expenses as a
percent of production increased to 1.84% from 1.72% in 1998 as PAMCO's average
monthly mortgage production declined over 1998. Other expenses as a percent of
originations increased to .66% in 1999 as compared to .51% in 1998 as a result
of rising fixed costs, as a percentage of originations, such as rent and
depreciation expense.
Net interest income was .01% in 1999 as a percent of production as
compared to net interest expense of .03% in 1998. Higher rates charged to
borrowers were offset mostly by higher borrowing costs.
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 $592,000 in 1999 as compared to $1,316,000
in 1998. The decrease was attributable to a reduction in personnel costs of
$184,000 in 1999 and a reduction in option termination related charges of
$108,000 in 1999 from $636,000 in 1998. Interest expense totaled $1,776,000 in
1999, a decrease of $657,000 over 1998. The decrease was due to a total
reduction in debt payable to CPS and SFSC of $3,600,000 from the end of 1998 to
the end of 1999.
Discontinued Operations
The discontinued operations, consisting of commercial and construction
lending recorded losses in 1999 of $1,553,000 as compared to earnings of
$796,000 in 1998. The 1999 loss included charges totaling $2,061,000 related to
the disposition of loans and severance and disposal charges totaling $346,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998 the Company reported a loss from
continuing operations, before cumulative change in accounting principle of
$(634,000) as compared to earnings from continuing operations of $1,053,000 for
the year ended December 31, 1997. In 1997 the Company disposed of its retail
automotive sales segment resulting in a gain of $1,384,000. Prior to the sale
the discontinued operation incurred a loss of $271,000 for the period from
January 1 to June 27, 1997 (the sale date).
Earnings in 1998 were negatively impacted by principally three factors:
1) Beginning in September 1998, as a result of a number of factors,
cash prices in the sub-prime mortgage market significantly deteriorated. Prices
received by the Company's for its sub-prime production declined in excess of 200
basis points. The Company, in response, entered into forward commitments,
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 a loss
in the fourth quarter.
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
14
<PAGE> 16
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 Company.
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,
beginning June 30, 1999. 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.
Compensation expense totaling $778,000 was recorded in the 1998
financial statements as a result of these agreements.
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 plans that were never presented to shareholders for
approval. The Company recorded a charge to earnings of $636,000 in 1998 as a
result.
MPS operations
For the year ended December 31, 1998 the MPS mortgage operation earned
$119,000 as compared to $2,381,000 in 1997. Revenues increased $4,571,000 or 42%
over 1997 and expenses increased $6,833,000 or 81% over 1997.
The decline in earnings resulted from the decline in sales prices in
the fourth quarter of 1998. In that quarter severe turmoil in the credit markets
resulted in a credit crunch for the larger sub-prime lenders. Many of the larger
lenders cut back production or eliminated entirely their loan production
facilities. Additionally, spreads on sub-prime backed securities widened
considerably, reducing the profitability of MPS's larger competitors and many of
the firms that MPS sold loans to. In reaction to the turmoil the firms that
continued to purchase loans reduced the price paid for such loans. The effect of
the price declines negatively impacted MPS's spreads between the prices received
upon the sale of the loans and the price or brokerage premiums paid to acquire
the loans. As a result the net gain on loan sales decline from 4.47% as a
percent of loans sold to 3.80%.
Compensation expenses as a percent of production increased to 2.71% in
1998 from 2.30% in 1997. The increase is mainly attributable to deferred
compensation expense of $778,000 or .24% of production and increased processing
and underwriting costs as the Company continued to emphasize customer service.
The sub-prime operation was also negatively impacted by a decline in its
production in the fourth quarter.
Other expenses increased in 1998 to 1.23% from 1.09% of production in
1997. The increase was attributable to an increase in losses on foreclosures
from $12,000 in 1997 to $230,000 in 1998 and the increased processing and
underwriting costs discussed above.
Net interest spread as a percentage of production increased from .23%
in 1997 to .32% in 1998 as a result of lowered borrowing costs.
15
<PAGE> 17
PAMCO operations
For the year ended December 31, 1998, MPS's principally prime
production operation, PAMCO, earned $2,637,000. For the four months ended
December 31, 1997 PAMCO earned $555,000. Operating revenues totaled $19,634,000
as compared to $5,245,000 for 1997 and expenses totaled $16,997,000 as compared
to $4,690,000 for 1997.
Gains on sales of loans and other loan fees as a percent of loans sold
was 2.77% in 1998 as compared to 3.21% in 1997. In 1997, as part of the
acquisition of PAMCO, the Company received $350,000 to dispose of the existing
loan inventory of the seller, Pacific Southwest Bank. The amount is included in
other fees. Additional retail production and sales that had higher margins were
a greater percentage of the Company's production in 1997. Compensation expenses
as a percent of production declined to 1.72% from 1.77% in 1997 as the PAMCO
gained efficiencies from higher average monthly mortgage production. Other
expenses as a percent of originations remained at .51%.
Net interest expense as a percent of production was .03% in 1998 as
compared to .08% in 1997. The deficit narrowed due to reduced borrowing costs
which was offset somewhat by lower interest rates on the products PAMCO
originates.
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 $1,316,000 in 1998 as compared to $787,000
in 1997. The increase was attributable to option termination related charges
totaling $636,000. Interest expense totaled $2,433,000 in 1998, an increase of
$2,045,000 over 1997. The increase in interest expense was due to borrowings
attributable to financing CPFI's acquisition of construction loans in December
of 1997 and borrowings to finance other corporate transactions. The borrowings
were obtained from CPS and SFSC.
Discontinued Operations
Earnings for the discontinued operations totaled $796,000 in 1998 as
compared to $1,181,000 in 1997. In June 1997, the Company disposed of its retail
automotive sales segment and recorded a gain of $1,384,000 as a result of the
sale of the segment. In 1998 the increased earnings were the result of a full
year of operations of CPFI which commenced operations in December of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had approximately $2,854,000 in
cash as compared to $4,898,000 at December 31, 1998. Of those amounts $1,457,000
and $3,952,000 as of December 31, 1999 and 1998, respectively, was restricted to
usage for mortgage loan fundings and repayments under the Company's residential
warehouse line of credit.
Total assets have decreased to $64,406,000 at December 31, 1999 from
$113,317,000 at December 31, 1998. The decrease is attributable to the decline
in the mortgage loan production, reduced levels of construction loans and
investment in the discontinued operations as the Company has disposed of a
significant amount of its investment in the operations at NAFCO and CPFI.
MPS's line of credit with Bank United totals $80,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.25% to 2.50%) over
the LIBOR rate. The line of credit matures June 15, 2000. The mortgage loans
receivable of MPS are pledged as collateral for the line of credit. At December
31, 1999, $40,218,000 was borrowed under the line.
The MPS line of credit requires NAB to have a minimum net worth of
$5,000,000. At December 31, 1999 NAB did not meet the guarantors net worth
requirement under the line of credit. Effective March
16
<PAGE> 18
7, 2000 the line of credit was amended to allow subordinated debt totaling
$4,000,000 from SFSC to be included in the net worth of NAB under the credit
agreement.
Management considers its relationships with its lenders to be good and
is currently in compliance with all of the covenants contained in its various
debt agreements as amended. Additionally management believes that the debt
agreements will be renewed in the ordinary course of business on substantially
the same terms and conditions or alternative credit facilities are available on
acceptable terms.
At December 31, 1999, the Company had borrowed under notes and a line
of credit from SFSC a total of $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 September 30, 1997 September 30, 2000 900,000 14%
SFSC Note March 13, 1998 January 3, 2000 877,000 13%
</TABLE>
During 1999, cash flow from operations was negative and as a result was
insufficient to cover the operating expenses of NAB. In the third quarter of
1999 NAB elected to dispose of its investments in CPFI and NAFCO in order to
reduce its debt to SFSC and provide operating funds to NAB. As of December 31,
1999 NAB had remaining indebtedness to SFSC totaling $9,277,000. Since December
31, 1999 NAB has repaid $1,724,000 and has $7,553,000 remaining. Additionally
NAB is current with respect to all interest due under the notes.
On March 15, 2000 NAB entered into a Second Debt Restructure Agreement,
effective March 7, 2000, with SFSC in which SFSC agreed to extend the maturity
dates on the indebtedness to December 31, 2002. Additionally, SFSC agreed to
defer monthly interest payments, at NAB's option, on the notes to March 31,
2001; provided that any deferred interest payment will bear interest at 14% per
annum until paid. Beginning in March 2001, monthly principal payments of
$100,000 are required in addition to monthly interest (and any deferred
interest). In order to pay the remaining indebtedness NAB must obtain cash from
operations (which consists primarily of tax sharing payments from MPS),
financing from third parties, sell existing assets, obtain more favorable terms
under its various debt agreements or achieve a combination of the above. The
Company is currently pursuing all of these alternatives and believes that the
remaining amounts due will be paid on a timely basis. In connection with the
Second Debt Restructure Agreement, SFSC agreed to subordinate $4,000,000 of NAB
indebtedness to the MPS lenders under the MPS line of credit.
On March 7, 2000, CPFI borrowed $500,000 from two officers of the
Company. The notes bear interest at 14% per annum and are due April 30, 2000.
Proceeds from the disposition of the remaining CPFI loans will be used to repay
this indebtedness. The proceeds from the borrowings were used to repay principal
and interest due SFSC and are included in the repayments discussed above.
On August 13, 1998, the Company entered into a Debt Restructure
Agreement with SFSC, in which, among other things a note due from the sale of
CARS was exchanged for a corresponding reduction in the Company's indebtedness
to SFSC.
In order to maintain its net operating loss carryforwards the Company
is limited under Section 382 of the Internal Revenue Code of 1986 as to issuance
of new common shares in order to raise additional capital. The Company must rely
on additional borrowings to grow its operations. In 1998, NAB relied on SFSC and
CPS to provide funds to support the additional growth of the Company. During
1999 the Company required no additional funding.
In the next twelve months the Company intends to expand the current
operations of MPS and PAMCO and acquire additional operations complimentary to
its core business lines. The Company anticipates no additional funding from SFSC
or CPS, therefore it must rely on internally generated funds or additional
borrowings from third parties. The ability of the Company to acquire additional
compatible
17
<PAGE> 19
operations is dependent upon the availability of financing. Current
credit agreements in place are sufficient to provide the Company funds to
operate its business lines as currently structured. There can be no assurance
that internally generated funds will be sufficient or financing will be
available.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and interest rates. The Company's operations are materially impacted by net
gains on sales of mortgage loans and net interest margins. The level of gains
from loan sales the Company achieves is dependent on demand for the products
originated. Net interest margins are dependent upon the ability of the Company
to maintain the spread or interest differential between the interest it charges
the customer for loans and the interest the Company is charged for the financing
of those loans.
Loans held for sale and securitization related assets
The sub-prime loans the Company sells generally are included in asset
backed securities the investor or purchaser issues. These securities are priced
at spreads over the LIBOR or an equivalent term treasury security. These spreads
are determined by demand for the security. Demand is affected by the perception
of credit quality and prepayment risk associated with the loans the Company
originates and sells. Interest rates offered to customers also affect prices
paid for loans. These rates are determined by review of competitors rate
offerings to the public and current prices being paid to the Company for its
products. The Company does not hedge these price risks.
Prices paid for prime loans are impacted by movements in long-term
interest rates. The Company mitigates this risk by locking in prices with its
investors as the customer locks in the price with the Company, thus allowing the
Company to maintain its margins. Generally, if interest rates rise
significantly, home sales will decline adversely affecting the Company's prime
mortgage loan production.
The Company's residual interest in securitization represents the
present value of the excess cash flows the Company expects to receive over the
life of the underlying sub-prime mortgage loans. The value is adversely affected
by prepayments, losses and delinquencies. The value would also be negatively
impacted by an increase in short-term interest rates, as a portion of the cash
flows fluctuate monthly based upon the one-month LIBOR.
In summary, the Company would be negatively impacted by rising interest
rates and declining prices for its sub-prime loans. Rising interest rates would
negatively impact prime mortgage production and the value of the residual
interest in the securitization and declining prices for the Company's sub-prime
loans would adversely effect the levels of gains achieved upon the sale of those
loans. The estimated negative effect on the statement of operations for fiscal
year 2000 of a 1% rise in interest rates and a 1% decline in prices received for
its sub-prime loans would be as follows:
Sub prime operations - $3,486,000
Prime operations - $1,139,000
Residual interest in securitization - $220,000
Certain shortcomings are inherent in the methodology used in the above
market risk measurement. Modeling changes requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yield and
costs respond to changes in market interest rate. Assumptions are the underlying
factors that drive the interest rate and market risk measurement system which
include asset and liability compositions, changes in pricing of loans, cost
structures and prepayment assumptions. The model also assumes that a particular
change in interest rates is reflected uniformly across the yield curve.
Accordingly the model is intended to provide an indication of the Company's
market risk at a particular point in time and is not a forecast of the effect of
changes in market conditions on the results of operations of the Company and
will differ from actual results.
18
<PAGE> 20
The maturities of the Company's construction loan portfolio are
generally short term and a substantial portion of the portfolio is adjustable
rate mortgage loans where the rate fluctuates with the prime rate. The Company
has determined that the market risk associated with this portfolio is not
material to the financial condition of the Company.
OTHER MATTERS
YEAR 2000
The Company did not experience any disruptions in its operations during
the transition into the Year 2000. In the third quarter of 1999, the Company
announced that it had completed necessary assessments, modifications or
replacement and testing of systems critical for to the Company's operations and
that it believed it had met its Year 2000 readiness objectives. The amounts
incurred and expensed for developing and carrying out the overall Year 2000 plan
totaled less than $15,000. While the Company did not experience any Year 2000
disruptions during the transition into the Year 2000, it will continue to
monitor its operations and systems and address any date-related problems that
may arise as the year progresses.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133)
"Accounting for Derivative Instruments and for Hedging Activities," requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Upon implementation of SFAS
No. 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to held for sale or trading. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133", deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on the future consolidated financial statements.
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
19
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
NAB Asset Corporation:
We have audited the accompanying consolidated balance sheets of NAB Asset
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAB Asset
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for organizational costs in accordance with the
American Institute of Certified Public Accountants Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities".
KPMG LLP
Dallas, Texas
March 22, 2000
20
<PAGE> 22
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
------------
Assets 1999 1998
------ -------- ---------
<S> <C> <C>
Cash and cash equivalents $1,397 $946
Restricted cash 1,457 3,952
Receivables:
Construction loans, net 3,330 9,465
Residential mortgage loans held for sale 46,029 78,911
Loans to officers 2,213 3,040
Other receivables 995 1,085
Residual interest in securitization of mortgage loans 3,678 3,534
Real estate owned, net 728 579
Property and equipment, net 612 1,038
Costs in excess of net assets acquired, net 442 630
Net assets of discontinued operations 2,855 9,536
Other assets, net 670 601
------- --------
Total assets $64,406 $113,317
======= ========
Liabilities and Shareholders' Equity
Liabilities:
Warehouse line of credit $40,218 $74,117
Notes payable to affiliates 9,277 12,877
Drafts payable 8,279 11,681
Accounts payable and accrued expenses 4,539 5,528
----- -----
Total liabilities 62,313 104,203
Minority interest 47 515
Commitments and contingencies (notes 12 and 16) Shareholders' equity :
Common stock: $.10 par value, 30,000,000
authorized shares; 5,091,300 issued and outstanding at
December 31, 1999 and 1998 509 509
Additional paid-in capital 7,815 7,815
Retained earnings (deficit) (6,278) 275
------- ---
Total shareholders' equity 2,046 8,599
----- -----
Total liabilities and shareholders' equity $64,406 $113,317
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Gains on sales of loans $13,295 $18,530 $10,153
Interest income 5,375 7,587 2,851
Origination and other fee income 8,540 9,559 3,209
----- ----- -----
Total revenues 27,210 35,676 16,213
------ ------ ------
Costs and expenses:
Compensation and benefits 19,248 20,445 8,475
Interest expense 3,799 5,591 2,234
Interest expense-affiliates 1,776 2,432 337
Bad debt expense 487 296 -
General and administrative 6,898 7,156 3,740
Minority interest (468) 224 263
----- --- ---
Total costs and expenses 31,740 36,144 15,049
------ ------ ------
Earnings (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle (4,530) (468) 1,164
Income tax expense 315 166 111
--- --- ---
Earnings (loss) from continuing operations before
cumulative effect of change in accounting principle (4,845) (634) 1,053
Cumulative effect of change in accounting principle,
write off of organizational costs (155) - -
Earnings (loss) from discontinued operations, net
of income taxes of $75, $18 and $6 (1,553) 796 1,181
------- --- -----
Net earnings (loss) $(6,553) $162 $2,234
======== ==== ======
Basic and diluted earnings (loss) per share:
Continuing operations before cumulative effect of
change in accounting principle $(0.95) $(0.13) $0.21
Cumulative effect of change in accounting principle (0.03) - -
Earnings (loss) per share from discontinued operations (0.31) 0.16 0.23
------ ----- ----
Earnings (loss) per share $(1.29) $0.03 $0.44
======= ===== =====
Weighted average number of common shares outstanding 5,091,300 5,091,300 5,091,300
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
( IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $509 $7,217 $(2,121) $5,605
Net earnings - - 2,234 2,234
------------- --------------- -------------- --------------
Balance, December 31, 1997 509 7,217 113 7,839
Issuance of stock of subsidiaries - 598 - 598
Net earnings - - 162 162
------------- --------------- -------------- --------------
Balance, December 31, 1998 509 7,815 275 8,599
Net (loss) - - (6,553) (6,553)
------------- --------------- -------------- --------------
Balance, December 31, 1999 $509 $7,815 $(6,278) $2,046
============ ============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 25
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................... $ (6,553) $ 162 $ 2,234
Discontinued operations ............................... 1,553 (796) (1,181)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Proceeds from sale of CARS USA ........................ -- -- 200
Non-cash gain on securitization of mortgage loans ..... -- (3,248) --
Amortization of net interest receivable account ....... 922 348 --
Deposits to over-collateralization account ............ (1,066) (634) --
Depreciation and amortization ......................... 784 779 421
Change in accounting principle ........................ 155 -- --
Reduction in note receivable from affiliate in exchange
for payment of interest ............................. 644 -- --
Minority interest ..................................... (468) 224 263
Net changes in:
Residential mortgage loans originated, purchased
and sold, net ..................................... 32,882 (33,439) (32,824)
Restricted cash ..................................... 2,495 (297) (3,655)
Loans to officers ................................... 827 (3,040) --
Real estate owned ................................... (149) (566) (13)
Other receivables ................................... 367 (395) (504)
Other assets ........................................ (281) 139 (351)
Drafts payable ...................................... (3,402) 6,256 5,425
Accounts payable and accrued expenses ............... (989) 2,068 2,873
-------- -------- --------
Net cash provided by (used in) operating activities 27,721 (32,439) (27,112)
-------- -------- --------
Cash flows from investing activities:
Construction loan repayments, net ........................ 6,135 3,626 (13,091)
Note receivable from affiliate ........................... (921) -- --
Acquisition of businesses, net of cash acquired .......... (18) (195) (725)
Purchases of property and equipment ..................... (95) (437) (439)
-------- -------- --------
Net cash provided by (used in) investing activities 5,101 2,994 (14,255)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under (repayments of) warehouse lines
of credit .............................................. (33,899) 24,115 38,184
Borrowings on notes payable to affiliates ................ -- 1,300 16,300
Principal payments on notes payable to affiliates ........ (3,600) (4,723) --
Notes receivable from affiliates ......................... -- -- (1,300)
Payments received on notes receivable from affiliates .... -- 1,300 --
Issuance of stock of subsidiaries ........................ -- 598 --
-------- -------- --------
Net cash provided by (used in) financing activities (37,499) 22,590 53,184
Cash provided by (used in) discontinued operations ............ 5,128 5,843 (12,998)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... 451 (1,012) (1,181)
Cash and cash equivalents at beginning of year ................ 946 1,958 3,139
-------- -------- --------
Cash and cash equivalents at end of year ...................... $ 1,397 $ 946 $ 1,958
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND DISCONTINUED OPERATIONS
Description of Business
NAB Asset Corporation, a Texas Corporation ("NAB") and subsidiaries
(together with NAB, the "Company") is primarily engaged in the residential
lending business. As discussed below NAB disposed of its retail automotive sales
business in June, 1997. Prior to June 5, 1996 NAB's business consisted of the
acquisition, ownership, management and disposition of loans and real estate for
its own account and the account of others.
