<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended June 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission file number 0-19391
NAB ASSET CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332956
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
4144 N. Central Expy, Suite 800, Dallas, TX 75204
------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 451-7830
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 10, 2000, there were 5,091,300 shares of common stock, $.10 par
value per share, of the registrant outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAB ASSET CORPORATION and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
Assets 2000 December 31,
------ (unaudited) 1999
----------- -------------
<S> <C> <C>
Cash and cash equivalents $ 402 $ 1,397
Restricted cash 5,057 1,457
Receivables:
Construction loans, net 3,690 3,330
Residential mortgage loans held for sale 45,915 46,029
Loans to officers 1,653 2,213
Other receivables 609 995
Residual interest in securitization of mortgage loans 3,315 3,678
Real estate owned 1,336 728
Property and equipment, net 403 612
Costs in excess of net assets acquired, net 336 442
Net assets of discontinued operations 15 2,855
Other assets 458 670
-------- --------
Total assets $ 63,189 $ 64,406
======== ========
Liabilities and Shareholders' Equity (Deficit)
----------------------------------------------
Liabilities:
Warehouse lines of credit (Note 3) $ 42,092 $ 40,218
Notes payable to affiliates (Note 3) 7,102 9,277
Drafts payable 10,771 8,279
Accounts payable and accrued expenses 4,492 4,539
-------- --------
Total liabilities 64,457 62,313
-------- --------
Minority interest -- 47
Contingencies (Note 3)
Shareholders' equity (deficit):
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
June 30, 2000 and December 31, 1999 509 509
Additional paid-in capital 7,815 7,815
Accumulated deficit (9,592) (6,278)
-------- --------
Total shareholders' equity (deficit) (1,268) 2,046
Total liabilities and shareholders' equity (deficit) $ 63,189 $ 64,406
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
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NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of loans $ 2,181 $ 3,841 $ 4,076 $ 7,385
Interest income 1,179 1,346 2,157 2,860
Origination and other fee income 2,223 2,371 3,925 4,578
------- ------- -------- --------
Total revenues: 5,583 7,558 10,158 14,823
Costs and expenses:
Compensation and benefits 4,013 5,266 7,876 10,456
Interest expense 993 1,118 1,718 2,164
Interest expense-affiliates 267 352 568 823
General and administrative 1,791 2,087 3,381 3,671
Minority interest -- (133) (47) (203)
------- ------- -------- --------
Total costs and expenses 7,064 8,690 13,496 16,911
------- ------- -------- --------
Loss from continuing
Operations before income taxes and
cumulative effect of change in
accounting principle (1,481) (1,132) (3,338) (2,088)
Income tax expense 5 36 7 65
------- ------- -------- --------
Loss from continuing
Operations before cumulative effect
of change in accounting principle (1,486) (1,168) (3,345) (2,153)
Cumulative effect of change in accounting
principle, write off of organizational costs -- -- -- (155)
Earnings (loss) from discontinued
Operations, net of income taxes 45 (911) 31 (720)
------- ------- -------- --------
Net loss $(1,441) $(2,079) $ (3,314) $ (3,028)
======= ======= ======== ========
Basic and diluted loss per share:
Continuing operations before
cumulative effect of change in
accounting principle $ (0.29) $ (0.23) $ (0.66) $ (0.42)
Cumulative effect of change in
accounting principle -- -- -- (0.03)
Earnings (loss) per share from
discontinued operations, net
of income taxes .01 (0.18) .01 (0.14)
------- ------- -------- --------
Loss per share $ (0.28) $ (0.41) $ (0.65) $ (0.59)
======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,314) $ (3,028)
Discontinued operations (31) 720
Adjustments to reconcile net loss to net cash
from operating activities:
Amortization of net interest receivable account 210 330
Deposits to overcollateralization account (218) (376)
Cash released from over-collateralization account 371 --
Deferred compensation charge 184 --
Depreciation and amortization 338 426
Change in accounting principle -- 155
Minority interest (47) (203)
Net changes in:
Residential mortgage loans originated, purchased and sold, net 114 22,533
Restricted cash (3,600) (3,392)
Other receivables 338 (227)
Other assets 212 (574)
Real estate owned (608) (533)
Drafts payable 2,492 196
Accounts payable and accrued expenses 377 (131)
------- --------
Net cash from (used by) operating activities (3,182) 15,896
Cash flows from investing activities:
Construction loan (fundings) repayments, net (360) 3,425
Purchases of property and equipment (23) (54)
------- --------
Net cash from (used by) investing activities (383) 3,371
Cash flows from financing activities:
Net borrowings (repayments) under warehouse lines of credit 1,874 (18,658)
Principal payments on notes payable to affiliates (2,175) (1,556)
------- --------
Net cash used by financing activities (301) (20,214)
Cash provided by discontinued operations 2,871 2,121
------- --------
Net increase (decrease) in cash and cash equivalents (995) 1,174
Cash and cash equivalents at beginning of period 1,397 946
------- --------
Cash and cash equivalents at end of period $ 402 $ 2,120
======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
NAB ASSET CORPORATION and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
NAB Asset Corporation, (the "Company" or "NAB") is a financial services
company engaged in two reportable segments, sub-prime and prime residential
mortgage banking. The residential mortgage banking business is conducted through
a majority owned subsidiary, Mortgage Portfolio Services, Inc. ("MPS"). MPS
originates, acquires and sells prime and sub-prime mortgage loans. The prime
segment of MPS is operated as a division, Pacific American Mortgage ("PAMCO").
