SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2004
OR
[_] 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 1-14103
NB CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-2063921
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 West 55th Street, New York, New York 10019
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(Address of principal executive offices) (Zip Code)
212-632-8580
(Registrant's telephone number, including area code)
(N/A)
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(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 15, 2004
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Common Stock 100
par value $0.01 per share
NB CAPITAL CORPORATION
INDEX
Page
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Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets -
As of March 31, 2004 and December 31, 2003 1
Statements of Income -
For the three-month periods ended March 31, 2004 and 2003 2
Statements of Stockholders' Equity -
For the three-month periods ended March 31, 2004 and 2003 3
Statements of Cash Flows -
For the three-month periods ended March 31, 2004 and 2003 4
Notes to the financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Item 4. Controls and Procedures 10
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
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This report contains certain forward-looking statements and information relating
to NB Capital Corporation (the "Company" or "NB Capital") that are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate", "believe", "estimate", "expect" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company's management with respect to future events and the
Company's future performance and are subject to certain risks, uncertainties and
assumptions. Should management's current view of the future or underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
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References to $ are to United States dollars; references to C$ are to Canadian
dollars. As of March 31, 2004, the Canadian dollar exchange rate was C$1.3113 =
$1.00 and certain amounts stated herein reflect such exchange rate.
i
NB CAPITAL CORPORATION
BALANCE SHEETS
March 31, December 31,
2004 2003
(in thousand of US dollars ) (Unaudited)
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$ $
Assets
Cash and cash equivalents 61,300 19,406
Due from an affiliated company 10,873 11,112
Promissory notes 408,817 448,333
Prepaid Expenses 30 28
Accrued interest on cash equivalents 1 5
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481,021 478,884
======================================================================================================
Liabilities
Due to the parent company 391 415
Accounts payable 30 42
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421 457
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Stockholders' equity
Capital stock and Additional paid-in capital 476,764 476,764
Retained earnings 3,836 1,663
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480,600 478,427
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481,021 478,884
======================================================================================================
See accompanying notes to financial statements.
1
NB CAPITAL CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three-month periods ended
March 31,
(in thousand of US dollars ) 2004 2003
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$ $
Revenue
Interest income
Cash equivalents 80 54
Promissory notes 8,805 9,577
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8,885 9,631
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Expenses
Servicing and advisory fees 391 368
Legal and other professional fees 54 66
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445 434
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Net income 8,440 9,197
Preferred stock dividends 6,267 6,267
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Income available to common stockholders 2,173 2,930
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Weighted-average number of common shares outstanding 100 100
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Earnings per common share - basic and diluted 22 29
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See accompanying notes to financial statements.
2
NB CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Three-month periods ended
March 31,
(in thousand of US dollars ) 2004 2003
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$ $
PREFERRED STOCK
Balance, beginning and end of period 3 3
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COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning and end of period 476,761 476,761
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RETAINED EARNINGS
Balance, beginning of period 1,663 5,128
Net income 8,440 9,197
Preferred stock dividends (6,267) (6,267)
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Balance, end of period 3,836 8,058
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TOTAL STOCKHOLDERS' EQUITY 480,600 484,822
================================================================================
See accompanying notes to financial statements.
3
NB CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three-month periods ended
March 31,
(in thousand of US dollars ) 2004 2003
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$ $
OPERATING ACTIVITIES
Net income 8,440 9,197
Items not affecting cash resources
Prepaid Expenses (2) (1)
Due from an affiliated company 238 (1,928)
Due to the parent company (24) 23
Accounts payable (11) (19)
Accrued interest receivable on cash equivalents 4 (4)
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Net cash provided by operating activities 8,645 7,268
FINANCING ACTIVITIES
Dividends (6,267) (6,267)
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Net cash used in financing activities (6,267) (6,267)
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INVESTING ACTIVITIES
Investment in promissory notes 0 0
Repayments of promissory notes 39,516 33,621
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Net cash used in investing activities 39,516 33,621
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Cash and cash equivalents, beginning of period 19,406 5,454
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Cash and cash equivalents, end of period 61,300 40,076
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See accompanying notes to financial statements.