NAB was organized on March 31, 1991, by National Asset Bank (a bank in
liquidation) (the "Bank") as a wholly-owned subsidiary of the Bank for the
purpose of acquiring substantially all of the assets of the Bank through a
series of transactions and agreements intended to effect the final liquidation
of the Bank. NAB acquired substantially all of the assets of the Bank in
consideration of the issuance by the NAB of shares of its common stock, $.01 par
value (the "Common Stock"), and the assumption of all the Bank's liabilities.
Immediately following such acquisition, the Bank distributed the shares of
Common Stock received to the holders of the Bank's common stock, (the "Bank
Common Stock"), on the basis of one share of Common Stock for each ten shares of
the Bank Common Stock held of record as of the close of business on July 17,
1991. Because NAB was formed for the purpose of effecting the acquisition of
substantially all of the Bank's assets, NAB had only limited operating
activities prior to such acquisition.
On June 5, 1996, pursuant to the Plan and Agreement of Merger, CPS
Investing Corp. ("CPS Sub"), a wholly owned subsidiary of Consumer Portfolio
Services, Inc. ("CPS"), was merged with and into NAB (the "Merger"). Under the
terms of the Plan and Agreement of Merger and in exchange for all of the
outstanding shares of NAB $.01 par value common stock, the shareholders of NAB
received on a pro rata basis (i) an aggregate cash distribution of $15.3 million
($3.64 per share), (ii) an undivided interest in a liquidating trust
("Liquidating Trust"), and (iii) 62% of the outstanding shares of common stock,
$.10 par value (the "New Common Stock") of the new combined company which had a
net asset value of $7.5 million as of the merger date. The Liquidating Trust was
established for the benefit of converting the trust assets to cash for the NAB
shareholders. On June 5, 1996 in connection with the Merger, NAB contributed
approximately $3.0 million in cash and all of the remaining non-cash assets of
NAB with a net book value of $3.7 million to the Liquidating Trust. No gain or
loss was recognized by NAB in connection with the merger. In exchange for a $4
million contribution to NAB, CPS received 38% or 1,934,706 shares of the New
Common Stock of NAB.
Acquisitions
On July 10, 1996 NAB acquired from CPS 84% percent of the outstanding
voting common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase
price of $300,000. NAB also acquired $2.25 million of MPS preferred stock
through conversion of debt to equity and contributed approximately $249,000 to
the additional paid-in capital of MPS. The MPS preferred stock acquired by NAB
provides cumulative dividends at a rate of 10% per annum and has liquidation
preference over the MPS common stock equal to the purchase price of the MPS
preferred stock plus any accrued and unpaid dividends.
MPS is a mortgage banking company that specializes in the purchase,
origination, sale and servicing of residential mortgage loans that do not meet
traditional secondary market guidelines due to credit or employment history of
the borrower, debt-to-income ratios, or the nature of the collateral.
25
<PAGE> 27
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On August 31, 1997, MPS acquired the fixed assets and employed the
personnel of the single-family mortgage lending division of Pacific Southwest
Bank ("PSB"), a Dallas based savings and loan. A premium of $200,000 was paid
for the operation. In 1999 and 1998 the Company incurred additional purchase
premiums of $18,000 and $195,000, respectively, based on 1999 and 1998
production levels. The additional purchase premium increased the cost in excess
of net assets acquired. The division, Pacific American Mortgage Company
("PAMCO") is primarily engaged in mortgage lending through eleven retail
branches in seven states. Substantially all PAMCO mortgage loan originations are
conventional conforming, non-conforming and government insured mortgages.
A summary of the PAMCO assets and liabilities acquired by MPS at fair
value are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Property and equipment $ 560
Other assets 125
Accounts payable and accrued
expenses (160)
-----
Net assets acquired 525
Purchase price paid (725)
-----
Cost in excess of net assets
acquired $(200)
=====
</TABLE>
Total accumulated amortization of the costs in excess of net assets
acquired related to MPS and PAMCO totaled $542,000 and $336,000 at December 31,
1999 and 1998, respectively.
Discontinued Construction Lending Operations
In the third quarter of 1999 the Company elected to dispose of
Construction Portfolio Funding, Inc. ("CPFI"). CPFI began operations in December
1997 and was engaged in the business of providing financing and servicing to
residential homebuilders.
Summarized assets and liabilities for the discontinued construction
lending operation are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------- --------
<S> <C> <C>
Loans receivable, net $ 5,122 $ 29,186
Other assets 49 1,322
Line of credit (2,914) (23,534)
Other liabilities (222) (786)
------- --------
Net assets of discontinued operation $ 2,035 $ 6,188
====== ========
</TABLE>
26
<PAGE> 28
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operating results of the discontinued construction lending operation
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period from January 1,
Period from July 1, 1999 to June 30, Period from January 1, Period from January 1,
1999 to December 31, 1999 (measurement 1998 to December 31, 1997 to December 31,
1999 date) 1998 1997
----------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues $1,229 $1,691 $6,093 $28
Expenses 1,137 1,374 5,544 24
------ ------ ------ ---
Net income $ 92 $ 317 $ 549 $ 4
====== ====== ====== ===
</TABLE>
Revenues and expenses for the discontinued construction lending operation
consisted primarily of interest income, interest expense and general and
administrative expenses. Expenses in 1999 include $159,000 relating to the
disposition of loans and severance costs and $173,000 of loan losses.
Discontinued Commercial Lending Operations
In the third quarter of 1999 the Company elected to dispose of its
interest in NAFCO, Inc. (NAFCO). NAFCO began operations in 1997 and was a lender
to companies in the rent-to-own and rental purchase business.
Summarized assets and liabilities for the discontinued commercial
lending operation are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
------ -------
<S> <C> <C>
Loans receivable, net $ 974 $ 6,099
Other assets 38 307
Line of credit -- (3,000)
Other liabilities (192) (58)
------ -------
Net assets of discontinued operation $ 820 $ 3,348
====== =======
</TABLE>
Operating results of the discontinued commercial lending operation is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period from January 1,
Period from July 1, 1999 to June 30, Period from January 1, Period from January 1,
1999 to December 31, 1999 (measurement 1998 to December 31, 1997 to December 31,
1999 date) 1998 1997
----------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues $ 325 $ 433 $ 954 $644
Expenses 1,293 1,427 707 581
------ ----- ----- ----
Net income (loss) $ (968) $(994) $ 247 $ 63
====== ===== ===== ====
</TABLE>
27
<PAGE> 29
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue and expenses for the discontinued commercial lending operation
consisted primarily of interest income, interest expense, loan loss provisions,
which includes losses on sales of loans of $1,888,000 and general and
administrative expenses. Expenses include $187,000 in 1999 for disposal costs.
Discontinued Retail Automotive Sales Operations
On July 8, 1996, NAB acquired 80% of CARS USA, Inc. ("CARS") for a
purchase price of $100,000. Additionally, NAB invested $400,000 in preferred
stock of CARS and made a $1,000,000 subordinated loan to CARS. At the time of
acquisition, Charles E. Bradley, Jr., a director of the Company, owned 50% of
the outstanding shares of CARS.
In March 1997, NAB entered into a definitive agreement to sell its
interest in CARS and on June 27, 1997 completed the transaction. The acquirer
was a newly formed company owned by Charles E. Bradley, Sr., the chief executive
officer and chairman of the board of NAB, and Charles E. Bradley, Jr., a
director of NAB. The purchase price consisted of a $200,000 cash payment and a
note for $1,300,000. The note was paid in 1998. NAB recorded a $1,384,000 gain
as a result of the sale.
Operating results of the discontinued retail automotive sales operation
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period from January 1,
Period from April 1, 1997 1997 to March 31, 1997
to June 27, 1997 (measurement date)
------------------------- ----------------------
<S> <C> <C>
Revenues $4,570 (1) $2,199
Expenses 3,249 2,406
------ ------
Net loss $1,321 $ (207)
====== ======
</TABLE>
(1) Includes gain on sale of $1,384,000.
Revenue and expenses for the discontinued automotive sales operation
consisted primarily of sales and cost of sales, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
The following is a description of significant accounting and financial
reporting policies:
Basis of Presentation
The consolidated financial statements include the accounts of NAB and
its majority-owned subsidiaries, with all significant inter-company transactions
being eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
28
<PAGE> 30
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Residential Mortgage Loans Held for Sale
Residential mortgage loans are stated at the lower of cost or market in
the aggregate as determined by outstanding commitments from investors or current
investor yield requirements.
Construction Loans Receivable
Construction loans are carried at the outstanding principal balance net
of unamortized purchase discount and net of allowances for loan losses of $0 at
December 31, 1999 and 1998. The outstanding principal balance of construction
loans is represented by the loan commitment amount net of the balance of
construction loan advances unsettled. At the end of the interim construction
phase, loans are modified, transferred to mortgage loans held for sale and
subsequently sold to outside investors.
Residual Interest in Securitization of Mortgage Loans
Net gains on securitization of loans represent the excess of the
estimated cash to be received and assets retained by the Company over the
relative fair value of the loans sold, less transaction costs. Various
assumptions are used in the calculation of the gain on the sale of the loans and
the valuation of the residual interest in the securitization of mortgage loans.
The residual interests in the securitization of loans represent 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 assumptions and (2) the
over-collateralization account which is the excess monthly cash flows, other
than servicing revenues, that are required to be maintained with the trustee
until certain over-collateralization levels are met. 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.
Property and Equipment, Net
Property and Equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized and depreciated.
Repairs and maintenance are expensed as incurred.
Depreciation is provided on a straight-line basis over the estimated
useful lives of depreciable assets. Cost and accumulated depreciation applicable
to assets retired or sold are eliminated from the accounts and any resulting
gains or losses are recognized at such time.
Real Estate Owned
Real estate owned is transferred from the loan portfolio at fair market
value less estimated selling costs. The excess carrying value, if any, of the
loan over the estimated fair value less selling costs is charged to the accrual
for indemnifications. Any subsequent impairments in value are recognized through
a valuation allowance.
29
<PAGE> 31
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Costs in Excess of Net Assets Acquired
Costs in net excess of net assets acquired, which represents the excess
of purchase price over fair value of net assets acquired, are amortized on a
straight-line basis over five years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the costs in
excess of net assets acquired balance over its remaining life can be recovered
through undiscounted future operating cash flows. The assessment of the
recoverability of costs in excess of assets acquired will be impacted if
estimated future operating cash flows are not achieved
Organizational Costs
On January 1, 1999 the Company adopted 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 charged-off
$155,000 in organizational costs as of January 1, 1999. The amount is reported
as a cumulative effect of a change in accounting principle as described in
Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes".
Drafts Payable
The Company issues checks or initiates wire transfers in connection
with the origination of its residential mortgage loans. Drafts payable represent
checks or wire transfers on originated loans which have not been presented for
payment to the bank. Upon presentment, the Company either funds the loans with
operating cash or borrowings under its warehouse line of credit.
Accrual for Indemnifications
The Company sells substantially all of its originated and purchased
residential mortgage loans to third party investors for cash. 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 sub-prime loans held for sale are being sold
through forward 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 borrowers 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 purchase premium paid if the loan pays
in full over a period of up to one year. The Company defers a portion of the
purchase premium, which reduces the gain recorded on each loan sale, to cover
potential liability resulting from the warranties given to the investor. The
accrual for indemnifications is included in accounts payable and accrued
expenses in the consolidated balance sheets.
Revenue Recognition
Gains on sales of loans are recognized to the extent the selling price
exceeds the carrying value of the loans sold based on the estimated relative
fair values of the assets transferred, assets obtained and liabilities incurred.
A portion of the sales price on loans sold servicing released is recorded as an
accrual for indemnifications.
Non-refundable fees and direct costs associated with the origination of
loans are deferred and included in the carrying value until the related loan is
sold. Interest is recognized as revenue when earned according to the terms of
the security instruments and when, in the opinion of management, it is
collectable.
30
<PAGE> 32
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's gain on sale of loans conforms to the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." Under SFAS 125, a transfer of financial
assets in which control is surrendered is accounted for as a sale to the extent
that consideration other than beneficial interests in the transferred assets is
received in the exchange. Liabilities and derivatives incurred or obtained by
the transfer of financial assets are required to be measured at fair value, if
practical. Also, servicing assets and other retained interests in the
transferred assets must be measured by allocating the previous carrying value
between the asset sold and the interest retained, if any, based on their
relative fair values at the date of transfer.
SFAS 125 also requires an assessment of interest-only strips, loans,
other receivables and retained interests in securitization (residuals). If these
assets can be contractually prepaid or otherwise settled such that the holder
would not recover substantially all of its recorded investment, the asset will
be measured like debt securities classified as available for sale or trading
securities.
Construction related lending revenues consist primarily of interest
income on loans and loan commitment fees. Interest is recognized as revenue when
earned according to the terms of the loan and when, in the opinion of
management, it is collectable. Non-refundable fees and direct costs are deferred
and income is recognized over the life of the loan commitment using the interest
method.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
base. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the period. For
the years ended December 31, 1999, 1998 and 1997 there were no dilutive common
share equivalents.
Restricted Cash
Restricted cash primarily represents amounts required to be used to
fund loans and repay amounts outstanding under the residential mortgage
warehouse line of credit.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash in banks and interest bearing demand deposits.
31
<PAGE> 33
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Consolidated Statements of Cash Flows-Supplemental Disclosure (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest paid - continuing operations $5,613 $7,721 $1,930
====== ====== ======
Taxes paid $ 354 $ 163 $ 116
====== ====== ======
Non-cash activities:
Loans held for sale transferred to real estate owned $ 898 $ 566 $ 14
====== ====== ======
Note receivable from affiliate in exchange for payment of
interest $ 644 $ -- $ --
====== ====== ======
Notes receivable exchanged for reduction in payable to
affiliates $ -- $1,600 $ --
====== ====== ======
</TABLE>
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133")
"Accounting for Derivative Instruments and for Hedging Activities," requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Upon implementation of SFAS
No. 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to held for sale or trading. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133", deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on the future consolidated financial statements.
Reclassifications
Certain amounts for the prior periods have been reclassified to conform
to the current presentation.
(3) RESIDENTIAL MORTGAGE LOANS HELD FOR SALE
Residential mortgage loans originated by the Company are fixed-rate or
adjustable-rate, 15 to 30-year fully amortizing loans, secured by first and
second liens on single-family residential properties. Loans held for sale were
comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- -------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Adjustable-rate $13,124 9.52% $17,178 9.77%
Fixed-rate 32,551 8.96% 60,906 7.78%
------- -------
45,675 78,084
Deferred loan fees
(net) 354 827
------- -------
$46,029 $78,911
======= =======
</TABLE>
32
<PAGE> 34
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) RESIDUAL INTEREST IN SECURITIZATION OF MORTGAGE LOANS
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. MPS recorded a net gain of $1,908,000 or 3.74%
of the principal balance of the loans sold, which is the excess of the cash
received and fair value of the assets retained by the Company over the relative
fair value of the loans sold, less transaction costs.
The performance of the loans underlying the security through December
31, 1999 is as follows:
Fixed Rate Adjustable Rate
---------- ---------------
Remaining Principal $21,925,000 $15,479,000
Annualized prepayment rates 12.2% 20.9%
Cumulative losses $28,000 --
Delinquency percentages
30-59 days .43% 2.46%
60-89 days .54% 2.17%
Over 90 days .81% 1.25%
Delinquent bankruptcies 1.79% .98%
Loans in foreclosure 3.53% 4.25%
Foreclosed loans .86% 4.43%
Total delinquencies 7.96% 15.54%
The Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. Total loss coverage under the pool
insurance policy is $2,569,000. The fee is .52% annually of the unpaid principal
of the loans. The pool insurance policy stipulates that the loans covered must
be current at the date of the policy. Three loans were delinquent at that date
and subsequently were foreclosed upon and sold. Of the three loans two were
repurchased by the Company prior to foreclosure and the remaining loan incurred
a loss of approximately $28,000.
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 is required by
the servicing agreement to be maintained at 2.75% of the fixed rate balance and
4% of the adjustable rate balance of the securities. The Company has met the
original minimum over-collateralization requirement as set forth by the bond
insurer. One of the requirements set forth by the bond insurer is that the
interest rate spread between the adjustable rate loans and the underlying bonds,
after expenses must be 2.5%. At December 31, 1999 this requirement was not met.
A formula is used to calculate the new required over-collateralization based
upon the extent of the spread deficiency. Based on the formula, assuming the
deposits to the over-collateralization account continue at present levels and
there is not a significant increase in the underlying bond rates, the Company
expects to begin receiving cash flow from the security in the second quarter of
2000.
Upon reaching the required over-collateralization levels, the Company
is entitled to receive the cash flows that represent collections on the mortgage
loans in excess of the amounts required to be paid to the bondholders. If the
actual performance of the mortgage loans differs significantly from the original
assumed performance, the cash the Company is entitled to receive will vary from
the NIR calculated using the assumptions above.
Escrow balances on securitized loans serviced by the Company are not
included in the accompanying consolidated balance sheets and totaled $27,000 and
$109,000 at December 31, 1999 and 1998, respectively.
33
<PAGE> 35
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1999 and 1998 the residual interests in the
securitization consisted of the following:
1999 1998
---------- ----------
NIR $1,978,000 $2,900,000
Over-collateralization account 1,700,000 634,000
---------- ----------
$3,678,000 $3,534,000
========== ==========
The assumptions used in the valuation of the residual interests were
as follows:
<TABLE>
<CAPTION>
December 31, 1999 Original Assumptions
--------------------------------- --------------------------------
Fixed Adjustable Fixed Adjustable
--------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Weighted average life 4.58 years 2.77 years 3.94 years 3.16 years
Prepayment speeds-ramp up to 17% CPR 35% CPR 24% CPR 25% CPR
Cumulative defaults 15.50% 18.00% 8.00% 10.00%
Cumulative losses, net of losses
Covered by pool insurance .62% .71% .40% .50%
Delinquencies (over 30 days) 13.00% 13.00% 8.00% 8.00%
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment, stated at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------- -------
<S> <C> <C>
Furniture and Equipment $ 905 $ 882
Computer Equipment and Software 973 901
Accumulated Depreciation (1,266) (745)
------- ------
$ 612 $1,038
======= ======
</TABLE>
(6) REAL ESTATE OWNED
Activity in the allowance for real estate losses consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Balance, beginning of year $ 147 $ 14 $ --
Increase in allowance for foreclosures 748 230 14
Charge-offs, net (455) (97) --
===== ===== =====
Balance, end of year $ 440 $ 147 $ 14
===== ===== =====
</TABLE>
(7) WAREHOUSE LINE OF CREDIT
MPS has an $80,000,000 line of credit agreement with a bank, of which
$40,218,000 was outstanding at December 31, 1999. The credit agreement matures
June 15, 2000 and requires monthly payments of principal and interest. Interest
is at an adjusted LIBOR rate plus 1.25% to 2.50%, as defined in the credit
agreement. At December 31, 1998, MPS had a $120,000,000 line of credit agreement
with a bank of which $74,117,000 was outstanding. The terms were consistent with
those in the current line-of-credit agreement. Outstanding amounts are
collateralized by mortgage loans held for sale and construction loans. Fees paid
in association with the line of credit are capitalized and amortized over the
life of the warehouse line of credit. The line of credit is guaranteed by NAB.