Previously, the Company had two additional segments, a residential construction
lending business, Construction Portfolio Funding, Inc. ("CPFI"), which
originates and holds for investment single family residential construction loans
to homebuilders and a commercial finance operation, NAFCO Inc. ("NAFCO"), which
provides financing to operators of rent-to-own or rental purchase retailers. In
the third quarter of 1999, the Company elected to dispose of CPFI and NAFCO.
The Company commenced operations in July 1991 following its acquisition and
assumption of substantially all of the assets and liabilities of National Asset
Bank (a bank in liquidation) (the "Bank"). The Bank was formed in 1988 in
connection with the merger of Allied Bancshares, Inc. ("Allied") with a
subsidiary of First Interstate Bancorp ("First Interstate") for the purpose of
liquidating various non-performing loan and real estate assets held by Allied
and its subsidiaries for the benefit of the prior Allied stockholders. Until
June 5, 1996, the Company's business consisted of the acquisition, ownership,
management and disposition of loans and real estate for its own account and the
accounts of others. The Company's business activities were limited to the
ownership, collection and sale of the assets acquired by the Company from the
Bank, the investment in and management of four privately held limited
partnerships formed for the purpose of acquiring non-performing and other
troubled loans.
On June 5, 1996, pursuant to a Plan and Agreement of Merger, CPS Investing
Corp. ("CPS Sub"), a wholly owned subsidiary of Consumer Portfolio Services,
Inc. ("CPS"), was merged with and into NAB (the "Merger"). Under the terms of
the Plan and Agreement of Merger and in exchange for all of the outstanding
shares of NAB $.01 par value common stock, the shareholders of NAB received on a
pro rata basis (i) an aggregate cash distribution of $15.3 million ($3.64 per
share), (ii) an undivided interest in a liquidating trust ("Liquidating Trust"),
and (iii) 62% of the outstanding shares of common stock, $.10 par value (the
"New Common Stock") of the new combined company which had a net asset value of
$7.5 million as of the merger date. The Liquidating Trust was established for
the benefit of converting the trust assets to cash for the NAB shareholders. On
June 5, 1996 in connection with the Merger, NAB contributed approximately $3.0
million in cash and all of the remaining non-cash assets of NAB with a net book
value of $3.7 million to the Liquidating Trust. No gain or loss was recognized
by NAB in connection with the merger. In exchange for a $4 million contribution
to NAB, CPS received 38% or 1,934,706 shares of the New Common Stock of NAB.
Simultaneously with the merger, the Company amended its Articles of
Incorporation and By-laws to remove the previous operating restrictions on NAB
and, in order to preserve the Company's large net operating loss ("NOL") for tax
purposes, to restrict the acquisition of 5% or more of the outstanding shares of
New Common Stock of the Company so as to prevent the occurrence of an ownership
change under Section 382 of the federal income tax laws. Section 382 of the
Internal Revenue Code of 1986 (Section 382), as amended, provides in general
that if a corporation undergoes an ownership change, the amount of taxable
income that the corporation
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may offset after the date of such ownership change with NOL's and certain
built-in losses existing at the date of such ownership change will be subject to
an annual limitation. The Company's NOL's could become subject to certain
limitations on utilization in the event the Company undergoes an ownership
change within the meaning of Section 382.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet of the Company as of June 30, 2000, the
related consolidated statements of operations for the three and six months ended
June 30, 2000 and 1999 and the related consolidated statements of cash flows for
the six month periods ended June 30, 2000 and 1999 are unaudited. These
statements reflect, in the opinion of management, all adjustments consisting
only of normal recurring accruals necessary for a fair presentation of the
consolidated balance sheet of the Company as of June 30, 2000, and results of
consolidated operations for the three and six months ended June 30, 2000 and
1999 and the consolidated cash flows for the six months ended June 30, 2000 and
1999. The results of consolidated operations for the unaudited period are not
necessarily indicative of the results of consolidated operations to be expected
for the entire year of 2000.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and therefore do not include all information and
footnotes normally included in consolidated financial statements prepared in
conformity with generally accepted accounting principles. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on SEC form 10-K for the year ended December 31, 1999.
On January 1, 1999 the Company adopted Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP
98-5 provides guidance on the financial reporting of start-up costs and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred and currently expense net
amounts previously capitalized. The Company wrote off $155,000 in organizational
costs effective January 1, 1999 as a cumulative effect of a change in accounting
principle as described in Accounting Principles Board (APB) Opinion No. 20,
Accounting Changes.
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. In June 2000, SFAS No.
138 was issued amending certain provisions of SFAS No. 133. The Company will
adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001 and is evaluating the
impact, if any, these statements may have on the future consolidated financial
statements.