4
NB CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(in thousand of U.S. dollars)
1) Incorporation and nature of operations
NB Capital Corporation (the "Company") was incorporated in the State of
Maryland on August 20, 1997. The Company's principal business is to
acquire, hold, finance and manage mortgage assets. The Company issued,
through an Offering Circular dated August 22, 1997, $300,000 of preferred
stock and simultaneously, National Bank of Canada, the Company's parent
company, made a capital contribution in the amount of $183,000. The Company
used the aggregate net proceeds of $477,000 to acquire promissory notes
("Promissory notes") issued by NB Finance, Ltd., a wholly-owned subsidiary
of National Bank of Canada.
2) Significant accounting policies
Financial statements
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and are
expressed in U.S. dollars.
The interim financial statements for the three-month period are unaudited,
however, the financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation. The unaudited financial
statements should be read in conjunction with the audited financial
statements included in the Company's annual report filed on Form 10-K. The
results of the interim financial statements may not be an indicator of the
results anticipated in the full year.
Promissory notes
In accordance with Statements of Financial Accounting Standards ("SFAS")
No.115 "Accounting for certain Investments in Debt and Equity Securities"
and based on the Company's intentions regarding these instruments, the
Company has classified the Promissory notes as held to maturity and has
accounted for them at amortized cost.
Income taxes
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under the Internal Revenue Code of 1986, as amended, and
accordingly, is generally not liable for United States federal income tax
to the extent that it distributes at least 90% of its taxable income to its
stockholders, maintains its qualification as a REIT and complies with
certain other requirements.
Per share data
Basic and diluted earnings per share with respect to the Company for the
three-month periods ended March 31, 2004 and 2003 are computed based upon
the weighted average number of common shares outstanding during the period.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
5
NB CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(in thousand of U.S. dollars)
3) Promissory notes
The Company entered into loan agreements evidenced by Promissory notes with
NB Finance, Ltd., an affiliated company. The Promissory notes are
collateralized by mortgage loans which are secured by residential first
mortgages and insured by the Canada Mortgage and Housing Corporation.
The promissory notes have maturities ranging from April 2004 to December
2012, at rates ranging from 5.49% to 10.21%, with a weighted average rate
of approximately 8.32% per annum.
These rates approximate market interest rates for loans of similar credit
and maturity provisions and, accordingly, management believes that the
carrying value of the promissory notes receivable approximates their fair
value.
Promissory notes as of December 31, 2003 $ 448,333
Acquisitions
-
Principal repayments (39,516)
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Promissory notes as of March 31, 2004 $ 408,817
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The scheduled principal repayments as of March 31, 2004 are as follows:
2004 $72,095 2009 $24,103
2005 $64,507 2010 $32,283
2006 $132,275 2011 $21,368
2007 $9,115 2012 $32,981
2008 $20,090
4) Transactions with an affiliated company
During the three-month periods ended March 31, 2004 and March 31, 2003, the
Company earned interest from NB Finance, Ltd. on the Promissory notes in
the amount of $8,805 ($9,577 in 2003) (see Note 3).
The amount of $10,873 due from an affiliated company as of March 31, 2004
and $11,112 as of December 31, 2003 represent interest and principal
repayments due on the promissory notes.
5) Transactions with the parent company
The Company has entered into agreements with National Bank of Canada in
relation to the administration of the Company's operations. The agreements
are as follows:
Advisory agreement
In exchange for a fee equal to $100 per year (30$ per year in 2003),
payable in equal quarterly installments, National Bank of Canada will
furnish advice and recommendations with respect to all aspects of the
business and affairs of the Company. During the three-month periods ended
March 31, 2004 and March 31, 2003, fees of $25 (8$ in 2003) were charged to
the Company.
6
NB CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(in thousand of U.S. dollars)
5) Transactions with the parent company (continued)
Servicing agreement
National Bank of Canada services and administers the Promissory notes and
the collateralized mortgage loans and performs all necessary operations in
connection with such servicing and administration in exchange for a monthly
fee based upon the outstanding balance of the collateralized mortgage.