34
<PAGE> 36
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The MPS line of credit provide for various financial covenants
including limitations on indebtedness, investments, transactions with
affiliates, minimum levels of net worth and restricts the payment of dividends
and material changes in ownership.
The MPS line of credit requires NAB to have a minimum net worth of
$5,000,000 and MPS to have a minimum tangible net worth, as defined in the
warehouse line of credit, of $7,000,000. At December 31, 1999, MPS had tangible
net worth of $7,844,000. At December 31, 1999 NAB did not meet the net worth
requirement under the line of credit. Effective March 7, 2000 the line of credit
was amended to allow subordinated debt totaling $4,000,000 to Stanwich Financial
Services Corp. ("SFSC") (Note 8) to be included in the net worth of NAB under
the credit agreement. As a result of this amendment, the net worth requirement
has been satisfied.
The Company is in compliance with all covenants in the warehouse line
of credit agreement as amended. Management believes its warehouse line of credit
will be renewed in the normal course of business.
(8) NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates were comprised of the following (in
thousands) (see note 16):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Note payable to Stanwich Financial Services, Corp., unsecured, interest at 13%
payable quarterly, principal due December 31, 2002 $ 4,000 $ 4,000
Line of credit payable to Stanwich Financial Services Corp., unsecured, interest
at 16% payable quarterly, payable in full on December 31, 2002 3,500 3,500
Note payable to Stanwich Financial Services Corp., unsecured, interest at 14%
payable quarterly, paid in 1999 -- 900
Note payable to Stanwich Financial Services Corp., unsecured, interest at 13%
payable quarterly, paid in 1999 -- 377
Note payable to Stanwich Financial Services Corp., unsecured, interest at 14%
payable quarterly, due December 31, 2002 900 900
Note payable to Stanwich Financial Services Corp., unsecured, interest at 13%
payable quarterly, due December 31, 2002 877 1,100
Note payable to Consumer Portfolio Services, Inc., unsecured, interest at 13%
payable quarterly, paid in 1999 -- 2,100
------- -------
$ 9,277 $12,877
======= =======
</TABLE>
Charles E. Bradley Sr., NAB's Chairman of the Board, and Charles E.
Bradley Jr., a NAB director, collectively own 92.5% of Stanwich Financial
Services Corp. ("SFSC").
35
<PAGE> 37
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) ACCRUAL FOR INDEMNIFICATIONS
The accrual for indemnifications are included in accounts payable and
accrued expenses in the consolidated balance sheets. Activity in the accrual for
indemnifications consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 830 $ 500 $ 163
Increase in accrual for loans sold 1,141 1,555 617
Charge-offs, net (1,015) (1,225) (280)
------- ------- -------
Balance, end of year $ 956 $ 830 $ 500
======= ======= =======
</TABLE>
(10) SHAREHOLDER AND OPTION AGREEMENTS
In June 1996 the Board of Directors adopted, subject to shareholder
approval, the 1996 Incentive Stock Option Plan (the "Incentive Plan") and the
1996 Non-Employee Director Stock Option Plan (the "Director Plan" and, together
with the Incentive Plan, the Option Plans). The Incentive Plan provided for,
among other things, the grant to key employees of the Company options to
purchase shares of NAB Common Stock. The Director Plan provided for, among other
things, the grant of options to purchase shares of NAB Common Stock to directors
of the Company who were not also employees of the Company.
The Option Plans were not presented to the shareholders for approval.
The Company currently has no employee or director stock option plans, and there
are no currently outstanding stock options held by any employee or director.
In April 1998, the board of directors authorized the Company to make
payments to officers and directors in lieu of stock options that had been
conditionally granted to them under the Option Plans. As a result, the Company
recorded a charge of $85,000 in 1999 and $636,000 in 1998.
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 $1,121,000, $1,101,000 and $1,101,000 in the years 1999, 2000
and 2001, respectively, to the executives, as long as the executives continue
employment with the Company. If an executive is terminated without cause all
remaining amounts due under the deferred compensation arrangement become
immediately payable.
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,
beginning June 30, 1999. 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. In exchange, the executive agreed to purchase stock in MPS of
$560,000.
36
<PAGE> 38
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Compensation expense totaling $1,278,000 and $778,000 was recorded in
the 1999 and 1998 financial statements, respectively as a result of these
agreements.
(11) INCOME TAXES
Total income taxes for the three years ended December 31, 1999 were
allocated as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
From continuing operations $315 $166 $111
From discontinued operations 75 18 6
---- ---- ----
$390 $184 $117
==== ==== ====
</TABLE>
Income taxes from continuing operations are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Current
Federal $ 190 $ 17 $ 299
State 313 232 55
----- ----- -----
Deferred
Federal -- (143) 132
State (188) (27) 24
----- ----- -----
315 79 510
Increase (reduction) in valuation
allowance -- 87 (399)
----- ----- -----
$ 315 $ 166 $ 111
===== ===== =====
</TABLE>
The Company's tax expense (benefit) before cumulative change in
accounting principle differs from the amount determined by applying the
statutory federal rate of 35% to earnings (loss) from continuing operations
before income taxes and cumulative effect of change in accounting principle as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expense (benefit) at Federal rate $(1,586) $ (164) $ 407
Excess inclusion interest 190 -- --
State taxes (81) 205 79
Other (37) 38 24
Increase (decrease) in valuation
allowance 1,829 87 (399)
------- ------- -------
Expense per accompanying
statements of operations $ 315 $ 166 $ 111
======= ======= =======
</TABLE>
37
<PAGE> 39
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of the deferred taxes assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrual for indemnifications $ 351 $ 290
Excess inclusion income 338 224
Foreclosure allowance 212 --
Deferred compensation 138 49
Other 185 114
Tax net operating loss carryforwards 65,855 64,405
-------- --------
Deferred tax assets 67,079 65,082
Valuation allowance (66,795) (64,966)
-------- --------
Deferred tax assets 284 116
Deferred tax liabilities:
Deferred loan costs (64) (116)
Other (32) --
-------- --------
Deferred tax liabilities (96) (116)
-------- --------
Net deferred tax asset (included in other receivables) $ 188 $ --
======== ========
</TABLE>
Net Federal deferred tax assets on a consolidated basis totaled $67.0
million and $65.0 million at December 31, 1999 and 1998, respectively with
corresponding valuation allowances of $66.8 million and $65.0 million,
respectively. No Federal deferred tax assets have been recognized in the 1999 or
1998 consolidated financial statements due to the fact that, based on the weight
of available evidence, it is more likely than not that the deferred tax assets
will not be realized. A state tax benefit of $188,000 was recognized in 1999
through a reduction of the state valuation allowance.
At December 31, 1999, for federal income tax purposes, the Company
had regular tax and alternative minimum tax net operating loss carryforwards of
approximately $188 million expiring as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2003 $ 51,214
2004 42,120
2005 28,004
2006 11,091
Thereafter 55,129
----------
$ 187,558
==========
</TABLE>
On June 5, 1996 the Company amended its Articles of Incorporation and
By-laws to restrict the acquisition of 5% or more of the outstanding shares of
New Common Stock of the Company so as to prevent the occurrence of an ownership
change under Section 382 of the federal income tax laws. Section 382 of the
Internal Revenue Code of 1986 (Section 382), as amended, provides in general
that if a corporation undergoes an ownership change, the amount of taxable
income that the corporation may offset after the date of such ownership change
will be subject to an annual limitation. The Company's NOL's could become
subject to certain limitations on utilization in the event the Company undergoes
an ownership change within the meaning of Section 382.
38
<PAGE> 40
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
MPS is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate and sell loans and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated financial statements.
Commitments to originate mortgage loans are agreements to provide
financing at a fixed or variable interest rate subject to specific terms and a
customer's creditworthiness on a case-by-case basis. These commitments have
fixed expiration dates and other termination clauses and may require payment of
a fee. At December 31, 1999 and 1998 MPS had commitments to originate mortgage
loans of approximately $14,793,000 and $29,400,000, respectively. These
commitments do not necessarily represent future cash requirements, as some
portion of the commitments will expire without being drawn upon or will be
declined for credit or other reasons. At December 31, 1999 and 1998, MPS had no
outstanding firm commitments to purchase loans. At January 1, 2000 MPS had a
$40,000,000 commitment with a remaining balance of $20,000,000 to sell sub-prime
loans to an institutional investor. On January 31, 2000 the commitment was
renewed for $30,000,000. The new commitment expires April 30, 2000.
MPS has entered into loan sale agreements with investors in the normal
course of business which includes standard representations and warranties
customary to the mortgage banking industry. Violations of these representations
and warranties may require MPS to repurchase loans previously sold. As of
December 31, 1999 and 1998, MPS had repurchase requests outstanding of
$1,248,000 and $0, respectively. MPS may in certain circumstances choose to
indemnify the investor rather than repurchase the loan. In the opinion of
management, the potential exposure related to loan sale agreements of MPS will
not have a material adverse effect on the consolidated financial position and
results of operations of the Company.
The Company's originations of conventional and government insured or
guaranteed loans are sold to investors on a loan by loan basis. If the loan does
not close within the allotted time period, the Company is under no further
obligation to the investor.
The Company is subject to lawsuits that arise in the ordinary course of
its business. Management is of the opinion, based in part upon consultation with
its counsel, that the liability of the Company, if any, arising from existing
and threatened lawsuits would not have a material adverse effect on the
Company's consolidated financial position and results of operations.
The Company conducts its business from leased facilities. Rent expense
for continuing operations of approximately $1,260,000, $1,082,000 and $451,000
have been recorded for the years ended December 31, 1999, 1998 and 1997,
respectively.
At December 31, 1999, minimum rental commitments under all
noncancelable leases with terms exceeding one year were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
2000 $ 1,243
2001 826
2002 622
2003 48
-------
$ 2,739
=======
</TABLE>
39
<PAGE> 41
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) RELATED PARTY TRANSACTIONS
In May 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 December 31, 1999 the
note had a balance of $277,000. This note was fully paid by SFSC in March 2000.
In October 1998, the Company borrowed $800,000 from SFSC pursuant to an
unsecured promissory note. The loan was paid off in 1998.
In September 1998, the Company borrowed $500,000 from SFSC pursuant to
an unsecured promissory note. The loan was paid off in 1998.
In December 1997, the Company borrowed $5,500,000 from CPS pursuant to
an unsecured promissory note. The loan was paid off in 1999. Messrs. Bradley,
Sr. and Bradley, Jr. are officers and directors of CPS.
As discussed in Note (1), the Company sold its Retail Automotive Sales
Segment in June, 1997 to a company controlled by Charles E. Bradley, Sr., the
Chief Executive Officer and Chairman of NAB and Charles E. Bradley, Jr., a
director of NAB, for $1,500,000. The purchase price consisted of a $200,000 cash
payment and a note for $1,300,000. The note was satisfied in 1998.
Also see Notes 7 and 16 for additional related party transactions.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made using estimated fair value amounts that have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The carrying values of cash and cash equivalents, restricted cash,
loans to officers and drafts payable are a reasonable estimate of their fair
value due to the short-term nature of these instruments.
The estimated fair value of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1999 1998
-------------------------- --------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Construction loans $ 3,330 $ 3,330 $ 9,465 $ 9,465
Residential mortgage loans held for sale 46,029 46,888 78,911 79,903
Residual interest in the securitization of
mortgage loans 3,678 3,678 3,534 3,534
Loans to officers 2,213 2,213 3,040 3,040
Financial liabilities:
Warehouse line of credit 40,218 40,218 74,117 74,117
Notes payable to affiliates 9,277 9,277 12,877 12,877
</TABLE>
The following methods and assumptions were used in estimating the
Company's fair value disclosures for financial instruments:
40
<PAGE> 42
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Construction loans: The carrying value reported in the consolidated
balance sheets approximates fair value as the construction loans are short term
and bear interest at a rate that approximates current market interest rates for
similar types of credit.
Residential mortgage loans held for sale: The fair value of loans
receivable held for sale is determined in the aggregate based on current
investor yield requirements.
Warehouse line of credit: The fair value of the variable rate line of
credit is equal to its carrying value as the variable rates are considered to be
the market rates.
Notes payable to affiliates and loans to officers: The carrying value
reported in the consolidated balance sheets approximates fair value based upon
current investor yield requirements for similar instruments.
Commitments to originate loans: The fair value is based on fees paid
by the borrowers to obtain the loan and is not considered material.
(15) SEGMENT REPORTING
The Company has two reportable segments, sub-prime and prime mortgage
lending. 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. Both of the business segments operate within the U.S.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies. The segment data
includes charges for interest and taxes from the parent, NAB Asset Corporation.
Allocation between segments represents charges from the sub prime mortgage
banking operation to the prime mortgage operation for administrative services.
The charges are based upon an estimate of actual expenses incurred.
The sub prime segment was acquired July 10, 1996. The prime mortgage
lending segment was acquired August 31, 1997.
Information concerning the operations of the segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage
Lending Lending Total
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1999
Revenues, other than interest $ 8,062 $ 13,773 $ 21,835
Interest income 2,601 2,556 5,157
Interest expense 1,657 2,522 4,179
Depreciation and amortization 588 246 834
Segment profit (loss) (4,179) 1,303 (2,876)
Segment assets (1) -- -- 59,969
Expenditures for fixed assets (1) -- -- 95
</TABLE>
41
<PAGE> 43
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage
Lending Lending Total
------- ------- -----
<S> <C> <C> <C>
Year ended December 31, 1998
Revenues, other than interest $ 11,630 $ 16,459 $ 28,089
Interest income 3,797 3,175 6,972
Interest expense 2,769 3,383 6,152
Depreciation and amortization 403 264 667
Segment profit 119 2,637 2,756
Other non-cash items:
Securitization of mortgage loans 3,248 -- 3,248
Segment assets (1) -- -- 100,680
Expenditures for fixed assets (1) -- -- 437
</TABLE>
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage
Lending Lending Total
------- ------- -----
<S> <C> <C> <C>
Year ended December 31, 1997
Revenues, other than interest $ 8,847 $ 4,516 $13,363
Interest income 2,009 729 2,738
Interest expense 1,531 863 2,394
Depreciation and amortization 332 76 408
Segment profit (loss) 2,381 555 2,936
Other non-cash items:
Premium amortization -- 383 383
Segment assets (1) -- -- 66,342
Expenditures for fixed assets (1) -- -- 439
</TABLE>
(1) The Company has not disclosed separate asset information for the sub prime
and prime mortgage segments because that information is not produced internally.
42
<PAGE> 44
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The reconciliation of the segment information above to that as
reported in the Company's Statement of Financial Condition and Statement of
Operations is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
Revenues
<S> <C> <C> <C>
Total revenues for reportable segments $ 26,992 $ 35,061 $ 16,101
Other revenues 218 615 112
--------- --------- ---------
Total consolidated revenues $ 27,210 $ 35,676 $ 16,213
========= ========= =========
1999 1998 1997
--------- --------- ---------
Interest Income
Total interest income for reportable segments $ 5,157 $ 6,972 $ 2,738
Unallocated interest income 598 1,177 324
Net interest paid to corporate from segments (380) (562) (211)
--------- --------- ---------
Total consolidated interest income $ 5,375 $ 7,587 $ 2,851
========= ========= =========
1999 1998 1997
--------- --------- ---------
Interest Expense
Total interest expense for reportable
segments $ 4,179 $ 6,152 $ 2,394
Unallocated interest expense 1,776 2,433 388
Net interest paid to corporate from segments (380) (562) (211)
--------- --------- ---------
Total consolidated interest expense $ 5,575 $ 8,023 $ 2,571
========= ========= =========
1999 1998 1997
--------- --------- ---------
Earnings (loss)
Total segment profit (loss) $ (2,876) $ 2,756 $ 2,936
Unallocated amounts:
Interest expense (1,776) (2,433) (388)
Corporate income 218 615 112
Corporate expenses (1,259) (1,910) (1,555)
Minority interest 468 (224) (263)
Net interest paid to corporate from segments 380 562 211
--------- --------- ---------
Earnings (loss) from continuing operations, before
cumulative effect of change in accounting principle $ (4,845) $ (634) $ 1,053
========= ========= =========
1999 1998 1997
--------- --------- ---------
Assets
Total assets for reportable segments $ 59,969 $ 100,680 $ 66,342
Elimination of corporate payables / receivables (1,187) (464) --
Net assets of discontinued operation 2,855 9,536 14,608
Other assets 2,769 3,565 2,285
--------- --------- ---------
Total consolidated assets $ 64,406 $ 113,317 $ 83,235
========= ========= =========
</TABLE>
During 1999, approximately $9,469,000 or 35% of the Company's
revenues were as a result of loan sales to three customers. During 1998
approximately $5,619,000 or 16% of the Company's revenues were the result of
sub-prime loan sales to one customer. During 1997 approximately $6,236,000 or
38% of the Company's revenues were the result of sub-prime loan sales to two
customers.
43
<PAGE> 45
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(16) SUBSEQUENT EVENTS AND LIQUIDITY
During 1999, cash flow from operations was negative and as result
insufficient to cover the operating expenses of NAB. In the third quarter of
1999 NAB elected to dispose of its investments in CPFI and NAFCO in order to
reduce its debt to SFSC and provide operating funds to NAB. As of December 31,
1999 NAB had remaining indebtedness to SFSC totaling $9,277,000. Since December
31, 1999 NAB has repaid $1,724,000 of this indebtedness, leaving a principal
balance of $7,553,000. Additionally, NAB is current in the payment of interest
due on this indebtedness.
On March 15, 2000 NAB entered into a Second Debt Restructure
Agreement, effective March 7, 2000, with SFSC in which SFSC agreed to extend the
maturity dates on the indebtedness to December 31, 2002. Additionally, SFSC
agreed to defer monthly interest payments, at NAB's option, on the notes to
March 31, 2001; provided that any deferred interest payment will bear interest
at 14% per annum until paid. Beginning in March 2001, monthly principal payments
of $100,000 are required in addition to monthly interest (and any deferred
interest). In order to pay the remaining indebtedness NAB must obtain cash from
operations (which consists primarily of tax sharing payments from MPS),
financing from third parties, sell existing assets, obtain more favorable terms
under its various debt agreements or achieve a combination of the above. The
Company is currently pursuing all of these alternatives and believes that the
remaining amounts due will be paid on a timely basis.
Principal repayments related to the notes payable to affiliates are
as follows (in thousands):
Year ended December 31,
2001 $ 900
2002 6,653
------
$7,553
======
On March 7, 2000, CPFI borrowed $500,000 from two officers of the
Company. The notes bear interest at 14% per annum and are due April 30, 2000.
Proceeds from the disposition of the remaining CPFI loans will be used to repay
this indebtedness. The proceeds from the borrowings were used to repay principal
and interest due SFSC and are included in the repayments discussed above.
In the next twelve months the Company intends to expand the current
operations of MPS and PAMCO and acquire additional operations complimentary to
its core business lines. The Company anticipates no additional funding from SFSC
or CPS, and therefore must rely on internally generated funds or additional
borrowings from third parties. The ability of the Company to acquire additional
compatible operations is dependent upon the availability of financing. Current
credit agreements in place are sufficient to provide the Company funds to
operate its business lines as currently structured. There can be no assurance
that internally generated funds will be sufficient or financing will be
available.