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For the purpose of computing basic and diluted earnings (loss) per share,
the weighted average number of common and common equivalent shares outstanding
was 5,091,300 for all periods presented.
Consolidated Statements of Cash Flows-Supplemental Disclosures (in
thousands):
<TABLE>
<CAPTION>
Six Months ended June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash paid during the period for
Interest $ 2,012 $2,837
Taxes $ 18 $ 10
Exchange of Loan to Officer for MPS common stock and
termination of deferred compensation agreement:
Loan to Officer $ 560 $ --
Interest receivable 48 --
Accrued deferred compensation (424) --
------- ------
Charge to compensation expense $ 184 $ --
======= ======
</TABLE>
(3) WAREHOUSE LINES OF CREDIT, NOTES PAYABLE TO AFFILIATES AND LIQUIDITY
During 1999 and the first six months of 2000, cash flow from operations 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 Stanwich Financial Services Corp. ("SFSC") and to provide
operating funds for NAB. At June 30, 2000 the disposition has been substantially
completed.
For the remainder of 2000 the Company intends to expand the current
operations of MPS and PAMCO and acquire additional operations complimentary to
its core business lines. Any acquisitions or expansion would be dependent upon
available funds. 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. There can be no
assurance that internally generated funds will be sufficient or financing will
be available. Current credit agreements in place are sufficient to provide the
Company funds to operate its business lines as currently structured.
Additionally, in the second quarter of 2000, the Company began receiving funds
from its over-collateralization account relating to the security issued by MPS
in 1998.
At June 30, 2000, the Company has borrowed under notes from SFSC a total of
$7,102,000. The notes bear interest at 14% per annum, payable monthly. Charles
E. Bradley, Sr., who is an officer and director of NAB, and Charles E. Bradley,
Jr., who is a director of NAB, together own a majority interest in SFSC. Messrs.
Bradley, Sr., and Bradley, Jr., are officers and directors of CPS.
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
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interest (and any deferred interest). In order to pay the remaining
indebtedness, including any interest due, 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. 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.
MPS's line of credit with Bank United totals $55,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.50% to 2.50%) over
the LIBOR rate. The line of credit, as amended, matures August 28, 2000. The
mortgage loans receivable of MPS are pledged as collateral for the line of
credit. At June 30, 2000, $42,092,000 was borrowed under the line. The amendment
to the line of credit removed the Company's net worth requirement as guarantor
and reduced the line of credit from $80,000,000 to $55,000,000.
The Company is currently negotiating the renewal of the line to June 15,
2001. 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.
On June 30, 2000, CPFI has borrowed, under a promissory note, $185,000 from
an officer of the Company that is included in the net assets of discontinued
operations. The note bears interest at 14% per annum and was due July 31, 2000.
Proceeds from the disposition of the remaining CPFI loan will be used to repay
this indebtedness. The proceeds from the borrowing were used to repay principal
and interest due SFSC. Subsequent to June 30, 2000 the note was extended to
September 30, 2000.
During the three months ended June 30, 2000, two officers of the Company
advanced MPS a total of $310,000 which is included in accounts payable and
accrued expenses. Since June 30, 2000, $123,000 has been repaid.
(4) SEGMENT REPORTING
The Company has two reportable segments, sub-prime and prime mortgage
banking. The sub-prime mortgage banking segment originates residential mortgage
loans to borrowers who are unable to obtain financing from conventional mortgage
sources due to credit problems or income qualification issues. The prime
mortgage banking segment originates conventional and government guaranteed or
insured mortgage loans. All of the business segments operate within the U.S.
The following is a summary of the results of continuing operations, before
change in accounting principle by business line for the three months ended June
30, 2000 as compared to June 30, 1999 (in thousands):
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<TABLE>
<CAPTION>
Business Line External Revenue Interest Expense Earnings (Loss)
------------- ------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $2,618 $3,047 $514 $390 $(1,149) $(1,172)
Residential mortgage
banking-prime 2,907 4,467 551 772 27 456
Corporate and
intercompany
eliminations 58 44 195 308 (364) (452)
------ ------ ------ ------ ------- -------
Total $5,583 $7,558 $1,260 $1,470 $(1,486) $(1,168)
====== ====== ====== ====== ======= =======
</TABLE>
The following is a summary of the results of continuing operations,
before change in accounting principle by business line for the six months ended
June 30, 2000 as compared to June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Business Line External Revenue Interest Expense Earnings (Loss)
------------- ------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999
------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $ 4,809 $5,541 $ 905 $ 819 $(2,408) $(2,203)
Residential mortgage
banking-prime 5,251 9,195 957 1,474 (227) 1,057
Corporate and
intercompany
eliminations 98 87 424 694 (710) (1,007)
------- ------- ------ ------ ------- -------
Total $10,158 $14,823 $2,286 $2,987 $(3,345) $(2,153)
======= ======= ====== ====== ======= =======
</TABLE>
The following is a summary of total assets by business line for June
30, 2000 as compared to December 31, 1999 (in thousands):
2000 1999
-------- --------
Residential mortgage banking-sub-prime (1) $ 63,121 $ 59,969
Residential mortgage banking-prime (1) N/A N/A
Net assets of discontinued operations 15 2,855
Other Assets 1,862 2,769
Elimination of corporate payables/receivables (1,809) (1,187)
-------- --------
Total $ 63,189 $ 64,406
======== ========
----------------------
(1) The Company has not disclosed separate total asset information for the sub
prime and prime mortgage segments because that information is not produced
internally. The information provided for the sub prime segment includes the
prime segment.
