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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To
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Commission file number 333 - 38673
RB ASSET, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-5041680
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the company's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
As of September 21, 1998, the aggregate market value of the 7,100,000 shares of
Common Stock of the registrant issued and outstanding, excluding the 2,774,550
shares held by all directors and principal officers as a group, was $32,440,875.
This figure is based on the last sales price of $7.50 per share of the common
stock of the Registrant's predecessor on May 22, 1998. Of the aggregate of
2,774,550 shares held by all directors and principal officers, Mr. Alvin
Dworman, the largest single holder of the registrant's Common Stock, held
2,768,400 shares at September 21, 1998.
The number of shares outstanding of the Registrant's Common Stock as of
September 21, 1998 was 7,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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RB ASSET, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JUNE 30, 1998
TABLE OF CONTENTS
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Page
PART I
Item 1 Business ................................................................... 3
Item 2 Executive Offices and Other Properties...................................... 24
Item 3. Legal Proceedings........................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......................... 26
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........ 27
Item 6. Selected Consolidated Financial Data........................................ 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 32
Item 8. Consolidated Financial Statements and Supplementary Data.................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 52
PART III
Item 10. Directors and Principal Officers of the Registrant.......................... 53
Item 11. Management Compensation and Transactions.................................... 58
Item 12 Security Ownership of Certain Beneficial Owners and Management.............. 61
Item 13 Certain Relationships and Related Transactions.............................. 64
PART IV
Item 14. Financial Statements and Schedules, Exhibits and Reports on Form 8-K........ 67
SIGNATURES............................................................................................. 69
CONSOLIDATED FINANCIAL STATEMENTS...................................................................... 70
FINANCIAL STATEMENT SCHEDULES INDEX.................................................................... 106
</TABLE>
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PART I
ITEM 1
BUSINESS
General
RB Asset, Inc. (the "Company") is a Delaware corporation that, as a result of
the completion of reorganization steps on May 22, 1998 (the "Reorganization,"
described in detail below), succeeded to the assets, liabilities and business of
River Bank America ("River Bank" or the "Predecessor Bank"). Prior to the
Reorganization, River Bank was a New York State chartered stock savings bank and
was regulated by the New York State Banking Department (the "Banking Department"
or the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance
Corporation (the "FDIC"). The Company's principal business continues to be the
management of its real estate assets, mortgage loans and investment securities,
under a business plan intended to maximize shareholder value. Following the
Reorganization, the Company intends to manage its business and assets without
the regulatory constraints previously imposed on the Predecessor Bank by the
Banking Department. This report is for the fiscal year ended June 30, 1998.
Unless the context otherwise requires, references to the business, assets and
liabilities of the Company prior to May 22, 1998 include the business, assets
and liabilities of the Predecessor Bank.
The Predecessor Bank was founded in 1848. In 1925, the Predecessor Bank adopted
the name "East River Savings Bank" which it continued to use in its retail
business through June 28, 1996. The Predecessor Bank converted to a stock-form
savings bank through a plan of conversion in 1985. Effective October 1, 1988,
East River Savings Bank formally changed its corporate name to "River Bank
America." On June 28, 1996, the Predecessor Bank sold its remaining eleven
branches ("the Branch Sale") to Marine Midland Bank ("Marine"), inclusive of the
name East River Savings Bank. Following consummation of the Branch Sale, all
retail banking operations of the Predecessor Bank ceased.
On May 22, 1998, River Bank completed its Reorganization into a Delaware
corporation named RB Asset, Inc. under a plan that was approved at the
Predecessor Bank's special meeting of stockholders on May 1, 1998. RB Asset,
Inc., as the successor in the Reorganization, succeeded to the assets,
liabilities and business of River Bank. As a result of the reorganization and
related dissolution discussed below, the capital stock of River Bank was
canceled and, as of the close of business on May 22, 1998, River Bank's stock
transfer records were closed.
Following stockholder approval of the Reorganization, all of the Predecessor
Bank's assets, liabilities and business were transferred to, or assumed by, the
Predecessor Bank's wholly-owned subsidiary, River Asset Sub, Inc. on May 11,
1998, pursuant to the terms of an assignment and assumption agreement and
related transfer documents. Thereafter, on May 18, 1998, the Board of Directors
declared distribution of the capital stock of its wholly-owned subsidiary, River
Distribution Sub, Inc. ("River Distribution"), payable on a book-entry basis to
the Predecessor Bank's stockholders of record on May 22, 1998. At the time of
such distribution the capital stock of River Distribution had no value.
In the distribution, all of the issued and outstanding shares of common stock
("River Distribution Common Stock") and 15% noncumulative perpetual preferred
stock, series A of River Distribution ("River Distribution Series A Preferred")
held by the Predecessor Bank were distributed to the Predecessor Bank's
stockholders on a share-for-share basis such that each holder of the common
stock of River Bank ("River Bank Common Stock") received one share of River
Distribution Common Stock for each share of River Bank Common Stock held by such
stockholder and each holder of 15% noncumulative perpetual preferred stock,
series A, of River Bank ("River Bank Series A Preferred") received one share of
River Distribution Series A Preferred Stock for each share of River Bank Series
A Preferred Stock held by such stockholder.
Finally, upon book-entry payment of the distribution, on May 22, 1998, River
Distribution merged with and into River Asset whereupon the stockholders of
River Distribution became stockholders of the surviving corporation which
changed its name to RB Asset, Inc. In the merger, the shares of capital stock of
River Distribution were converted into shares of identical capital stock of RB
Asset, Inc., the renamed surviving corporation in the merger. Accordingly,
subsequent to the merger, the capital stock of River Bank had no value. Stock
certificates representing shares of capital stock of RB Asset, Inc. were then
distributed to holders of record as of May 22, 1998.
In connection with the reorganization steps, on May 19, 1998, a petition for an
order of dissolution declaring River Bank dissolved and its legal existence
terminated was filed in the Supreme Court of the State of New York. The Supreme
Court issued the order on June 18, 1998 and, upon the filing of the order of
dissolution with the Banking
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Department on June 23, 1998, the Predecessor Bank was dissolved and its legal
existence terminated. Upon such dissolution, the capital stock of River Bank was
canceled and the stock transfer records of River Bank were closed.
On June 28, 1996, the Predecessor Bank consummated the "Branch Sale contemplated
by the Purchase of Assets and Liability Assumption Agreement (the "Branch Sale
Agreement") by and between the Predecessor Bank and Marine. Pursuant to the
terms of the Branch Agreement, Marine assumed $1,159.6 million of deposit
liabilities (the "Assumed Deposits") and acquired assets with an aggregate
carrying value of $1,066.6 million (the "Transferred Assets"). The Transferred
Assets consisted primarily of loans secured by real estate, mortgage-backed and
investment securities, and 11 bank branch offices, inclusive of the name East
River Savings Bank. Included in the Transferred Assets was approximately $32.4
million of loans in which the Predecessor Bank was granted subordinated
participation interests. Also included in the Transferred Assets were the
proceeds of dispositions from five individual asset sale transactions with third
parties, aggregating $60.4 million, composed of real estate assets, loans and
other receivables (the "Asset Sale Transactions"). The Asset Sale Transactions
were structured to include ongoing recourse to, and participation by, the
Predecessor Bank with respect to the assets sold, based upon the net proceeds
realized on disposition of assets by the purchasers. See "Asset Sale
Transactions" and Note 11 to the Consolidated Financial Statements.
The Assumed Deposits exceeded the Transferred Assets by approximately $93.0
million, which represented the premium received by the Predecessor Bank in the
Branch Sale. Marine also purchased the Predecessor Bank's branch office realty
at 96th Street in Manhattan for $1.3 million. The Predecessor Bank recorded a
net pretax gain on the sale of offices and branches of $77.6 million reflecting
the deposit premium of $93.0 million, partially offset by Branch Sale
transaction costs of $5.8 million, professional fees of $3.2 million, employee
benefits and severance costs of $4.6 million, net losses on the sale of assets
of $1.1 million and other net costs of $700,000. During the year ended June 30,
1997, the Predecessor Bank's indemnification agreements with Marine were amended
and a $3.3 million contingency reserve was recorded.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans. The balance of
the retained assets consisted of performing loans (including loans sold with
recourse, subordinated participations, junior subordinated participations, loans
to facilitate the sale of real estate owned and mortgage and other loans) and a
modest amount of cash and investment securities (collectively, the "Retained
Assets"). Subsequent to the Branch Sale, the Predecessor Bank continued
substantially the same asset management strategy for Retained Assets as had been
previously employed by the Predecessor Bank, in the years immediately prior to
the Branch Sale.
Following the Branch Sale, the Company engaged RB Management Company, LLC (the
"Management Company") to manage its operations on a day-to-day basis, including
developing and recommending strategies to the Company's Board of Directors
regarding the ongoing management of assets. The Management Company is a
privately-owned entity that was newly formed in June 1996 and is controlled by
Alvin Dworman, who owns 39.0% of the outstanding Common Stock of the Company.
See "Management."
The closing of the Branch Sale was conditioned upon the Predecessor Bank's
obtaining financing with terms and in an amount reasonably acceptable to the
Predecessor Bank and determined to be reasonably adequate to permit consummation
of the Branch Sale. The Predecessor Bank obtained from Marine a loan facility
(the "Facility" or "Initial Facilities") consisting of eleven independent
mortgage loans with additional collateral, in an aggregate amount not to exceed
$99.1 million. As of June 30, 1996, Marine had extended $89.8 million under the
Facility to the Predecessor Bank, which has been reduced by repayment activity
to $60.6 million at June 30, 1998, with an additional $19.6 million in proceeds
maintained in a restricted cash account pending negotiation with Marine as to
the application of such proceeds to reduce the outstanding balances of the
Facility. Proceeds of the Facility were utilized by River Bank to (i) refinance
all or part of the certain indebtedness secured by assets to be transferred to
Marine, including all or a substantial part of the outstanding advances from the
Federal Home Loan Bank ("FHLB") and (ii) provide additional funds for the
development and completion of two individual real estate assets as part of the
Predecessor Bank's operations subsequent to the Branch Sale.
Marine assumed substantially all of the Predecessor Bank's retail deposits in
connection with the Branch Sale. In addition, the Predecessor Bank ceased
accepting retail deposits on the date of the Branch Sale. At June 30, 1996, the
Predecessor Bank held certain non-retail deposits, which aggregated
approximately $3.0 million. During the quarter following the Branch Sale, the
Predecessor Bank arranged for the assumption by other insured depository
institutions of its remaining non-retail deposits. Accordingly, the Predecessor
Bank held no deposit liabilities at June 30, 1997. However, at June 30, 1997,
the Predecessor Bank continued to be regulated by the FDIC and the NYSBD. On
October
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31, 1996 the Predecessor Bank requested that the FDIC terminate its insurance of
accounts in accordance with the requirements of the NYSBD's approval of the
Branch Sale. On April 14, 1997, the Predecessor Bank received notice that the
FDIC, as requested by the Predecessor Bank, intended to terminate the
Predecessor Bank's status as an insured state nonmember Bank on December 31,
1997. Upon the issuance of this order by the FDIC, the Predecessor Bank was no
longer subject to banking regulation by the FDIC. In connection therewith, the
Predecessor Bank also received from the Banking Department a waiver of any
applicable New York State deposit insurance requirements.
Conditions imposed in connection with the NYSBD's approval of the Branch Sale
included: (i) the Predecessor Bank's agreement to file an application with the
Banking Department, within one year of the closing of the Branch Sale, for
approval of a plan of dissolution; (ii) the Predecessor Bank's agreement to file
with the Supreme Court of the State of New York an application for a closing
order within 13 months of the closing of the Branch Sale and an application for
a final order of dissolution within five months following the filing of an
application for a closing order; (iii) increased levels of minimum regulatory
capital requirements; (iv) the Predecessor Bank's agreement to continue to
submit its proposed capital transactions to the NYSBD for prior approval; (v)
the continuation of the Predecessor Bank's then-current periodic reporting
obligations with respect to its retained assets, as well as in connection with
its ongoing activities subsequent to the Branch Sale; and (vi) such other
conditions and obligations as the Banking Department may have deemed
appropriate.
In June 1997, the Predecessor Bank submitted an alternate proposal (the
"Alternate Proposal") to the NYSBD pursuant to which the Predecessor Bank would
implement Conditions No. 1 and No. 2 of the approval of the Branch Sale,
described above. The Predecessor Bank proposed to adopt a plan under which it
would transfer all of its assets and liabilities, including all contingent
liabilities, to a successor corporation ("Successor") incorporated under
Delaware General Corporation Law. Successor would acquire all of the assets of
the Predecessor Bank and continue all of the business of the Predecessor Bank
under the same business plan as adopted by the Predecessor Bank. Following the
transfer of its assets and liabilities to Successor, the Predecessor Bank would
surrender its banking charter and dissolve. The implementation of the proposed
plan would result in a mere change of form from a banking corporation to a
corporation incorporated under the Delaware General Corporation Law, which would
not be subject to the jurisdiction of the Banking Department. The proposed
transfer was expected to qualify as a tax-free reorganization under the Internal
Revenue Code and, as such, the Company expected (and continues to expect) that
certain of the Predecessor Bank's tax attributes would be preserved. In
connection with the Alternate Proposal, common and preferred shareholders of
River Bank would receive shares of Successor on a share-for-share basis so that
Successor will be owned by the same stockholders, in the same proportions, as
owned the Predecessor Bank on the record date.
Prior to June 30, 1997, the Predecessor Bank received the NYSBD's letter
indicating their conditional approval of the Alternate Proposal as meeting the
Conditions of the Banking Department's approval of the Branch Sale, if
implemented by the Predecessor Bank on a timely basis. The NYSBD's conditional
approval of the Alternate Proposal and related modification of Condition No. 1
of the Approval of the Branch Sale provided that the approval of shareholders of
the Alternate Proposal not later than September 30, 1997 would be deemed to
satisfy Condition No. 1. Condition No. 2 of the Banking Department's approval of
the Branch Sale would be deemed to be satisfied if the petition required by
Condition No. 2 was filed by the Bank by October 15, 1997. The Predecessor Bank
met Condition No. 1 and Condition No. 2 on a timely basis. A copy of the
Alternate Proposal and the NYSBD's letter indicating their conditional approval
of the Alternate Proposal were included as Exhibits 14 and 15 to FDIC Form F-2,
dated June 30, 1997.
The Banking Department had also advised the Predecessor Bank that the
Predecessor Bank's minimum capital requirement, set at $115 million in the
NYSBD's approval of the Branch Sale and subsequently amended to $106 million in
May 1997, was to remain at $106 million until the Predecessor Bank's final
dissolution. Further, the Banking Department's conditional approval of the
Alternate Proposal required that the Predecessor Bank seek prior approval from
the NYSBD for any material sale or transfer of assets, or expenditures for
development or renovation of any properties held by the Predecessor Bank prior
to the completion of the dissolution of the Predecessor Bank.
The Company will continue to be subject to the requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") as amended and will be required to
file periodic reports and other information with the Securities Exchange
Commission (the "SEC").
Primarily as a result of deterioration in the real estate markets and a general
economic recession in the New York metropolitan area and, later in other areas
in which the Predecessor Bank was engaged in lending activities, particularly
California, the Company's non-performing assets began increasing in 1989 and
continued to increase in the aggregate through 1992. The resolution of
non-performing assets, which substantially resulted from the Predecessor Bank's
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lending strategy of the 1980s, required significant time and attention by the
Predecessor Bank's management. Over the five-year period preceding the Branch
Sale, the Bank's primary loan origination focus was single-family (one-to-four
units) and, to a lesser extent, multi-family (five or more units) residential
loans secured by properties in the New York City metropolitan area. Primarily as
a result of conditions imposed by the NYSBD, subsequent to June 28, 1996, the
Predecessor Bank has not originated a material amount of loans.
The Predecessor Bank has previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of
River Bank Series A Preferred Stock would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a River Bank Series A Preferred
Stock dividend for the quarter ending June 30, 1996, payment of which was
subject to the receipt of required approvals from the FDIC and the NYSBD (the
Predecessor Bank's regulators at the time), as well as Marine (the Predecessor
Bank's and the Company's principal lender). Primarily as a result of the above,
neither the Company's or the Predecessor Bank's Board of Directors has taken any
action regarding a quarterly dividend on the Company's Series A Preferred Stock
for any of the quarterly periods ended from September 30, 1996 through June 30,
1998. Although the Company is no longer subject to the jurisdiction of either
the FDIC or the NYSBD, declaration or payment of future dividends on the
Company's Series A Preferred Stock will continue to be subject to the approval
of Marine for so long as the Facility remains outstanding. The Company has
received notice from Marine that the approval necessary to declare or pay
dividends on the Company's Series A Preferred Stock will not be provided at this
time. There can be no assurance that the Board of Directors of the Company will
deem it appropriate to pay dividends on the Series A Preferred Stock, even if
permitted to do so by Marine.