44
<PAGE> 46
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(17) PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------
December 31,
---------------------
Assets 1999 1998
- ------ ------- -------
<S> <C> <C>
Cash and cash equivalents $ 71 $ 145
Loans to MPS officers 2,213 3,040
Note receivable from MPS 1,800 3,500
Note receivable from affiliate 277 --
Investment in discontinued operations 2,855 9,536
Investment in MPS 6,637 6,327
Other assets 251 381
------- -------
Total assets $14,104 $22,929
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Notes payable to affiliates $ 9,277 $12,877
Payable to MPS 1,201 317
Payable to MPS officers 860 683
Other accounts payable and accrued expenses 720 453
------- -------
Total liabilities 12,058 14,330
Shareholders' equity 2,046 8,599
------- -------
Total liabilities and shareholders' equity $14,104 $22,929
======= =======
</TABLE>
STATEMENTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------
For the years ended December 31,
------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Interest income $ 597 $ 1,177 $ 323
Earnings (loss) from MPS (2,530) 2,532 2,673
Earnings (loss) from discontinued operations (1,553) 796 1,181
------- ------- -------
Total revenues (losses) (3,486) 4,505 4,177
------- ------- -------
Costs and expenses:
Compensation and benefits 585 1,316 787
Interest expense-affiliates 1,776 2,433 388
General and administrative expenses 486 576 657
Income taxes 220 18 111
------- ------- -------
Total costs and expenses 3,067 4,343 1,943
------- ------- -------
Net earnings (loss) $(6,553) $ 162 $ 2,234
======= ======= =======
</TABLE>
45
<PAGE> 47
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (6,553) $ 162 $ 2,234
Discontinued operations 1,553 (796) (1,181)
Adjustments to reconcile net earnings (loss) to
Net cash used in operating activities:
Undistributed earnings (loss) from MPS 2,530 (2,532) (2,673)
MPS intercompany tax (benefit) expense (562) 1,237 911
Depreciation 106 119 24
Reduction in note receivable from affiliate in exchange
for payment of interest 644 -- --
Net changes in:
Other assets 24 134 (360)
Payable to MPS 884 559 (242)
Payable to MPS officers 177 683 --
Accounts payable and accrued expenses 267 (138) 405
-------- -------- --------
Net cash used in operating activities (930) (572) (882)
-------- -------- --------
Cash flows from investing activities:
Repayments from (loans to) MPS 1,700 -- (3,500)
Preferred stock dividend from MPS -- 463 --
Note receivable from affiliate (921) -- --
Pushdown of deferred compensation liability (1,278) (778) --
Acquisition of MPS preferred stock (1,000) -- --
Repayments from (loans to) MPS officers 827 (3,040) --
-------- -------- --------
Net cash used in investing activities (672) (3,355) (3,500)
-------- -------- --------
Cash flows from financing activities:
Borrowings on notes payable to affiliates -- 1,300 16,300
Principal payments on notes payable to affiliates (3,600) (4,723) --
Notes receivable from affiliates -- -- (1,300)
Payments received on notes receivable from affiliates -- 1,300 --
-------- -------- --------
Net cash provided by (used in) financing activities (3,600) (2,123) 15,000
Cash provided by discontinued operations 5,128 5,843 (12,998)
-------- -------- --------
Net decrease in cash and cash equivalents (74) (207) (2,380)
Cash and cash equivalents at beginning of year 145 352 2,732
-------- -------- --------
Cash and cash equivalents at end of year $ 71 $ 145 $ 352
======== ======== ========
</TABLE>
46
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, information on
executive compensation is incorporated by reference from the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, information on
executive compensation is incorporated by reference from the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, information on
security ownership of certain beneficial owners and management is incorporated
by reference from the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A promulgated by the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, information on
certain relationships and related transactions is incorporated be reference from
the Registrant's definitive Proxy Statement to filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) 1. INDEX TO FINANCIAL STATEMENTS PAGE
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets as of December 31, 1999 and 1998 21
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 22
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
FINANCIAL STATEMENT SCHEDULES
None
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C>
3. EXHIBITS
2.1 Plan and Agreement of Merger dated February 7, 1996, by and among
Consumer Portfolio Services, Inc., CPS Investing Corp., and
Registrant (Incorporated by reference to Exhibit 2.1 to Form 8-K
dated February 28, 1996).
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit A to Appendix A to the Registrant's Proxy Statement dated
April 23, 1996).
3.2 Restated By-laws (Incorporated by reference to Exhibit B to Appendix
A to the Registrant's Proxy Statement dated April 23, 1996).
10.1 Employment Agreement dated December 1, 1996 between James E. Hinton
and Mortgage Portfolio Services, Inc. (Incorporated by reference to
Exhibit 10.9 to Form 10K dated December 31, 1996).
10.2 Amendment No.1 to Employment Agreement dated December 1, 1996 between
James E. Hinton and Mortgage Portfolio Services, Inc. (Filed
herewith).
10.3 $3,000,000 Promissory Note dated June 25,1998 issued by Registrant to
CPS. Paid in full. (Incorporated by reference to Exhibit 10.26 to
Form 10Q dated September 30, 1998)
10.4 Third Restated Credit Agreement between Mortgage Portfolio Services,
Inc. and Guaranty Federal Bank, F.S.B. dated June 30, 1998
(Incorporated by reference to Exhibit 10.23 to Form 10Q dated June
30, 1998)
10.5 Debt Restructure Agreement dated as of August 13, 1998 between the
Registrant and SFSC (Incorporated by reference to Exhibit 10.13 to
Form 10K dated December 31, 1998)
10.6 $500,000 Promissory Note dated September 25,1998 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.27 to Form 10Q
dated September 30, 1998) Paid in full
10.7 $800,000 Promissory Note dated October 23,1998 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.15 to Form 10K
dated December 31, 1998) Paid in full
10.8 Credit agreement between Mortgage Portfolio Services, Inc., and Bank
United dated June 15, 1999 (Incorporated by reference to Exhibit
10.18 to Form 10Q dated June 30, 1999)
10.11 Third Amendment to Warehousing Credit and Security Agreement dated as
of December 15, 1998 between Construction Portfolio Funding, Inc. and
Bank United (Incorporated by reference To Exhibit 10.13 to Form 10K
dated December 31, 1998)
10.12 Payment Deferral Agreement dated March 26, 1999 between Registrant
and SFSC (Incorporated by reference to Exhibit 10.17 to Form 10K
dated December 31, 1998)
10.13 Separation Agreement dated as of June 4, 1999 between Registrant and
Michael W. Caton effective as of July 15, 1999 (Incorporated by
reference to Exhibit 10.19 to Form 10Q dated June 30, 1999)
10.14 Consulting and Finder's Agreement dated as of June 4, 1999 between
Registrant and Caton Financial Services, Inc. effective as of July
15, 1999 (Incorporated by reference to Exhibit 10.20 to Form 10Q
dated June 30, 1999)
10.15 $921,345 Promissory Note dated May 12, 1999 issued by SFSC to
Registrant (Incorporated by reference to Exhibit 10.21 to Form 10Q
dated June 30, 1999) Paid in full
10.16 Credit Agreement between Mortgage Portfolio Services, Inc. and Bank
United dated June 15, 1999 (incorporated by reference to Exhibit
10.19 to Form 10Q dated June 30, 1999)
10.17 First Amendment to Credit Agreement between Mortgage Portfolio
Services, Inc., and Bank United dated June 15, 1999 (Incorporated by
reference to Exhibit 10.22 to Form 10Q dated September 30, 1999)
10.18 Eighth Amendment to Warehousing Credit and Security Agreement and
Amendment of Promissory Note dated February 1, 2000 between
Construction Portfolio Funding, Inc. and Bank United (Filed herewith)
10.19 $300,000 Promissory Note from Construction Portfolio Funding, Inc. to
James E. Hinton dated March 7, 2000 (Filed herewith)
10.20 Pledge Agreement dated as of March 7, 2000 made by Construction
Portfolio Funding, Inc. in favor of James E. Hinton (Filed herewith)
10.21 $200,000 Promissory Note from Construction Portfolio Funding, Inc. to
Alan Ferree dated March 7, 2000 (filed herewith)
10.22 Pledge Agreement dated as of March 7, 2000 made by Construction
Portfolio Funding, Inc. in favor of Alan Ferree (filed herewith)
10.23 Second Debt Restructure Agreement dated March 15, 2000 (effective
March 7, 2000) between
</TABLE>
48
<PAGE> 50
<TABLE>
<S> <C>
SFSC and the Registrant (filed herewith)
10.24 $4,000,000 Promissory Note issued March 15, 2000 (effective March 7,
2000) between SFSC and the Registrant (filed herewith)
10.25 $3,553,169.20 Promissory Note issued March 15, 2000 (effective March
7, 2000) between SFSC and the Registrant (filed herewith)
10.26 Subordination Agreement dated as of March 15, 2000 between SFSC the
Registrant and Bank United (filed herewith)
10.27 Second Amendment to Credit Agreement dated January 31, 2000 by and
among MPS, the Registrant and Bank United (filed herewith)
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule.
</TABLE>
(b). REPORTS ON FORM 8-K
None
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAB ASSET CORPORATION
By: /s/ Charles E. Bradley, Sr.
----------------------------
Charles E. Bradley, Sr.
Chairman of the Board/Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board March 29, 2000
/s/ Charles E. Bradley, Sr. Chief Executive Officer
------------------------------------------
Charles E. Bradley, Sr. (Principal Executive Officer)
Senior Vice President March 29, 2000
/s/ Alan Ferree Chief Financial Officer
------------------------------------------
Alan Ferree (Principal Financial Officer)
/s/ Timothy G. Hanson Controller March 29, 2000
------------------------------------------
Timothy G. Hanson (Principal Accounting Officer)
/s/ Charles E. Bradley, Jr. Director March 29, 2000
------------------------------------------
Charles E. Bradley, Jr.
/s/ James B. Gardner Director March 29, 2000
------------------------------------------
James B. Gardner
/s/ Jeffrey W. Kramer Director March 29, 2000
------------------------------------------
Jeffrey W. Kramer
/s/ James Hinton Director and President of March 29, 2000
------------------------------------------
James Hinton Mortgage Portfolio Services, Inc.
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C>
3. EXHIBITS
2.1 Plan and Agreement of Merger dated February 7, 1996, by and among
Consumer Portfolio Services, Inc., CPS Investing Corp., and
Registrant (Incorporated by reference to Exhibit 2.1 to Form 8-K
dated February 28, 1996).
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit A to Appendix A to the Registrant's Proxy Statement dated
April 23, 1996).
3.2 Restated By-laws (Incorporated by reference to Exhibit B to Appendix
A to the Registrant's Proxy Statement dated April 23, 1996).
10.1 Employment Agreement dated December 1, 1996 between James E. Hinton
and Mortgage Portfolio Services, Inc. (Incorporated by reference to
Exhibit 10.9 to Form 10K dated December 31, 1996).
10.2 Amendment No.1 to Employment Agreement dated December 1, 1996 between
James E. Hinton and Mortgage Portfolio Services, Inc. (Filed
herewith).
10.3 $3,000,000 Promissory Note dated June 25,1998 issued by Registrant to
CPS. Paid in full. (Incorporated by reference to Exhibit 10.26 to
Form 10Q dated September 30, 1998)
10.4 Third Restated Credit Agreement between Mortgage Portfolio Services,
Inc. and Guaranty Federal Bank, F.S.B. dated June 30, 1998
(Incorporated by reference to Exhibit 10.23 to Form 10Q dated June
30, 1998)
10.5 Debt Restructure Agreement dated as of August 13, 1998 between the
Registrant and SFSC (Incorporated by reference to Exhibit 10.13 to
Form 10K dated December 31, 1998)
10.6 $500,000 Promissory Note dated September 25,1998 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.27 to Form 10Q
dated September 30, 1998) Paid in full
10.7 $800,000 Promissory Note dated October 23,1998 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.15 to Form 10K
dated December 31, 1998) Paid in full
10.8 Credit agreement between Mortgage Portfolio Services, Inc., and Bank
United dated June 15, 1999 (Incorporated by reference to Exhibit
10.18 to Form 10Q dated June 30, 1999)
10.11 Third Amendment to Warehousing Credit and Security Agreement dated as
of December 15, 1998 between Construction Portfolio Funding, Inc. and
Bank United (Incorporated by reference To Exhibit 10.13 to Form 10K
dated December 31, 1998)
10.12 Payment Deferral Agreement dated March 26, 1999 between Registrant
and SFSC (Incorporated by reference to Exhibit 10.17 to Form 10K
dated December 31, 1998)
10.13 Separation Agreement dated as of June 4, 1999 between Registrant and
Michael W. Caton effective as of July 15, 1999 (Incorporated by
reference to Exhibit 10.19 to Form 10Q dated June 30, 1999)
10.14 Consulting and Finder's Agreement dated as of June 4, 1999 between
Registrant and Caton Financial Services, Inc. effective as of July
15, 1999 (Incorporated by reference to Exhibit 10.20 to Form 10Q
dated June 30, 1999)
10.15 $921,345 Promissory Note dated May 12, 1999 issued by SFSC to
Registrant (Incorporated by reference to Exhibit 10.21 to Form 10Q
dated June 30, 1999) Paid in full
10.16 Credit Agreement between Mortgage Portfolio Services, Inc. and Bank
United dated June 15, 1999 (incorporated by reference to Exhibit
10.19 to Form 10Q dated June 30, 1999)
10.17 First Amendment to Credit Agreement between Mortgage Portfolio
Services, Inc., and Bank United dated June 15, 1999 (Incorporated by
reference to Exhibit 10.22 to Form 10Q dated September 30, 1999)
10.18 Eighth Amendment to Warehousing Credit and Security Agreement and
Amendment of Promissory Note dated February 1, 2000 between
Construction Portfolio Funding, Inc. and Bank United (Filed herewith)
10.19 $300,000 Promissory Note from Construction Portfolio Funding, Inc. to
James E. Hinton dated March 7, 2000 (Filed herewith)
10.20 Pledge Agreement dated as of March 7, 2000 made by Construction
Portfolio Funding, Inc. in favor of James E. Hinton (Filed herewith)
10.21 $200,000 Promissory Note from Construction Portfolio Funding, Inc. to
Alan Ferree dated March 7, 2000 (filed herewith)
10.22 Pledge Agreement dated as of March 7, 2000 made by Construction
Portfolio Funding, Inc. in favor of Alan Ferree (filed herewith)
10.23 Second Debt Restructure Agreement dated March 15, 2000 (effective
March 7, 2000) between
</TABLE>
48
<PAGE> 53
<TABLE>
<S> <C>
SFSC and the Registrant (filed herewith)
10.24 $4,000,000 Promissory Note issued March 15, 2000 (effective March 7,
2000) between SFSC and the Registrant (filed herewith)
10.25 $3,553,169.20 Promissory Note issued March 15, 2000 (effective March
7, 2000) between SFSC and the Registrant (filed herewith)
10.26 Subordination Agreement dated as of March 15, 2000 between SFSC the
Registrant and Bank United (filed herewith)
10.27 Second Amendment to Credit Agreement dated January 31, 2000 by and
among MPS, the Registrant and Bank United (filed herewith)
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule.
</TABLE>
(b). REPORTS ON FORM 8-K
None
49
<PAGE> 1
Exhibit 10.2
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Agreement, dated as of March 18, 1999 is between Mortgage
Portfolio Services, Inc., a Delaware corporation (the "COMPANY"), and James E.
Hinton (the "EMPLOYEE").
RECITALS
a. The Company and the Employee are parties to a certain Employment
Agreement dated as of December 1, 1996 (the "AGREEMENT").
b. The parties desire to amend the Agreement as hereinafter provided.
NOW THEREFORE, the parties hereby agree as follows:
1. Section 1 of the Agreement is hereby amended to change the
termination date of the "Employment Period" from March 18, 1999 to March 18,
2001.
2. Section 2 of the Agreement is hereby amended by changing the amount
stated therein as the Employee's salary from $175,000 per year to $225,000 per
year.
3. Except as amended hereby, the Employment Agreement remains in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date and year first above written.
THE COMPANY: THE EMPLOYEE:
MORTGAGE PORTFOLIO SERVICES, INC.
By: /s/ Alan Ferree /s/ James E. Hinton
----------------------------- -----------------------------
Alan Ferree James E. Hinton
Vice President
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Exhibit 10.18
EIGHTH AMENDMENT TO
WAREHOUSING CREDIT AND SECURITY AGREEMENT
AND AMENDMENT OF PROMISSORY NOTE
This Eighth Amendment to Warehousing Credit and Security Agreement
(this "Amendment"), is entered into as of the 1st day of February, 2000, by and
between CONSTRUCTION PORTFOLIO FUNDING, INC., a Texas corporation (the
"Company"), and BANK UNITED, a federal savings bank ("Lender"). Capitalized
terms used but not defined herein have the meanings assigned to them in that
certain Warehousing Credit and Security Agreement (the "Credit Agreement") dated
effective as of December 30, 1997, by and between the Company and Lender, as the
same has been or may be amended or supplemented from time to time.
Section 1. Recitals. The Company and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:
Section 2. Amendment of Credit Agreement. The Credit Agreement and the
Credit Note (as hereinafter defined) are hereby amended and supplemented as
follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by the
amendment or addition of the following definitions:
"Termination Date" shall mean March 31, 2000, or such
earlier date upon which Lender's obligation to fund shall be
terminated pursuant to the terms of this Agreement.
(b) Section 2.5(a) of the Credit Agreement is deleted in its entirety,
and the following is substituted therefor:
"(a) The outstanding unpaid principal amount of all Advances
shall be payable in full on March 31, 2000.
Section 3. Amendment of Promissory Note. The promissory note
("Credit Note") dated as of July 30, 1999, in the original principal
amount of $30,000,000, executed by Borrower and payable to the order of
Lender is hereby amended to provide that the entire unpaid principal
balance of this Note plus all accrued and unpaid interest shall be due
and payable in full on March 31, 2000. The definition of the term
"Note" in the Credit Agreement is hereby amended to mean the Credit
Note as amended hereby, and all renewals, extensions, modifications,
increases, rearrangements, and replacements thereof.
Section 3. Representations. The Company 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.
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Section 4. Continued Force and Effect. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the same meanings as set out
in the Credit Agreement, unless amended hereby or unless the context clearly
requires otherwise. References in the Credit Agreement to the "Agreement," the
"Loan Agreement," "hereof," "herein" and words of similar import shall be deemed
to be references to the Credit Agreement as amended hereby. Any reference in the
other Loan Documents to the "Agreement," the "Line of Credit Agreement,"
"Warehouse Agreement," or the "Loan Agreement" shall be deemed to be references
to the Credit Agreement as amended through the date hereof. Any references in
the Credit Agreement or any of the Loan Documents to the Note or the Credit Note
shall be deemed to be references to that certain promissory note ("Credit Note")
dated as of July 30, 1999, in the original principal amount of $30,000,000,
executed by Borrower and payable to the order of Lender, and all renewals,
extensions, modifications, increases, rearrangements, and replacements thereof.
Section 5. Guarantor. NAB Asset Corporation joins in the execution of
this Amendment for, among other things, the purpose of ratifying its Guaranty
dated December 30, 1997 (the "Guaranty"), which guarantees the payment of the
indebtedness evidenced by the Credit Agreement and the Credit Note. GUARANTOR
(I) CONSENTS TO THE TERMS OF THIS AMENDMENT, (II) RATIFIES AND CONFIRMS THE
GUARANTY, WHICH IS IN FULL FORCE AND EFFECT IN ACCORDANCE WITH ITS TERMS, AND
(III) ACKNOWLEDGES THAT THE GUARANTY IS NOT SUBJECT TO ANY CLAIMS, OFFSETS,
DEFENSES, OR COUNTERCLAIMS OF ANY NATURE WHATSOEVER.
