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 SEPTEMBER 30,2001
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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
(Exact name of registrant as specified in its charter)
Maryland 52-2063921
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 West, 55th Street, New York, New York 10019
(Address of principal executive offices) (Zip Code)
212-632-8532
(Registrant's telephone number, including area code)
(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 ____
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 November 15, 2001
Common Stock
par value $0.01 per share 100
NB CAPITAL CORPORATION
Index
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Page
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets -
As of September 30, 2001 and December 31, 2000............1
Statements of Income -
For the three-month and nine-month periods ended September
30, 2001 and 2000..........................................2
Statements of Stockholders' Equity -
For the three-month and nine-month periods ended September
30, 2001 and 2000..........................................3
Statements of Cash Flows -
For the nine-month periods ended September 30, 2001 and
2000.......................................................4
Notes to the financial statements.............................5
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations..................................8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................12
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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.
References to $ are to United States dollars; references to C$ are to Canadian
dollars. As of September 30, 2001, the Canadian dollar exchange rate was
C$1.5785 = $1.00 and certain amounts stated herein reflect such exchange rate.
NB CAPITAL CORPORATION
BALANCE SHEETS
September 30, December 31,
2001 2000
(in U.S. dollars) Unaudited
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Assets
Cash and cash equivalents $ 10,346,000 $ 97,133,758
Due from an affiliated company 10,597,524 5,285,479
Promissory notes 468,867,008 379,543,070
Accrued interest on cash equivalents 1,645 75,850
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$ 489,812,777 $ 482,038,157
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Liabilities
Due to the parent company 338,937 302,486
Accouns payable 49,478 46,979
Dividend payable 0 1,500,000
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388,415 1,849,465
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Stockholders' equity
Preferred stock, $0.01 par value per share;
10,000,000 shares authorized,
110 Senior preferred shares issued
and outstanding 1 1
300,000 Series A shares isued and
outstanding 3,000 3,000
Common stock, $0.01 par value per share;
1,000 shares authorized,
100 shares issued and outstanding 1 1
Additional paid-in capital 476,761,014 476,761,014
Retained earnings 12,660,346 3,424,676
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489,424,362 480,188,692
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489,812,777 482,038,157
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See accompanying notes to financial statements.
- 1 -
NB CAPITAL CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three-month periods ended Nine-Month periods ended
September 30, September 30,
(in U.S. Dollars) 2001 2000 2001 2000
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Revenue
Interest income
Cash equivalents $ 325,527 $ 1,407,683 $ 1,450,804 $ 3,475,193
Promissory notes 10,670,556 8,050,951 27,770,415 24,314,320
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10,996,083 9,458,634 29,221,219 27,789,513
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Expenses
Servicing and advisory fees 338,942 300,367 1,012,011 905,657
Legal and other professional fees 62,461 35,154 162,674 251,491
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401,403 335,521 1,174,685 1,157,148
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Net income 10,594,680 9,123,113 28,046,534 26,632,365
Preferred stock dividends 6,270,288 6,270,627 18,810,864 18,811,880
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Income available to common stockholders 4,324,392 2,852,486 9,235,670 7,820,485
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Weighted average number of common
shares outstanding 100 100 100 100
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Earnings per common share - basic 43,244 28,525 92,357 78,205
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See accompanying notes to financial statements.
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NB CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Three-month periods ended Nine-month periods ended
September 30 September 30
(in U.S. dollars) 2001 2000 2001 2000
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PREFERRED STOCK
Balance, beginning and end of period $ 3,001 $ 3,001 $3,001 $3,001
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COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning and end of period 476,761,015 476,761,015 476,761,015 476,761,015
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RETAINED EARNINGS
Balance, beginning of period 8,335,954 8,874,402 3,424,676 3,906,403
Net income 10,594,680 9,123,113 28,046,534 26,632,365
Preferred stock dividends (6,270,288) (6,270,627) (18,810,864) (18,811,880)
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Balance, end of period 12,660,346 11,726,888 12,660,346 11,726,888
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TOTAL STOCKHOLDERS' EQUITY 489,424,362 488,490,904 489,424,362 488,490,904
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See accompanying notes to financial statements.