During the fiscal year ended June 30, 1998, the Company reported a net loss
applicable to common shares of $1.5 million, or $0.21 per share. Significant
factors contributing to the Company's fiscal 1998 results include a net interest
loss (interest expense on borrowed funds in excess of interest income from loan
assets), after provision for possible credit losses, of $3.4 million, real
estate property and maintenance expenses of $10.9 million, other operating
expenses of $6.1 million, writedowns of investment in real estate of $1.1
million, depreciation expenses of $383,000 and provisions for income taxes of
$434,000, partially offset by rental income from real estate operations of $13.8
million, realization of contingent participation interest and gains on the sale
of real estate of $3.4 million and $2.0 million, respectively, and net gains on
the sale of investment securities, available for sale, of $1.7 million.
Real Estate Assets
At June 30, 1998, the Company held total real estate assets with a book value of
$145.1 million, which represented approximately 76.0% of the Company's total
assets on that date.
Categorization of Real Estate Assets. The Company accounts for its real estate
assets in accordance with Statement of Financial Accounting Standards No. 121
(SFAS-121), "Accounting for the Impairment of Long-Lived Assets to be Disposed
of," issued by the Financial Accounting Standards Board (the "FASB"). SFAS-121
requires that long-lived assets be reviewed for impairment whenever
circumstances and situations change such that there is an indication that the
carrying amount of the asset may not be recoverable. In addition, SFAS-121
requires that long-lived assets to be disposed of be carried at the lower of
carrying value or fair value less the cost to sell. Under SFAS-121, the Company
is required to categorize its real estate assets as either real estate held for
investment or real estate held for disposal.
Real Estate Held for Investment. This category is comprised of the following
types of real estate assets:
Assets to Be Held and Used. This category is represented by
assets which the Company intends to hold until such time as
the Company determines that such assets are ready for sale. No
aggressive marketing activities would be commenced with
respect to these assets until such time. When the asset is
marketed, it is expected that the asset would be recategorized
as real estate held for disposal.
Assets to Be Developed. This category is represented by assets
which the Company intends to develop over an extended period
of time. Certain costs (such as interest and overhead) will be
capitalized until the project is substantially complete. At
the completion of the development phase, the asset would
normally will be expected to be recategorized as real estate
assets held for disposal, or real estate held and used.
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Real Estate Held for Disposal. This category is represented by assets for which
marketing activities are underway with a goal of consummating a sale within one
year. Real estate held for disposal may include entire real estate properties
held for disposal or separately saleable portions of properties, generally
described as Assets Held for Inventory. The Assets Held for Inventory category
primarily consists of co-operative apartment shares and condominium units. The
Company intends to sell such assets on a unit-by-unit basis in as expedient a
manner as possible. Marketing and sales activities are underway for this
category of assets. The portion of such real estate asset expected to be sold
within one year have been categorized as real estate held for disposal at June
30, 1998.
These categories identify the Company's disposition strategy with respect to
each individual real estate asset. See "Disposition Strategy." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality."
Under generally accepted accounting principals ("GAAP"), the Company is required
to depreciate real estate held for investment over the estimated useful life of
the assets. The depreciable portion of assets categorized as real estate held
for investment includes the accumulated costs of acquisition and/or development
of building structures and leasehold improvements. No depreciation charges are
made for the portion of the asset's historical cost attributable to land.
Depreciation for real estate held for investment is generally calculated on a
straight-line basis over a 30-year period or over the remaining term of the
lease for leasehold improvements, whichever period is less.
During the year ended June 30, 1998, the Company recorded depreciation charges
of approximately $383,000, of which $175,000 represents depreciation of the
capitalized costs of the real estate held for investment (less land value) for
five of the Company's six real estate assets from the period May 22, 1998 to
June 30, 1998. The remaining $208,000 in depreciation charges recorded during
the year ended June 30, 1998 were for the sixth property, accounted for as a
leasehold improvement, consistent with depreciation charges taken in prior
periods for that property. On May 22, 1998, as a consequence of the
Reorganization, the Company was no longer subject to the categorization and
depreciation regulations for investments in real estate previously imposed by
the Predecessor Bank's regulators. Accordingly, on that date, the Company began
to record depreciation charges, as required by GAAP, for all real estate held
for investment, that had not been subject to depreciation charges in prior
periods.
Real Estate Assets Composition. Tables that set forth information concerning the
Company's real estate portfolio at the dates indicated are included in a
separate section of this annual report on Form 10-K. See "Financial Schedules".
Lending Activities and the Real Estate Loan Portfolio. From 1985 until 1990, the
Predecessor Bank's lending activities emphasized multi-family residential,
commercial real estate, construction and commercial business loans and, to a
lesser extent, single-family residential loans and education loans. In addition,
pursuant to a business plan adopted by the Predecessor Bank, the Predecessor
Bank during this time restructured its assets and liabilities to reduce the
vulnerability of its operations to changes in interest rates. The Predecessor
Bank effected this strategy by emphasizing multi-family residential, commercial
real estate and construction loans, including loans to joint ventures in which
the Predecessor Bank, or a subsidiary of the Predecessor Bank, had an interest
in the real estate development activities and loans secured by properties
primarily outside of the New York metropolitan area, as well as commercial
business lending activities.
As a result of deteriorating economic conditions beginning in 1989 and the
resultant increases in non-performing assets (non-accrual loans and real estate
acquired by foreclosure) during 1989, the Predecessor Bank began to
substantially decrease its lending activities during 1990, particularly
investments in higher-risk multi-family residential, commercial real estate,
construction and commercial business loans, as well as its joint venture
activities. These practices were formalized by the Board of Directors of the
Predecessor Bank in April 1991 following the Predecessor Bank's entering into a
Memorandum of Understanding in December 1990. As a result of the Board's
actions, the Predecessor Bank changed its lending policies to specifically
exclude acquisition, development and construction loans and all lending
characterized as highly-leveraged transactions or joint venture activities. In
addition, the Predecessor Bank substantially curtailed its multi-family
residential and commercial real estate lending. The foregoing loans were
permitted, however, to the extent that the Predecessor Bank was obligated under
legally binding commitments, as well as in connection with the
restructuring/refinancing of existing loans or in connection with the sale of
investments in real estate.
During this period, the Predecessor Bank continued to originate relatively low
volumes of single-family residential loans and, to a lesser extent, certain
consumer loans. In addition, since 1990 and 1991, other than single-family
residential loans, the Company has primarily originated loans secured by
multi-family residential elevator properties with approximately 75 units,
generally in its market area and under much stricter underwriting guidelines
than had previously
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been in effect for multi-family residential and commercial real estate loans.
Following consummation of the Branch Sale, primarily as a result of conditions
imposed by the NYSBD, the Company no longer engaged in lending activities.
Loans Secured by Real Estate. At June 30, 1998, the Company's loans secured by
real estate primarily consist of performing and non-performing loans secured by
multi-family residential properties and commercial real estate. Commercial real
estate and multi-family residential loans may involve a substantial risk of loss
due to, among other things, the potentially negative effects of changes in
either property-specific or general economic conditions, which may result in
excessive vacancy rates, inadequate rental income levels and volatility in real
estate values.
The Company's multi-family residential loans consist primarily of loans secured
by rental apartment buildings, unsold condominium units, cooperative apartment
buildings and unsold shares secured by cooperative apartments. The Company's
commercial real estate loans consist primarily of loans secured by office
buildings, shopping centers, industrial warehouse buildings, hotels and other
income-producing properties.
The terms of the Company's multi-family residential and commercial real estate
loans are most commonly five to ten years. Certain of these loans have options
to extend the term of the loan at interest rates which may be fixed or adjusted
upward for one, or in certain instances two, additional five-year periods. These
loans include amortizing loans which require the monthly payment of interest and
principal. The amortization period for the payment of principal on such loans
generally is 20 to 30 years, with balloon payments of the remaining principal
amount due upon the maturity of the loan. The Company's commercial real estate
loans also were frequently made on an interest-only basis, with the payment of
the entire principal amount due at maturity. The multi-family residential and
commercial loans included in the Retained Assets are nearly all fixed interest
rate loans.
Performing Loans Secured by Real Estate. Performing loans secured by real estate
at June 30, 1998 consist of loans secured by multi-family residential,
commercial real estate and single-family residential loans which are
wholly-owned by the Company, as well as participation interests in multi-family
residential and commercial real estate loans pursuant to the Participation
Agreements with Marine. Approximately $36.4 million or approximately 19.3% of
the Company's total assets are categorized as performing loans secured by real
estate as of June 30, 1998. Of the approximately $36.4 million of performing
loans included in this total, approximately $13.5 million or approximately 37.2%
of such loans are subordinated loans. Subordinated loans, including second
mortgages and participation interests, generally involve more risk than senior
loans.
Whole Loans. At June 30, 1998, the Retained Assets include 4 performing loans
(exclusive of participating loans) of approximately $22.8 million, all of which
are commercial real estate loans. All of such loans have been modified since
origination and are currently performing in accordance with their terms.
Approximately $1 million or approximately 2.7% of the Company's performing loans
(other than the participation loans) at June 30, 1998, are currently
interest-only loans, with the payment of the entire principal amount due at
maturity.
Subordinated Participation Interests. At June 30, 1998, performing loans secured
by real estate include a subordinated participation interest in 9 performing
loans in which the Company retained an interest in approximately $13.5 million
of principal amount on such loans. All of the performing loans have been
modified since origination and are currently performing in accordance with their
modified terms.
Non-Performing Loans Secured by Real Estate. Non-performing loans consist of
multi-family residential, commercial real estate, commercial business loans and
student loans. Non-performing loans are those loans which have been placed on
non-accrual status. The Company generally places a loan which is delinquent 90
days or more on non-accrual status unless it is well secured and, in the opinion
of management, collection appears likely. In addition, the Company may place a
loan on non-accrual status even when it is not yet delinquent 90 days or more if
the Company makes a determination that such loan is not collectible. When loans
are placed on non-accrual status, any accrued but unpaid interest on the loan is
reversed and future interest income is recognized only if actually received by
the Company and collection of principal is not in doubt. Approximately $22.6
million, or approximately 12.0%, of the Company's assets comprised of loans
categorized as non-performing as of June 30, 1998 and are all currently on
non-accrual status.
Junior Subordinated Participation Interests. The Retained Assets include a
junior subordinated participation interest in three non-performing loans in
which the Company retains an interest of approximately $2.9 million in principal
amount, which have been fully reserved (100%) for by the Company. All of such
loans have been modified since origination and are currently performing in
accordance with their terms.
759883.5
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<PAGE>
Real Estate Loan Portfolio Composition. Tables that set forth information
concerning the Company's loans secured by real estate portfolio at the dates
indicated are included in a separate section of this annual report on Form 10-K.
See "Financial Schedules".
Origination, Purchase and Sale of Loans. As of the close of business on June 28,
1996, primarily as a result of conditions imposed by the NYSBD, the Company's
lending activities were substantially curtailed. During 1998, the Company
advanced funds only to fund continuing construction involving a limited number
of loans and investments in real estate. The multi-family residential and
commercial real estate loans originated by the Company in recent periods have
been primarily in connection with the restructuring/refinancing of existing
loans and loans to facilitate the sale of investments in real estate.
The following table sets forth the activity in the Company's loans, including
commercial business and consumer loans, originated by the Predecessor Bank
during the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
1998 1997 1996
------------------- ------------------- -------------
<S> <C> <C> <C>
Originations:
Single-family residential loans $ -- $ -- $ 105,850
Multi-family residential loans -- -- 3,701
Commercial real estate loans -- -- 11,838
Consumer loans -- -- 3,237
------------- ------------- -------------
Total loans originated -- -- 124,626
Loans to facilitate sale of investments -- -- 83,892
Repurchased from Marine -- 471 --
------------- ------------ ---------------
Total loan increases -- 471 208,518
Sales (1) -- -- (1,034,928)
Loans transferred (to)/from -- -- (7,852)
Principal repayments, net (26,333) (7,706) (65,360)
------------- -------------- --------------
Net increase (decrease) in total loans $ (26,333) $ (7,235) $ (899,622)
============= ============= =============
</TABLE>
During the year ended June 30, 1997, the Company repurchased a loan from Marine
in the amount of $471,000 in accordance with the terms of the Branch Sale
Agreement.
(1) Primarily loans sold to Marine in connection with the Branch Sale and
included within Transferred Assets. Also includes the sale of $48.0
million of loans to facilitate sales to third parties. Such loans to
facilitate were delivered to Marine as part of the Transferred Assets
in the Branch Sale. See Asset Sale Transactions and Note 11 to the
Consolidated Financial Statements.
Concentrations of Loans Secured by Real Estate by Loan and by Borrower. At June
30, 1998, the Company's loans secured by real estate portfolio included 2 loans
aggregating $36.5 million with principal amounts greater than $10.0 million, 1
loan with a principal balance of $6.8 million and 4 loans aggregating $8.1
million with principal amounts of $1.0 million to $5.0 million. At the same
date, the Company's five largest loans secured by real estate borrowers
(including their related entities) had $21.8 million, $14.7 million, $6.8
million, $3.1 million and $1.8 million, respectively, of loans outstanding, and
the aggregate amount of loans to the Company's five, 10 and 20 largest real
estate borrowers (including related entities) amounted to $48.2 million, $54.5
million and $59.0 million, respectively. At June 30, 1998, $22.1 million of the
loans to the Company's 20 largest borrowers were non-performing loans and $7.7
million had been restructured and were performing according to their
restructured terms.
Loans Sold With Recourse. At June 30, 1998 and 1997, the Company held three loan
assets secured by multi-family residential projects currently under development.
These assets were carried at $15.8 million and $24.5 million at June 30, 1998
and 1997, respectively.
In connection with the Branch Sale, on June 28, 1996, the Company consummated
$24.0 million of Asset Sale Transactions, known as the Pool B and C
transactions. These Asset Sale Transactions represented two of five such
759883.5
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<PAGE>
transactions (totaling $60.4 million) which were structured to include ongoing
recourse to, and participation by, the Company with respect to the assets sold,
based upon the proceeds realized by the purchasers. See "Asset Sales
Transactions."
For accounting purposes the Company accounted for the Asset Sale Transactions
included in Pools B and C as financings, primarily due to their longer term
nature and the more substantial risks related to ongoing construction for the
assets included in each of the other Pools. Pool B and C Asset Sale Transactions
have been included in the Company's consolidated financial statements as loans
sold with recourse. Related financing for such assets has been included in the
Company's consolidated financial statements as Borrowed Funds, secured by assets
sold with recourse. Financings related to loans sold with recourse were $8.2
million and $18.2 million at June 30, 1998 and 1997, respectively. The Company
believes that it has made adequate provision at June 30, 1998 for all recourse
amounts expected to result from the sale of the assets included in Pools B and
C.
At June 30, 1998, one of these loans (the Pool B transaction) was composed of a
mortgage loan secured by land and construction in process related to a single
family condominium project in Wayne, New Jersey (the "Wayne Project"). The Wayne
Project is in the final phase of a three-phase development and all remaining
units are under contract to be sold. The Company believes that the Wayne Project
will be fully completed and all individual units sold prior to June 30, 1999.
The Company's remaining investment in the Wayne Project, net of applicable
reserves, was $3.0 million at June 30, 1998. At June 30, 1998, $2.1 million of
borrowed funds remained outstanding with respect to the Pool B recourse
financing.
During the year ended June 30, 1998, the Company made deposits in the amount of
$2.1 million against recourse claims related to the Pool B asset sale
transaction completed on June 28, 1996. Such deposits were made to terminate the
recourse provisions of the Pool B asset sale transaction and interest expense to
the Company subsequent to December 1997. These deposits will be refunded to the
Company when the remaining $2.1 million in recourse debt related to Pool B is
repaid from asset sales proceeds. See "Asset Sale Transactions," and Note 15 to
the Consolidated Financial Statements.
At June 30, 1998 Pool C consisted of contracts of sale for two adjacent parcels
of land located in the Bronx, New York (the "Bronx Projects"). At June 30, 1998,
the Company's remaining investment in the Bronx Projects aggregated $12.7
million, including $9.0 million for one site ("Site One") and $3.7 million for a
second site ("Site Two"). The sale contract for the Bronx Projects represented
the sale of ownership and development rights for each of the parcels of land
and, for Site One, the Company's investment in construction in process. At June
30, 1998, development of the first phase of Site One, involving the construction
of 84 condominium units, was completed and all units were sold. Site Two was
vacant on June 30, 1998 with no development yet commenced. At June 30, 1998, the
Company was evaluating various development and joint venture strategies with
respect to these properties. Such strategies would include, but not be limited
to, sales of one or both of the sites and various arrangements for a joint
venture to accommodate the development and sale of subparcels of the sites.
759883.5
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<PAGE>
The following table details activity with respect to loans sold with recourse
for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
The Bronx The Bronx
The Wayne Projects- Projects-
Project Site One Site Two Total
(Pool B) (Pool C) (Pool C)
-------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Investment at June 30,1996 $ 13,137 $ 11,210 $ 5,567 $ 29,914
Project fundings 2,268 5,763 -- 8,031
Unit sales (7,693) (3,801) -- (11,494)
Writedowns -- -- (2,000) (2,000)
------------- --------------- ----------------- ---------------
Investment at June 30, 1997 7,712 13,172 3,567 24,451
Project fundings 1,647 1,538 195 3,380
Unit sales (6,310) (5,740) -- (12,050)
Writedowns -- -- -- --
------------- --------------- --------------- -------------
Investment at June 30, 1998 $ 3,049 $ 8,970 $ 3,762 $ 15,781
============== ============== ============== ============
</TABLE>
Composition of Loans Sold with Recourse. Tables that set forth information
concerning the Company's loans sold with recourse portfolio at the dates
indicated are included on page 91 of this annual report on Form 10-K. See
"Financial Schedules".