Section 6. Representations and Release of Claims. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Company, Guarantor,
or any third party to Lender, as evidenced by the Loan Documents. The Company
and Guarantor hereby acknowledge, agree, and represent that (i) the Company is
indebted to Lender pursuant to the terms of the Credit Note; (ii) the liens,
security interests and assignments created and evidenced by the Loan Documents
are, respectively, first, prior, valid and subsisting liens, security interests
and assignments against the Collateral and secure all indebtedness and
obligations of the Company to Lender under the Credit Note, the Credit
Agreement, and all other Loan Documents, as modified herein; (iii) there are no
claims or offsets against, or defenses or counterclaims to, the terms or
provisions of the Loan Documents, and the other obligations created or evidenced
by the Loan Documents; (iv) neither the Company nor the Guarantor has any
claims, offsets, defenses or counterclaims arising from any of the Lender's acts
or omissions with respect to the Loan Documents, or the Lender's performance
under the Loan Documents; (v) the representations and warranties contained in
the Loan Documents are true and correct representations and warranties of the
Company, as of the date hereof; (vi) the Company promises to pay to the order of
Lender the indebtedness evidenced by the Credit Note according to the terms
thereof; and (vii) the Company is not in default and no event has occurred
which, with the passage of time, giving of notice, or both, would constitute a
default by the Company of the Company's obligations under the terms and
provisions of the Loan Documents. In consideration of the modification of
certain provisions of the Loan Documents, all as herein provided, and the other
benefits received by the Company hereunder, the Company and Guarantor hereby
RELEASE, RELINQUISH and forever DISCHARGE Lender, its predecessors, successors,
assigns, shareholders, principals, parents, subsidiaries, agents, officers,
directors, employees, attorneys and representatives
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(collectively, the "Lender Released Parties"), of and from any and all claims,
demands, actions and causes of action of any and every kind or character,
whether known or unknown, present or future, which the Company has, or may have
against Lender Released Parties, arising out of or with respect to any and all
transactions relating to the Credit Agreement, the Credit Note, the Original
Note, the Guaranty, and the other Loan Documents occurring prior to the date
hereof, including any other loss, expense and/or detriment, of any kind or
character, growing out of or in any way connected with or in any way resulting
from the acts, actions or omissions of the Lender Released Parties, and
including any loss, cost or damage in connection with any breach of fiduciary
duty, breach of any duty of fair dealing, breach of competence, breach of
funding commitment, undue influence, duress, economic coercion, conflict of
interest, negligence, bad faith, malpractice, violations of the Racketeer
Influence and Corrupt Organizations Act, intentional or negligent infliction of
emotional or mental distress, tortious interference with corporate governments
or prospective business advantage, tortious interference with contractual
relations, breach of contract, deceptive trade practices, libel, slander,
conspiracy, the charging, contracting for, taking, reserving, collecting or
receiving of interest in excess of the highest lawful rate applicable to the
Loan Documents (i.e., usury), any violations of federal or state law, any
violations of federal or state banking rules, laws or regulations, including,
but not limited to, any violations of Regulation B, Equal Credit Opportunity,
bank tying act claims, any violation of the Texas Free Enterprise Antitrust Act
or any violation of federal antitrust acts.
Section 7. Severability. In the event any one or more provisions
contained in the Credit Agreement, this Amendment, or any of the Loan Documents
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 8. Expenses. The Company agrees to pay all out-of-pocket costs
and expenses (including reasonable fees and expenses of legal counsel) of Lender
in connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 9. Acknowledgment. Except as amended hereby, the Company and
Guarantor ratify and confirm that the 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 the Company under the Credit
Note, the Credit Agreement, and all other Loan Documents, as modified hereby.
The undersigned officer of the Company executing this Amendment represents and
warrants that he has full power and authority to execute and deliver this
Amendment on behalf of the Company. The undersigned officer of the Company
represents and warrants that his execution and delivery of this Amendment has
been duly authorized, and that the resolutions and affidavits previously
delivered to Lender, in connection with the execution and delivery of the Credit
Agreement, are and remain in full force and effect and have not been altered,
amended or repealed in anywise.
Section 10. No Waiver. The Company and Guarantor agree that no Event of
Default and no Default has been waived or remedied by the execution of this
Amendment by Lender, and any such Default or Event of Default heretofore arising
and currently continuing shall continue after the execution and delivery hereof.
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Section 11. 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 12. Counterparts. 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.
SECTION 13. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, THE GUARANTY, AND THE OTHER LOAN DOCUMENTS, ALL AS
MODIFIED HEREBY, 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 and effective as of the dates first written above.
COMPANY: GUARANTOR:
- -------- ----------
CONSTRUCTION PORTFOLIO
FUNDING, INC., NAB ASSET CORPORATION,
a Texas corporation a Texas corporation
By: /s/ Alan Ferree
By: /s/ Alan Ferree Alan Ferree, Senior Vice-President
LENDER:
-------
BANK UNITED,
a federal savings bank
By: /s/ Darcey Carter
Darcey Carter, Regional Director,
Mortgage Banker Finance
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Exhibit 10.19
PROMISSORY NOTE
$300,000 March 7, 2000
For value received, CONSTRUCTION PORTFOLIO FUNDING, INC. (the "MAKER"),
a Texas corporation, promises to pay to the order of JAMES E. HINTON (the
"HOLDER") the principal amount of Three Hundred Thousand Dollars ($300,000) in
accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
full on April 30, 2000.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on the last day of each calendar month.
3. Prepayments. The Maker may prepay this Note in whole or, from time
to time, in part without penalty or premium. All such prepayments shall be
applied against the required installments of principal in order of maturity
thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that, in the event that:
(i) any installment of principal or interest under this Note shall not
be paid when it is due and payable, and such failure to pay is not
cured within fifteen (15) days after notice from Holder of such failure
to pay; or
(ii) Maker shall suffer or permit the filing by or against the Maker of
any petition for adjudication, arrangement, reorganization or the like
under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property,
then, upon the happening of any such event (each an "Event of Default"), the
entire indebtedness and accrued interest thereon due under this Note shall, at
the option of the Holder, accelerate and become immediately due and payable
without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of
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evidence reasonably satisfactory to the Maker of the loss, theft, destruction or
mutilation of this Note, and of indemnity or security reasonably satisfactory to
the Maker, and upon reimbursement to the Maker of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Note, if
mutilated, the Maker will make and deliver a new note of like tenor in lieu of
this Note. Any note made and delivered in accordance with the provision of this
paragraph shall be dated as of the date to which interest has been paid on this
Note, or if no interest has theretofore been paid on this Note, then dated the
date hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Texas, without regard to principles of
conflicts of laws.
9. Successors and Assigns. All the covenants, stipulations, promises
and agreements contained in this Note by or on behalf of the Maker or the Holder
and all rights of the Maker or the Holder contained in this Note shall bind or
inure to their respective successors, assigns, heirs and personal
representatives, whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
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(a) If to Maker: Construction Portfolio Funding, Inc.
NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Attention: Alan Ferree
Telephone: (214) 860-1882
Telecopy: (214) 821-3689
(b) If to Holder: James E. Hinton
c/o Mortgage Portfolio Services, Inc.
LBJ Financial Center
5520 LBJ Freeway, Suite 200
Dallas TX 75240
Telephone: (972)404-4400
Telecopy: (972)701-6937
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note evidences the following indebtedness of
the Maker to the Holder: a loan in the amount hereof made by the Holder to the
Maker on the date hereof.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
CONSTRUCTION PORTFOLIO FUNDING, INC.
By: /s/ Alan Ferree
---------------------------------
Name: Alan Ferree
Title: Executive Vice-President
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Exhibit 10.20
PLEDGE AGREEMENT
This PLEDGE AGREEMENT, dated as of March 7, 2000, made by CONSTRUCTION
PORTFOLIO FUNDING, INC., a Texas corporation (the "PLEDGOR"), in favor of JAMES
E. HINTON (the "SECURED PARTY").
W I T N E S S E T H:
WHEREAS, the Pledgor is the legal and beneficial owner of the Pledged
Notes (as hereinafter defined);
WHEREAS, on the date hereof, Pledgee is making a $300,000 loan to
Pledgor (the "LOAN"), and such loan is evidenced by a certain Promissory Note of
even date herewith in the principal amount of $300,000 issued by Pledgor to
Pledgee (the "NOTE");
WHEREAS, Pledgee is making the Loan in reliance on Pledgor's commitment
to enter into and perform its obligations under this Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Pledgor
hereby agrees for the benefit of Secured Party, and his successors, transferees,
assigns, heirs and personal representatives, as follows:
1. DEFINED TERMS. Unless otherwise defined herein, the following terms
shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in
effect in the State of Texas.
"Collateral" means the Pledged Notes, and all Proceeds of the
Pledged Notes.
"Event of Default" shall have the meaning given such term in
the Note.
"Obligations" means the obligations of the Pledgor under the
Note (including, without limitation, interest accruing after the maturity of the
Note and interest accruing after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding, relating
to the Pledgor whether or not a claim for post-filing or post-petition interest
is allowed in such proceeding) and all other obligations and liabilities of the
Pledgor to the Secured Party, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred, which
may arise under, out of, or in connection with, this Pledge Agreement
(including, without limitation, all fees and disbursements of counsel to the
Secured Party that are required to be paid by the Pledgor pursuant to the terms
of this Pledge Agreement).
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"Pledge Agreement" means this Pledge Agreement, as amended,
supplemented or otherwise modified form time to time.
"Pledged Notes" means the promissory notes listed on Schedule
A hereto.
"Proceeds" means all "proceeds" as such term is defined in
Section 9-306(1) of the Code on the date hereof and, in any event, shall
include, without limitation, all interest or other income from the Pledged
Notes, collections thereon or distributions with respect thereto.
2. PLEDGE, GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to
the Secured Party the Pledged Notes and hereby grants to the Secured Party a
first security interest in the Collateral, as collateral security for the prompt
and complete payment and performance when due (whether at the stated maturity by
acceleration or otherwise) of the Obligations.
3. ALLONGE; PAYMENTS ON PLEDGED NOTES.
(a) Concurrently with the delivery to the Secured Party of the
Pledged Notes to the Secured Party, the Pledgor shall deliver an undated
Allonges collaterally assigning the Pledged Notes to the Secured Party.
(b) The Secured Party shall (i) be entitled to receive all
principal, interest and other payments made under the Pledged Notes until the
Obligations have been paid in full and (ii) apply the same to the payment of the
Obligations.
4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants
that:
(a) the Pledgor has the power and authority and the legal
right to execute and deliver, to perform its obligations under, and to grant the
lien on the Collateral pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and
binding obligation of the Pledgor enforceable in accordance with its terms,
except as enforceability may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' right generally, (ii) general equitable principles (whether
enforcement is sought by proceedings in equity or at law), and (iii) by the need
to make filings with or obtain the consent of any governmental authority to
enforce rights under this Pledge Agreement;
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(c) the execution, delivery and, except for filings and
consents necessary for the enforcement of rights under this Pledge Agreement by
the Secured Party, performance of this Pledge Agreement will not violate any
provision of any requirement of law or contractual obligation of the Pledgor and
will not result in the creation or imposition of any lien on any of the
properties or revenues of the Pledgor pursuant to any requirement of law or
contractual obligation, except as contemplated hereby;
(d) no litigation, investigation or proceeding of or before
any arbitrator or governmental authority is pending or, to the knowledge of the
Pledgor, threatened by or against the Pledgor or against any of its properties
or revenues with respect to this Pledge Agreement or any of the transactions
contemplated hereby;
(e) the Pledgor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Notes, free of any and all liens or
options in favor of, or claims of, any other person, except the lien created by
this Pledge Agreement; and
(f) upon delivery to the Secured Party of the Pledged Notes,
the lien granted pursuant to this Pledge Agreement will constitute a valid,
perfected first priority lien on the Collateral, enforceable as such against all
creditors of the Pledgor and any persons purporting to purchase any Collateral
from the Pledgor.
5. COVENANTS. The Pledgor covenants and agrees with the Secured Party
that, from and after the date of this Pledge Agreement until the Obligations are
paid in full:
(a) Without the prior written consent of the Secured Party,
which consent shall not be unreasonably withheld, the Pledgor will not (i) sell,
assign, transfer, exchange, or otherwise dispose of, or grant any option with
respect to, the Collateral, or (ii) create, incur or permit to exist any lien or
option in favor of, or any claim of any person with respect to, any of the
Collateral, or any interest therein, except for the lien provided for by this
Pledge Agreement. The Pledgor will defend the right, title and interest of the
Secured Party in and to the Collateral against the claims and demands of all
persons whomsoever.
(b) At any time and from time to time, upon the written
request of the Secured Party, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further instruments and
documents and take such further actions as the Secured Party may reasonably
request for the purposes of obtaining or preserving the full benefits of this
Pledge Agreement and of the rights and powers herein granted including, without
limitation, the filing of any financing or continuation statements under the
Uniform Commercial Code in effect in any jurisdiction with respect to the liens
created hereby. The Pledgor also hereby authorizes the Secured Party to file any
such financing or continuation statement without the signature of the Pledgor to
the extent permitted by applicable law. If
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any amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note, other instrument or chattel paper, such
note, instrument or chattel paper shall be immediately delivered to the Secured
Party, to be held as Collateral pursuant to this Pledge Agreement.
6. RIGHTS OF THE SECURED PARTY.
(a) If an Event of Default shall occur and be continuing, the
Secured Party shall be entitled to exercise upon the pledge, lien and security
interest granted hereby with respect to the Collateral in the manner permitted
by law.
(b) The rights of the Secured Party hereunder shall not be
conditioned or contingent upon the pursuit by the Secured Party of any right or
remedy against the Pledgor or against any other person which may be or become
liable in respect of all or any part of the Obligations or against any
collateral security therefor, guarantee therefor or right of offset with respect
thereto. Except as required by applicable law, the Secured Party shall not be
liable for any failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so, nor shall the Secured Party be under
any obligation to sell or otherwise dispose of any Collateral upon the request
of the Pledgor or any other person or to take any other action whatsoever with
regard to the Collateral or any part thereof.
7. REMEDIES. If an Event of Default shall occur and be continuing, the
Secured Party may exercise all rights and remedies of a secured party under the
Code and other applicable law.
8. PRIVATE SALES.
(a) The Pledgor recognizes that the Secured Party may be
unable to effect a public sale of the Pledged Notes, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, and applicable
state securities laws or otherwise, and may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers which will be
obliged to agree, among other things, to acquire such securities for their own
account for investment and not with a view to the distribution or resale
thereof. The Pledgor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable than if such sale were a public
sale and, notwithstanding such circumstances, agrees that the private nature of
any such sale shall not render such sale commercially unreasonable. The Secured
Party shall be under no obligation to delay a sale of the Pledged Notes for the
period of time necessary to permit the Pledgor to register such securities for
public sale under the Securities Act, or under applicable state securities laws,
even if the Pledgor would agree to do so.
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(b) Any sale by the Secured Party of any of the Pledged Notes
shall require fifteen (15) business days' prior notice to the Pledgor providing
reasonable details with respect to such sale or, as the case may be, the
procedures for such sale (it being agreed that such notice may run concurrently
with any other notice required by law or hereunder)
(c) The Pledgor further agrees to use its best efforts to do
or cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Pledged Notes pursuant to this Section 8
valid and binding and in compliance with any and all other applicable
requirements of law.
9. LIMITATION ON DUTIES REGARDING COLLATERAL. The Secured Party's sole
duty with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to deal with it in the same manner as the Secured Party deals with
similar securities and property for its own account. The Secured Party shall not
be liable for failure to demand, collect or realize upon any of the Collateral
or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or
otherwise.
10. TERMINATION OF AGREEMENT; RETURN OF COLLATERAL. This Agreement
shall terminate upon payment of the Obligations in full. Within three (3)
business days after payment of the Obligations in full, the Secured Party shall
return all of the Collateral and the related Allonges to the Pledgor.
11. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies
herein contained with respect to Allonges delivered pursuant hereto are
irrevocable and powers coupled with an interest.
12. SEVERABILITY. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
13. SECTION HEADINGS. The section headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
14. NO WAIVER; CUMULATIVE REMEDIES. The Secured Party shall not by any
act (except by a written instrument pursuant to Section 15 hereof) be deemed to
have waived any right or remedy hereunder or to have acquiesced in any Event of
Default or in any breach of any of the terms and conditions hereof. No failure
to exercise, nor any delay in exercising, on the part of the Secured Party, any
right, power or privilege hereunder shall operate as a waiver thereof. No single
or partial exercise of any right, power or privilege hereunder shall
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preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Secured Party of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy which the Secured Party would otherwise have on any future occasion. The
rights and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any other rights or remedies provided by
law.
15. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None
of the terms or provisions of this Pledge Agreement may be amended, supplemented
or otherwise modified except by a written instrument executed by the Pledgor and
the Secured Party, provided that any provision of this Pledge Agreement may be
waived by the Secured Party in a letter or agreement executed by the Secured
Party or by telex or facsimile transmission from the Secured Party. This Pledge
Agreement shall be binding upon the successors and assigns of the Pledgor and
shall inure to the benefit of the Secured Party and his successors, and assigns,
heirs and personal representatives. This Pledge Agreement shall be governed by,
and construed and interpreted in accordance with, the laws of the State of Utah.
16. NOTICES. Notices by the Secured Party may be given by mail, by
private courier by telex or by facsimile transmission, (such facsimile
transmission to be confirmed by telephone) addressed or transmitted to the
Pledgor at his address or transmission number set forth below and shall be
effective upon receipt (which may be evidenced in any customary manner). The
Pledgor may change its address and transmission number by written notice to the
Secured Party.
To Secured Party: James E. Hinton
c/o Mortgage Portfolio Services, Inc.
LBJ Financial Center
5520 LBJ Freeway, Suite 200
Dallas TX 75240
Telephone: (972) 404-4400
Telecopy: (972) 701-6937
To Pledgor: Construction Portfolio Funding, Inc.
c/o NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Attention: Alan Ferree
Telephone: (214)860-1882
Telecopy: (214) 821-3689
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be duly executed and delivered as of the date first above written.
PLEDGOR:
CONSTRUCTION PORTFOLIO FUNDING, INC.
By: /s/ Alan Ferree
Name: Alan Ferree
Title: Executive Vice-President
SECURED PARTY:
/s/ James E. Hinton
James E. Hinton
7
<PAGE> 8
SCHEDULE A
LIST OF PLEDGED NOTES
<TABLE>
<CAPTION>
BORROWER LOAN NUMBER TYPE NOTE DATE MATURITY LOAN AMOUNT PRINCIPAL BAL.
-------- ----------- ---- --------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Normandy, Inc. 5802626456 1 3 06/10/99 06/11/00 300,000.00 300,000.00
Desert Communities, Inc. 5802706471 7 Sold 07/13/99 01/13/00 122,962.00 88,844.81
Rhodes/The Granada Hills Partnership 5802596436 20 Sold 05/12/99 02/12/00 171,067.00 140,355.25
Rhodes/The Granada Hills Partnership 5802596496 6 Spec 08/03/99 02/03/00 223,669.00 213,122.88
Pacific Construction, Inc. 5801496074 1 Spec 10/12/98 10/12/99 203,376.00 164,010.35
Norman Construction, Inc. 5802496356 1 A&D 01/27/99 01/27/00 261,000.00 99,081.65
1,282,074.00 1,005,414.94
</TABLE>
8
<PAGE> 1
Exhibit 10.21
PROMISSORY NOTE
$200,000 March 7, 2000
For value received, CONSTRUCTION PORTFOLIO FUNDING, INC. (the "MAKER"),
a Texas corporation, promises to pay to the order of ALAN FERREE (the "HOLDER")
the principal amount of Two Hundred Thousand Dollars ($200,000) in accordance
with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
full on April 30, 2000.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on the last day of each calendar month.