- 3 -
NB CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-month periods ended
September 30,
(in U.S. dollars) 2001 2000
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OPERATING ACTIVITIES
Net Income $ 28,046,534 $ 26,632,365
Items not affecting cash resources
Due from an affiliated company (5,312,045) 16,953,110
Due to the parent company 36,451 (27,440)
Accounts payable 2,499 7,790
Accrued interest receivable on cash equivalents 74,205 53,595
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Net cash provided by operating activities 22,847,644 43,619,420
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FINANCING ACTIVITIES
Dividends (20,310,864) (21,811,880)
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Net cash used in financing activities (20,310,864) (21,811,880)
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INVESTING ACTIVITIES
Investment in promissory notes (284,500,923) (166,159,779)
Repayments of promissory notes 195,176,985 150,908,364
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Net cash provided by (used in) investing activities (89,323,938) (15,251,415)
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Cash position, beginning of period 97,133,758 58,048,336
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Cash position, end of period 10,346,600 64,604,461
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See accompanying notes to financial statements
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NB CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
(in 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 million of
preferred stock and simultaneously, National Bank of Canada, the parent
company, made a capital contribution in the amount of $183 million. The
Company used the aggregate net of proceeds of $477 million to acquire
promissory notes of 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 months and nine months
periods 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
indicator of the results anticipated in the full year.
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 95% of its taxable income to its
stockholders, maintains its qualification as a REIT and complies with
certain other requirements.
Per share data
Basic earnings per share with respect to the Company for the three-month
and nine-month periods ended September 30, 2001 and 2000 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
September 30, 2001
(unaudited)
(in 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 only by mortgage loans that are secured by residential first
mortgages and insured by the Canada Mortgage and Housing Corporation.
The promissory notes have maturities ranging from October 2001 to September
2006, at rates ranging from 7.312% to 10.211%, with a weighted average rate
of approximately 8.273% 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 June 30, 2001 $ 465,313,188
Acquisitions 55,963,732
Principal repayments (52,409,912)
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Promissory notes as of September 30, 2001 $ 468,867,008
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The scheduled principal repayments as of September 30, 2001 are as follows:
2001 $33,345,922
2002 42,427,861
2003 96,666,046
2004 143,379,093
2005 105,444,169
2006 47,603,917
4) Transactions with an affiliated company
During the quarters ended September 30, 2001 and September 30, 2000, the
Company earned interest from NB Finance, Ltd. on the promissory notes in
the amount of $10,670,556 and $8,050,951, respectively (see Note 3).
The amount of $10,597,524 due from an affiliated company as of September
30, 2001 and $5,285,479 as of December 31, 2000, represent interest and
principal repayments due on the promissory notes.
5) Transactions with the parent company
The Company 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 $25,000 per year, 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 September 30, 2001 and
September 30, 2000, fees of $6,250 were charged to the Company.
Servicing agreement
National Bank of Canada will service and administer the promissory notes
and the collateralized mortgage loans and will perform all necessary
operations in connection with such servicing and administration.
- 6 -
NB CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
(in U.S. dollars)
The fee will equal 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
September 30, 2001 and September 30, 2000, the average outstanding balance
of the collateralized mortgage loans were $550,462,170 and $481,649,108,
respectively. During the three-month periods ended September 30, 2001 and
September 30, 2000, fees of $332,692 and $294,117 respectively, were
charged to the Company.
Custodian agreement
National Bank of Canada will hold all documents relating to the
collateralized mortgage loans. During the three-month periods ended
September 30, 2001 and September 30, 2000, no fee was charged to the
Company.
6) Stockholders' equity
Common stock
The Company is authorized to issue up to 1,000 shares of $ 0.01 par value
common stock.
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 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 of America and in Canada, on or after September 3, 2002.
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 These Series A shares are traded in the form of Depositary Shares,
each representing a one-fortieth interest therein.
o 1,000 shares authorized and 110 shares 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.
7) Recent Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141")
and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but
with no maximum life). The Company has concluded that the adoption of the
provisions of FAS 141 and 142 will have no material effect on its results
of operations and financial position.
- 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 95% of its taxable income, subject to
certain adjustments, to its stockholders.