Joint Ventures. During the mid- to late-1980s, the Predecessor Bank sought to
supplement the income derived from its mortgage activities by engaging in real
estate development activities, most commonly through participations in joint
ventures. These activities generally were conducted through subsidiaries of the
Predecessor Bank and, unlike loans, were intended to provide a return which was
based on the overall profitability of each project. The structure of each of the
Predecessor Bank's joint venture investments generally involved the formation of
a partnership between the Company's co-venturer and a subsidiary of the
Predecessor Bank. The Predecessor Bank's subsidiary generally had up to a 50%
interest in the partnership, which was responsible for the acquisition,
development and sale of a project. The Predecessor Bank's subsidiary generally
functioned as both a non-managing general partner and in many cases a limited
partner in the partnership. Upon completion and sale of a project, and after all
partnership obligations were satisfied, the Predecessor Bank's equity investment
was expected to be paid in full and any profits would then be distributed to the
partners in accordance with the terms of the partnership agreement.
At June 30, 1998, the Company held one investment in a joint venture project,
totaling $1.5 million. This joint venture project is a shopping center located
in Escondido, CA. Thirty-five percent of the joint venture is owned by the
Company. At June 30, 1997, the Company held three investments in joint ventures,
totaling $3.1 million. The three investments in joint venture projects at June
30, 1997 were (1) A shopping center located in Escondido, CA, 35% owned by the
Company (carrying value of $1.6 million), (2) Four industrial buildings and
adjacent land located in Sacramento, CA, 50% owned by the Company (carrying
value of $1.2 million), and (3) an industrial warehouse located in Cicero, IL,
50% owned by the Company (carrying value of $364,000).
During the year ended June 30, 1998, the Company sold a part of its investment
in the Sacramento, CA joint venture project for $423,000 and wrote off the
remainder of this investment ($756,000). In addition, during the year ended June
30, 1998, the Company also wrote off its investment in the Cicero, IL joint
venture project ($364,000).
At June 30, 1998, the Company did not have any material amounts left to be
funded pursuant to legally binding commitments relating to its joint ventures,
except certain ongoing operating expenses and limited amounts of capital
investment. Failure by the Company or its joint venture partner to fund
operating expenses, in the event that the underlying property does not generate
sufficient cash flow to meet its operating costs, could result in the loss of
the asset.
759883.5
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<PAGE>
Other Assets
Cash, Due from banks and Cash Equivalents. Included in cash, due from banks and
cash equivalents at June 30, 1998, are approximately $3.0 million in funds
maintained on deposit by wholly-owned subsidiaries and required to meet ongoing
cash flow requirements of those subsidiaries. At June 30, 1998, Marine had
restricted a total of $19.6 million in funds, held on deposit with Marine, in
accordance with the terms of the Branch Sale and the Marine Facility agreements.
At June 30, 1997, Marine had restricted a total of approximately $5.1 million.
Restricted funds held by Marine are not available to the Company for the
settlement of any of the Company's current obligations. Of the $19.6 million
cash balance restricted by Marine at June 30, 1998, $5.0 million relates to
reserve amounts specified under the Branch Sale Agreement. The remaining
restricted cash reserves arose from the sale of assets which were pledged as
primary or additional collateral for the Marine Facility. The restricted cash
held by Marine is intended to serve as substitute collateral for the Marine
Facility until the Company and Marine negotiate the application or other use of
the funds in accordance with the Company's Asset Management Plan and the terms
of the Marine Facility agreements.
Investment Securities. The following table sets forth the Company's investment
securities portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Securities:
Marketable Equity Securities
Common $ 2,299 $ 2,298 $ 2,298
Preferred -- -- --
Valuation allowance (926) (1,105) (1,218)
------------ ------------ ------------
Total 1,373 1,193 1,080
Non-marketable Equity Securities, net -- 5,082 4,605
------------ ------------ ------------
Total Equity Securities, net 1,373 6,275 5,685
----------- ------------ ------------
Total Investment Securities, net (1) $ 1,373 $ 6,275 $ 5,685
========== =========== ===========
</TABLE>
(1) At June 30, 1998, 1997 and 1996, all of the Company's investment
securities were classified as available for sale and carried at market
value in accordance with SFAS-115. See Note 1 to the Consolidated
Financial Statements.
At June 30, 1998, the Company's investment in common stock was comprised of
investments in the common stock of one corporate issuer.
The Company's investments in equity securities prior to June 30, 1997 include a
historically required investment in the FHLB of New York, redeemed during the
Company's 1997 fiscal year, which amounted to $9.0 million at June 30, 1996. The
Company's investments in equity securities prior to June 30, 1998 also include
investments, liquidated in 1997, in two service organizations, which amounted to
$790,000 at June 30, 1996. These organizations previously provided data
processing and related services to their shareholders, which included the
Predecessor Bank, on a cooperative basis.
The Company held no debt securities as of June 30, 1998 and 1997. For additional
information relating to the Company's investment securities, see Note 7 to the
Consolidated Financial Statements.
Commercial Business and Consumer Loans. The Company has been collecting the
portfolio of commercial business and consumer loans, which consisted of $6.1
million of commercial business loans, net of provision for possible credit
losses, $2.0 million of consumer loans at June 30, 1998. Of the $6.1 million
commercial business loans in the Company's portfolio at June 30, 1998, $6.1
million, or 100%, was classified as non-performing and maintained on non-accrual
status. Of the $2.0 million consumer loans in the Company's portfolio at June
30, 1998, $2.0 million or 100% was classified as non-performing.
The Company's commercial business loans previously consisted primarily of loans
which involved the buyout, acquisition or recapitalization of an existing
business (including management buyouts and corporate mergers and acquisitions).
Such loans involved a high degree of risk in their origination since such
transactions frequently resulted in a substantial increase in both the
borrower's liabilities and its liabilities-to-assets leverage ratio, thus
increasing the prospects for default. At June 30, 1998 all of the Company's
commercial business loans had fixed rates of interest and stated maturities
greater than five years.
759883.5
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<PAGE>
Other assets. The Company held other assets equal to $4.2 million and $2.2
million at June 30, 1998 and 1997, respectively. At June 30, 1998, other assets
were primarily composed of deposits against asset sale recourse claims, accrued
interest receivable, net of interest reserves, and other prepaid assets. At June
30, 1997, other assets were primarily composed of accrued interest receivable,
net of interest reserves, and other prepaid assets.
The increase in other assets of $2.0 million from June 30, 1997 to June 30, 1998
was primarily attributable to deposits in the amount of $2.1 million made during
1998 against recourse claims related to the Pool B asset sale transaction
completed on June 28, 1996. Such deposits were made to terminate the recourse
provisions of the Pool B asset sale transaction and interest expense to the
Company subsequent to December 1997. These deposits will be refunded to the
Company when the remaining $2.1 million in recourse debt related to Pool B is
repaid from asset sales proceeds. See "Asset Sale Transactions," and Note 15 to
the Consolidated Financial Statements.
Asset Sale Transactions
In connection with, and to facilitate the closing of, the Branch Sale, the
Company consummated $60.4 million of Asset Sale Transactions. The Asset Sale
Transactions, which were arranged by RB Management Company LLC, were structured
to include ongoing recourse to, and participation by, the Company with respect
to the assets sold, based upon the proceeds realized by the purchasers. The
assets included within each pool of assets sold and the nature of related
recourse provisions are described below. The Asset Sales Transactions were
entered into with five entities, each of which was independent of the Company
and Alvin Dworman, who owns 39% of the common stock of the Company and 100% of
RB Management, LLC. In connection with the Asset Sale Transactions, entities
controlled by Mr. Dworman loaned $12.8 million to the five entities on a
non-recourse basis.
Assets included within each pool sold were, with the exception of Pool C (the
Bronx Projects), believed by the Company and the purchasers to be in the final
process of disposition by the Company. In essence the Asset Sale Transactions
resulted in the acceleration of the receipt of disposition proceeds which the
Company expected to realize on the included assets in fiscal years immediately
following the Company's 1996 fiscal year.
In each of the Asset Sale Transactions, the Company sold a pool of assets and
received a 20% cash down payment and non-recourse purchase money notes (the
"Purchase Money Notes") which approximated 80% of the sale price. In all cases,
except for Pool C, the Purchase Money Notes had maturity dates, including any
extension options, of less than one year from June 30, 1996. The maturity date
on the Pool C Purchase Money Note was three years. The Company also received
additional contingent proceeds notes for each of the five pools which provided
the Company with rights to receive proceeds from subsequent asset sales by
purchasers in excess of the initial sales price after the purchaser had received
a return of 8%, a transaction fee of 25 basis points and reimbursement of
certain transaction expenses. In the event that proceeds of subsequent assets
sales exceed specified amounts for each pool, such amounts were to be retained
by the purchaser.
The Company received aggregate cash down payments of $12.8 million in connection
with the Asset Sale Transactions. The Purchase Money Notes, aggregating $47.6
million, were included in the assets delivered to Marine in connection with the
Branch Sale.
The Company made representations and warranties (the "Recourse Provisions")
with respect to the assets sold which included, among other things, the present
condition of each asset, the nature of disposition arrangements which had been
entered into by the Company prior to June 28, 1996 and that each of the assets
was free of any liens or encumbrances. The Recourse Provisions also included
representations with respect to certain of the assets that the Company had taken
all actions to effect specific proposed dispositions or had made arrangements
with third parties to complete actions required to effect such dispositions.
For accounting purposes the Company accounted for the Asset Sale Transactions
included in Pools B and C as financings, primarily due to their longer term
nature and the more substantial risks related to ongoing construction for the
assets included in each of the Pools. Pool B and C Asset Sale Transactions have
been included in the Company's consolidated financial statements as loans sold
with recourse. Related financing for such assets has been included in the
Company's consolidated financial statements as Borrowed Funds, secured by assets
sold with recourse. The Company believes that it has made adequate provision at
June 30, 1998 for all recourse amounts expected to result from the sale of the
assets included in Pools B and C.
759883.5
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<PAGE>
For accounting purposes the Company accounted for the Asset Sale Transactions
included in Pools A, D, and E as sale transactions since each of the financial
receivables, asset sale contracts or other proceeds included in these pools
represented reasonably estimable amounts, including related recourse claims, in
transactions with limited duration. Substantial proceeds from dispositions
conducted within Pools A, D and E were realized by the purchasers during the
fiscal year ended June 30, 1997 with the reminder being realized during the
fiscal year ended June 30, 1998. Assets included in Asset Sale Transactions, and
a description of the assets sold, were as follows:
Pool A
Pool A originally included $13.8 million in assets, composed of $12.0 million of
receivables related to the collection of certain federally guaranteed, defaulted
student loans and other student loan related claims from the Student Loan
Marketing Agency ("SLMA") (collectively, the "Student Loan Receivables") and
$1.8 million related primarily to delinquent single family residential loans
(collectively the "Single Family Receivables").
The Company's aggregate investment in the Student Loan Receivables and the
Single Family Receivables prior to the Asset Sale Transactions approximated
$12.4 million and $7.1 million, respectively.
During the year ended June 30, 1998, the Company elected to satisfy its debt to
the purchaser and reacquire, under the recourse terms of the Asset Sale
Transaction, the remaining unsold assets sold to the purchaser on June 28, 1996.
This action was undertaken to reduce the Company's ongoing interest expense and
related obligations under the debt agreement with the purchaser. As a result of
this action, and the realization of asset disposition proceeds during the 1998
fiscal year, at June 30, 1998 the purchaser had realized all anticipated
proceeds from its participation in the Asset Sale Transactions and all fundings
associated with the transaction had been retired by the Company.
At June 30, 1998, the remaining Student Loan Receivables balance, net of
applicable reserves, was $1.9 million. This balance is carried by the Company as
a component of it commercial and consumer loans. This balance represented claims
which had been filed with state processing agencies for reimbursement for which
the Company expected to receive more timely reimbursement. At June 30, 1998, the
remaining Single Family Receivables balance, net of applicable reserves, of $1.1
million were in the process of being disposed of through amortization and sales
of individual loans or, to a lesser degree, sales of real estate owned to bulk
buyers or individuals. This balance is carried by the Company as loans secured
by real estate.
Pool B
At June 30, 1996, Pool B was composed of a mortgage loan in the amount of $13.0
million secured by land and construction in process related to a single-family
condominium project in Wayne, New Jersey (the Wayne Project). The Company's
aggregate investment in the Wayne Project prior to the Asset Sale Transactions
approximated $13 million.
At June 30, 1998, the Wayne Project is in the final phase of a three-phase
development and all remaining units are under contract to be sold. The Company
believes that the Wayne Project will be fully completed and all individual units
sold prior to June 30, 1999. The Company's remaining investment in the Wayne
Project, net of applicable reserves, was $3.0 million at June 30, 1998. At June
30, 1998, all Marine debt related to this asset has been repaid and $2.1 million
of recourse debt remained payable to a third party.
Pool C
Pool C included contracts of sale, in the amount of $11.0 million for two
adjacent parcels of land located in the Bronx, New York (the "Bronx Projects").
The Company's investment in the Bronx Projects prior to the Asset Sale
Transactions aggregated $17.7 million, including $12.1 million for one site
("Site One") and $5.6 million for a second site ("Site Two"). The sale contract
for the Bronx Projects represented the sale of ownership and development rights
for each of the parcels of land and, for Site One, the Company's investment at
June 28, 1996 in construction in process.
At June 30, 1998, the Company's remaining investment in the Bronx Projects
aggregated $12.7 million, including $9.0 million for Site One and $3.7 million
for Site Two. At June 30, 1998, development of the first phase of Site One,
involving the construction of 84 condominium units, was completed and all units
were sold. Site Two was vacant on
759883.5
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<PAGE>
June 30, 1998 with no development yet commenced. At June 30, 1998, the Company
was evaluating various agreements for a joint venture to accommodate the sale of
these properties. Such strategies would include, but not be limited to, sales of
one or both of the sites and joint venture arrangements for the development and
sales of subparcels of the sites.
Payments made to reduce the remaining recourse claims related to the Pool C sale
were made from Bronx Project condominium unit sales proceeds to Marine and to a
third party lender aggregating $2.1 million and $2.2 million, respectively, in
the year ended June 30, 1998 and $600,000 and $0, respectively, in the year
ended June 30, 1997. Such payments reduced the outstanding amount payable to
Marine and the third party lender to $6.1 million and $0, respectively, at June
30, 1998 and to $8.2 million and $2.2 million, respectively, at June 30, 1997.
Pool D
Pool D, with an aggregate sales price of $14.3 million, included six individual
real estate properties, located in New York State, New Jersey and California
(collectively, the "Real Estate Properties"). The Company's aggregate investment
in the Real Estate Properties prior to the Asset Sale Transactions aggregated
$16.1 million. Each of the properties included in Pool D were either under
contract of sale or contracts of sale for the remaining assets were being
actively negotiated. All properties were disposed of during 1997 with the
exception of one property. This property had a remaining asset balance of
approximately $2.0 million at June 30, 1998.
During the year ended June 30, 1998, the Company elected to satisfy its debt to
the purchaser and reacquire, under the recourse terms of the Asset Sale
Transaction, the remaining unsold asset sold to the purchaser on June 26, 1998.
This action was undertaken to reduce the Company's ongoing interest expense and
related obligations under the debt agreement with the purchaser. As a result of
this action, at June 30, 1998 the purchaser had realized all anticipated
proceeds from its participation in the Asset Sale Transactions and all debt
associated with the transaction had been retired by the Company.
Pool E
Pool E, with an aggregate sales price of $8.3 million, included the rights to
proceeds from sale of two joint venture projects, the sale of which was
scheduled to close within 90 days, rights to proceeds of sale of 35 condominium
projects located in New York City, a mortgage secured by cooperative apartment
units in New York City and a mortgage secured by a multi-family apartment
complex in New York State (collectively, the "Venture Proceeds and Residential
Mortgages Pool"). The Company's aggregate investment in the Venture Proceeds and
Residential Mortgages Pool prior to the Asset Sale Transactions aggregated $11.6
million. Each of the assets included in Pool E was disposed of during fiscal
1997 and consequently, the purchaser had realized all anticipated proceeds from
its participation in the Asset Sale Transactions and all debt associated with
this transaction had been retired by the Company prior to June 30, 1997.
Sources of Financing
Subsequent to the Branch Sale, the primary source of the Company's financing has
been secured financing provided by Marine.
The closing of the Branch Sale was conditioned upon the Company's obtaining
financing with terms and in an amount reasonably acceptable to the Company and
determined to be reasonably adequate to permit consummation of the Branch Sale.
The Company obtained from Marine the Facility, consisting of eleven independent
mortgage loans with additional collateral, in an aggregate amount not to exceed
$99.06 million. Proceeds of the Facility were utilized by the Company to (i)
refinance all or part of the certain indebtedness secured by assets to be
transferred to Marine, including all or a substantial part of the outstanding
advances from the FHLB and (ii) provide additional funds for the development and
completion of two individual real estate assets as part of the Company's
operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts which are equal to 60% and 30% of the original aggregate amount of the
Facility and remaining fully current on all obligations and in compliance with
all covenants.