3. Prepayments. The Maker may prepay this Note in whole or, from time
to time, in part without penalty or premium. All such prepayments shall be
applied against the required installments of principal in order of maturity
thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that, in the event that:
(i) any installment of principal or interest under this Note shall not
be paid when it is due and payable, and such failure to pay is not
cured within fifteen (15) days after notice from Holder of such failure
to pay; or
(ii) Maker shall suffer or permit the filing by or against the Maker of
any petition for adjudication, arrangement, reorganization or the like
under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property,
then, upon the happening of any such event (each an "Event of Default"), the
entire indebtedness and accrued interest thereon due under this Note shall, at
the option of the Holder, accelerate and become immediately due and payable
without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
<PAGE> 2
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Texas, without regard to principles of
conflicts of laws.
9. Successors and Assigns. All the covenants, stipulations, promises
and agreements contained in this Note by or on behalf of the Maker or the Holder
and all rights of the Maker or the Holder contained in this Note shall bind or
inure to their respective successors, assigns, heirs and personal
representatives, whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
2
<PAGE> 3
(a) If to Maker: Construction Portfolio Funding, Inc.
NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Attention: Alan Ferree
Telephone: (214) 860-1882
Telecopy: (214) 821-3689
(b) If to Holder: Alan Ferree
c/o NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Telephone: (214) 860-1882
Telecopy: (214) 821-3689
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note evidences the following indebtedness of
the Maker to the Holder: a loan in the amount hereof made by the Holder to the
Maker on the date hereof.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
CONSTRUCTION PORTFOLIO FUNDING, INC.
By: /s/ James E. Hinton
Name: James E. Hinton
Title: President
3
<PAGE> 1
Exhibit 10.22
PLEDGE AGREEMENT
This PLEDGE AGREEMENT, dated as of March 7, 2000, made by CONSTRUCTION
PORTFOLIO FUNDING, INC., a Texas corporation (the "PLEDGOR"), in favor of ALAN
FERREE (the "SECURED PARTY").
W I T N E S S E T H:
WHEREAS, the Pledgor is the legal and beneficial owner of the Pledged
Notes (as hereinafter defined);
WHEREAS, on the date hereof, Pledgee is making a $200,000 loan to
Pledgor (the "LOAN"), and such loan is evidenced by a certain Promissory Note of
even date herewith in the principal amount of $200,000 issued by Pledgor to
Pledgee (the "Note");
WHEREAS, Pledgee is making the Loan in reliance on Pledgor's commitment
to enter into and perform its obligations under this Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Pledgor
hereby agrees for the benefit of Secured Party, and his successors, transferees,
assigns, heirs and personal representatives, as follows:
1. DEFINED TERMS. Unless otherwise defined herein, the following terms
shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in
effect in the State of Texas.
"Collateral" means the Pledged Notes, and all Proceeds of the
Pledged Notes.
"Event of Default" shall have the meaning given such term in the
Note.
"Obligations" means the obligations of the Pledgor under the Note
(including, without limitation, interest accruing after the maturity of the Note
and interest accruing after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
the Pledgor whether or not a claim for post-filing or post-petition interest is
allowed in such proceeding) and all other obligations and liabilities of the
Pledgor to the Secured Party, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred, which
may arise under, out of, or in connection with, this Pledge Agreement
(including, without limitation, all fees and disbursements of counsel to the
Secured Party that are required to be paid by the Pledgor pursuant to the terms
of this Pledge Agreement).
<PAGE> 2
"Pledge Agreement" means this Pledge Agreement, as amended,
supplemented or otherwise modified form time to time.
"Pledged Notes" means the promissory notes listed on Schedule A
hereto.
"Proceeds" means all "proceeds" as such term is defined in
Section 9-306(1) of the Code on the date hereof and, in any event, shall
include, without limitation, all interest or other income from the Pledged
Notes, collections thereon or distributions with respect thereto.
2. PLEDGE, GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to
the Secured Party the Pledged Notes and hereby grants to the Secured Party a
first security interest in the Collateral, as collateral security for the prompt
and complete payment and performance when due (whether at the stated maturity by
acceleration or otherwise) of the Obligations.
3. ALLONGE; PAYMENTS ON PLEDGED NOTES.
(a) Concurrently with the delivery to the Secured Party of the
Pledged Notes to the Secured Party, the Pledgor shall deliver an undated
Allonges collaterally assigning the Pledged Notes to the Secured Party.
(b) The Secured Party shall (i) be entitled to receive all
principal, interest and other payments made under the Pledged Notes until the
Obligations have been paid in full and (ii) apply the same to the payment of the
Obligations.
4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants
that:
(a) the Pledgor has the power and authority and the legal right
to execute and deliver, to perform its obligations under, and to grant the lien
on the Collateral pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms, except as
enforceability may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' right
generally, (ii) general equitable principles (whether enforcement is sought by
proceedings in equity or at law), and (iii) by the need to make filings with or
obtain the consent of any governmental authority to enforce rights under this
Pledge Agreement;
2
<PAGE> 3
(c) the execution, delivery and, except for filings and
consents necessary for the enforcement of rights under this Pledge Agreement by
the Secured Party, performance of this Pledge Agreement will not violate any
provision of any requirement of law or contractual obligation of the Pledgor and
will not result in the creation or imposition of any lien on any of the
properties or revenues of the Pledgor pursuant to any requirement of law or
contractual obligation, except as contemplated hereby;
(d) no litigation, investigation or proceeding of or before
any arbitrator or governmental authority is pending or, to the knowledge of the
Pledgor, threatened by or against the Pledgor or against any of its properties
or revenues with respect to this Pledge Agreement or any of the transactions
contemplated hereby;
(e) the Pledgor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Notes, free of any and all liens or
options in favor of, or claims of, any other person, except the lien created by
this Pledge Agreement; and
(f) upon delivery to the Secured Party of the Pledged Notes,
the lien granted pursuant to this Pledge Agreement will constitute a valid,
perfected first priority lien on the Collateral, enforceable as such against all
creditors of the Pledgor and any persons purporting to purchase any Collateral
from the Pledgor.
5. COVENANTS. The Pledgor covenants and agrees with the Secured Party
that, from and after the date of this Pledge Agreement until the Obligations are
paid in full:
(a) Without the prior written consent of the Secured Party,
which consent shall not be unreasonably withheld, the Pledgor will not (i) sell,
assign, transfer, exchange, or otherwise dispose of, or grant any option with
respect to, the Collateral, or (ii) create, incur or permit to exist any lien or
option in favor of, or any claim of any person with respect to, any of the
Collateral, or any interest therein, except for the lien provided for by this
Pledge Agreement. The Pledgor will defend the right, title and interest of the
Secured Party in and to the Collateral against the claims and demands of all
persons whomsoever.
(b) At any time and from time to time, upon the written
request of the Secured Party, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further instruments and
documents and take such further actions as the Secured Party may reasonably
request for the purposes of obtaining or preserving the full benefits of this
Pledge Agreement and of the rights and powers herein granted including, without
limitation, the filing of any financing or continuation statements under the
Uniform Commercial Code in effect in any jurisdiction with respect to the liens
created hereby. The Pledgor also hereby authorizes the Secured Party to file any
such financing or continuation statement without the signature of the Pledgor to
the extent permitted by applicable law. If
3
<PAGE> 4
any amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note, other instrument or chattel paper, such
note, instrument or chattel paper shall be immediately delivered to the Secured
Party, to be held as Collateral pursuant to this Pledge Agreement.
6. RIGHTS OF THE SECURED PARTY.
(a) If an Event of Default shall occur and be continuing, the
Secured Party shall be entitled to exercise upon the pledge, lien and security
interest granted hereby with respect to the Collateral in the manner permitted
by law.
(b) The rights of the Secured Party hereunder shall not be
conditioned or contingent upon the pursuit by the Secured Party of any right or
remedy against the Pledgor or against any other person which may be or become
liable in respect of all or any part of the Obligations or against any
collateral security therefor, guarantee therefor or right of offset with respect
thereto. Except as required by applicable law, the Secured Party shall not be
liable for any failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so, nor shall the Secured Party be under
any obligation to sell or otherwise dispose of any Collateral upon the request
of the Pledgor or any other person or to take any other action whatsoever with
regard to the Collateral or any part thereof.
7. REMEDIES. If an Event of Default shall occur and be continuing, the
Secured Party may exercise all rights and remedies of a secured party under the
Code and other applicable law.
8. PRIVATE SALES.
(a) The Pledgor recognizes that the Secured Party may be
unable to effect a public sale of the Pledged Notes, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, and applicable
state securities laws or otherwise, and may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers which will be
obliged to agree, among other things, to acquire such securities for their own
account for investment and not with a view to the distribution or resale
thereof. The Pledgor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable than if such sale were a public
sale and, notwithstanding such circumstances, agrees that the private nature of
any such sale shall not render such sale commercially unreasonable. The Secured
Party shall be under no obligation to delay a sale of the Pledged Notes for the
period of time necessary to permit the Pledgor to register such securities for
public sale under the Securities Act, or under applicable state securities laws,
even if the Pledgor would agree to do so.
4
<PAGE> 5
(b) Any sale by the Secured Party of any of the Pledged Notes
shall require fifteen (15) business days' prior notice to the Pledgor providing
reasonable details with respect to such sale or, as the case may be, the
procedures for such sale (it being agreed that such notice may run concurrently
with any other notice required by law or hereunder)
(c) The Pledgor further agrees to use its best efforts to do
or cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Pledged Notes pursuant to this Section 8
valid and binding and in compliance with any and all other applicable
requirements of law.
9. LIMITATION ON DUTIES REGARDING COLLATERAL. The Secured Party's sole
duty with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to deal with it in the same manner as the Secured Party deals with
similar securities and property for its own account. The Secured Party shall not
be liable for failure to demand, collect or realize upon any of the Collateral
or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or
otherwise.
10. TERMINATION OF AGREEMENT; RETURN OF COLLATERAL. This Agreement
shall terminate upon payment of the Obligations in full. Within three (3)
business days after payment of the Obligations in full, the Secured Party shall
return all of the Collateral and the related Allonges to the Pledgor.
11. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies
herein contained with respect to Allonges delivered pursuant hereto are
irrevocable and powers coupled with an interest.
12. SEVERABILITY. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
13. SECTION HEADINGS. The section headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
14. NO WAIVER; CUMULATIVE REMEDIES. The Secured Party shall not by any
act (except by a written instrument pursuant to Section 15 hereof) be deemed to
have waived any right or remedy hereunder or to have acquiesced in any Event of
Default or in any breach of any of the terms and conditions hereof. No failure
to exercise, nor any delay in exercising, on the part of the Secured Party, any
right, power or privilege hereunder shall operate as a
5
<PAGE> 6
waiver thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Secured Party of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which the Secured Party would otherwise have on any future
occasion. The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
15. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None
of the terms or provisions of this Pledge Agreement may be amended, supplemented
or otherwise modified except by a written instrument executed by the Pledgor and
the Secured Party, provided that any provision of this Pledge Agreement may be
waived by the Secured Party in a letter or agreement executed by the Secured
Party or by telex or facsimile transmission from the Secured Party. This Pledge
Agreement shall be binding upon the successors and assigns of the Pledgor and
shall inure to the benefit of the Secured Party and his successors, and assigns,
heirs and personal representatives. This Pledge Agreement shall be governed by,
and construed and interpreted in accordance with, the laws of the State of Utah.
16. NOTICES. Notices by the Secured Party may be given by mail, by
private courier by telex or by facsimile transmission, (such facsimile
transmission to be confirmed by telephone) addressed or transmitted to the
Pledgor at his address or transmission number set forth below and shall be
effective upon receipt (which may be evidenced in any customary manner). The
Pledgor may change its address and transmission number by written notice to the
Secured Party.
To Secured Party: Alan Ferree
c/o NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Telephone: (214) 821-1882
Telecopy: (214) 821-3689
To Pledgor: Construction Portfolio Funding, Inc.
c/o NAB Asset Corporation
4144 N. Central Expressway, Suite 900
Dallas, TX 75204
Telephone: (214) 821-1882
Telecopy: (214) 821-3689
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be duly executed and delivered as of the date first above written.
PLEDGOR:
CONSTRUCTION PORTFOLIO FUNDING, INC.
By: /s/ James E. Hinton
Name: James E. Hinton
Title: President
SECURED PARTY:
/s/ Alan Ferree
Alan Ferree
7
<PAGE> 8
SCHEDULE A
LIST OF PLEDGED NOTES
<TABLE>
<CAPTION>
BORROWER LOAN NUMBER TYPE NOTE DATE MATURITY LOAN AMOUNT PRINCIPAL BAL.
-------- ----------- ---- --------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Rhodes/The Granada Hills Partnership 5802596436 4 Sold 05/12/99 02/12/00 222,854.00 204,717.65
Rhodes/The Granada Hills Partnership 5802596496 1 Spec 08/03/99 02/03/00 196,191.00 187,453.94
Desert Communities Inc. (Rhodes) 5802706471 6 Spec 07/13/99 01/13/00 122,587.00 120,958.80
Rhodes/The Granada Hills Partnership 5802596436 3 Sold 05/12/99 02/12/00 193,691.00 170,205.82
735,323.00 683,336.21
</TABLE>
8
<PAGE> 1
Exhibit 10.23
SECOND DEBT RESTRUCTURE AGREEMENT
This Agreement dated March 15, 2000, but effective as of March 7, 2000
(the "EFFECTIVE DATE") is between Stanwich Financial Services Corp., a Rhode
Island corporation ("SFSC"), and NAB Asset Corporation, a Texas corporation
("NAB").
RECITALS
a. On the Effective Date NAB was indebted to SFSC under the Promissory
Notes listed on Schedule A hereto (the "NAB NOTES").
b. The Notes were amended by the following agreements between SFSC and
NAB: (1) Debt Restructure Agreement dated August 13, 1998 (the "DRA") and (ii)
Payment Deferral Agreement dated March 26, 1999 (the "PDA").
c. SFSC is indebted to NAB under a Promissory Note dated May 12, 1999
in the original principal amount of $921,345.24, issued by SFSC to NAB (the
"SFSC NOTE").
d. NAB has requested that the indebtedness evidenced by the NAB Notes
be restructured and that SFSC subordinate $4,000,000 of such indebtedness to
NAB's obligations to Bank United, as agent Bank (the "BANK") under a certain
Guaranty dated June 15, 1999 issued by NAB to the Bank, as hereinafter provided.
SFSC has agreed to restructure and to subordinate a portion of the indebtedness
represented thereby, on the terms hereinafter set forth.
NOW THEREFORE in consideration of the premises, the parties hereby
agree as follows:
SECTION 1. ACKNOWLEDGMENT RE INDEBTEDNESS UNDER NAB NOTES.
On the Effective Date, NAB made (i) an interest payment to SFSC under
the NAB Notes in the amount of $229,459.58, the same constituting all accrued
interest under the NAB Notes to the Effective Date and (ii) a principal payment
to SFSC under the NAB Notes in the amount of $270,540.42 (which was applied
against NAB Note A (as defined in Schedule A)). After giving effect to such
payment (and before giving effect to the transactions referred to below in this
Agreement), the aggregate indebtedness of NAB under the NAB Notes as of the
Effective Date was $7,849,296.88, all of which was principal.
SECTION 2. ACKNOWLEDGMENT RE INDEBTEDNESS UNDER THE SFSC NOTE.
The aggregate indebtedness of SFSC under the SFSC Note as of the
Effective Date was $296,127.68, (before giving effect to the transactions
referred to below in this Agreement), consisting of $276,832.82 of principal and
$19,294.86 of accrued and unpaid interest to the Effective Date.
<PAGE> 2
SECTION 3. SETOFF.
On the Effective Date, NAB paid $296,127.68 of principal under NAB Note
A by setoff against (i) $276,832.82 of principal under the SFSC Note and (ii)
$19,294.86 of accrued interest under the SFSC Note.
After giving effect to such setoff and the payment referred to in
Section 1, (i) all interest under the NAB Notes to the Effective Date has been
paid, (ii) the SFSC Note (including all principal and accrued interest to the
Effective Date) has been paid in full, (iii) the principal of NAB Note A was
reduced to $53,169.20 and (iv) the aggregate principal of all the NAB Notes
(including NAB Note A) was reduced to $7,553,169.20. NAB shall promptly return
the original of the SFSC Note to SFSC, marked "PAID."
SECTION 4. ISSUANCE OF REPLACEMENT NOTES.
(a) On the date hereof, NAB is issuing two promissory notes to SFSC
dated the Effective Date in the respective principal amounts of $4,000,000
("REPLACEMENT NOTE A") and $3,553,169.20 ("REPLACEMENT NOTE B"). Replacement
Note A and Replacement Note B are sometimes hereinafter referred to collectively
as the "REPLACEMENT NOTES." The Replacement Notes supersede and replace the NAB
Notes, effective as of the Effective Date. The aggregate principal of the
Replacement Notes equals the aggregate principal outstanding as of the Effective
Date under the NAB Notes (after giving effect to the setoff and payments
referred to above). The indebtedness represented by the Replacement Notes is the
same indebtedness heretofore represented by the NAB Notes. The purpose of
issuing the Replacement Notes in replacement of the NAB Notes is to facilitate
(i) the amending of the interest and payment terms applicable to such
indebtedness and (ii) the subordination of $4,000,000 of such indebtedness
referred to in Recital d., above.
SFSC shall promptly return the originals of the NAB Notes to NAB marked
"Superseded and Replaced."
(b) The interest and payment terms of the Replacement Notes are
summarized as follows, which summary is qualified in its entirety by reference
to the Replacement Notes themselves, whose terms shall prevail in the event of
any conflict between such terms and such summary:
(i) Each Replacement Note bears interest at the rate of
14% per annum, payable monthly in arrears. Such
interest rate is the approximate average interest
rate applicable to the NAB Notes.
(ii) The principal of Replacement Note B is payable in 22
installments as follows: The first 21 installments
shall be in the amount of $100,000.00 each, payable
on the last day of each month beginning on March 31,
2001 and ending on November 30, 2002; and the 22nd
installment shall be in the amount of $1,453,169.20,
payable on December 31, 2002.
(iii) The principal of Replacement Note A is payable in
installments as follows: $2,000,000 on or before June
30, 2002; and $2,000,000 on or before December 31,
2002.
2
<PAGE> 3
(iv) In addition to the scheduled payments referred to
above, NAB shall have the right, without premium or
penalty, to prepay, in whole or in part, the
Replacement Notes, or either of them, with any such
voluntary prepayments being applied first to
Replacement Note B.
SECTION 5. EXTENSION FEE.
The terms of the Replacement Notes constitute a substantial extension
of the maturities of the NAB Notes, all of which, but for this Agreement, would
be due in the year 2000. In consideration of such extensions, NAB paid SFSC an
extension fee of $100,000 on January 10, 2000.
SECTION 6. SUBORDINATION; FEE.
SFSC has agreed that it will subordinate Replacement Note A to NAB's
obligations to the Bank. Such subordination is being effected by a Subordination
Agreement of even date herewith among SFSC, the Bank and NAB (the "SUBORDINATION
AGREEMENT"). In consideration of SFSC's commitment to enter into the
Subordination Agreement and to induce it to do so, MPS paid SFSC a fee of
$75,000 on December 2, 1999.
SECTION 7. MISCELLANEOUS.
This Agreement (i) constitutes the entire agreement and understanding
of the parties with respect to the subject matter hereof (along with the
Replacement Notes and the Subordination Agreement), (ii) may not be amended
except in writing signed by both parties, (iii) shall inure to the benefit of
and be binding upon NAB, SFSC and their respective successors and assigns, (iv)
shall be governed and construed in accordance with Connecticut law, with regard
to principles of conflicts of laws and (v) may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall constitute one and the same agreement. There are no
third-party beneficiaries to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NAB ASSET CORPORATION STANWICH FINANCIAL SERVICES CORP.
By: /s/ Alan Ferree By: /s/ Charles E. Bradley, Sr.
Alan Ferree Charles E. Bradley, Sr.