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(5) SIGNIFICANT TRANSACTIONS
On April 15, 2000, the Company sold its Southern California wholesale
sub-prime operation. The Company continued to fund the operation until the
purchaser obtained the appropriate state licenses. The sales price was the net
book value of the fixed assets, assumption of the lease obligations and 1% of
the principal balance of each loan originated by the operation and funded by the
Company for which there was an outstanding borrower application at April 15,
2000. The Company did not recognize a gain or loss on the sale. Revenues earned
by the Company relating to the sale totaled $111,000 in the second quarter. The
sale is not expected to have a material adverse effect on the ongoing operations
of the Company.
The Company was party to a deferred compensation agreement with an
executive in its Southern California office and the executive was obligated
under a $560,000 note payable to the Company. Accrued interest on the note
payable totaled $48,000 at the date of sale. The Company had recorded a deferred
compensation liability to the executive totaling $424,000 as of April 15, 2000.
In connection with the sale, the Company charged off all the amounts related to
the executive and the executive surrendered 350 share of MPS common stock to the
Company. This resulted in a charge to compensation expense of $184,000 for the
second quarter of 2000.
In the second quarter of 2000 the Company also eliminated its
correspondent lending division. No significant gain or loss was recorded as a
result of the closure of the division.
(6) DISCONTINUED OPERATIONS
In the third quarter of 1999, the Company elected to dispose of its
investment in CPFI and NAFCO. The disposition of these two operations is not
expected to have a material adverse effect on the ongoing financial results of
the Company.
Summarized financial information for the discontinued operations is as
follows:
June 30, 2000 December 31, 1999
------------- -----------------
Total assets (principally loans receivable) $ 292 $ 6,183
Line of credit -- (2,914)
Notes payable to officers (185) --
Other liabilities (92) (414)
----- -------
Net assets of discontinued operations $ 15 $ 2,855
===== =======
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Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----- ------- ---- -------
Revenues $ 32 $ 895 $127 $ 2,019
Expenses (13) 1,806 96 2,739
---- ------- ---- -------
Earnings (loss) from
discontinued operations,
net of income taxes $ 45 $ (911) $ 31 $ (720)
==== ======= ==== =======
Expenses in the second quarter of 2000 include a $40,000 reversal of
allowances previously provided. The second quarter of 1999 includes a $1,079,000
provision for losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Additionally the seasonal
nature of PAMCO's business results in lower origination volume in the first
calendar quarter.
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 used to reduce the outstanding indebtedness to SFSC. The notes payable to
CPS were paid in full during 1999.
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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
$55,000,000 line of credit with a federal savings bank of which $42,092,000 was
outstanding at June 30, 2000. 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 1.50% to 2.50%.
At June 30, 2000 residential mortgage loans held for sale totaled
$45,915,000. Of this amount $26,864,000 was conventional and government insured
or guaranteed loans (prime) and $19,051,000 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 June 30, 2000 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
borrower's financial position is the same at the date of delivery to the
investor as the origination date. The Company also agrees to reimburse the
investor a portion of the 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.
Included in accounts payable and accrued expenses at June 30, 2000 is
the liability, as a result of the warranties given to the purchasers of the
Company's loans. The liability totaled $591,000 at June 30, 2000 as compared to
$956,000 at December 31, 1999. Additions to the liability totaled $248,000 and
$488,000 for the three and six months ended June 30, 2000 as compared to
$304,000 and $522,000 for the same periods in 1999. Such additions are charged
to gains on sales of loans. The decrease in the liability from December 31, 1999
was attributable to realized losses on sales of repurchase loans and write-downs
of real estate owned at foreclosure.
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 Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. Claims for losses to date total
$380,000 which have been paid by the insurer. Total remaining loss coverage
under the pool insurance policy is $2,189,000. The fee for the insurance
coverage is .52% annually of the unpaid principal of the loans.
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The performance of the loans underlying the security through June 30,
2000 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
----------- ---------------
<S> <C> <C>
Remaining Principal $19,872,000 $12,698,000
Annualized prepayment rates 13.28% 22.41%
Cumulative losses incurred by the Company $ -- $ --
Delinquency percentages
30-59 days 4.00% 1.05%
60-89 days .23% .64%
Over 90 days .21% 0%
Delinquent bankruptcies 2.42% 3.61%
Loans in foreclosure 1.25% 1.49%
Foreclosed loans 4.35% 5.99%
Total delinquencies 12.43% 12.78%
</TABLE>
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 and in the second quarter of 2000 began receiving cash from the
over-collateralization account.
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 that the Company believes is commensurate with the
risks involved.