759883.5
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<PAGE>
The Facility is priced at 175 basis points over LIBOR for the initial six months
following June 28, 1996, automatically increasing by 25 basis points at the
beginning of each of the subsequent three six-month periods and will be priced
at 275 basis points over LIBOR for the third year of the Facility. In the event
that the Company elects to exercise its option to extend the initial term of the
Facility, the Facility will be priced at 300 basis points over LIBOR during the
initial one year extension and 325 basis points over LIBOR during the second
one-year extension. Following maturity or an event of default, the Senior Debt
Financing (as defined below) will accrue interest at a specified default rate.
The Facility was initially secured by first priority mortgage liens on eleven of
River Bank's real estate assets approved by Marine and collateral assignments of
first priority mortgages held by River Bank (the "Primary Collateral"). Each of
the loans are cross-defaulted with each other and cross-collateralized by all
collateral for the Facility. As additional collateral for the Facility, each
loan is also secured by first priority mortgages (or, where applicable, a
collateral assignment of first priority mortgages held by the Company), stock
pledges and assignment of partnership interests and assignment of miscellaneous
interests on additional Bank assets (the "Additional Collateral"). The Company
collaterally assigned to Marine all of the cash flow from the Primary Collateral
and the Additional Collateral. All of the net cash flow from the Primary
Collateral and Additional Collateral will be applied to the prepayment of the
Facility. In addition, all net proceeds from the sale of any Primary Collateral,
and the proceeds from the sale of any Additional Collateral, is required to be
applied to the prepayment of the Facility subject to the Company's right to
establish reserves for its operating needs. The Company will be permitted to
prepay the Facility in whole or in part at any time without prepayment penalty
or premium (subject to customary LIBOR breakage provisions).
The commitment letter for the Facility provided that the Company could continue
to pursue additional debt financing of up to $25 million of additional debt
financing from other lenders or, in the alternative or in combination,
accelerate the Company's disposition of assets so as to reduce or eliminate its
need for supplemental financing. If the Company pursued additional debt
financing, the proceeds of such financing would be required to be utilized in a
manner approved by Marine (which might include the application of a percentage
of such proceeds to the prepayment of the Senior Debt Financing), such financing
could not be secured by any assets which are Primary Collateral and the lender
must enter into an intercreditor agreement with Marine satisfactory to Marine.
If the Company elects to accelerate its disposition of assets, such dispositions
must be of assets which are not Primary Collateral and the proceeds of such
asset dispositions will be required to be utilized in a manner approved by
Marine (which may include the application of a percentage of such proceeds to
the prepayment of the Senior Debt Financing). Such proceeds, received during the
1998 Fiscal Year, are currently held by Marine as restricted cash ($19.6 million
at June 30, 1998) pending negotiations with Marine as to the application of the
proceeds.
Additionally, Marine initially indicated that it would be willing to consider a
request by the Company for an increase in the Facility by an amount not to
exceed an additional $25 million in mortgage loans (such increase in the
Facility, together with the initial Facility, the "Senior Debt Financing"). Any
increase in the Facility was subject to Marine's approval and was to be secured
by additional mortgaged properties of the Company or collateral assignments of
mortgage loans of the Company acceptable to Marine, in its sole discretion. In
addition, any increase in the Facility will be subject, among other things, to
the acceptability to Marine of the terms of all regulatory approvals or
restrictions associated with the Company's continuing operations. The increase
in the Facility, if any, would be utilized by the Company only to facilitate the
retirement of the Series A Preferred Stock. The Company has been advised by
Marine that it has no intent to provide additional financing for this purpose at
this time.
The Loan Agreement requires that while any amounts remain outstanding under the
Senior Debt Financing, the Company must receive Marine's prior written consent
to, among other things, materially alter its charter or by-laws, incur
additional corporate indebtedness and liens, make any distributions to
stockholders or repurchases or redemptions of capital stock, acquire additional
assets, exchange existing assets with a third party or assume additional
liabilities as a result of any proposed merger transaction.
As a former member of the FHLB, River Bank had, prior to June 28, 1996, been
eligible to obtain borrowed funds from the FHLB, subject to the availability of
collateral, which was sufficient, in the judgment of the FHLB, to fully secure
advances and compliance with other applicable requirements. The outstanding FHLB
financing prior to June 28, 1996, was previously fully secured by individual
assets of the Company, a substantial amount of which were being sold to Marine
as part of the Branch Sale. As a result, the Company was required to repay or
refinance substantially all of its FHLB indebtedness at or prior to the closing
of the Branch Sale. At June 30, 1998 and 1997, the Company had no outstanding
advances from the FHLB of New York. As a consequence of the Branch Sale and,
further, the Reorganization, the Company is no longer a member of the FHLB or
eligible to become a member. Consequently, FHLB financing is no longer an
available source of funds for the Company.
759883.5
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Deposits. As a Delaware corporation, the Company may no longer accept any
banking deposits and such deposits are no longer a potential source of funds
available to the Company. The Predecessor Bank had not offered any banking
deposit products subsequent to the Branch Sale. Prior to the Branch Sale,
deposits obtained through retail banking offices of the Predecessor Bank had
traditionally been the primary source of the Company's funds for use in lending
and for other general business purposes.
Borrowed Funds. The following table sets forth certain information concerning
the Company's borrowed funds at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
FHLB Advances $ -- $ -- $ 2,026
Marine Initial Facilities 60,557 66,066 89,760
Secured by loans sold
with recourse 8,203 18,206 24,000
--------------- -------------- -------------
Total $ 68,760 $ 84,272 $ 115,786
=============== ============== =============
</TABLE>
For additional information relating to the Company's borrowed funds, see Asset
Sale Transactions and Note 16 to the Consolidated Financial Statements.
Subsidiaries
Under the Banking Law, which had applied to the Predecessor Bank prior to the
Reorganization, the Company previously invested in subsidiaries which engaged in
various activities authorized for savings banks, as well as additional
activities authorized by the Banking Department. These activities were subject
to the requirements of federal laws and regulations.
A substantial amount of the Company's activities in subsidiaries consists of
holding investments in real estate not held directly by the Company. The Company
has established a number of subsidiaries for the sole purpose of holding and/or
disposing of a single real estate asset. Real estate assets located in New York
City are generally held by subsidiaries of Rivercity Realty Corp. ("RRC"), and
those located in the eastern United States including New York State are held by
subsidiaries of Riverbank Properties, Inc. ("RPI") and certain other
subsidiaries of the Company. RRC and RPI are New York corporations. The
Company's investments in real estate located in the western United States are
generally held by subsidiaries of Riverbank Financial Group ("RFG"), a
California corporation which had an office in San Francisco. RPI, RRC and RFG
were originally formed to engage in real estate development and lending
activities.
A wholly-owned subsidiary of the Company, East River Financial Group, Inc.,
previously sold on an agency basis certain tax-deferred and variable annuities
issued by specified insurance companies. This subsidiary ceased origination and
sale activity as of the date of the Branch Sale.
Employees
Following the consummation of the Branch Sale by the Predecessor Bank, at June
30, 1996, the Company had 37 full-time and 13 part-time employees. At June 30,
1997 the Company maintained a full-time staff compliment of four personnel, the
President and Chief Executive Officer, one employee who performs administrative
functions and two employees directly involved in day-to-day management of
certain real estate properties. Due to the retirement of the Company's President
and Chief Executive Officer, at June 30, 1998 the Company had only one employee.
That employee continued to be involved in administrative functions. Subsequent
to June 30, 1998, the Company increased its staff to two with the appointment of
a new President and Chief Executive Officer. See Note 14 to the Consolidated
Financial Statements. See "Directors and Principal Officers of the Registrant."
759883.5
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Taxation
Federal Income Tax Considerations of the Reorganization. The following
discussion summarizes the principal material federal income tax considerations
of the Reorganization. Except as otherwise indicated, conclusions of tax
treatment, tax effect, or tax consequences set forth in this section are based
on the Internal Revenue Code (the "Code"), Regulations of the United States
Treasury Department thereunder, Internal Revenue Service ("IRS" or the
"Service") Rulings, and judicial and administrative decisions in effect as of
the date of the Reorganization, all of which are subject to change at any time,
possibly with retroactive effect. Such conclusions have no binding effect on the
IRS or the courts. Roberts & Holland LLP, special tax counsel to River Bank, has
provided an opinion, in the form attached as an exhibit to the Registration
Statement of River Distribution Sub, Inc and River Asset Sub, Inc., filed on
Form S-4, to the effect that the discussion set forth under the caption "Tax
Consequences of the Reorganization" below as to the characterization of the
transaction as a "reorganization" under section 368 of the Code is correct. As
with all such complex matters, there is a risk that the IRS could disagree with
the conclusions stated herein and in the opinion of counsel.
Tax Consequences of the Reorganization. The Reorganization was structured and
implemented in a manner intended to constitute a tax-free "reorganization" for
Federal income tax purposes, within the meaning of section 368 of the Code.
Assuming that the Reorganization did constitute such a "reorganization," the
following consequences would pertain:
1. The transaction would be treated for Federal income tax purposes as
though River Bank had transferred substantially all of its assets to
the Company in exchange for RB Asset, Inc. capital stock followed by a
distribution of the RB Asset, Inc. capital stock by River Bank to its
stockholders in exchange for their River Bank capital stock in
constructive liquidation of River Bank.
2. No gain or loss would be recognized to a holder of River Bank Common
Stock who is deemed to exchange such stock for RB Asset, Inc. common
stock ("RB Asset Common Stock"). No gain or loss would be recognized to
a holder of River Bank Series A Preferred Stock who is deemed to
exchange such stock for RB Asset, Inc. series A preferred stock ("RB
Asset Series A Preferred Stock"). The basis of any RB Asset Common
Stock or RB Asset Series A Preferred Stock would continue to be the
same as that of the River Bank Common Stock or River Bank Series A
Preferred Stock, respectively, deemed exchanged therefor. In
determining the period for which a holder of RB Asset Common Stock or
RB Asset Series A Preferred Stock has held such stock received in the
Reorganization, there will be included the period for which such holder
held the River Bank Common Stock or River Bank Series A Preferred Stock
deemed exchanged therefor. The foregoing conclusions do not address
taxation to holders of the River Bank Series A Preferred Stock of the
dividend declared, but not paid, for the quarter ended June 30, 1996.
Those holders should consult their own tax advisers concerning the tax
treatment of such dividends.
3. No gain or loss will be recognized by River Bank on its disposition or
distribution of property in connection with the Reorganization. The
basis of the property of River Bank acquired by RB Asset, Inc. shall be
the same as it would be in the hands of River Bank. RB Asset, Inc. will
succeed to and take into account various tax attributes of River Bank
(including net operating loss carryforwards, to the extent not used to
offset income or gain of River Bank, and accumulated earnings and
profits).
The Reorganization was reasonably characterized as a tax-free "reorganization."
However, the ability of the Reorganization to qualify as a tax-free
reorganization turns on certain unresolved and complex issues of tax law as to
which there are no clearly established legal precedents and for which the
Company has not requested a ruling from the IRS. As a result, the IRS or a court
could determine that the Reorganization did not constitute a tax-free
reorganization. If such a determination were made and sustained, certain of the
tax consequences described above would not apply. In particular, the Predecessor
Bank's stockholders would be required to recognize gain upon the deemed
exchanges of River Bank capital stock for RB Asset Common Stock and RB Asset
Series A Preferred Stock to the extent that the fair market value of any RB
Asset, Inc. capital stock received exceeded the basis of the River Bank capital
stock deemed exchanged therefor, and their holding period would begin on the
date of the exchange. Recognition of loss on such deemed exchanges might not be
allowed until the stockholders dispose of some or all of their RB Asset, Inc.
capital stock. Moreover, the Predecessor Bank would be required to recognize
gain on its disposition and distribution of property in connection with the
Reorganization and any loss on such disposition and distribution may be required
to be deferred until RB Asset, Inc. were to sell the assets to an unrelated
third party, and, to the extent its tax attributes were not used to offset any
gain, RB Asset, Inc. would not succeed to them.
759883.5
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<PAGE>
See "Tax Consequences of Holding RB Asset Common Stock and RB Asset Preferred
Stock" in the Registration Statement of River Bank America, filed on Form S-4,
for a summary of the tax effects of holding the Reorganization on RB Asset
Common Stock and RB Asset Preferred Stock subsequent to the Reorganization.
Certain Tax Attributes. As of June 30, 1998, the Bank had recorded a gross
deferred tax liability of approximately $19.2 million in its consolidated
financial statements. Also, as of June 30, 1998, the Bank had recorded a gross
deferred tax asset of approximately $68.6 million, primarily attributable to net
operating loss carryforward attributes ("NOLs") of approximately $88.9 million,
reserves for loan losses and real estate valuation allowances of approximately
$12.2 million and general business and alternative minimum tax credits of
approximately $10.7 million. The Company's ability to realize the excess of the
gross deferred tax asset over the gross deferred tax liability is dependent upon
its ability to earn taxable income in the future. As a result of recent losses
and other evidence, this realization is uncertain and a valuation allowance has
been established to reduce the deferred tax asset to the amount that management
of the Bank believes will more likely than not be realized. Accordingly, neither
a net overall liability nor a net overall asset was reflected in the Bank's
consolidated financial statements. The tax attributes associated with the
deferred tax assets have not been reviewed or approved by the IRS. As described
further below, the Equity Offering and related transactions may have adversely
affected the ability of the Bank to realize its deferred tax assets, with the
effect that the Bank would have an overall net deferred tax liability and
concomitant reduction to its stockholders' equity. As a result, the Bank could
be subject to substantial increased out-of-pocket tax expenditures.
Section 382 of the Code generally provides that if a corporation undergoes an
"ownership change," the amount of taxable income that the corporation may offset
after the date of the ownership change (the "Change Date") by NOLs (and certain
built-in losses, as described below) existing on the Change Date will be subject
to an annual limitation. In general, the annual limitation is equal to the
product obtained by multiplying (i) the fair market value of the corporation's
equity immediately prior to the Change Date (with certain adjustments, including
an exclusion of capital contributions made during the two years preceding the
Change Date), by (ii) the long-term tax-exempt bond rate determined for the
month in which the Change Date occurs, as published by the IRS. For "ownership
changes" occurring during June 1994, that rate is 6.01%. If an "ownership
change" of the Bank took place during June 1994, the Bank might be permitted to
use no more than approximately $865,000 of its NOLs annually to offset taxable
income realized after the Change Date, including income which will be realized
in connection with the Branch Sale. Accordingly, the Bank's ability to use its
deferred tax assets may be reduced materially, resulting in the recognition of
additional tax expense and a reduction to its stockholders' equity and the
Company's liquidity.
Built-in losses, measured by the excess, if any, of the tax basis of each asset
of the corporation over its fair market value, also may be limited under Section
382, if, as is believed to be the case with respect to the Bank, the corporation
had a net unrealized built-in loss in excess of the lesser of $10.0 million or
15% of the fair market value of its assets, and if the built-in losses are
recognized within five years after the Change Date. Certain deductions that have
accrued economically on the Change Date and would otherwise have been taken
after the Change Date (possibly including suspended passive activity losses) may
also be treated as built-in losses.
In general, an "ownership change" occurs with respect to a corporation if any of
its stockholders who own, directly or indirectly, five percent or more of the
stock of the corporation ("5-percent stockholders") increase their aggregate
percentage ownership of such stock by more than 50 percentage points over the
lowest percentage of stock owned by those stockholders at any time during a
three-year testing period. In applying Section 382, newly-issued stock generally
is considered to have been acquired by one or more 5-percent stockholders, even
if none of the persons acquiring that stock in fact owns (or owned) at least
five percent of the issuer's stock.
Based on current ownership information available to the Company, the Company is
of the view that no ownership change of the Bank occurred within the three years
preceding and three years succeeding the Equity Offering. The Bank expects that
the Equity Offering, when combined with prior changes in ownership of stock of
the Bank and other contemplated transactions affecting ownership of the capital
stock of the Bank occurring in connection with the Equity Offering, did not
result in an ownership change of the Bank. However, the application of Section
382 is in many respects uncertain. In assessing the effects of prior
transactions and of the Equity Offering under Section 382, the Bank has made
certain legal judgments and certain factual assumptions. The Bank has not
requested or received any rulings from the IRS with respect to the application
of Section 382 to the Equity Offering and the IRS could challenge the Bank's
determinations.
759883.5
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<PAGE>
Although it may not have caused an ownership change, the Equity Offering caused
a significant increase in the percentage ownership of stock of the Predecessor
Bank by one or more new 5-percent stockholders. Specifically, the Company
believes that the Equity Offering resulted in 5-percent stockholders increasing
their ownership for purposes of Section 382 of the Code by approximately 49
percentage points. Therefore, the Equity Offering significantly increased the
likelihood that relatively small future issuances of, or transactions in or
affecting the direct or indirect ownership of, shares of Common Stock would
result in an ownership change.