Senior Vice President President
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<PAGE> 4
SCHEDULE A
DESCRIPTION OF NAB NOTES
1. Promissory Note dated September 30, 1997 in the original principal amount of
$2,500,000 ("NAB NOTE A". On the Effective Date, before giving effect to the
payments and setoff referred to in this Agreement, the principal balance was
$619,837.30. This Note bears interest at 14% per annum. The maturity date is
September 30, 2000. This Note was amended by the PDA.
2. Promissory Note dated December 30, 1997 in the original principal amount of
$4,000,000. On the Effective Date, before giving effect to the payments and
setoff referred to in this Agreement, the principal balance was $4,000,000. This
Note bears interest at 13% per annum. The maturity date is January 3, 2000. This
Note was amended by the DRA and the PDA.
3. Line of Credit Note dated August 28, 1997 in a principal amount not to exceed
$5,000,000. On the Effective Date, before giving effect to the payments and
setoff referred to in this Agreement, the principal balance was $3,500,000. This
Note bears interest at 16% per annum. The maturity date is September 30, 2000.
This Note was amended by the PDA.
All of the foregoing notes, except for the $4,000,000 note (#2), were
issued by NAB to SFSC. The $4,000,000 Note was originally issued by NAB to
Consumer Portfolio Services, Inc. ("CPS") and subsequently assigned by CPS to
SFSC.
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<PAGE> 1
Exhibit 10.24
THIS NOTE IS SUBJECT TO A CERTAIN SUBORDINATION AGREEMENT DATED MARCH
15, 2000 AMONG THE MAKER, THE HOLDER AND BANK UNITED.
PROMISSORY NOTE
Issued March 15, 2000
$4,000,000 Effective as of March 7, 2000
For value received, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of STANWICH FINANCIAL SERVICES CORP.
(the "HOLDER"), a Rhode Island corporation, the principal amount of Four Million
Dollars ($4,000,000) in accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
installments of $2,000,000 on June 30, 2002 and $2,000,000 on December 31, 2002.
2. Interest.
(a) The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of March 7, 2000, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Subject to numbered paragraph 2(b)
hereof, interest shall be payable monthly in arrears beginning March 31, 2000
and continuing thereafter on the last day of each calendar month until the
principal hereof is paid in full. In addition, if the principal hereof is paid
on other than the last day of a calendar month, then, in such case, interest
shall also be payable on the date of such principal payment.
(b) The Maker shall have the option to defer making any or all
of the First 12 Interest Payments until March 31, 2001. As used herein, the term
"FIRST 12 INTEREST PAYMENTS" means the interest payments scheduled by the terms
hereof to be paid during the period beginning on the date hereof and ending on
February 28, 2001. If the Maker defers any of the First 12 Interest Payment
pursuant to the second preceding sentence, then, in such case, the amount of
each interest payment that is so deferred shall itself bear interest at the rate
of 14% per annum during the period from the original due date of such deferred
payment to the date such deferred payment is actually made. Each item of
additional interest provided for in this numbered paragraph 2(b) shall be
payable on the earlier to occur of (i) March 31, 2001 or (ii) the date on which
the deferred interest to which such additional interest relates is paid.
3. Prepayments. The Maker may prepay this Note in whole or, from time to
time, in part without penalty or premium. All such prepayments shall be applied
against the required installments of principal in order of maturity thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be
<PAGE> 2
made to the order of Holder at the address specified in numbered paragraph 12
hereof.
5. Default; Acceleration. Maker agrees that:
(i) if any installment of principal or interest under this Note shall
not be paid when it is due and payable, and such failure to pay is not
cured within ten (10) days after notice from Holder of such failure to
pay; or
(ii) if Maker shall suffer or permit the filing by or against the Maker
of any petition for adjudication, arrangement, reorganization or the
like under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property; or
(iii) if the payment of any indebtedness of the Maker or MPS (as defined
below) for borrowed money is accelerated to a date prior to the date of
the scheduled maturity thereof as a result of the occurrence of a
default or event of default under the loan or financing agreements or
instruments pursuant to which such indebtedness was incurred; or
(iv) if the Maker or MPS dissolves or commences proceedings in
dissolution; or
(v) if the Maker or MPS sells all or substantially all of its assets
other than in the ordinary course of business; or
(vi) if the Maker merges or consolidates with or into another
corporation or entity in a transaction in which the Maker is not the
surviving corporation
then, upon the happening of any such event (specified in items (i) through (vi),
above), the entire indebtedness and accrued interest thereon due under this Note
shall, at the option of the Holder, accelerate and become immediately due and
payable without notice, presentment, demand or any other formalities, all of
which, to the extent permitted by applicable law, the Maker hereby expressly
waives.
As used herein, the term "MPS" means Mortgage Portfolio Services, Inc.,
a Delaware corporation and a subsidiary of the Maker.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note.
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<PAGE> 3
Any note made and delivered in accordance with the provision of this paragraph
shall be dated as of the date to which interest has been paid on this Note, or
if no interest has theretofore been paid on this Note, then dated the date
hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Connecticut, without regard to principles
of conflicts of laws.
9. Successors and Assigns. All the covenants, stipulations, promises and
agreements contained in this Note by or on behalf of the Maker or the Holder and
all rights of the Maker or the Holder contained in this Note shall bind or inure
to their respective successors, assigns, heirs and personal representatives,
whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker: NAB Asset Corporation
c/o Construction Portfolio Funding
4144 North Central Expressway
Dallas, Texas 75204
Attention: Chief Financial Officer
(b) If to Holder: Stanwich Financial Services Corp.
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, Connecticut 06902
3
<PAGE> 4
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note is issued pursuant to, and for the
consideration recited in, a certain Second Debt Restructure Agreement dated
March 15, 2000 between the Maker and the Holder.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By:/s/ Alan Ferree
Name: Alan Ferree
Title: Senior Vice President
4
<PAGE> 1
Exhibit 10.25
PROMISSORY NOTE
Issued March 15, 2000
$3,553,169.20 Effective as of March 7, 2000
For value received, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of STANWICH FINANCIAL SERVICES CORP.
(the "HOLDER"), a Rhode Island corporation, the principal amount of Three
Million Five Hundred Fifty-three Thousand One Hundred Sixty-nine and 20/100
Dollars ($3,553,169.20) in accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
22 installments as follows: The first 21 installments shall be in the amount of
$100,000 each, payable on the last day of each month commencing March 31, 2001
and ending on November 30, 2002. The 22nd installment shall be in the amount of
$1,453,169.20 and shall be payable on December 31, 2002.
2. Interest.
(a) The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of March 7, 2000, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Subject to numbered paragraph 2(b)
hereof, interest shall be payable monthly in arrears beginning March 31, 2000
and continuing thereafter on the last day of each calendar month until the
principal hereof is paid in full. In addition, if the principal hereof is paid
on other than the last day of a calendar month, then, in such case, interest
shall also be payable on the date of such principal payment.
(b) The Maker shall have the option to defer making any or all
of the First 12 Interest Payments until March 31, 2001. As used herein, the term
"FIRST 12 INTEREST PAYMENTS" means the interest payments scheduled by the terms
hereof to be paid during the period beginning on the date hereof and ending on
February 28, 2001. If the Maker defers any of the First 12 Interest Payment
pursuant to the second preceding sentence, then, in such case, the amount of
each interest payment that is so deferred shall itself bear interest at the rate
of 14% per annum during the period from the original due date of such deferred
payment to the date such deferred payment is actually made. Each item of
additional interest provided for in this numbered paragraph 2(b) shall be
payable on the earlier to occur of (i) March 31, 2001 or (ii) the date on which
the deferred interest to which such additional interest relates is paid.
3. Prepayments. The Maker may prepay this Note in whole or, from time
to time, in part without penalty or premium. All such prepayments shall be
applied against the required installments of principal in order of maturity
thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
<PAGE> 2
5. Default; Acceleration. Maker agrees that:
(i) if any installment of principal or interest under this Note shall
not be paid when it is due and payable, and such failure to pay is not
cured within ten (10) days after notice from Holder of such failure to
pay; or
(ii) if Maker shall suffer or permit the filing by or against the Maker
of any petition for adjudication, arrangement, reorganization or the
like under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property; or
(iii) if the payment of any indebtedness of the Maker or MPS (as
defined below) for borrowed money is accelerated to a date prior to the
date of the scheduled maturity thereof as a result of the occurrence of
a default or event of default under the loan or financing agreements or
instruments pursuant to which such indebtedness was incurred; or
(iv) if the Maker or MPS dissolves or commences proceedings in
dissolution; or
(v) if the Maker or MPS sells all or substantially all of its assets
other than in the ordinary course of business; or
(vi) if the Maker merges or consolidates with or into another
corporation or entity in a transaction in which the Maker is not the
surviving corporation
then, upon the happening of any such event (specified in items (i) through (vi),
above), the entire indebtedness and accrued interest thereon due under this Note
shall, at the option of the Holder, accelerate and become immediately due and
payable without notice, presentment, demand or any other formalities, all of
which, to the extent permitted by applicable law, the Maker hereby expressly
waives.
As used herein, the term "MPS" means Mortgage Portfolio Services, Inc.,
a Delaware corporation and a subsidiary of the Maker.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
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<PAGE> 3
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Connecticut, without regard to principles
of conflicts of laws.
9. Successors and Assigns. All the covenants, stipulations, promises
and agreements contained in this Note by or on behalf of the Maker or the Holder
and all rights of the Maker or the Holder contained in this Note shall bind or
inure to their respective successors, assigns, heirs and personal
representatives, whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker: NAB Asset Corporation
c/o Construction Portfolio Funding
4144 North Central Expressway
Dallas, Texas 75204
Attention: Chief Financial Officer
(b) If to Holder: Stanwich Financial Services Corp.
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, Connecticut 06902
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note is issued pursuant to, and for the
consideration recited in,
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<PAGE> 4
a certain Second Debt Restructure Agreement dated March 15, 2000 between the
Maker and the Holder.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By:/s/ Alan Ferree
Name: Alan Ferree
Title: Senior Vice President
4
<PAGE> 1
Exhibit 10.26
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT ("AGREEMENT") is dated effective as of
March 15, 2000, by and among STANWICH FINANCIAL SERVICES CORP., a Rhode Island
corporation ("SUBORDINATE CREDITOR"), NAB ASSET CORPORATION, a Texas corporation
(the "COMPANY"), and BANK UNITED, a federally chartered savings bank, as agent
("SENIOR Creditor").
RECITALS:
a. The Debtor is indebted to the Subordinate Creditor under a certain
Promissory Note issued March 15, 2000, but effective March 7, 2000 in the
principal amount of $4,000,000 (the "SUBORDINATED NOTE").
b. The Company has certain contingent obligations to the Senior
Creditor under a certain Guaranty dated June 15, 1999 issued by the Company in
favor of the Senior Creditor (the "GUARANTY"). Under the Guaranty, the Company
guarantied the payment of the obligations of its subsidiary, Mortgage Portfolio
Services, Inc. ("MPS"), to the Senior Creditor under that certain CREDIT
AGREEMENT dated June 15, 1999 between MPS and the Senior Creditor (the "CREDIT
AGREEMENT").
c. Section 6.09 of the Credit Agreement requires that the Company, as
guarantor, maintain a consolidated net worth of not less than $5,000,000.
d. Since September 30, 1999, the Company's consolidated net worth has
been less than $5,000,000.
e. The Company and MPS requested the Senior Creditor to amend the
second sentence of Section 6.09 of the Credit Agreement to read as follows: "As
of the end of each Fiscal Quarter, Guarantor's Consolidated Net Worth plus
Subordinated Debt, if any, shall not be less than Five Million Dollars
($5,000,000)." The Senior Creditor agreed to such amendment provided that the
parties enter into this Agreement.
In consideration of the premises and the mutual agreements herein set
forth, Company, Subordinate Creditor and Senior Creditor hereby agree as
follows:
1. As used in this Agreement, and in addition to the definitions stated
above, the following terms have these meanings:
a. Senior Debt means all debt and obligations now existing or
hereafter arising of Company to Senior Creditor under the Guaranty, whether
direct or indirect, primary or secondary, joint or several, fixed or contingent
and whether originally payable. The Senior Debt shall include amounts accruing
subsequent to the filing of any bankruptcy, receivership, insolvency or like
petition. Without limiting the generality of the foregoing, Senior Debt shall
include all obligations of Company to Senior Credit under the Guaranty for fees,
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<PAGE> 2
to indemnify, to reimburse for expenses and to reimburse for advances (whether
for the payment of taxes, insurance premiums, the preservation or protection of
property or title to property or any other reason).
b. Subordinated Debt means all debt of Company now or
hereafter evidenced by the Subordinated Note.
2. Unless and until this Agreement shall have terminated, or Senior
Creditor shall have specifically consented in writing, Subordinate Creditor will
not, except as otherwise specifically provided in section 22 below, (a) ask,
demand, sue for, take or receive, or retain, from Company or any other person or
entity, by setoff or in any other manner, payment of all or any part of the
Subordinated Debt, (b) ask for, demand, receive or refuse to release in writing
promptly after Senior Creditor's request any security for the Subordinated Debt,
(c) amend any document existing in connection with the Subordinated Debt, (d)
bring or join with any creditor in bringing any proceeding against Company under
any bankruptcy, reorganization, readjustment or arrangement of debt, suspension
of payments, receivership, liquidation or insolvency or similar law or statute
now or hereafter in effect ("PROCEEDINGS"), or (e) seek, join or assist any
other creditor in seeking to have any of the business or assets of Company
substantively consolidated with any of the business or liabilities of any other
entity in any such proceeding. Subordinate Creditor hereby directs Company to
make, and Company hereby agrees to make, such prior payment of the Senior Debt
to Senior Creditor.
3. (a) Upon any distribution of the assets of Company in connection
with any dissolution, winding up, liquidation or reorganization of Company
(whether in Proceedings or upon an assignment for the benefit of creditors or
any other marshalling of the assets and liabilities of Company or otherwise),
Senior Creditor shall first be entitled to receive payment in full of all Senior
Debt before Subordinate Creditor shall be entitled to receive any payment in
respect of the Subordinated Debt. Upon any such dissolution, winding up,
liquidation or reorganization, any payment or distribution of assets of Company
of any kind or character, whether in cash, property or securities, to which
Subordinate Creditor would be entitled except for the provisions of this
Agreement (including any such payment or distribution which may be payable or
deliverable by virtue of the provisions of any securities which are subordinated
as junior in right of payment to the Subordinated Debt) shall be made by the
liquidating trustee or agent or other persons making such payment or
distribution (whether a trustee in bankruptcy, a receiver or liquidating trustee
or otherwise) (a "PAYING PARTY"), or if received by Subordinate Creditor,
directly to Senior Creditor, to the extent necessary to pay in full the Senior
Debt remaining unpaid, after giving effect to any concurrent payment or
distribution to Senior Creditor, pursuant to the terms of the Guaranty (in the
case of payments or distributions of Company's assets). Subordinate Creditor
hereby authorizes and directs each Paying Party to pay over to Senior Creditor
upon demand by Senior Creditor, all such payments or distributions without the
necessity of any inquiry as to the status or balance of the Senior Debt, and
without further notice to or consent of Subordinate Creditor. Any such payments
received by the Senior Creditor in excess of the Senior Debt shall be held in
trust for the benefit of Subordinate Creditor and shall promptly be paid over to
Subordinate Creditor by Senior Creditor.
(b) Subordinate Creditor hereby irrevocable authorizes and
empowers Senior Creditor, after default has occurred under the Guaranty, to
demand, sue for, collect and receive every such payment or distribution and give
acquittance therefor, to execute, sign, endorse, transfer and deliver any and
all receipts and instruments, and to file claims and take such other
proceedings, all in the name of Subordinate Creditor, or
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<PAGE> 3
otherwise, as Senior Creditor may deem necessary or advisable for the
enforcement of this Agreement, but Senior Creditor has no obligation to do so.
Subordinate Creditor hereby (i) agrees duly and promptly to take such action as
may be required by Senior Creditor to collect the Subordinated Debt for the
account of Senior Creditor including filing appropriate proofs of claim in
respect of the Subordinated Debt, (ii) authorizes and empowers Senior Creditor
to vote the full amount of the Subordinated Debt in any bankruptcy,
reorganization or similar proceedings affecting Company and in any meeting of
creditors of Company, (iii) agrees to execute and deliver to senior Creditor or
its representatives on demand such powers of attorney, proofs of claim and other
instruments as may be requested by Senior Creditor or its representatives to
enable Senior Creditor to enforce any and all claims upon or with respect to the
Subordinated Debt, to collect and receive any and all such payments or
distributions which may be payable or deliverable at any time upon or with
respect to the Subordinated Debt and to vote the full amount of the Subordinated
Debt in any proceeding or meeting referred to in clause (ii) of this
subparagraph 3(b).
(c) In the event any payment or distribution of assets of
Company of any kind or character, whether in cash, property or securities, and
whether or not pursuant to any dissolution, winding up, liquidation or
reorganization, not permitted by or in accordance with the provisions of this
Agreement shall be received by Subordinate Creditor, Subordinate Creditor shall
not commingle such payment or distribution to Subordinate Creditor with other
funds and shall hold it in trust for the benefit of, and shall pay it over or
deliver it to, Senior Creditor, or to Senior Creditor's representative, in
precisely the form received (except for the endorsement or assignment of
Subordinate Creditor where required to effect a complete transfer); provided,
that the provisions of this subparagraph 3(c) shall not be applicable to
interest payments which shall have been made to Subordinate Creditor in strict
accordance with the provisions of Section 22 below. In the event Subordinate
Creditor fails to make any such endorsement or assignment, Senior Creditor is
hereby irrevocable authorized to make it and to sign Subordinate Creditor's name
to it as Subordinate Creditor's agent.
(d) Subject to the payment in full of all Senior Debt, the
Subordinate Creditor shall be subrogated to the rights of the holder of the
Senior Debt to receive payments or distributions of cash, property or securities
of the Company applicable to the Senior Debt until all amounts owing on the
Subordinated Debt shall be paid in full, and, as between the Company, its
creditors (other than holders of Senior Debt) and the Subordinate Creditor, no
such payment or distribution made to the holder of the Senior Debt by virtue of
this Section 3, which otherwise would have been made to the Subordinate
Creditor, shall be deemed to be a payment by the Company on account of any
Senior Debt, it being understood that the provisions of this Section 3 are and
are intended solely for the purpose of defining the relative rights of the
Subordinate Creditor, on the one hand, and the holder of Senior Debt, on the
other hand.
(e) The provisions of this Agreement are and are intended
solely for the purpose of defining the relative rights of Subordinate Creditor
and Senior Creditor, and are solely for the benefit of Senior Creditor and may
not be relied upon or enforced by any person or entity other than Senior
Creditor and other present and future holders of the Senior Debt, and nothing
contained in this Agreement is intended to or shall impair the obligation of
Company, which is unconditional and absolute, to pay to Subordinate Creditor the
principal of and interest on the Subordinated Debt as and when the same shall
become due and payable, or to affect the relative rights of Subordinate Creditor
and creditors of Company other than Senior Creditor.
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(f) Senior Creditor may, at any time and from time to time,
without the consent of or notice to Subordinate Creditor, and without impairing
or releasing the obligations of Subordinate Creditor hereunder (i) change the
manner, place or terms of payment or change or extend the time of payment of, or
renew or alter, the Senior Debt or the security therefor, or otherwise amend in
any manner the Credit Agreement, the Guaranty, or any loan documents executed in
connection with or relating to the Senior Debt; (ii) exercise or refrain from
exercising any rights against Company and others; (iii) apply any sums by
whomsoever paid or however realized to the Senior Debt, whether or not then
matured; (iv) sell, exchange, release, surrender, realize upon or otherwise deal
with in any manner and in any order any property whatsoever and by whomsoever at
any time pledged or mortgaged to secure, or howsoever securing, any Senior Debt;
(v) release anyone liable in any manner for the payment or collection of any
Senior Debt; and (vi) settle or compromise all or any part of the Senior Debt,
and subordinate the payment of any part of the Senior Debt to the payment of any
other debt (including any other part of the Senior Debt). No invalidity,
irregularity or unenforceability of all or any part of the Senior Debt or of any
of the Senior Creditor's Liens shall affect, impair or be a defense to this
Agreement.