The monthly fee equals to one-twelfth (1/12) of 0.25% per annum of the
aggregate outstanding balance of the collateralized mortgage loans as of
the last day of each calendar month. For the three-month periods ended
March 31, 2004 and March 31, 2003, the average outstanding balance of the
collateralized mortgage loans were $529,266 and $562,248 respectively.
During the three-month periods ended March 31, 2004 and March 31, 2003,
fees of $366 and $360 respectively, were charged to the Company.
Custodial agreement
National Bank of Canada holds all documents relating to the collateralized
mortgage loans. During the three-month periods ended March 31, 2004 and
March 31, 2003, no fee was charged to the Company.
6) Stockholders' equity
(in U.S. Dollars)
Common stock
The Company is authorized to issue up to 1,000 shares of $ 0.01 par value
common stock as follows:
o 100 shares have been authorized and issued to the National Bank of
Canada.
Preferred stock
The Company is authorized to issue up to 10,000,000 shares of $0.01 par
value preferred stock as follows:
o 300,000 shares have been authorized and issued as 8.35% Non-cumulative
Exchangeable Preferred Stock, Series A, non-voting, ranked senior to
the common stock and junior to the Adjustable Rate Cumulative Senior
Preferred Shares, with a liquidation value of $1,000 per share,
redeemable at the Company's option on or after September 3, 2007,
except upon the occurrence of certain changes in tax laws in the
United States or in Canada, on or after September 3, 2002. These
Series A shares are traded on the New York Stock Exchange in the form
of Depository Shares, each representing a one-fortieth interest
therein.
o Each Series A share is exchangeable, upon the occurrence of certain
events, for one newly issue 8.45% Non-cumulative First Preferred
Share, Series Z, of National Bank of Canada.
o 1,000 shares have been authorized and 110 shares have been issued as
Adjustable Rate Cumulative Senior Preferred Shares, non-voting, ranked
senior to the common stock and to the 8.35% Non-cumulative
Exchangeable Preferred Stock, Series A, with a liquidation value of
$3,000 per share, redeemable at the Company's option at any time and
retractable at the holder's option on December 30, 2007 and every
ten-year anniversary thereof.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's principal business objective is to acquire, hold, finance and
manage assets consisting of obligations secured by real property as well as
other qualifying REIT assets ("Mortgage Assets"). The Company has elected to be
taxed as a REIT under the Internal Revenue Code of 1986, as amended, and
accordingly, is generally not liable for United States federal income tax to the
extent that it distributes at least 90% of its taxable income, subject to
certain adjustments, to its stockholders.
Critical accounting policies
We believe that there are no critical accounting policies in connection with the
preparation of the financial statements of the Company.
Results of operations
(in thousand of U.S. dollars)
For the the three-month periods ended March 31, 2004 and March 31, 2003, the
Company reported net income of $8,440 and $9,197 respectively. Revenues, which
were comprised entirely of interest income, were $8,885 and $9,631 respectively,
and expenses were $445 and $434, respectively. Since the Company has elected to
be taxed as a REIT, no income tax was recorded during the period.
Ninety-nine percent of revenues for the three-month period ended March 31, 2004
and the ninety-nine percent of revenues for the three-month period ended March
31, 2003 were derived from the Mortgage Assets issued by NB Finance, Ltd., an
affiliated company ("NB Finance"). The Mortgage Assets issued by NB Finance are
collateralized by the "Mortgage Loans" that consist of fifty-nine pools of
residential first mortgages insured by the Canada Mortgage and Housing
Corporation and which are secured by real property located in Canada. The
balance of the revenues result from interest on cash equivalents.
Expenses for the three-month periods ended March 31, 2004 and 2003 totaled $445
and $434, respectively, of which $391 and $368, respectively, represent
servicing and advisory fees paid to National Bank of Canada, the Company's
direct parent (the "Bank") pursuant to the Servicing Agreement between the Bank
and the Company (the "Servicing Agreement") and the Advisory Agreement between
the Bank and the Company (the "Advisory Agreement"), whereby the Bank performs
all necessary operations in connection with administering the Mortgage Assets
issued by NB Finance and the Mortgage Loans. Legal and other professional fees
include payment to the transfer agent and other professional fees.