As part of its efforts to avoid any limitation under Section 382 of the Code on
the use of its NOLs and other tax attributes, each of Mr. Dworman, Odyssey
Partners, L.P. and East River Partnership B agreed to certain restrictions on
the transfer of the Common Stock and any other security of the Company which is
deemed to be "stock" for purposes of Section 382 of the Code and regulations
promulgated thereunder for a five-year period following consummation of the
Equity Offering. These restrictions on transfer are intended to reduce, but do
not eliminate, the possibility that there may be a future ownership change
affecting the ability of the Bank to use its then-existing losses, loss
carryovers and built-in losses. Mr. Dworman, as the largest stockholder of the
Bank following the Equity Offering, may continue to exert substantial influence
over decisions made by the Company's Board, including its decisions whether to
approve a transfer of stock of the Bank that could result in an ownership
change, with the above-described consequences.
Section 269(a)(1) of the Code generally provides that, if one or more persons
acquire control of a corporation and the principal purpose of the acquisition is
to evade or avoid federal income tax by securing the benefit of a deduction,
credit or other allowance which those persons or the corporation would not
otherwise enjoy, then the IRS may disallow the corporation's deductions, credits
or other allowances. For this purpose, "control" means ownership of stock
possessing either at least 50% of the voting power or at least 50% of the total
value of all classes of stock of the corporation. Although the Bank's Equity
Offering resulted in one or more persons acquiring control of the Bank, the Bank
understands that the principal purpose of the investors for participating in the
Equity Offering was not to avail themselves of any tax benefits of the Bank. It
is possible, however, that the IRS may challenge this view. If any such
challenge were successful, the Bank could lose its future ability to use its
losses, loss carryovers and built-in losses to offset its future income.
Federal Taxation. For federal income tax purposes, the Company reports its
income and expenses using the accrual method of accounting. The Company and
certain of its subsidiaries file consolidated federal income tax returns on a
fiscal year basis and are subject to federal income tax under the rules of the
Internal Revenue Code ("Code") in the same manner as other corporations.
Pursuant to the Omnibus Budget Reconciliation Act of 1993, signed into law by
President Clinton on August 10, 1993, the maximum federal corporate income tax
rate increased to 35%, effective January 1, 1993. In addition to regular income
taxes, corporations such as the Company are subject to an alternative minimum
tax which is generally equal to 20% of the excess of alternative minimum taxable
income (taxable income, increased by tax preference items and adjusted for
certain other tax items) over regular income taxes. A portion of alternative
minimum taxes paid can be credited against regular taxes due in later years,
subject to certain limitations.
In prior years, the Predecessor Bank maintained "qualifying assets," as defined
in the Code, in excess of 60% of its assets on an unconsolidated basis, and as a
result was considered to be a "domestic building and loan association" which was
able to use the percentage of taxable income method for computing a deductible
addition to its bad debt reserve for federal, state and local income tax
purposes. Beginning in 1992, the Predecessor Bank failed to maintain qualifying
assets in excess of 60% of total assets and, as a result, was no longer
considered a "domestic building and loan association," but was considered to be
a "bank" for federal income tax purposes. As a result, as of December 31, 1992,
the Company had recaptured the entire balance of the bad debt reserve which it
had previously maintained for federal tax purposes while it was a "domestic
building and loan association" into taxable income. Due to operating losses
incurred in 1991 and 1992, however, no tax was required to be paid on the
recaptured amount.
As of June 30, 1998, the Company had four existing tax attributes which could be
used to reduce federal tax liabilities in the current and future years. These
are its passive activity loss carryforwards and credits, net operating loss
(NOL) carryforwards, and general business and alternative minimum tax credits,
each of which is discussed below and in Note 19 to the Consolidated Financial
Statements.
At June 30, 1998, the Company had suspended passive activity losses for federal
income tax purposes of approximately $277,000 and suspended passive activity
credits (consisting of rehabilitation tax credits) which it has not been able to
utilize in prior periods and are subject to substantially similar limitations,
of approximately $8.2 million. In addition, tax credits of $1.0 million,
$784,000, and $555,000 were generated in 1998, 1997 and 1996, respectively, and
are considered non-passive. This credit is primarily attributable to the
Company's investment in the rehabilitation of an
759883.5
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historic multi-family residential project located in Philadelphia, Pennsylvania.
See Note 19 to the Consolidated Financial Statements for additional information.
The primary source of the Company's "passive" losses has been from losses
incurred by subsidiaries of the Company in real estate joint ventures, and
certain losses incurred by the Company in connection with real estate acquired
through foreclosure. "Passive" losses from these sources may be deducted against
the Company's "active income" other than its "portfolio income." For tax years
in which the Company is considered to be "closely held" within the meaning of
the Code, passive activity losses and credits in excess of the amounts currently
allowed are suspended and may be carried forward indefinitely to offset taxable
income and liabilities from passive activities or from an active trade or
business in future years, or will generally be fully deductible (but not
creditable) upon a complete disposition of the underlying passive activity.
These tax credits are only utilizable against tax liability which would
otherwise be incurred, and, accordingly, can not be used until after the
available deductible loss carryforwards have been utilized.
The passive activity loss limitations applied to the Company in prior years
because the Company was considered to be "closely held" within the meaning of
the passive activity loss limitation rules set forth in the Code. The Company
was previously considered to be "closely held" for this purpose because more
than 50% of the value of its outstanding stock was owned, directly or
indirectly, by or for not more than five individuals. The determination of stock
ownership for the purposes of the passive activity loss limitation rules differs
from the requirements of Section 382 of the Code with regard to the ownership of
certain preferred stock (see Note 18 to the Consolidated Financial Statements).
As a result of the Equity Offering, the Company believes that it is not "closely
held" for purposes of the passive activity loss rules following consummation of
the Equity Offering notwithstanding the absence of the occurrence of an
"ownership change" for purposes of Section 382 of the Code. The passive activity
loss limitation rules will continue to apply to losses and credits from any
preceding period during which the Company was "closely held," but current losses
and credits are not subject to treatment as passive activity losses.
At June 30, 1998, the Company had NOL carryforwards for federal income tax
purposes of approximately $88.9 million. The Company's NOLs may be carried
forward 15 years and will expire in 2006 through 2013.
The Company is subject to Federal income tax on its operations conducted after
the Branch Sale and will recognize gain or loss at the time of the disposition
of those of its assets not sold therein. Commencing with the taxable year of the
making of any liquidating distribution with regard to the Series A Preferred
Stock, the Company will become subject to the passive activity loss limitation
rules and the "at-risk" rules of the Code and, if at least 60% of the Company's
"adjusted ordinary gross income" for any year is "personal holding company
income" (each as defined), the Company may be subject to a personal holding
company tax on its undistributed personal holding company income for such year.
The passive activity loss limitation and "at-risk" rules have not applied to the
Company during the period that the Series A Preferred Stock was outstanding
(although the Company has passive activity loss carryovers and credits arising
before that period) and the personal holding company rules have not applied to
the Company during the time that it has been a "bank" or a "domestic building
and loan association," each as defined in the relevant provisions of the Code.
At June 30, 1998, the Company had an alternative minimum tax credit carryforward
of approximately $2.5 million for federal income tax and financial reporting
purposes attributable to alternative minimum taxes paid in prior periods. This
tax credit is only utilizable against regular tax liabilities which would
otherwise be incurred, and, accordingly, can not be used until after the
available deductible loss carryforwards have been utilized.
The Company's federal income tax returns have been audited or closed without
audit by the IRS through its 1991 taxable year.
The IRS has reviewed the Company's federal income tax returns for calendar years
1991 and 1990 in connection with the Company's claims for refunds of taxes paid
in 1987 through 1989 as a result of the carryback of NOLs from 1991 and 1990.
The agent's adjustments have been issued to the Company. The adjustments, which
are not material, have been approved by the Joint Committee review and a final
assessment was issued.
For additional information regarding Federal tax matters, see Note 19 to the
Consolidated Financial Statements.
State and Local Taxation. Prior to May 22, 1998, the Company was subject to the
New York State Franchise Tax on Banking Corporations and to the New York City
Banking Corporation Tax (collectively, the "Banking Tax" rules). The
reorganization on May 22, 1998, and the dissolution of the Predecessor Bank
under New York State Banking Law, resulted in the new organization becoming (on
that date) subject to the New York State and New York City Corporate
759883.5
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tax rules, as opposed to the Banking Tax rules. The Corporate tax rules impose a
tax calculated on the greater of either tax imposed on net income or capital tax
base, as defined in the regulations.
In addition to the foregoing, the New York State Tax Law also imposes a
Metropolitan Transportation Business Tax surcharge equal to 17% of the portion
of the net New York State franchise tax (after deduction of any allowable
credits against tax) otherwise payable which is attributable to the Company's
gross income within New York City and in several other New York counties in the
New York Metropolitan Area. Also, New York State imposed through 1993 a
surcharge on banking corporations at a rate of 15% of the net franchise tax due
(after deduction of any allowable credits against tax). This rate was
effectively reduced to 2.5% for the Company's tax year ending December 31, 1996.
The Company files a combined New York State franchise tax return with several of
its currently active subsidiaries that do business in New York. The Company's
New York State tax returns have either been audited or closed without audit by
the New York State Department of Taxation and Finance through its 1984 taxable
year.
In October 1995, the Company paid New York State $2.0 million to settle all
amounts claimed including penalties and interest for the tax years 1985 and
1986. In addition, New York State agreed that no additional taxes will be
assessed for the years 1987, 1988 and 1989 as a result of any potential
adjustment to the bad debt reserve deduction reported for any of those years.
Please see the Company's Report F-3 filed for the month of October 1995 which is
incorporated herein by reference. In November 1995, the Company paid New York
State $761,000 to settle all amounts, including penalties and interest for the
calendar years 1987, 1988 and 1989.
The Company has filed claims for refunds of New York State and local franchise
taxes of approximately $1.2 million related to calendar year 1982. The basis of
such claims relates to the applicability of the exemption from such taxes when
net worth certificates ("Certificates") are outstanding. Certificates were those
issued to the FDIC by the Company under the 1982 Assistance Agreement. The
Company's initial refund claims were denied on the basis that the exemption was
applicable only during the period Certificates were outstanding and not for the
entire year. On October 13, 1994, a decision was rendered in a court case
involving a similar claim for refund on behalf of another savings institution
which confirmed the position taken by New York State in denying the Company's
initial refund claim. The Company continues to review the impact of this
decision on its position.
REGULATION
The references to laws and regulations which are applicable to the Company set
forth below and elsewhere herein do not purport to be complete and are qualified
in their entirety by reference to such laws and regulations.
General. The Company is a Delaware corporation that succeeded to the assets,
liabilities and business of River Bank as a result of a reorganization
consummated on May 22, 1998. Prior to the Reorganization, the Company was a
stock-form savings bank chartered under the laws of the State of New York, and
its remaining non-retail deposit accounts and escrow accounts were insured up to
applicable limits by the Bank Insurance Fund administered by the FDIC. The
Company was therefore subject to extensive regulation, examination and
supervision by the Banking Department and by the FDIC. For a summary of
regulations that were applicable to the Predecessor Bank, prior to the
Reorganization, see "Regulation" in the annual report on FDIC Form F-2, dated
June 30, 1997.
Marine assumed all the Company's remaining retail deposits in connection with
the Branch Sale, and so notified the FDIC. The Company ceased accepting deposits
on the date of the Branch Sale. At June 30, 1997, the Company continued to be
regulated by the FDIC and the NYSBD. On October 31, 1996 the Company requested
that the FDIC terminate its insurance of accounts in accordance with the
requirements of the NYSBD's approval of the Branch Sale. On April 14, 1997, the
Company received notice that the FDIC, as requested by the Company, intends to
terminate the Company's status as an insured state non-member Bank on December
31, 1997. Upon the issuance of such order by the FDIC, the Company was no longer
be subject to banking regulation by the FDIC but remained a banking organization
chartered and regulated by the Banking Department. In connection therewith, the
Company received from the Banking Department a waiver of any applicable New York
State deposit insurance requirements.
On May 22, 1998, River Bank completed its reorganization into a Delaware
corporation named RB Asset, Inc., under a plan that was approved at the
Predecessor Bank's special meeting of stockholders on May 1, 1998. RB Asset,
Inc., as the successor in the Reorganization, succeeded to the assets,
liabilities and business of River Bank.
759883.5
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<PAGE>
At this time, the Company remains subject to the information and reporting
requirements of the Exchange Act, as amended, administered by the SEC.
Restrictions on Dividends. In addition to the conditions imposed in connection
with approval by the NYSBD and Marine in connection with the Branch Sale,
dividends payable by the Predecessor Bank were also subject to restrictions
under the Banking Law. According to the Banking Law, dividends could only be
declared and paid out of net profits of a regulated bank. The approval of the
Superintendent would have been required if the total of all dividends declared
in any calendar year exceeded net profits for that year plus the retained net
profits of the preceding two years less any required transfer to surplus or a
fund for the retirement of any preferred stock.
The Company has previously received notice that the approvals necessary to
declare or pay dividends on the Company's outstanding shares of Series A
Preferred Stock would not be provided. In June 1996, the Predecessor Bank's
Board of Directors declared a Series A Preferred Stock dividend for the quarter
ending June 30, 1996, payment of which was subject to the receipt of required
approvals from the FDIC and the NYSBD (the Predecessor Bank's regulators at the
time), as well as Marine (the Predecessor Bank's and the Company's principal
lender). Primarily as a result of the above, neither the Company's or the
Predecessor Bank's Board of Directors has taken any action regarding a quarterly
dividend on the Company's Series A Preferred Stock for any of the quarterly
periods ended from September 30, 1996 through June 30, 1998. Although the
Company is no longer subject to the jurisdiction of either the FDIC or the
NYSBD, declaration or payment of future dividends on the Company's Series A
Preferred Stock will continue to be subject to the approval of Marine for so
long as the Facility remains outstanding. The Company has received notice from
Marine that the approval necessary to declare or pay dividends on the Company's
Series A Preferred Stock will not be provided at this time. There can be no
assurance that the Board of Directors of the Company will deem it appropriate to
pay dividends on the Series A Preferred Stock, even if permitted to do so by
Marine.
759883.5
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<PAGE>
ITEM 2
EXECUTIVE OFFICES AND OTHER PROPERTIES
During the year ended June 30, 1996 the Company terminated all remaining lease
obligations involving properties and executive offices. The Company is no longer
obligated under any material amounts of non-cancelable operating leases. During
1998, the Company paid rent in an aggregate amount that was not material to its
financial statements.
ITEM 3
LEGAL PROCEEDINGS
Litigation. The Company is involved in various legal proceedings occurring in
the ordinary course of business. Management of the Company, based on discussions
with litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be decided adversely to the Company's interests and
have a material adverse effect on the financial condition and operations of the
Company.
In recent periods, the Company has been involved in several legal proceedings
relating to certain commercial business loans and joint venture investments made
by Quest in the mid- to late-1980s. Upon the defaults of certain of these loans
and the bankruptcy of one of the joint venture participants, the Company and
Quest participated in a global settlement in September 1990 with an arbitrator
and accepted a $1.4 million payment in settlement of certain claims which the
Company and Quest believed were available. As reported in the Company's Current
Report on Form F-3 for the month of December 1994, all of such legal
proceedings, except for the Adversary Proceeding in the FBN Bankruptcy case
discussed below, have been settled. See also the Company's Report on Form F-3
for the month of December 1994, which is incorporated by reference herein.
Regarding the Adversary Proceeding entitled In Re FBN Food Services, Inc.,
Debtor, et al. v. River Bank America and Quest Equities Corp., United States
Bankruptcy Court, Northern District of Illinois, Eastern Division (Chapter 7 No.
91 B 08983, Adversary No. 92 A 00961), as reported in the Company's Current
Report on Form F-3 for the month of December 1994, on December 6, 1994, the
Bankruptcy Court issued a decision which dismissed Quest Equities and Quest
Realty as defendants and entered judgment against the Company for $1,400,000,
together with prejudgment interest of approximately $150,000. The decision of
the Bankruptcy Court was affirmed by the United States District Court for the
Northern District of Illinois. On appeal, the United States Court of Appeals for
the 7th Circuit affirmed certain portions of the lower court decision and
reversed other portions, remanding those issues to the Bankruptcy Court. The
Bankruptcy Court ordered the institution to which the collateral was pledged to
turn over the proceeds to the Trustee in the amount of $1,683,790. Proceedings
continue with regard to the disbursement of those funds by the Trustee; the
Company has a claim for a refund. Since the Company has satisfied the judgment,
it has no further exposure to the Bankruptcy Court Trustee.
Environmental Matters. Under various federal, state and local laws, ordinances
and regulations, an owner, operator or manager of real property, including under
certain circumstances the directors and officers of such entities, may become
liable for the costs of removal or remediation of certain hazardous substances
and materials released on or in its property or as a result of the disposal of
such substances or materials on the owner's or another person's property. Such
loans can impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release of such hazardous substances. The
presence of such substances, or the failure to properly remediate such
substances when released, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. Under certain
circumstances secured lenders may become exposed to environmental liabilities
if, among other things, they take on an active management role with respect to
the real estate property that is the subject of their security interest. While
the Comprehensive Environmental Response, Compensation and Liability Act
provides certain exemptions from liability for secured lenders, the scope of
such exemptions are limited and may not be applicable to all the assets
currently or previously owned by the Company and its subsidiaries.