4. Subordinate Creditor represents and warrants that no liens, security
interests or assignments exist to secure any Subordinated Debt, and agrees that
no liens, security interests or assignments ("SUBORDINATE LIENS") will arise or
will be taken in the future to secure any Subordinated Debt without the specific
written consent of Senior Creditor. Without limiting the foregoing, Subordinate
Creditor hereby agrees until this Agreement is terminated (a) that Subordinate
Creditor will not enforce any Subordinate Liens which may exist from time to
time without the specific prior written consent of Senior Creditor and (b) that
the Subordinate Liens, to the extent enforceable, will be enforceable by Senior
Creditor. All amounts, whether in the form of cash, proceeds, checks, drafts,
orders or other instruments for the payment of money, recovered with respect to
any property of Company subject to the Subordinate Liens by the enforcement of
the Subordinate Liens, shall, immediately upon the receipt by Subordinate
Creditor, be paid over and delivered in the form received, but with any
necessary endorsements or instruments required for payment, to Senior Creditor,
and, until so delivered shall not be commingled with any other funds or property
but shall be held by Subordinate Creditor upon an express trust for the benefit
of Senior Creditor.
5. Subordinate Creditor hereby expressly subordinates and makes second,
junior and inferior any and all liens, rights, powers, titles and interests of
Subordinate Creditor under, pursuant to or by virtue of the Subordinate Liens
(if any) to all liens, rights, titles and interests of Senior Creditor under,
pursuant to or by virtue of the Senior Creditor's Liens, and Subordinate
Creditor agrees that all liens, rights, titles and interests of the Senior
Creditor's Liens shall be unconditionally first, prior and superior to any and
all lines, rights, powers, titles and interests of Subordinate Creditor under,
pursuant to or by virtue of the Subordinate Liens. Subordinate Creditor further
agrees that any and all liens, rights, titles and interests of Subordinate
Creditor under, pursuant to or by virtue of the Subordinate Liens shall be and
remain expressly subject and subordinate to any renewal, extension, refinancing,
consolidation, modification or supplement of the liens, rights, titles and
interests of the Senior Creditor's Liens, as well as any and all increases of
them.
6. Subordinate Creditor, its successors or assigns or any other legal
holder of the Subordinated Debt shall not acquire by subrogation, assignment,
contract or otherwise, any lien upon or other estate, right or interest in any
property (including but not limited to any which may arise in respect to real
estate taxes, assessments or other governmental charges) which is or may be
prior in right or dignity to the Senior Liens or any renewal, extension,
refinancing, consolidation, modification or supplement of them.
Page 4
<PAGE> 5
7. Subordinate Creditor represents to Senior Creditor that the
Subordinated Debt is in good standing and in full force and effect and no
breaches or defaults exist under the Subordinated Note which have not been cured
or waived, and that the outstanding principal balance of the Subordinated Debt
on this date is FOUR MILLION DOLLARS ($4,000,000).
8. This Agreement extends to and covers all amounts due on the Senior
Debt both before and after filing of any Proceeding by or against Company, and
Senior Creditor shall be entitled to amounts accruing on the Senior Debt from
the date of filing of any such Proceeding to the date of full and final payment
of the Senior Debt.
9. No part of the Subordinated Debt or any instrument evidencing or
securing it has been heretofore transferred or assigned, and Subordinate
Creditor will not transfer or assign any part of the Subordinated Debt or any
instrument evidencing any part of it while the Senior Debt remains unpaid
without providing written notice of any such transfer or assignment to Senior
Creditor at or before the time of the transfer or assignment, which notice shall
include the name, address, telephone and telecopy numbers of the transferee and
must be accompanied by (a) a true, correct and complete copy of the
instrument(s) of assignment and (b) a statement (which may be made a part of the
assignment) executed by the transferee or assignee of the transferee's or
assignee's express written recognition of this Agreement and agreement to
recognize it, abide by it and honor it in accordance with its terms. No such
assignment or transfer shall be effective unless and until such notice,
assignment copy and transferee's statement have been received by Senior
Creditor. ANY INSTRUMENT NOW OR HEREAFTER EVIDENCING THE SUBORDINATED DEBT WILL
CONTAIN PROVISIONS REFERRING SPECIFICALLY TO THIS AGREEMENT.
10. In the event of a breach by any party to it of any of the
provisions of this Agreement, or in the event any representation or warranty
contained herein or furnished to Senior Creditor by any party to it shall prove
to have been false when made, Senior Creditor shall have all rights provided to
it under law or equity, including, without limitation, the right to sue the
breaching party or parties to recover damages suffered by Senior Creditor as a
result of such breach, and the right to obtain injunctive relief.
11. Subordinate Creditor shall give, execute and deliver any notice,
statement, instrument, document, agreement or other papers, and shall permit
Senior Creditor, upon request, to make any notation or endorsement upon any
promissory note or other instrument or paper evidencing or securing the
Subordinated Debt, that may be necessary or desirable, or that Senior Creditor
any reasonably request, in order to create, preserve or validate the rights of
Senior Creditor under this Agreement, to enable Senior Creditor to exercise or
enforce its rights under it, or otherwise to effect the purposes of this
Agreement.
12. This Agreement is a continuing one, and all Senior Debt to which it
applies or may apply under its terms shall conclusively be presumed to have been
created in reliance on this Agreement.
13. Company hereby agrees to pay upon demand all attorneys' fees and
expenses reasonably incurred by Senior Creditor in connection with the
enforcement of its rights under this Agreement.
Page 5
<PAGE> 6
14. Subordinate Creditor and Company agree that, if at any time all or
any part of any payment previously applied by Senior Creditor to the Senior Debt
is or must be returned by Senior Creditor or recovered from Senior Creditor for
any reason (including the order of any bankruptcy court), this Agreement shall
automatically be reinstated to the same effect as if the prior application had
not been made, and, in addition, Company hereby agrees to indemnify Senior
Creditor against, and to save and hold Senior Creditor harmless from, any
required return by Senior Creditor or recovery from Senior Creditor of any such
payments because of its being deemed preferential under applicable bankruptcy,
receivership or insolvency laws, or for any other reason.
15. Subordinate Creditor acknowledges that he has been given the
opportunity to receive and review the Credit Agreement, the Guaranty and the
other loan documents executed in connection with or relating to the Senior Debt
and that Subordinate Creditor has availed himself of such opportunity to the
extent he desires to do so, and that he has no objection to any of the terms and
conditions of such documents and consents to the execution and delivery of them
and of this Agreement by Company, and to the performance of each of them by
Company.
16. Except as provided in the next sentence, this Agreement and the
subordination provided for herein shall terminate on the earliest of the
following to occur: (i) payment in full of the Senior Debt, (ii) termination of
the Guaranty and (iii) December 31, 2000. If an Insolvency Event (as defined
below in this Section 3) shall have occurred prior to the termination of this
Agreement pursuant to the preceding sentence, then, in such case, this Agreement
and the subordination provided for herein shall terminate on the earlier to
occur of (i) payment in full of the Senior Debt and (ii) termination of the
Guaranty. The termination of this Agreement shall not affect any rights of
subrogation that the Subordinate Creditor may have under this Agreement or under
applicable law, which rights shall survive such termination. An "INSOLVENCY
EVENT" shall be deemed to occur if (i) a liquidation, dissolution or winding up
of the Company is commenced or (ii) if the Company shall suffer or permit the
filing by or against the Company for adjudication, arrangement, reorganization
or the like under any federal state bankruptcy or insolvency law or (iii) the
Company makes an assignment for the benefit of creditors or (iv) a receiver is
appointed by a court of competent jurisdiction for any part of the Company's
property or assets; provided, however, that, in the case of an involuntary
filing or petition under clause (ii) of this sentence, if the same is dismissed
within 45 days of such filing or petition, such Insolvency Event shall be deemed
not to have occurred.
17. Any notice, request or other communication required or permitted to
be given hereunder shall be given in writing by delivering it against receipt
for it, by depositing it with an overnight delivery service or by depositing it
in a receptacle maintained by the United States Postal Service, postage prepaid,
registered or certified mail, return receipt requested, addressed to the
respective parties at the addresses set forth in the introductory paragraph
hereof (and if so given, shall be deemed given on the second business day after
mailing. The Company's address for notice may be changed at any time and from
time to time, but only after thirty (30) days advance written notice to the
other parties and shall be the most recent such address furnished in writing by
Company to the other parties. Subordinate Creditor's and Senior Creditor's
respective addresses for notice may be changed at any time and from time to
time, but only after ten (10) days' advance written notice to company and each
such party's address for notice shall be the most recent such address furnished
in writing by such party to Company. Actual notice, however and from whomever
given or received, shall always be effective when received.
Page 6
<PAGE> 7
18. This Agreement shall not be changed orally but shall be changed
only by agreement in writing signed by Subordinate Creditor and Senior Creditor
(without any necessity for notice to or consent by Company, which are expressly
WAIVED by Company). No course of dealing between the parties, no usage of trade
and no parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Agreement.
19. If any provision of this Agreement is held to be illegal, invalid
or unenforceable under present or future laws, the legality, validity and
enforceability of the remaining provisions of this Agreement shall not be
affected thereby, and this Agreement shall be liberally construed so as to carry
out the intent of the parties to it.
20. THIS AGREEMENT (A) SHALL BE BINDING UPON THE PARTIES HERETO AND
THEIR RESPECTIVE SUCCESSORS AND ASSIGNS; (B) MAY BE MODIFIED OR AMENDED ONLY BY
A WRITING AND SIGNED BY EACH PARTY TO THIS AGREEMENT; (C) SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD
TO CONFLICT OF LAW PRINCIPLES THEREOF; (D) MAY BE EXECUTED IN SEVERAL
COUNTERPARTS, AND BY THE PARTIES TO IT ON SEPARATE COUNTERPARTS AND EACH
COUNTERPART WHEN SO EXECUTED AND DELIVERED SHALL CONSTITUTE AN ORIGINAL
AGREEMENT, AND ALL SUCH SEPARATE COUNTERPARTS SHALL CONSTITUTE ONE AND THE SAME
AGREEMENT; AND (E) EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING AMONG THE
PARTIES WITH RESPECT TO ITS SUBJECT MATTER AND SUPERSEDES ALL PRIOR AGREEMENTS,
CONSENTS AND UNDERSTANDINGS RELATING TO SUCH SUBJECT MATTER.
21. This Agreement is performable in Harris County, Texas, which shall
be a proper place of venue for suit on or in respect of this Agreement.
Subordinate Creditor irrevocably agrees that any legal proceeding in respect of
this Agreement shall be brought in the district courts of Harris County, Texas
or the United States District Court for the Southern District of Texas, Houston
Division (collectively, the "SPECIFIED COURTS"). Subordinate Creditor hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts of the State of Texas. Subordinate Creditor hereby irrevocably waives, to
the fullest extent permitted by law, any objection which he may now or hereafter
have to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement brought in any Specified Court, and hereby further
irrevocably waives any claims that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum. Subordinate
Creditor further irrevocably consents to the service of process out of any of
the Specified Courts in any such suit, action or proceeding by the mailing of
copies thereof by certified mail, return receipt requested, postage prepaid, to
Subordinate Creditor at its address as provided in this Agreement or as
otherwise provided by Texas law. Nothing herein shall affect the right of Senior
Creditor to commence legal proceedings or otherwise proceed against Subordinate
Creditor in any jurisdiction or to serve process in any manner permitted by
applicable law. Subordinate Creditor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
22. So long as no default has occurred under the Guaranty which has not
been waived or fully cured to the satisfaction of Senior Creditor, or would
result from such payment (AND THE PARTIES TO THIS AGREEMENT SPECIFICALLY
STIPULATE AND AGREE OCCURRENCE OF ANY EVENT OF DEFAULT UNDER THE SUBORDINATED
NOTE SHALL
Page 7
<PAGE> 8
AUTOMATICALLY CONSTITUTE A DEFAULT UNDER THE SENIOR DEBT), Company may pay, and
Subordinate Creditor may accept and apply, payments (but not prepayments) of
interest accruing on the Subordinated Debt in accordance with the Subordinated
Note's present terms and provisions, as they may hereafter be supplemented or
amended; provided, that no supplement or amendment to the Subordinated Note made
without Senior Creditor's prior written consent shall be effective for any
purpose.
23. To the maximum extent not prohibited by law, any controversy,
dispute, or claim arising out of, in connection with, or relating to this
Agreement or any transaction provided for herein, including but not limited to
any claim based on or arising from an alleged tort or an alleged breach of any
agreement contained herein, shall, at the request of either party hereto (either
before or after the commencement of judicial proceedings), be settled by
arbitration pursuant to Title 9 of the United States Code, which the parties
hereto acknowledge and agree applies to the transaction involved herein, and in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"). In any such arbitration proceeding: (a) all statutes of
limitations which would otherwise be applicable shall apply; and (b) the
proceeding shall be conducted in Houston, Texas, by a single arbitrator, if the
amount in controversy is $1,000,000.00 or less, or by a panel of three
arbitrators if the amount in controversy is over $1,000,000.00. All arbitrators
shall be selected by the process of appointment from a panel pursuant to Section
13 of the AAA Commercial Arbitration Rules and each arbitrator shall be either
an active attorney or retired judge with an AAA acknowledged expertise in the
subject matter of the controversy, dispute, or claim. Any award rendered in any
such arbitration proceeding shall be final and binding, and judgment upon any
such award may be entered in any court having jurisdiction.
If either party hereto files a proceeding in any court to resolve any
such controversy, dispute, or claim, such action shall not constitute a waiver
of the right of such party or a bar to the right of any other party to seek
arbitration under the provisions of this paragraph of that or any other claim,
dispute, or controversy, and the court shall, upon motion of any party to the
proceeding, direct that such controversy, dispute, or claim be arbitrated in
accordance with this paragraph.
Notwithstanding any of the foregoing, the parties hereto agree that no
arbitrator or panel of arbitrators shall possess or have the power to (i) assess
punitive damages, (ii) dissolve, rescind or reform this Agreement (except that
the arbitrator may construe ambiguous terms of this Agreement), (iii) enter
judgment on the debt, (iv) exercise equitable powers or issue or enter any
equitable remedies, or (v) allow discovery of attorney/client privileged
information, and the parties hereby waive the aforementioned remedies. The
Commercial Arbitration Rules of the AAA are hereby modified to this extent for
the purpose of arbitration of any dispute, controversy, or claim arising out of,
in connection with this Agreement.
Page 8
<PAGE> 9
EXECUTED as of the date first above written.
"SUBORDINATE CREDITOR"
STANWICH FINANCIAL SERVICES CORP.
By: /s/ Charles E. Bradley, Sr.
Name: Charles E. Bradley, Sr.
Title: President
"COMPANY"
NAB ASSET CORPORATION
By: /s/ Alan Ferree
Name: Alan Ferree
Title: Senior Vice President
"SENIOR CREDITOR"
BANK UNITED
By: /s/ Patrick C. Freeman
Name: Patrick C. Freeman
Title: A.V.P. Account Officer
Page 9
<PAGE> 1
Exhibit 10.27
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
This Second Amendment to Credit Agreement (this "Amendment"), is
entered into effective as of the 31st day of January, 2000, 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 Second Amendment to the Credit
Agreement.
(b) "Credit Agreement" means the Original Agreement as amended by
First Amendment to Credit Agreement and as amended hereby.
Section 2. Amendments. Section 6.09 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 ($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 plus Subordinated Debt, if any, shall not be less
than Five Million Dollars ($5,000,000.00)."
In connection with the amendment of Section 6.09, Exhibit D-1 to the
Credit Agreement is deleted in its entirety, and Exhibit D-1 attached
hereto is substituted therefor.
Section 3. Conditions Precedent. Lenders' agreement to enter into this
Amendment is conditioned upon delivery by Guarantor and Stanwich Financial
Services Corp. ("Junior Creditor") of a subordination agreement, in form and
substance acceptable to Lenders, subordinating at least $3,000,000 of debt due
and owing from Guarantor to the Junior Creditor to the Obligations.
Page 1
<PAGE> 2
Section 3. 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 4. 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 5. 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 6. 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 7. 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 8. No Waiver. Borrower and Guarantor agree 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 of Default heretofore arising
and currently continuing shall continue after the execution and delivery hereof.
Without in any way limiting the foregoing, Agent and Lenders acknowledges that
as of September 30, 1999, Guarantor reported a Consolidated Net Worth of
$4,100,000. The Loan Documents impose a minimum net worth covenant of $5,000,000
for Guarantor. Lenders' and Agent's agreement to enter into this Amendment shall
not constitute (a) a waiver of any existing Event of Default under the Loan
Documents, including, without limitation, Guarantor's failure to comply with the
minimum net worth covenant as set forth above; (b) a waiver of any right,
remedy, or recourse of Lenders exercisable upon any existing event of default or
any subsequent Event of Default; or (c) a waiver of any of Lenders' rights,
remedies, or recourses under the Loan Documents or as provided by the laws of
the State of Texas. Furthermore, Lenders shall
Page 2
<PAGE> 3
have the right, at any time and from time to time, to insist upon strict
performance by Borrower and Guarantor of all terms and conditions set forth in
the Loan Documents, and Lenders' agreement to enter into this Amendment
notwithstanding the referenced existing Event of Default in no way affects
Borrower's or Guarantor's obligations to timely make any and all payments now of
hereafter due under the Loan Documents and/or to perform any or all of its
obligations under the Loan Documents.
Section 9. 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 10. 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 11. 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 as of the date set forth above.
BORROWER:
---------
MORTGAGE PORTFOLIO SERVICES, INC.,
a Delaware corporation
By:
-------------------------------------
James E. Hinton, President
GUARANTOR:
----------
NAB ASSET CORPORATION,
a Texas corporation
By: /s/ Alan Ferree
Alan K. Ferree, Senior Vice President
<PAGE> 4
AGENT:
------
BANK UNITED
By: /s/ Patrick C. Freeman
Patrick C. Freeman, A.V.P.
Mortgage Banker Finance
LENDERS:
--------
BANK UNITED
By: /s/ Patrick C. Freeman
Patrick C. Freeman, A.V.P
Mortgage Banker Finance
RESIDENTIAL FUNDING CORPORATION
By: /s/ Thomas M. Clement
Name: Thomas M. Clement
Title: Director
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Kathleen M. Connor
Name: Kathleen M. Connor
Title: Vice President
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
Mortgage Portfolio Services, Inc. Delaware
NAFCO, Inc. Delaware
Construction Portfolio Funding, Inc. Texas
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 2,854 4,898
<SECURITIES> 0 0
<RECEIVABLES> 52,567 92,501
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,878 1,783
<DEPRECIATION> 1,266 745
<TOTAL-ASSETS> 64,406 113,317
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 1,537 8,090
<TOTAL-LIABILITY-AND-EQUITY> 64,406 113,317
<SALES> 13,295 18,530
<TOTAL-REVENUES> 27,210 35,676
<CGS> 0 0
<TOTAL-COSTS> 25,833 27,825
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 487 296
<INTEREST-EXPENSE> 5,575 8,023
<INCOME-PRETAX> (4,685) (468)
<INCOME-TAX> 315 166
<INCOME-CONTINUING> (5,000) (634)
<DISCONTINUED> (1,553) 796
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,553) 162
<EPS-BASIC> (1.29) 0.03
<EPS-DILUTED> (1.29) 0.03
</TABLE>