At June 30, 2000 and December 31, 1999 the residual interests in the
securitization consisted of the following:
June 30, December 31,
2000 1999
---------- ------------
NIR $1,696,000 $1,978,000
Over-collateralization account 1,619,000 1,700,000
---------- ----------
$3,315,000 $3,678,000
========== ==========
13
<PAGE> 14
Cash released to the Company from the over-collateralization account
for the three months ended June 30, 2000 was $371,000. No cash had been released
prior to the second quarter of 2000.
At June 30, 2000 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>
June 30, 2000 Original Assumptions
--------------------------- ---------------------------
Fixed Adjustable Fixed Adjustable
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Weighted average life 4.31 years 2.59 years 3.94 years 3.16 years
Prepayment speeds-ramp up to 28% CPR 50% CPR 24% CPR 25% CPR
Cumulative defaults 12.82% 12.13% 8.00% 10.00%
Cumulative losses, net of losses
covered by pool insurance .38% .36% .40% .50%
Delinquencies (over 30 days) 13.00% 13.00% 8.00% 8.00%
</TABLE>
DISCONTINUED OPERATIONS
For financial statement purposes the operations of CPFI and NAFCO have
been classified as discontinued operations.
Summarized assets and liabilities of the discontinued operations as of
June 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Loans receivable, net $ 214 $ 6,096
Other assets 78 87
Warehouse lines of credit -- (2,914)
Notes payable to officers (185) --
Other liabilities (92) (414)
----- -------
Net assets of discontinued operations $ 15 $ 2,855
===== =======
</TABLE>
14
<PAGE> 15
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000 the Company reported
net losses of $1,441,000 and $3,314,000 as compared to net losses of $2,079,000
and $3,028,000 for the three and six months ended June 30, 1999.
The current year losses are principally due to the continued losses
associated with the Company's sub prime mortgage lending operation, MPS and a
decline in PAMCO's originations resulting from an increase in long-term interest
rates. The losses have been somewhat mitigated by the decline in interest
expense at NAB due to a reduction in outstanding borrowings using the proceeds
from the disposition of assets at CPFI and NAFCO.
PAMCO's mortgage production declined approximately 34% over the same
period of 1999. Rising long-term interest rates have reduced originations in
general in the prime mortgage banking industry as a whole. Additionally rising
long-term interest rates curb the home refinance business that was a source of
loan originations in 1999. It is expected that higher long-term interest rates
will continue for the foreseeable future and will have a negative impact, as
compared to 1999, on PAMCO's earnings and operations.
On April 15, 2000, the Company sold its Southern California wholesale
sub-prime operation. The Company continued to fund the operation until the
purchaser obtained the appropriate state licenses. The sales price was the net
book value of the fixed assets, assumption of the lease obligations and 1% of
the principal balance of each loan originated by the operation and funded by the
Company for which there was an outstanding borrower application at April 15,
2000. The Company did not recognize a gain or loss on the sale. Revenues earned
by the Company relating to the sale totaled $111,000 in the second quarter. The
sale is not expected to have a material adverse effect on the ongoing operations
of the Company.
The Company was party to a deferred compensation agreement with an
executive in its Southern California office and the executive was obligated
under a $560,000 note payable to the Company. Accrued interest on the note
payable totaled $48,000 at the date of sale. The Company had recorded a deferred
compensation liability to the executive totaling $424,000 as of April 15, 2000.
In connection with the sale, the Company charged off all the amounts related to
the executive and the executive surrendered 350 share of MPS common stock to the
Company. This resulted in a charge to compensation expense of $184,000 for the
second quarter of 2000.
In the second quarter of 2000 the Company also eliminated its
correspondent lending division. No significant gain or loss was recorded as a
result of the closure of the division.
On January 1, 1999 the Company adopted Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP
98-5 requires costs of start-up activities and organizational costs to be
expensed as incurred. In accordance with SOP 98-5, the Company wrote off
approximately $155,000 in previously capitalized organizational costs.
15
<PAGE> 16
Results of Continuing Operations
The following discussion and analysis presents the significant changes
in financial condition and results of continuing operations of the Company's
operating segments for the three and six months ended June 30, 2000 and 1999. A
summary of the operating profits and losses by the Company's operating segments
before cumulative effect of change in accounting principle is as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Residential mortgage banking
Sub-prime $ 2,618 $ 3,047 $ 4,809 $ 5,541
Residential mortgage banking
Prime 2,907 4,467 5,251 9,195
Corporate and intercompany
eliminations 58 44 98 87
------- ------- -------- --------
Total revenues: 5,583 7,558 10,158 14,823
Costs and expenses:
Residential mortgage banking
Sub-prime 3,767 4,219 7,217 7,744
Residential mortgage banking
Prime 2,880 4,011 5,478 8,138
Corporate and intercompany
eliminations 422 496 808 1,094
------- ------- -------- --------
Total costs, expenses and taxes 7,069 8,726 13,503 16,976
------- ------- -------- --------
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle:
Residential mortgage banking
Sub-prime (1,149) (1,172) (2,408) (2,203)
Residential mortgage banking
Prime 27 456 (227) 1,057
Corporate and intercompany
eliminations (364) (452) (710) (1,007)
------- ------- -------- --------
Loss from continuing
operations before cumulative effect of
change in accounting principle $(1,486) $(1,168) $ (3,345) $ (2,153)
</TABLE>
Results of Continuing Operations for the Three Months Ended June 30, 2000 and
1999
Residential Mortgage Banking
The Company operates its mortgage banking activities through its 84%
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.