During the three-month period ended March 31, 2004, the Board of Directors of
the Company authorized dividends, in the aggregate, of $6,267 compared to $6,267
for the three-month period ended March 31, 2003, on its Adjustable Rate
Cumulative Senior Preferred Shares (the "Senior Preferred Shares") and 8.35%
Non-cumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares") and, accordingly, the Depository Shares. Such dividends were paid on
March 31, 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Capital Resources and Liquidity
(in thousand of U.S. dollars)
The Company's revenues are derived from interest payments from the Mortgage
Assets. As of March 31, 2004, $409 million of Mortgage Assets issued by NB
Finance were collateralized by C$749 million ($511 million) of Mortgage Loans.
The Company believes that the amounts generated from the payment of interest and
principal on such Mortgage Loans will provide more than sufficient funds to make
full payments with respect to the Mortgage Assets issued by NB Finance and that
such payments will provide the Company with sufficient funds to meet its
operating expenses and to pay quarterly dividends on the Senior Preferred Shares
and the Series A Preferred Shares and, accordingly, the Depository Shares. To
the extent that the cash flow from its Mortgage Assets exceeds those amounts,
the Company will use the excess to fund the acquisition of additional Mortgage
Assets and make distributions on the Common Stock.
The Company does not require any capital resources for its operations and,
therefore, it is not expected to acquire any capital assets in the foreseeable
future.
As of March 31, 2004, the Company had cash equivalents of $61,300 representing
12.74% of total assets, compared to $19,406 representing 4.05% of total assets,
as of December 31, 2003. The increase in liquidity is attributable to repayment
of Mortgage Assets. It is expected that the Company will invest in additional
Mortgage Assets once cash resources are close to, but not exceeding, 20% of
total assets. While this continues to be the Company's investment policy, the
Company maintains flexibility in this regard. The liquidity level is sufficient
for the Company to pay fees and expenses pursuant to the Servicing Agreement and
the Advisory Agreement.
The Company's principal short-term and long-term liquidity needs are to pay
quarterly dividends on the Senior Preferred Shares and the Series A Preferred
Shares and, accordingly, the Depository Shares, to pay fees and expenses of the
Bank pursuant to the Servicing Agreement and the Advisory Agreement, and to pay
franchise fees and expenses of advisors, if any.
Disclosure of Contractual Obligations
The Company does not have any indebtedness (current or long-term), other
material capital expenditures, balloon payments or other payments due on other
long-term obligations. No negative covenants have been imposed on the Company.
Off-Balance Sheet Accounting
The Company does not have any off-balance sheet obligations.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the market risk faced by the Company
since December 31, 2003. For information regarding the Company's risk refer to
the information under the caption `Disclosure About Market Risk' under this item
and to the Company's 2003 Form 10-K.
Disclosure About Market Risk
Any market risk to which the Company would be exposed would result from
fluctuations in interest rates that would affect the interest payments received
by the Company in respect of the Mortgage Assets issued by NB Finance. Since the
Mortgage Assets are significantly overcollateralized by the Mortgage Loans,
interest rate fluctuations should not present significant market risk. The
Company expects that the interest and principal generated by the Mortgage Loans
should enable full payment by NB Finance of all of its obligations as they
become due.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this report,
the Company's President and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission"s rules and forms.
10
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. The Company is not
currently involved in, nor to the Company's knowledge, currently threatened with
any material litigation other than routine litigation arising in the ordinary
course of business, most of which is expected to be covered by liability
insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
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11 Computation of Earnings Per Share
31.1 Certification of Chairman and President pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Written Statement of Chairman and President Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
32.2 Written Statement of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter for which this report
is filed.
11
SIGNATURES
Pursuant to the requirements 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.
NB CAPITAL CORPORATION
Date May 17, 2004 /s/ Serge Lacroix
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Serge Lacroix
Chairman of the Board and President
Date May 17, 2004 /s/ Jean Dagenais
---------------------------------------
Jean Dagenais
Chief Financial Officer
12