The Company has not been notified by any governmental authority of any material
noncompliance, liability or other claim in connection with any of the real
estate properties currently owned or classified as in-substance foreclosures by
the Company or its subsidiaries, but it is aware of the presence of certain
hazardous substances and materials on certain of its properties (foreclosed and
in-substance foreclosed), which it has taken into account in connection with the
appraisals of such properties. The Company believes that the expected costs of
remediation of such conditions are not significant and would not materially
impair the Company's ability to sell such properties. It is the Company's
general
759883.5
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<PAGE>
practice to take title to a property only if a Phase I environmental audit
(which involves only limited procedures) does not reveal a risk of a material
environmental condition and to establish a separate subsidiary to hold each
newly-foreclosed property. There can be no assurance, however, that such audits
reveal all potential environmental liabilities that might exist with respect to
a foreclosed property, that no prior owner created any material unknown
environmental condition, that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in imposition of environmental liability on the Company or its
subsidiaries, or that the establishment of separate subsidiaries for foreclosed
properties will insulate the Company against potential environmental liability
relating to such properties.
759883.5
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<PAGE>
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company held its annual meeting of shareholders on September 16, 1998. The
Company's stockholders considered proposals to:
1. elect Edward V. Regan and James J. Houlihan as directors to serve for a
term of three years or until such directors' successors are elected and
shall have qualified ("Proposal 1");
2. ratify the appointment of Ernst & Young LLP as the independent auditors
of the Bank for fiscal year 1999 ("Proposal 2"); and
3. consider and vote upon a proposal to elect David J. Liptak and Jeffrey
E. Susskind as directors nominated by holders of RB Asset 15%
non-cumulative perpetual preferred stock, series A, $1.00 par value
(the "Series A Preferred Stock") for a term of one year or until such
directors' successors are elected and shall have qualified. ("Proposal
3").
According to the records of the Company and American Stock Transfer Company, the
Company's transfer agent ("AST"), there were a total of 7,100,000 shares of
common stock, $1.00 par value, of the Company (the "Common Shares") that could
be voted at the meeting, and 5,125,284 Common Shares were represented at such
meeting by the holders thereof or by proxy, which constitutes a quorum with
respect to Proposal 1 and Proposal 2.
According to the records of the Company and AST, there were a total of 1,400,000
shares of 15% non cumulative perpetual preferred stock, series A, $1.00 par
value, of the Company the ("Series A Preferred Shares") that could be voted on
Proposal 3 only, and that 1,201,700 Series A Preferred Shares were represented
at such meeting by the holders thereof or by proxy, which constitutes a quorum
with respect to Proposal 3.
The following table sets forth the number of votes in favor, the number of votes
opposed, and the number of abstentions (or votes withheld in the case of the
election of directors) with respect to each of the foregoing proposals:
Abstentions
Proposal Votes in Favor Votes Opposed (Withheld)
- --------------------------------------------------------------------------------
Proposal 1
Edward V. Regan 5,124,284 -- 1,000
James J. Houlihan 5,124,284 -- 1,000
- --------------------------------------------------------------------------------
Proposal 2 5,125,284 -- --
Proposal 3
David J. Liptak 1,201,700 -- --
Jeffrey E. Susskind 1,201,700 -- --
759883.5
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<PAGE>
PART II
ITEM 5
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Common Stock - The Common Stock of the Company is traded in the over-the-counter
market. As of September 21, 1998, the Company had approximately 12 holders of
record of its Common Stock. Prior to the Reorganization, River Bank Common Stock
traded in the over-the-counter market for which trading price information was
available. No trading price information for the Company's Common Stock is
available. Neither the Company nor River Bank have ever declared dividends on
their respective common stock. See "Regulation - Restrictions on Dividends" in
Item 1 hereof for certain information regarding the payment of dividends.
Stock Price
The table below shows the reported last trade prices of the River Bank Common
Stock during the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Quarterly Stock Prices
--------------------------------------------------
High Low Quarter End
---- ------ -----------
<S> <C> <C> <C>
First Quarter ended September 30, 1997 $ 6.375 $ 5.500 $ 6.000
Second Quarter ended December 31, 1997 6.125 5.750 5.875
Third Quarter ended March 31, 1998 5.625 5.500 5.560
Fourth Quarter ended June 30, 1998 (1) (1) (1)
</TABLE>
(1) - As of May 22, 1998, market quotations for RB Asset, Inc. common stock were
deleted from published listings due to an insufficient number of market makers
for the stock. The last trade price reported for the Predecessor Bank was $7.50
per share based on the most recent transaction prior to May 22, 1998.
Please reference the information contained in Note 18 of the Notes to
Consolidated Financial Statements.
759883.5
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<PAGE>
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
The following table sets forth selected consolidated financial and other data of
the Company at the dates and for the periods indicated. The data at June 30,
1998, 1997, 1996, 1995 and 1994 and for the years ended June 30, 1998, 1997,
1996, 1995 and 1994 (unaudited), have been derived from audited consolidated
financial statements of the Company, including the audited Consolidated
Financial Statements and related Notes included elsewhere herein and other
schedules prepared for item 6 of this document. At a meeting on September 21,
1994, the Board of Directors of the Company authorized management to change the
Company's fiscal year end from December 31 to June 30. The selected consolidated
financial and other data set forth below should be read in conjunction with, and
is qualified in its entirety by, the more detailed information included in the
Consolidated Financial Statements and related Notes, included elsewhere herein.
<TABLE>
<CAPTION>
June 30
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Total assets $ 190,910 $ 211,659 $ 285,478 $1,463,637 $1,541,368
Real estate held for investment 82,835 84,102 -- -- --
Real estate held for disposal, net 3,650 13,247 -- -- --
Investments in real estate, net (3) -- -- 146,440 231,302 233,286
Loans receivable:
Single-family residential 1,306 3,924 4,557 234,386 209,295
Multi-family residential 24,638 26,092 31,336 249,252 245,245
Commercial real estate 33,062 50,077 51,090 463,760 488,830
Construction -- -- -- 5,301 6,157
Commercial business -- -- 12,984 36,695 40,224
Consumer -- -- 3,038 21,274 15,421
Less:
Deferred fees and unearned discount -- -- -- (2,220) (3,880)
Allowance for credit losses (17,697) (25,787) (34,142) (33,985) (41,076)
-------- --------- --------- --------- ---------
Total loans receivable, net 41,309 54,306 68,863 974,463 960,216
Loans sold with recourse 15,781 24,451 29,914 -- --
-------- --------- --------- --------- ---------
Total loans, net and loans sold with recourse 57,090 78,757 98,777 974,463 960,216
Cash and due from banks and money 32,087 14,036 17,129 108,540 173,631
market instruments
Investment securities, net and investment
securities available for sale (2) 1,373 6,275 5,685 31,372 49,185
Commercial and consumer loans, net 8,091 9,894 -- -- --
Mortgage-backed and related securities
and mortgage-backed and related
securities available for sale (2) -- -- 187 72,643 82,074
Deposits -- -- 3,022 1,171,530 1,254,199
Borrowed funds 68,760 84,272 115,786 179,061 141,592
Stockholders' equity (6) (11) $ 107,183 $ 108,510 $ 138,520 $ 90,134 $ 117,847
========= ========= ========= ========= =========
7,100,000 7,100,000 7,100,000 7,100,000 7,100,000
Shares of Common Stock outstanding
Book value per common share (5) $ 10.17 $ 10.35 $ 14.58 $ 7.77 $ 11.67
========== ========== ========= ========= =========
(Footnotes on second following page)
</TABLE>
759883.5
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operations Data(1):
Rental revenue and operations:
Rental income and other property revenue $ 13,779 $ 16,158 $ 18,530 $ -- $ --
Property operating and maintenance expense (10,884) (12,827) (17,734) -- --
Depreciation - real estate held for investment (383) (200) (208) -- --
------- -------- -------- -------- ------
Net rental operations 2,512 3,131 588 -- --
Other property income (expense):
Net gain (loss) on sale of real estate 1,998 (1,754) (3,499) -- --
Writedowns of investment in real estate (1,106) (19,745) (1,889) (14,460) (16,050)
------- -------- -------- ------- ------
Total other property income (expense) 892 (21,499) (5,388) (14,460) (16,050)
Other income:
Interest income:
Interest and dividend income 4,197 5,469 94,409 88,878 93,478
Provision for possible credit losses (1,500) (1,000) (5,250) (5,041) (5,360)
------- -------- -------- -------- -------
Total interest income 2,697 4,469 89,159 83,837 88,118
Realization of contingent participation revenues 3,356 -- -- -- --
Income (loss) from other real estate owned, net -- -- -- 103 4,973
Other -- -- -- 1,228 1,065
------- -------- -------- -------- -------
Total other income 6,053 4,469 89,159 85,168 94,156
Total revenues 9,457 (13,899) 84,359 70,708 78,106
Interest expense 6,109 7,360 61,794 52,255 51,636
Other expenses:
Deposit insurance expenses -- -- 2,533 3,704 4,683
Foreclosure costs -- -- 225 1,105 2,780
Other 6,117 7,369 33,996 38,666 39,616
------- -------- -------- -------- -------
Total other expenses 6,117 7,369 36,754 43,475 47,079
Total expenses 12,226 14,729 98,548 95,730 98,715
Net loss before other income (expense) and before
Provision for income taxes (2,769) (28,628) (14,189) (25,022) (20,609)
Other income (expense):
Banking fees, service charges and other net
income -- -- 3,996 2,320 3,531
Gains on sale of offices and branches of the
Predecessor Bank (6) (11) -- -- 77,560 -- 18,045
Net gains (losses) on sale of investment securities 1,697 (1,495) (605) 441 1,179
Provision for Marine Branch Sale
contingencies (4) -- (3,300) -- -- --
------- -------- -------- -------- -------
Total other income (expense) 1,697 (4,795) 80,951 2,761 22,755
------- -------- -------- -------- -------
Income (loss) before income tax expense (benefit) (1,072) (33,423) 66,762 (22,261) 2,146
Income tax expense (benefit) 434 (3,300) 11,749 2,113 2,608
------- -------- -------- -------- -------
Income (loss after income tax expense (benefit) (1,506) (30,123) 55,013 (24,374) (462)
Dividends declared on preferred stock -- -- 5,250 5,250 --
------- -------- -------- -------- -------
Net income (loss) applicable to Common Shares $ (1,506) $(30,123) $ 49,763 $(29,624) (462)
======= ======== ======== ========= =======
Primary and diluted net income (loss) per share (5) $ (0.21) $ (4.24) $ 7.01 $ (4.17) $ (0.45)
======= ======== ======== ========= =======
Other Data (1) (7):
Average equity to average assets 54.37% 50.97% 5.51% 7.18% 2.69%
Equity to assets at period end (9) 56.14 51.35 48.52 6.16 7.65
Weighted average yield on interest earning assets (8) 4.21 4.90 7.42 7.11 7.13
Weighted average rate paid on interest-bearing
liabilities (8) 8.17 6.97 4.43 3.88 3.39
Interest rate spread (8) (3.96) (2.07) 2.99 3.23 3.74
Net interest margin -n/a- -n/a- -n/a- 2.93 3.19
Return on average assets (10) (0.76) (1.27) 3.64 (1.65) (0.03)
Return on stockholders' equity (10) (1.40) (24.84) 66.12 (27.04) (0.39)
</TABLE>
759883.5
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<PAGE>
(1) Reflects the sale, effective June 28, 1996, of the Company's
remaining eleven branch offices. As a result of such
transaction, the Company's total assets, loans receivable,
net, and deposits decreased by $1,066.6 million, $1,034.9
million and $1,159.6 million, respectively, and the Company
recorded a pre-tax net gain of $77.6 million.
(2) At June 30, 1998, 1997, 1996, and 1995, all of the Company's
investment and mortgage backed securities, were classified as
available for sale in accordance with the Company's asset
disposition plan and in 1994 because of the possibility that
they may be sold in response to changes in interest rates,
prepayment risk, liquidity needs or similar factors in
connection with the Predecessor Bank's asset and liability
management strategy.
(3) For years prior to June 30, 1997, investments in real estate
consist of in-substance foreclosures, real estate held for
disposal and real estate held for investment, net of related
reserves.
(4) During the year ended June 30, 1997, the Company and Marine
undertook an overall review of the closing of the Branch Sale.
As a result of such review, the Company established a reserve
of $3.3 million for potential closing settlement adjustments
and claims which it believes may be asserted by Marine related
to certain assets acquired by Marine in the Branch Sale. The
establishment of this reserve is reflected on the 1997
Statement of Operations as provision for Marine Branch Sale
contingencies. The Company believes that the reserve for
closing settlement adjustments adequately provides for claims
which may be asserted by Marine.
(5) Per share information is based on the weighted average number
of outstanding shares of Common Stock during the period. The
Company had no securities outstanding that have a dilutive
effect.
(6) Consists of a $77.6 million net pre-tax gain from the sale, in
June 1996, of the Company's eleven branch offices, the 96th
Street branch office realty and related deposits.
(7) With the exception of end of period ratios, all ratios are
based on average daily balances during the indicated periods.
(8) Interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities (which
do not include non- interest-bearing demand accounts), and net
interest margin represents net interest income as a percent of
average interest-earning assets.
(9) Data is as of the end of the indicated periods.
(10) Net income for fiscal 1996 includes a $67.6 million after-tax
net gain from the Branch Sale in June 1996. Excluding this
gain, return on average assets and return on stockholders'
equity for 1996 would have been (0.83%) and (15.09%),
respectively.
(11) Consists of $18.1 million gain from the sale, in October 1993,
of the Company's four branch offices in Westchester County,
New York and related deposits and a $2.3 million gain from the
sale of a building, in March 1993, which formerly contained a
branch office of the Company in Manhattan, New York, the
operations of which were consolidated into another branch
office of the Company.
759883.5
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<PAGE>
The following table sets forth selected data related to non-performing loans for
the periods indicated: (Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing Loans Data (1):
Non-performing loans (2):
Single-family residential (3) $ 1,306 $ 3,924 $ 4,557 $ 7,496 $ 7,587
Multi-family residential 14,724 16,790 19,658 -- 2,900
Commercial real estate 6,611 11,557 3,113 38,685 89,569
Construction -- -- -- 4,941 5,641
Commercial business 8,458 12,806 6,817 6,263 3,938
Consumer 1,973 2,871 2,671 165 702
------- -------- -------- -------- -------
Total non-performing loans __ __ __ __ __
Other asset Quality Data $ 33,072 $ 47,948 $ 36,816 $ 57,550 $110,337
------- -------- -------- -------- -------
Delinquent loans (4) -- -- -- 9,206 1,595
Restructured loans (5) 22,999 24,454 29,842 166,291 132,944
Loans to facilitate sale of real estate assets(6) -- -- -- 215,191 149,555
Allowance for potential credit losses
20,037 31,570 34,142 33,985 41,076
Ratios: Loan Quality
Non-performing loans as a percentage
of total assets 17.52% 22.65% 12.90% 3.93% 7.16%
Non-performing loans as a percentage
of total loans 47.63 50.07 35.74 5.71 11.02
Allowance for credit losses as a percentage
of non-performing loans 60.59 65.84 92.74 59.05 37.23
Net charge-offs as a percentage of
average loans during the period ended 14.41 3.59 1.03 0.90 3.00
</TABLE>
(1) Non-performing loans consist of loans for which the Company has
ceased to accrue interest income and has fully reserved against
previously accrued interest income.
(2) The Company's total non-performing loans decreased by $14.9
million or 31.0% to $33.1 million at June 30, 1998, as compared to
$47.9 million at June 30, 1997. Such net decreases were due
primarily to the sales/satisfactions of an aggregate of $3.8
million of non-performing loans, a return of $2.2 million to
performing status, and a writeoff of $8.9 million.
(3) Prior to fiscal 1997, these loans primarily consisted of completed
single-family residential developments and lots for the
development of single-family residences. After June 30, 1996, such
loans represent non-accrual loans on 1-4 family residential
properties for which interest income is recognized only as
received.
(4) Delinquent loans consist of loans which are 31 to 89 days overdue.
(5) Restructured loans consist of loans which have been restructured
primarily as a result of the financial condition of the property
which secures the loan and which are performing in accordance with
their restructured terms.
(6) Loans to facilitate consist of loans to finance the sale of
investments in real estate.
759883.5
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<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
General. The Company's assets and liabilities have substantially decreased
during the past two fiscal years, consistent with the Company's asset management
plan and the conditions imposed by the NYSBD. Following the Branch Sale by the
Predecessor Bank at June 28, 1996 (which resulted in the sale of all of the
Predecessor Bank's branches and a substantial portion of the Predecessor Bank's
assets) the Company undertook to manage its assets in a manner that was
consistent with the Predecessor Bank's efforts to improve its capital ratios (as
defined by the Predecessor Bank's then-current regulators, FDIC and the NYSBD)
by, among other things, reducing the total assets of the Company. Total assets
decreased from $285.5 million at June 28, 1996 to $190.9 million at June 30,
1998 and total liabilities decreased from $147.0 million to $83.7 million at the
same dates, respectively. Total assets decreased by $20.7 million, or 9.8%
during the year ended June 30,1998, following a decrease of $73.8 million or
25.9% during the year ended June 30, 1997. Total liabilities decreased by $19.4
million, or 18.8% during the year ended June 30, 1998 following a decrease of
$43.8 million or 29.8% during the year ended June 30, 1997. Decreases in assets
and liabilities in recent periods have been generally comprised of decreases in
most of the principal categories of assets and liabilities.