16
<PAGE> 17
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
Three months ended June 30,
2000 1999
--------- ---------
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 1,939 $ 2,453
Interest income 568 594
Other revenue 111 --
Compensation and benefits (2,280) (2,708)
Interest expense (514) (390)
Other expenses (973) (1,121)
--------- ---------
Loss from operations (1,149) (1,172)
Loans originated $ 47,761 $ 72,078
Loans sold $ 54,751 $ 70,400
Gains on sales of loans and other fee
income as a percent of loans sold 3.54% 3.48%
Compensation and benefits
as a percent of originations 4.77% 3.76%
Other expenses as a percent
of originations 2.04% 1.56%
Net interest income as a
percent of originations .11% .28%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 2,354 $ 3,758
Interest income 553 709
Compensation and benefits (1,662) 2,417
Interest expense (551) 722
Other expenses (667) 872
--------- ---------
Earnings from operations 27 456
Loans originated $ 102,093 $ 136,134
Loans sold(1) $ 97,383 $ 136,756
Gains on sales of loans and other fee
income as a percent of loans sold 2.42% 2.75%
Compensation and benefits
as a percent of originations 1.63% 1.78%
Other expenses as a percent
of originations .65% .64%
Net interest income (expense) as a
percent of originations .00% (.01%)
----------------
(1) Includes loans totaling $8,371,000 for the quarter ended June 30, 2000 and
$9,008,000 for the quarter ended June 30, 1999 that were closed in the name
of a third party (brokered-out).
17
<PAGE> 18
MPS operations
For the three months ended June 30, 2000 the loss from the MPS mortgage
operation totaled $1,149,000 as compared to a loss of $1,172,000 for the same
period in 1999. Revenues declined $429,000 or 14.1% over 1999 and expenses
decreased $452,000 or 10.7% over 1999. Net gains on loan sales and other fees
increased from 3.48% as a percent of loans sold in the second quarter of 1999 to
3.54% as a percent of loans originated in the second quarter of 2000. Margins
have improved as a result of increased premiums received from investors on loan
sales and increased fees received on retail originations as the Company
continues to open new retail sub-prime branches. At June 30, 2000, MPS has ten
retail net branches, one commenced operations in the fourth quarter of 1999,
three in the first quarter of 2000 and six in the second quarter of 2000. Since
the end of the second quarter MPS has opened four additional retail net
branches. The Company believes that retail branches with company paid personnel
will protect it against origination errors, such as fraud, which will ultimately
reduce the level of allowances required at the time of loan sale. Loan fees also
increase, which reduces the Company's reliance on the loan sale process in the
sub-prime market.
Compensation expenses as a percent of production increased to 4.77% in
the second quarter of 2000 from 3.76% in for the same period in 1999. Other
expenses increased to 2.04% of production for the quarter ended June 30, 2000
from 1.56% of production for the three months ended June 30, 1999. Compensation
and other expenses have declined as MPS has reduced costs in its wholesale and
correspondent (which has been eliminated) origination functions. These costs
reductions have been offset by the start up costs associated with the new net
branches. Of the increase in compensation expense .39% is attributable to the
one-time charge to compensation expense of $184,000 relating to the sale of the
Southern California operation. Compensation and other expenses will continue at
higher levels in relation to production.
Net interest spread as a percentage of production decreased from .28%
for the three months ended June 30, 1999 to .11% for the three months ended June
30, 2000 as a result of a lower spread between the rates charged to borrowers
and the LIBOR based borrowings of MPS and higher commitment fees, as a
percentage of production, charged on the MPS's previous line of credit which
totaled $80,000,000.
PAMCO operations
For the three months ended June 30, 2000, MPS's principally prime
production operation, PAMCO, recorded earnings of $27,000 as compared to
earnings of $456,000 for the three months ended June 30, 1999. Operating
revenues totaled $2,907,000 as compared to $4,467,000 for 2000 and expenses
totaled $2,880,000 as compared to $4,011,000 for 1999.
18
<PAGE> 19
Gains on sales of loans and other loan fees as a percent of production
was 2.42% for the three months ended June 30, 2000 as compared to 2.75% for the
three months ended June 30, 1999. 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 rates
or fees charged to borrowers. Compensation expenses as a percent of production
decreased to 1.63% from 1.78% for the three months ended June 30, 1999 as a
result of lower fees charged to borrowers that results in lower commission
expense. Other expenses as a percent of loan originations increased from .64%
for the three months ended June 30, 1999 to .65% for the three months ended June
30, 2000 as the decline in origination levels have negatively impacted fixed
expenses, such as rent, as a percent of loan originations.
Net interest margin was approximately $2,000 as compared to a net
expense of $13,000 in the same period of 1999.
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 $70,000 for the three months ended June
30, 2000 as compared to $140,000 for the same period in 1999. The decrease was
attributable to option termination related charges totaling $46,000 in 1999 as
compared to $0 in 2000 and a reduction in incentive compensation expense and
personnel in 2000.