Results of operations:
For the three-month periods ended September 30, 2001 and September 30, 2000, the
Company reported net income of $10,594,680 and $9,123,113, respectively.
Revenues, which were comprised entirely of interest income, were $10,996,083 and
$9,458,634 respectively, and expenses were $401,403 and $335,521, respectively.
Since the Company has elected to be taxed as a REIT, no income tax was recorded
during the period.
Ninety-seven percent of revenues for the three-month period ended September 30,
2001 and eighty-five percent of revenues for the three-month period ended
September 30, 2000 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 thirty-six
pools of residential first mortgages insured by 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 September 30, 2001 and 2000, totaled
$401,403 and $335,521, respectively, of which $338,942 and $300,367,
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, annual
fees to Security Exchange Commission and other professional fees.
During the three-month period ended September 30, 2001, the Board of Directors
of the Company authorized dividends, in the aggregate, of $6,270,288, compared
to $6,270,627 for the three-month period ended September 30, 2000, on its
Preferred Stock (i.e., 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
Depositary Shares. Such dividends were paid on September 28, 2001.
- 8 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (continued)
Capital Resources and Liquidity:
The Company's revenues are derived from its Mortgage Assets. As of September 30,
2001, $469 million of Mortgage Assets issued by NB Finance were
over-collaterized by the C$884 million ($586 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 Depositary 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 September 30, 2001, the Company had cash equivalents of $10,346,600
representing 2.1% of total assets, compared to $97,133,758, representing 20% of
total assets, as of December 31, 2000. The decrease in liquidity is attributable
to investment in Mortgage Assets. It is expected that the Company will invest in
additional Mortgage Assets once cash resources exceed 20% of total assets. While
this continues to be the Company's investment policy, the Company maintains
flexibility in this regard. On September 24, 2001, the Company bought $56
million in additional Mortgage Assets in order to reduce increased liquidity.
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 Depositary 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.
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.
Disclosure About Market Risk
Any market risk to which the Company would be exposed would result from
fluctuations in (a) interest rates and (b) currency exchange rates affecting 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 became due. Since the Mortgage Loans
are guaranteed by a fixed ratio of exchange, predetermined on the date of
purchase and applicable until the maturity of the Mortgage Loans pursuant to the
Mortgage Loan Assignment Agreement, fluctuations in currency exchange rates
should not present significant market risk.
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PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
- 10 -
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 November 15, 2001 /s/ Tom Doss
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Tom Doss
Chief Financial Officer and Treasurer
- 11 -
EXHIBIT 11
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NB CAPITAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Three-month period Three-month period
ended ended
September 30, 2001 September 30, 2001
Net income $10,594,680 $ 9,123,113
Deduct: Senior preferred stock and 6,270,288 6,270,627
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series A preferred stock
dividends
(A) $4,324,392 $ 2,852,486
Common share outstanding (B) 100 100
Earnings per share (A/B) $43,243.92 $ 28,524.86
- 12 -
EXHIBIT 27
NB CAPITAL CORPORATION
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NB CAPITAL
CORPORATION'S UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 2001 AND UNAUDITED
STATEMENT OF INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 2001 INCLUDED IN NB
CAPITAL CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2001 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
NB CAPITAL CORPORATION
Period type 3-MOS
Fiscal year end DEC-31-2001
Period start JAN-01-2001
Period end SEP-30-2001
Cash 10,346,600
Securities 0
Receivables 479,466,177
Allowances 0
Inventory 0
Current assets 489,812,777
PP&E 0
Depreciation 0
Total assets 489,812,777
Current liabilities 388,415
Bonds 0
Preferred mandatory 0
Preferred 3,001
Common 1
Other-SE 489,421,360
Total liability and equity 489,812,777
Sales 0
Total revenues 10,996,083
CGS 0
Total costs 0
Other expenses 401,403
Loss provision 0
Interest expense 0
Income - pre tax 10,549,680
Income - tax 0
Income - continuing 10,549,680
Discontinued 0
Extraordinary 0
Changes 0
Net income 10,549,680
EPS - primary 43,244
EPS - diluted 43,244
- 13 -