The following table sets forth the principal categories of the Company's assets
and liabilities at the dates indicated.
June 30,
---------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Assets:
Investments in real estate, net $ 86,485 $ 97,349 $146,440
Real estate loans receivable, net 57,090 78,757 88,628
Cash due from banks and money market
instruments 32,087 14,036 17,129
Investment securities available for sale 1,373 6,275 5,685
Commercial and consumer loans, net 8,091 9,894 10,239
Total assets 190,910 211,659 285,478
Liabilities:
Borrowed funds 68,760 84,272 115,786
Total liabilities 83,727 103,149 146,958
Stockholders' equity $107,183 $108,510 $138,520
Investments in Real Estate, Net. Investments in real estate, which are comprised
of real estate held for investment and real estate held for disposal, net of
applicable fair market value reserves, declined $10.9 million, or 11.2%, and
$49.1 million, or 33.5%, during the years ended June 30, 1998 and 1997,
respectively. The net disposals of investments in real estate, during fiscal
1998 and 1997, were made in accordance with the Company's asset disposition
strategies.
During the year ended June 30, 1998, the company disposed of two properties
totaling $5.2 million. In addition, investments in real estate decreased, during
the fiscal year ended June 30, 1998, as the result of the sale/satisfaction of
$9.1 million in investments in real estate and depreciation affecting
investments in real estate of $383,000. These decreases in investments in real
estate, totaling $14.7 million, were partially offset by additional asset
fundings in the amount of $3.8 million which were made during the year.
During the year ended June 30, 1997, the company disposed of 13 properties
totaling $32.2 million. In addition, investments in real estate decreased,
during the fiscal year ended June 30, 1997, as the result of the writedown of
$16.6 million and the sale/satisfaction of $3.1 million in investments in
759883.5
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<PAGE>
real estate, and depreciation affecting investments in real estate of $200,000.
These decreases in investments in real estate, totaling $52.1 million, were
partially offset by additional asset fundings in the amount of $3.0 million made
during the year. The writedowns in investments in real estate of $16.3 million,
recorded during the year ended June 30, 1997, included a writedown of $11.3
million for an office building complex in Atlanta, GA, categorized as real
estate held for investment. This charge followed a change in operating plans for
the property and a resultant reevaluation of projected operating cash flows
related to this property. For detailed information concerning the Company's
investments in real estate, see "Real Estate Assets" and Notes 1, 12 and 13 to
the Consolidated Financial Statements.
Loans Secured by Real Estate. Total loans secured by real estate declined $21.1
million, or 26.3%, and $6.9 million, or 7.9%, during the fiscal years ended June
30, 1998 and 1997, respectively. During the year ended June 30, 1998, 5 loans
were paid in full, totaling $6.3 million. In addition, the Company received
principal reduction payments of $15.9 million. During the year ended June 30,
1998, the Company funded $1.1 million.
The decrease during the fiscal year ended June 30, 1997 was due primarily to the
disposition of $8.8 million in loans as part of the Company's continuing efforts
to liquidate its remaining assets and the effects of normal loan amortization
and borrower prepayments activity, partially offset by the reacquisition of a
single property carried at $1.9 million. See Notes 1, 8, 10 and 11 to the
Consolidated Financial Statements.
Cash and Due from Banks and Money Market Instruments. Cash and due from banks
and money market instruments increased by $18.1 million or 128.6% during the
year ended June 30, 1998, following a decrease of $3.1 million or 18.1% during
the year ended June 30, 1997. The increase in cash for the year ended June 30,
1998 was primarily due to the sales and/or repayment of investments in real
estate and loans receivable during the year. The decrease in cash and due from
banks during the year ended June 30, 1997 was due to payment of other
liabilities related to the Branch Sale and the settlement of the Company's
remaining non-retail deposit liabilities. For additional information, see Note 5
to the Consolidated Financial Statements.
At June 30, 1998, Marine had restricted a total of $19.6 million in funds, held
on deposit with Marine, in accordance with the terms of the Branch Sale and the
Marine Facility agreements. At June 30, 1997, Marine had restricted a total of
approximately $5.1 million. Restricted funds held by Marine are not available to
the Company for the settlement of any of the Company's current obligations. Of
the $19.6 million cash balance restricted by Marine at June 30, 1998, $5.0
million relates to reserve amounts specified under the Branch Sale Agreement.
The remaining restricted cash reserves arose from the sale of assets which had
served as primary or supplemental collateral for the Marine Facility. The
restricted cash held by Marine is intended serve as substitute collateral for
the Marine Facility, until such time as the Marine Facility is reduced in
accordance with the Company's Asset Management Plan and the Marine Facility
agreements.
Investment Securities, Available for Sale. Total investment securities,
available for sale decreased $4.9 million, or 78.1%, during the year ended June
30, 1998, following an increase of $590,000, or 10.4% during the year ended June
30, 1997. During the year ended June 30, 1998, the Company liquidated its
preferred stock investment which had been carried on the books of the Company at
June 30, 1997 at $5.0 million. The disposition proceeds received by the Company
were $6.9 million, which included $54,000 in additional accrued preferred
dividends. Accordingly the Company recognized a gain in the amount of $1.8
million during the 1998 fiscal year. The increase in investment securities,
available for sale during the year ended June 30, 1997 was due to the
recognition of $590,000 in accrued preferred dividends associated with the
Company's preferred stock investment. These accrued dividends were added to the
carrying value of the asset at June 30, 1997 and were received in conjunction
with the disposition of this asset during fiscal 1998.
Commercial and Consumer Loans, Net. Total commercial and consumer loans
decreased $5.2 million, or 39.3%, and $345,000, or 3.4%, during the fiscal years
ended June 30, 1998 and 1997, respectively. During the year ended June 30, 1998,
one loan was paid in full, totaling $400,000. In addition, the Company received
principal reduction payments of $1.0 million. During the year ended June 30,
1998, the Company also wrote off $3.8 million in commercial and consumer loans.
Borrowed Funds. The Company's borrowed funds decreased by $17.6 million or 20.9%
and $31.5 million or 27.2% during the years ended June 30, 1998 and 1997,
respectively. Borrowed funds decreased during fiscal 1998 and 1997 primarily as
the result of repayment transactions utilizing funds received from the
liquidation of certain assets under the Company's plan of asset dispositions.
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<PAGE>
Stockholders' Equity. Total stockholders' equity decreased by $1.3 million, or
1.2%, and $30.0 million, or 21.7%, during the fiscal years ended June 30, 1998
and 1997, respectively. The declines in total stockholders' equity in each of
the past two fiscal years was primarily a result of the Company's reported
operating losses of $1.5 million and $30.1 million in the years ended June 30,
1998 and 1997, respectively. At June 30, 1998 and 1997, an aggregate of $926,000
and $1.1 million, respectively, were deducted from the Company's stockholders'
equity under Statement of Financial Accounting Standards No. 115 (SFAS-115)
"Accounting for Marketable Equity Securities," reflecting net unrealized losses
on investment securities classified as available for sale. See the consolidated
statements of changes to stockholders' equity in the Consolidated Financial
Statements and Note 18 to the Consolidated Financial Statements.
The following table summarizes the calculation of the Company's book value per
share at June 30, 1998, June 30, 1997, and June 30, 1996.
Year ended June 30,
1998 1997 1996
---- ----- ----
(Dollars in thousands)
Total stockholders' equity $ 107,183 $ 108,510 $ 138,520
Less: liquidation value of preferred stock 35,000 35,000 35,000
---------- ---------- ----------
Net stockholders' equity $ 72,183 $ 73,510 $ 103,520
========== ========== ==========
Total shares of Common Stock issued
and outstanding (1) 7,100,000 7,100,000 7,100,000
Book value per common share $ 10.17 $ 10.35 $ 14.58
========== ========== ==========
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset Quality - Allowance for Credit Losses."
(1) As reduced by the preferred stock dividend for the quarter ending June 30,
1996 which was declared and not yet paid as of June 30, 1998.
Results of Operations - Fiscal year ended June 30, 1998 compared to fiscal year
ended June 30, 1997
General. The Company reported a net loss attributable to common shares of $1.5
million, or ($0.21) per share, for the years ended June 30, 1998, as compared
with a net loss applicable to Common Shares of $30.1 million, or ($4.24) per
share, for the fiscal year ended June 30, 1997. The primary reason for the
decrease in the Company's net loss for the fiscal year ended June 30, 1998, as
compared to the previous year, was the reduction in writeoffs of investments in
real estate from $19.7 million in fiscal 1997 to $1.1 million in fiscal 1998, a
net pre-tax reduction in such writeoffs of $18.6 million, or 94.4%. In addition,
the Company's total revenues, excluding other income (expense), increased to
$21.8 million during the year ended June 30, 1998, as compared to $18.8 million
in the previous year. Total revenues increased during fiscal 1998, as compared
with the previous year, primarily as a result of the realization of contingent
participation revenues in the amount of $3.4 million in 1998, as compared with
zero in the previous year, and the recognition of a net gain from real estate
sales during 1998 of $2.0 million, as compared with a net loss in the previous
year of $1.8 million. Other operating expenses declined $1.3 million to $6.1
million during fiscal 1998 as compared to $7.4 million in the previous fiscal
year. In addition, other income (expense) was $1.7 million in the year ended
June 30, 1998, an increase of $6.5 million, as compared to a loss of $4.8
million recorded as other income (expense) in the previous fiscal year.
Rental Income. For the year ended June 30, 1998, rental income was $13.8
million, a decline of $2.4 million, or 14.7%, from $16.2 million for the year
ended June 30, 1997. The decline in rental income was primarily attributable to
sales of properties and reductions in the number of rental units at some of the
Company's multi-family residential properties as units were converted to
condominiums and sold.
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<PAGE>
Interest Income. For the year ended June 30, 1998, total interest income, net of
provisions for possible credit losses, was $2.7 million, a decline of $1.8
million, or 39.7%, from $4.5 million for the previous fiscal year. The decline
in interest income in fiscal 1998, as compared with the previous year, was
primarily due to a decline in interest from loans and an increase in the
provision for possible credit losses in fiscal 1998 as compared with fiscal
1997.
For the year ended June 30, 1998, interest income from loans was $3.7 million, a
decline of $824,000, or 18.3%, from $4.5 million for the year ended June 30,
1997. The decline was primarily attributable to the repayment in full of a $10.2
million participation loan secured by real estate in the quarter ended September
30, 1997.
For the year ended June 30, 1998, income from investment securities was $55,000,
a decline of $519,000, or 90.4%, from $574,000 for the year ended June 30, 1997.
The decline was primarily attributable to the recovery of the Company's $5.0
million preferred stock investment during the quarter ended September 30, 1997.
Total proceeds from the recovery of this preferred stock investment were $6.8
million. Accordingly, a gain on the recovery was recognized in the amount of
$1.8 million during the year.
For the year ended June 30, 1998, the Company's provision for possible credit
losses was $1.5 million, an increase of $500,000, or 50%, from the $1.0
provision taken in the previous fiscal year. These provisions resulted from
management's ongoing evaluation of the adequacy of the allowance for credit
losses in light of, among other things, the amount of non-performing loans, the
risks inherent in the Company's loan portfolio and the markets for real estate
and economic conditions in the New York metropolitan area and other areas in
which the Company had engaged in lending activities. The provision for credit
losses in the fiscal 1998 and 1997 period reflects management's internal
analysis of its loan assets. See Note 10 to the Consolidated Financial
Statements.
Depreciation - Real Estate Held for Investment. For the year ended June 30,
1998, depreciation charges associated with real estate held for investment were
$383,000 an increase of $183,000, or 91.5%, as compared with depreciation
charges associated with real estate held for investment in fiscal 1997 of
$200,000. Under SFAS-121, the Company is required to depreciate Real Estate Held
for Investment over the estimated useful life of the assets. No depreciation
charges are made for the portion of the assets attributable to land values.
During the year ended June 30, 1998, the Company recorded depreciation charges
of approximately $383,000, of which $175,000 represents depreciation of the
capitalized costs of the Real Estate Held for Investment (less land value) for
five of the Company's six real estate assets from the period May 22, 1998 to
June 30, 1998. The remaining $208,000 in depreciation charges recorded during
the year ended June 30, 1998 were for the sixth property, consistent with
depreciation charges taken in prior periods for that property. On May 22, 1998,
as a consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation charges, as required by SFAS-121,
for all Real Estate Held For Investment, that had not been subject to
depreciation charges in prior periods. See Note 1 to the Consolidated Financial
Statements.
Writedowns of Investments in Real Estate. During the year ended June 30, 1998,
the Company wrote down investments in real estate in the amount of $1.1 million.
This amount represents a decrease in writedowns for investments in real estate
of $18.6 million, or 94.4%, as compared with writedowns taken in fiscal 1997,
totaling $19.7 million. During 1998, the Company wrote down two investments in
joint ventures, totaling $1.1 million.
During the quarter ended December 31, 1996, the Predecessor Bank determined that
it would not immediately undertake the rehabilitation and leasing of an Atlanta,
GA office property that had been leased by the Federal Government under a lease
with a term which ended during 1997. The Atlanta office property was acquired by
the Predecessor Bank in foreclosure and previously had a net book value of
approximately $25.3 million. At that time, as an alternative to undertaking the
major rehabilitation project and assuming the resultant risk of leasing the
building at a rate sufficient to recover the Company's substantially increased
investment subsequent to rehabilitation, the Predecessor Bank elected to explore
the sale of the property with expected net proceeds of approximately $14.0
million. As a result, the Predecessor Bank established a real estate valuation
reserve for this property in the amount of $11.3 million. At June 30, 1998, the
Company continues to explore strategic alternatives with respect to this
property other than its immediate sale and has, therefore, categorized the
property as real estate held for investment.
The Predecessor Bank also decided during the quarter ended December 31, 1996 to
dispose of four other real estate properties and one real estate joint venture
and has established aggregate real estate valuation reserves for these
properties in the amount of $3.4 million.
759883.5
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<PAGE>
During the quarter ended September 30, 1996, the Bank also established a $4.0
million real estate valuation reserve providing for the anticipated sale of four
other real estate properties at net sale proceeds which are expected to be less
than the Bank's previously recorded net book value for those assets.
Other Income. During the year ended June 30, 1998, other income was $5.4
million, an increase of $7.2 million as compared with a loss of $1.8 million in
fiscal 1997. Other income increased during fiscal 1998, as compared with the
previous year, primarily as a result of the realization of contingent
participation revenues in the amount of $3.4 million in 1998, as compared with
zero in the previous year, and the recognition of a net gain from real estate
sales during 1998 of $2.0 million as compared with a net loss in the previous
year of $1.8 million.
Contingent participation revenues were realized on two junior participation
loans, which were paid in full during fiscal 1998. Each of the loans had been
sold to Marine on June 28, 1996 and were fully reserved for on the Company's
books following the Branch Sale. The Company retained a contingent interest in
these two loans approximating $3.3 million in principal amount following the
Branch Sale. At June 30, 1998, the Company had a remaining contingent interest
in three junior participation loans in which the Company retains an interest of
approximately $2.9 million in principal amount, which are fully reserved for
(100%) by the Company. All of such loans have been modified since origination
and are currently performing in accordance with their terms.
During the year ended June 30, 1998, the Company sold two properties realizing a
net gain on sale of $2.0 million. During the previous fiscal year, the Company
sold 13 properties realizing a net loss of $1.8 million.
Property Operating and Maintenance Expenses. For the year ended June 30, 1998,
property operating and maintenance expenses ("property expenses") were $10.9
million, a decline of $1.9 million, or 15.2%, from $12.8 million for the year
ended June 30, 1997. The decline in property expenses was primarily attributable
to reductions in operating costs associated with maintaining rental units at
certain multi-family residential properties, as these units were converted to
condominiums and sold.
Interest Expense. During the year ended June 30, 1998, the Company recorded
interest expenses in the amount of $6.1 million, a decline of $1.3 million, or
17.0%, as compared with interest expenses of $7.4 million in the previous fiscal
year. Interest expenses declined in 1998 as compared with 1997 primarily as a
result of declines in the average amount borrowed by the Company in fiscal 1998
as compared with fiscal 1997. During 1997, the Company borrowed an average of
$73.3 million, a decline of $19.9 million, or 21.4%, as compared with average
borrowings of $93.2 million during the year ended June 30, 1997. The decline in
the average amount of borrowed funds was attributable to the repayment of
outstanding obligations which occurred in fiscal 1998 as a result of asset
dispositions.
Other Expenses. Other expenses consist of the Company's general and
administrative expenses. Other expenses do not include direct real estate
operations expenses, which are included in "property operating and maintenance
expense."
During the year ended June 30, 1998, the Company recorded other expenses in the
amount of $6.1 million, a decline of $1.3 million, or 17.0%, as compared with
other expenses of $7.4 million in the previous fiscal year. Other expenses
declined in 1998 as compared with 1997 primarily as a result of declines in the
average amount borrowed by the Company in fiscal 1998 as compared with fiscal
1997. The following table sets forth the components of the Company's other
expenses, excluding during the periods indicated.