Interest expense to affiliates was $267,000 for the three months ended
June 30, 2000, a decrease of $85,000 over 1999. The decrease is attributable to
the Company's partial repayment of debt to SFSC and the full repayment of debt
to Consumer Portfolio Services, Inc. ("CPS").
Other expenses totaled $119,000 for the second quarter of 2000 as
compared to $120,000 for the second quarter of 1999.
19
<PAGE> 20
Results of Continuing Operations for the Six Months Ended June 30, 2000 and 1999
Residential Mortgage Banking
A summary of the major revenue and expense components of the mortgage
banking operation for the six months ended June 30, 2000 and 1999 are as follows
(in thousands):
Six months ended June 30,
2000 1999
--------- ---------
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 3,582 $ 4,253
Interest income 1,116 1,288
Other revenue 111 --
Compensation and benefits (4,506) (4,970)
Interest expense (905) (819)
Other expenses (1,806) (1,955)
--------- ---------
Loss from operations (2,408) (2,203)
Loans originated $ 101,081 $ 123,774
Loans sold $ 110,076 $ 127,803
Gains on sales of loans and other fee
income as a percent of loans sold 3.25% 3.33%
Compensation and benefits
as a percent of originations 4.46% 4.02%
Other expenses as a percent
of originations 1.79% 1.58%
Net interest income as a
percent of originations .21% .38%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 4,308 $ 7,709
Interest income 943 1,486
Compensation and benefits (3,220) (5,093)
Interest expense (957) (1,474)
Other expenses (1,301) (1,571)
--------- ---------
(Loss) earnings from operations (227) 1,057
Loans originated $ 181,851 $ 276,797
Loans sold(1) $ 179,971 $ 279,536
Gains on sales of loans and other fee
income as a percent of loans sold 2.39% 2.76%
Compensation and benefits
as a percent of originations 1.77% 1.84%
Other expenses as a percent
of originations .72% .57%
Net interest (expense) income as a
percent of originations (.01%) .00%
-----------------
(1) Includes loans totaling $17,667,000 for the six months ended June 30, 2000
and $19,649,000 for the quarter ended June 30, 1999 that were closed in the
name of a third party (brokered-out).
20
<PAGE> 21
MPS operations
For the six months ended June 30, 2000 the loss from the MPS mortgage
operation totaled $2,408,000 as compared to a loss of $2,203,000 for the same
period in 1999. Revenues declined $732,000 or 13.2% over 1999 and expenses
decreased $527,000 or 6.8% over 1999. Net gains on loan sales and other fees
decreased from 3.33% as a percent of loans sold in the first half of 1999 to
3.25% as a percent of loans originated in the second quarter of 2000. Margins
were negatively impacted by a larger portion of loans sold in the first quarter
that were of higher credit quality, which have lower sales premiums, as MPS
broadened its product lines. The lower margins were offset somewhat by increased
loan fees as MPS increases the amount of retail sub- prime loan originations as
compared to wholesale and correspondent production. In the second quarter of
2000 loan sale margins improved significantly.
Compensation expenses as a percent of production increased to 4.46% for
the six months ended June 30, 2000 from 4.02% for the same period in 1999. Other
expenses increased to 1.79% of production for the six months ended June 30, 2000
from 1.58% of production for the six months ended June 30, 1999. Compensation
and other expenses have declined as MPS has reduced costs in its wholesale and
correspondent (which has been eliminated) origination functions. These costs
reductions have been offset by the start up costs associated with the new net
branches. Of the increase in compensation expense .18% is attributable to the
one-time charge to compensation expense of $184,000 relating to the sale of the
Southern California operation. Compensation and other expenses will continue at
higher levels in relation to production as a result of continuing to open retail
branches.
Net interest spread as a percentage of production decreased from .38%
for the six months ended June 30, 1999 to .21% for the six months ended June 30,
2000 as a result of a lower spread between the rates charged to borrowers and
the LIBOR based borrowings of MPS and higher commitment fees, as a percentage of
production, charged on the MPS's previous line of credit which totaled
$80,000,000.
PAMCO operations
For the six months ended June 30, 2000 MPS's principally prime
production operation, PAMCO, recorded losses of ($227,000) as compared to
earnings of $1,057,000 for the six months ended June 30, 1999. Operating
revenues totaled $5,251,000 as compared to $9,195,000 for 1999 and expenses
totaled $5,478,000 as compared to $8,138,000 for 1999. Increasing long-term
interest have reduced the level of business activity in the mortgage banking
industry in general. Both origination levels and costs have decline accordingly.
Gains on sales of loans and other loan fees as a percent of production
was 2.39% for the six months ended June 30, 2000 as compared to 2.76% for the
six months ended June 30, 1999. 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 rates
or fees charged to borrowers. Compensation expenses as a percent of production
declined to 1.77% for the six months ended June 30, 2000 as compared to 1.84%
for the same period of 1999. Commission levels have declined as a result of
lower revenues, however support staff reductions have not completely offset the
lower revenue base. Other expenses as a percent of loan originations increased
from .57% for the six months ended June 30, 1999 to .72% for the six months
ended June 30, 2000. Declines in origination levels have negatively impacted
fixed expenses, such as rent, as a percent of loan originations.
21
<PAGE> 22
Net interest expense was $14,000 for the six months ended June 30, 2000
as compared to net interest income of $12,000 for the same period in 1999.
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 $150,000 for the six months ended June 30,
2000 as compared to $393,000 for the same period in 1999. The decrease was
attributable to option termination related charges totaling $136,000 in 1999 as
compared to $0 in 2000 and a reduction in incentive compensation expense and
personnel in 2000.
Interest expense to affiliates was $568,000 for the six months ended
June 30, 2000, a decrease of $255,000 over 1999. The decrease is attributable to
the Company's partial repayment of debt to SFSC and the full repayment of debt
to Consumer Portfolio Services, Inc. ("CPS").
Other expenses totaled $246,000 for the six months ended June 30, 2000
as compared to $241,000 for the same period in 1999.
DISCONTINUED OPERATIONS
Discontinued operations consist of the CPFI and NAFCO lending
activities.
A summary of the operating results of the discontinued operations is as
follows:
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ------- ---- -------
Revenues $ 32 $ 895 $127 $ 2,019
Expenses (13) 1,806 96 2,739
---- ------- ---- -------
Earnings (loss) from
discontinued
operations,
net of income taxes $ 45 $ (911) $ 31 $ (720)
==== ======= ==== =======
Expenses in the second quarter of 2000 include a $40,000 reversal of
allowances previously provided. The second quarter of 1999 includes a $1,079,000
provision for losses.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had approximately $402,000 in cash as
compared to $1,397,000 at December 31, 1999. The decrease in unrestricted cash
is attributable to the losses incurred by the Company and the repurchase of
foreclosed loans in the first quarter of 2000.
Total assets have decreased to $63,189,000 at June 30, 2000 from
$64,406,000 at December 31, 1999. The decrease is attributable to the Company's
investment in discontinued operations that has declined from $2,855,000 to
$15,000 as a result of loan dispositions. The decrease was substantially offset
by the seasonal increase in mortgage loan production that results in higher loan
inventory and restricted cash levels.
MPS's line of credit with Bank United totals $55,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.50% to 2.50%) over
the LIBOR rate. The line of credit, as amended, matures August 28, 2000. The
mortgage loans receivable of MPS are pledged as collateral for the line of
credit. At June 30, 2000, $42,092,000 was borrowed under the line. The amended
line of credit removed the Company's net worth requirement as guarantor and
reduced the line of credit from $80,000,000 to $55,000,000.
The Company is currently negotiating the renewal of the line to June
15, 2001. 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.
During 1999 and the second quarter of 2000, cash flow from operations
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 Stanwich Financial Services Corp. ("SFSC") and to provide
operating funds for NAB. At June 30, 2000 the disposition has been substantially
completed.
For the remainder of 2000 the Company intends to expand the current
operations of MPS and PAMCO and acquire additional operations complimentary to
its core business lines. Any acquisitions or expansion would be dependent upon
available funds. 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. There can be no
assurance that internally generated funds will be sufficient or financing will
be available. Current credit agreements in place are sufficient to provide the
Company funds to operate its business lines as currently structured.
Additionally, in the second quarter of 2000, the Company began receiving funds
from its over-collateralization account relating to the security issued by MPS
in 1998.
At June 30, 2000, the Company had borrowed under notes from SFSC a
total of $7,102,000. The notes bear interest at 14% per annum payable monthly
and mature December 31, 2002. Monthly principal repayments of $100,000 begin in
March 2001. Interest payments may be deferred by the Company. Deferred interest
payments bear interest at 14% until paid. In order to pay the remaining
indebtedness, including any interest due, NAB must obtain cash from
23
<PAGE> 24
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.
On June 30, 2000, CPFI had borrowed under a promissory note, $185,000
from an officer of the Company. The note bears interest at 14% per annum and was
due July 31, 2000. Proceeds from the disposition of the remaining CPFI loan will
be used to repay this indebtedness. The proceeds from the borrowing was used to
repay principal and interest due SFSC. Subsequent to June 30, 2000 the note was
extended to September 30, 2000.
During the three months ended June 30, 2000, two officers of the
Company advanced MPS a total of $310,000. Since June 30, 2000, $123,000 has been
repaid.
In order to maintain its net operating loss carryforwards the Company
is limited under Section 382 of the Internal Revenue Code of 1986 as to issuance
of new common shares in order to raise additional capital. The Company must rely
on additional borrowings to grow its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk profile has not significantly changed since
December 31, 1999. For a discussion of the Company's market risk, read Item 7A
of the Company's 10K for the year ended December 31, 1999.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-27. Financial Data Schedule
(b) Reports on Form 8-K
None
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2000
By: /s/ Charles E. Bradley, Sr.
---------------------------
Charles E. Bradley, Sr.
Chairman of the Board and
Chief Executive Officer
By: /s/ Alan Ferree
---------------------------
Alan Ferree
Senior Vice President and
Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