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<PAGE>
Fiscal Year ended June 30,
1998 1997
---- ----
(Dollars in Thousands)
Depreciation - other $ -- $ 15
Salaries and employee benefits 900 1,170
Legal and professional fees 2,305 1,892
Management fees 2,562 2,942
Other operating expenses 350 1,350
-------------- --------------
Total $ 6,117 $ 7,369
============== ==============
Legal and professional fees expense increased from $1.9 million during the year
ended June 30, 1997 to $2.3 million during the same period in 1998, as a result
of expenses incurred in connection with the Bank's successful reorganization
from a New York State chartered savings bank to a Delaware corporation. The
Company initiated these corporate form conversion activities in the quarter
ended June 30, 1997. The Company accrued and paid $53,000 and $53,000,
respectively, in the year ended June 30, 1997, and the Company accrued and paid
$900,000 and $1.6 million, respectively, in the year ended June 30, 1998, for
legal and professional fees associated with this conversion.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a
newly-formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0%
of the outstanding Common Stock of the Company. During the year ended June 30,
1998, the Company accrued $2.9 million in fees payable to the Management
Company, of which $360,000 related to fees incurred for the successful
disposition of assets. During the year ended June 30, 1997, the Company accrued
$3.7 million in fees payable to the Management Company, of which $774,000
related to fees incurred for the successful disposition of assets. At June 30,
1998, the Company had accrued fees payable to the Management Company and its
affiliate, Fintek, Inc., aggregating $224,000. See "Management."
All other operating expenses declined $1.0 million, or 74.1%, to $350,000 for
the year ended June 30, 1998 as compared with the year ended June 30, 1997, in
which other operating expenses were $1.35 million. These expenses declined in
1998, as compared with the previous year due to the Company's continuing efforts
to reduce the expense of managing its operations.
Other Income (Expense). Other income and expense was income of $1.7 million
during the year ended June 30, 1998, an increase of $6.5 million, as compared to
the year ended June 30, 1997 where other income (expense) was a loss of $4.8
million. Other income (expense) in the year ended June 30, 1998 was primarily
due to the $1.8 million recorded gain on sale of the Company's largest preferred
stock holding during the quarter ended September 31, 1997.
During the quarter ended December 31, 1996, the Company and Marine undertook an
overall review of the closing of the Branch Sale. As a result of such review,
the Company established a reserve of $3.3 million for potential closing
settlement adjustments and claims which it believes may be asserted by Marine
related to certain assets acquired by Marine in the Branch Sale. The
establishment of this reserve is reflected on the Statement of Operations, for
fiscal 1997, as provision for Marine Branch Sale contingencies. The Company
believes that the remaining reserve for closing settlement adjustments
adequately provides for claims which may be asserted by Marine.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109
(SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a
deferred tax asset relating to the unrecognized benefit for all temporary
differences that will result in future tax deductions and for all unused NOL and
tax credit carryforwards, subject to, in certain circumstances, reduction of the
asset by a valuation allowance. A valuation allowance is recorded if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized based on a review of available evidence. Realization of tax benefits
for deductible temporary differences and unused NOL and tax credit carryforwards
may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carryforwards, taxable income in prior carryback years and, if appropriate,
from tax planning strategies.
759883.5
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<PAGE>
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated federal income
tax liability for fiscal 1998, fiscal 1997, and fiscal 1996. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax. For
additional information, see Note 19 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 1998, the Company recorded a net deferred tax asset
of approximately $19.2 million and deferred tax liabilities of $19.2 million.
The net deferred tax asset reflects gross deferred tax assets of $68.6 million
and a valuation allowance of $49.4 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carryforwards.
Generally, the amount of a company's net deferred tax asset may serve to
increase its net worth under generally accepted accounting principles. However,
because of the net losses incurred by the Company in recent years, the Company
established a $49.4 million valuation allowance, resulting in a net deferred tax
asset of $19.2 million. The valuation allowance decreased by approximately $12.5
million during the fiscal year ended June 30, 1998. Realization of the net
deferred tax asset is expected to occur upon reversal of existing taxable
temporary differences for which deferred tax liabilities of $19.2 million have
been recorded.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 1998, the Company recorded a net provision for income
taxes of $434,000, primarily to reflect the effects of operations and asset
disposition on its current state and local income tax liability at June 30,
1998.
During the year ended June 30, 1997, the Company completed a review of its
potential current and deferred federal and state tax liability for the fiscal
year in light of the Branch Sale and its related effect. As a result of the
review of its potential current and deferred tax liabilities and the results of
operations for the twelve months ended June 30, 1997, the Company reduced its
provision (recorded a benefit from) for state and local income taxes by $3.3
million. Additionally, the Company reduced its estimated current state and local
income tax liability at June 30, 1997 to reflect the effect of the Branch Sale
and disposition transactions completed during the twelve months ended June 30,
1997.
Results of Operations - Fiscal year ended June 30, 1997 compared to fiscal year
ended June 30, 1996
General. The Company reported a net loss attributable to common shares of $30.1
million or ($4.24) per share for the years ended June 30, 1997, as compared with
net income applicable to Common Shares of $49.8 million or $7.01 per share for
the fiscal year ended June 30, 1996. The primary reason for the decrease in the
Company's net income in the fiscal year ended June 30, 1997 as compared to the
previous year was the net pre-tax gain of $77.6 million on the Branch Sale
recorded in 1996, a decrease in income (net of interest expenses) in fiscal 1997
as compared to fiscal 1996 of $30.3 million as a result of the substantial
decline in net earning assets as a result of the Branch Sale and an increase in
the writedowns of investments in real estate from $1.9 million in fiscal 1996 to
$19.7 million in fiscal 1997, partially offset by reduction in operating
expenses in 1997 as compared to the previous year of $36.7 million.
In fiscal 1996, the operations of the Company, operating as the Predecessor
Bank, were substantially dependent on its net interest income, which is the
difference between the interest income received from its interest-earning
assets, including investment securities, mortgage-backed and related securities
and loans, and the interest expense incurred on its interest-bearing
liabilities, including deposits, FHLB advances and other borrowed funds. Net
interest income is determined by an institution's interest rate spread (i.e.,
the difference between the yield earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets and interest-bearing liabilities. Net interest income
can be positively or negatively impacted by changes in interest rates. The level
of the Company's non-performing loan assets continues to have a negative effect
on net interest income.
Rental Income. For the year ended June 30, 1997, rental income was $16.2
million, a decline of $2.4 million, or 12.8%, from $18.5 million for the year
ended June 30, 1996. The decline in rental income was due to the sale of 10 real
estate properties in 1997. In addition, the decline in rental income was also
partially attributable to reductions of
759883.5
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<PAGE>
rental units at some of the Company's multi-family residential properties as
units were converted to condominiums and sold. In addition rental income
declined as a result of falling occupancy rates at certain other properties.
Interest Income. For the year ended June 30, 1997, total interest income, net of
provisions for possible credit losses, was $4.5 million, a decline of $84.7
million, or 95.0%, from $89.2 million for the previous fiscal year. The decline
in interest income in fiscal 1997, as compared with the previous year, was
primarily due to a decline in interest and other interest-bearing assets as a
result of the Branch Sale.
For the year ended June 30, 1997, the Company's provision for possible credit
losses was $1.0 million, a decrease of $4.3 million, or 80.9%, from the $5.3
million provision taken in the previous fiscal year. These provisions resulted
from management's ongoing evaluation of the adequacy of the allowance for credit
losses in light of, among other things, the amount of non-performing loans, the
risks inherent in the Company's loan portfolio and the markets for real estate
and economic conditions in the New York metropolitan area and other areas in
which the Company had engaged in lending activities. The provision for credit
losses in the fiscal 1997 and 1996 period reflects management's internal
analysis of its loan assets. See Note 10 to the Consolidated Financial
Statements.
Writedowns of Investments in Real Estate. During the year ended June 30, 1997,
the Company wrote down investments in real estate in the amount of $19.7
million. This amount represents an increase in writedowns for investments in
real estate of $18.6 million, or 94.4%, as compared with writedowns taken in
fiscal 1997, totaling $19.7 million. During 1998, the Company wrote down two
investments in joint ventures, totaling $1.1 million.
During the quarter ended December 31, 1996, the Predecessor Bank determined that
it would not undertake the rehabilitation and leasing of an Atlanta, GA office
property leased by the Federal Government under a lease with a term which ended
during 1997. The Atlanta office property was acquired by the Predecessor Bank in
foreclosure and previously had a net book value of approximately $25.3 million.
As an alternative to undertaking the major rehabilitation project and the risk
of leasing the building to recover the Predecessor Bank's substantially
increased investment subsequent to rehabilitation, the Predecessor Bank elected
to list the property for sale at that time with expected net proceeds of
approximately $14.0 million. As a result, the Predecessor Bank established a
real estate valuation reserve for this property in the amount of $11.3 million.
At June 30, 1998, the Company continues to explore strategic alternatives with
respect to this property in addition to its immediate sale. The Predecessor Bank
also decided during the quarter ended December 31, 1996 to dispose of four other
real estate properties and one real estate joint venture and has established
aggregate real estate valuation reserves for these properties in the amount of
$3.4 million.
During the quarter ended September 30, 1996, the Predecessor Bank also
established a $4.0 million real estate valuation reserve providing for the
anticipated sale of four other real estate properties at net sale proceeds which
are expected to be less than the Predecessor Bank's previously recorded net book
value for those assets.
Other Income. During the year ended June 30, 1997, other income was a reported
loss of $1.8 million, an increase of $1.7 million as compared with a loss of
$3.5 million in fiscal 1996. The loss reported in other income decreased during
fiscal 1997, as compared with the previous year as a result of the reduced
losses realized on the sale of investments in real estate during 1997 as
compared with the previous year.
Property Operating and Maintenance Expenses. For the year ended June 30, 1997,
property operating and maintenance expenses ("property expenses") were $12.8
million, a decline of $4.9 million, or 27.7%, from $17.7 million for the year
ended June 30, 1996. The decline in property expenses was primarily attributable
to the sale of real estate assets as a result of the Branch Sale and additional
real estate asset dispositions which took place in fiscal 1997.
Interest Expense. The Company's interest expense decreased by $54.4 million or
88.1% during the fiscal year ended June 30, 1997 compared to fiscal 1996. Such
decrease was primarily attributable to the decrease in the Company's average
balances of interest-bearing liabilities in 1997 as compared with 1996 following
the Branch Sale.
Other Expenses. During the year ended June 30, 1997, the Company recorded other
expenses in the amount of $7.4 million, a decline of $29.4 million, or 80.0%, as
compared with other expenses of $36.8 million in the previous fiscal year. Other
expenses declined in 1997, as compared with 1997, primarily as a result of the
substantial reduction in the Company's operating activities and associated
expenses following the Branch Sale. The following table sets forth the
components of the Company's other expenses, excluding during the periods
indicated.
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Fiscal Year ended June 30,
1997 1996
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Depreciation - other $ 15 $ 951
Salaries and employee benefits 1,170 14,163
Legal and professional fees 1,892 4,521
Management fees 2,942 --
Other operating expenses 1,350 17,119
-------- ---------
Total $ 7,369 $ 36,754
======== =========
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a
newly-formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0%
of the outstanding Common Stock of the Company. During the year ended June 30,
1997, the Company accrued $3.7 million in fees payable to the Management
Company, of which $774,000 related to fees incurred for the successful
disposition of assets. See "Management."
Other Income (Expense). Other income and expense was a loss of $4.8 million
during the year ended June 30, 1997, a decrease of $85.7 million, as compared to
the year ended June 30, 1997 where other income (expense) was $81.0 million.
During the quarter ended December 31, 1996, the Company and Marine undertook an
overall review of the closing of the Branch Sale. As a result of such review,
the Company established a reserve of $3.3 million for potential closing
settlement adjustments and claims which it believes may be asserted by Marine
related to certain assets acquired by Marine in the Branch Sale. The
establishment of this reserve is reflected on the Statement of Operations, for
fiscal 1997, as provision for Marine Branch Sale contingencies. The Company
believes that the remaining reserve for closing settlement adjustments
adequately provides for claims which may be asserted by Marine.
Other income (expense) in fiscal 1997, includes a recorded gain of $77.6 million
related to the premium paid by Marine for the branches and purchased assets of
the Predecessor Bank as a result of the Branch Sale.
Income Tax Expense. The high levels of loan charge-offs and other losses, which
were largely responsible for losses during the periods, effectively eliminated
federal income tax liability for fiscal 1997, fiscal 1996, and fiscal 1995. The
Company's income tax provision includes state and local taxes on the greater of
combined entire net income, combined alternative entire net income or combined
taxable assets. Certain subsidiaries provide for state and local taxes on a
separate company basis on income, capital, assets or an alternative minimum tax.
For additional information, see Note 19 to the Consolidated Financial
Statements.
Under SFAS No. 109, at June 30, 1997, the Company recorded a net deferred tax
asset of approximately $19.6 million and deferred tax liabilities of $19.6
million. The net deferred tax asset reflects gross deferred tax assets of $56.4
million and a valuation allowance of $36.9 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carryforwards.
Generally, the amount of an institution's net deferred tax asset may serve to
increase its net worth under generally accepted accounting principles. However,
because of the net losses incurred by the Company in recent years, the Company
established a $36.9 million valuation allowance, resulting in a net deferred tax
asset of $19.6 million. The valuation allowance increased by approximately $2.9
million during the fiscal year ended June 30, 1997. Realization of the net
deferred tax asset is expected to occur upon reversal of existing taxable
temporary differences for which deferred tax liabilities of $19.6 million have
been recorded.
759883.5
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<PAGE>
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 1997, the Company completed a review of its potential
current and deferred federal and state tax liability for the fiscal year in
light of the Branch Sale and its related effect. As a result of the review of
its potential current and deferred tax liabilities and the results of operations
for the twelve months ended June 30, 1997, the Company reduced its provision
(recorded a benefit from) for state and local income taxes by $3.3 million.
Additionally, the Company reduced its estimated current state and local income
tax liability at June 30, 1997 to reflect the effect of the Branch Sale and
disposition transactions completed during the twelve months ended June 30, 1997.
Income tax expense in 1996 was $11.7 million, which was largely attributable to
provisions made for taxes associated with the Predecessor Bank's $77.6 million
gain on the Branch Sale. During 1996, the provision for income taxes differs
from the amount computed by applying the statutory Federal income tax rate of
35% to the reported income before provision for income taxes primarily due to
state and local income and franchise taxes and limitations on the recognition of
tax benefits of net operating losses.
Asset Quality
Loan Asset Portfolio Composition The high levels of the Company's non-performing
loan assets in recent years was primarily attributable to the Company's emphasis
during the mid- to late-1980s on loans to joint ventures for the acquisition,
development and construction of real estate in which the Company or a subsidiary
had an equity interest, commercial business loans, commercial real estate loans
and multi-family residential loans. Primarily as a result of the restrictions
imposed by the NYSBD, the Company did not originate any such loans during the
years ended June 30, 1998 and 1997.
Among various types of loans secured by real estate, commercial real estate,
construction and multi-family residential loans are generally considered to
involve more risk than single-family residential loans due to, among other
things, the higher principal amount of such loans and the effects of a downturn
in general economic conditions, which may result in excessive vacancy rates,
inadequate rental income levels and volatility in real estate values. At June
30, 1998, the Company's total loans secured by real estate portfolio of $59.0
million included $24.6 million or 41.8% of multi-family residential loans and
$33.1 million or 56.0% of commercial real estate loans. Since the early 1990s,
the Company continued to originate such loans, on a limited basis, in connection
with the sale of investments in real estate and other resolutions of
non-performing assets.
The Company discontinued construction lending and loans to joint ventures in
1991. Construction lending is considered to involve even more credit risk than
multi-family residential and commercial real estate lending. Construction loans
generally require only interest payments prior to the ultimate sale or lease of
the completed project, which are funded by the lender and added to the
outstanding principal of the loan. To evaluate a construction loan prior to
completion, leasing and/or sale of the underlying property, the Company must
rely on estimates of anticipated completed cost and subjective assessments of
future demand for the completed project. Accurate assessments of these factors
have been (and continue to be) difficult to perform because of the weakness of
the local economies and the real estate markets in which the Company has engaged
in lending activities. Loans to joint ventures are subject to the same risks as
construction loans and may even be more susceptible to risks of uncertain costs
and changing economic conditions due to the broader scope and longer term of
some ventures and the Company's status in some ventures as an equity
participant.
The Company's multi-family residential, commercial real estate and construction
lending activities included activities conducted outside of its primary market
area, primarily in states on the eastern and western coasts of the United
States. Although the Company's largest concentration remains in New York, in
which the Company had $53.2 million of multi-family residential and commercial
real estate at June 30, 1998, primarily located in the New York metropolitan
area, at such date the Company also had $1.4 million, $1.8 million and $1.3
million of such loans in California, Kentucky and other states, respectively.
Like the New York metropolitan area, certain of these states, particularly
California, have experienced adverse economic conditions, including declining
business and real estate activity and declining real estate values, resulting in
increases in loan delinquencies, defaults and foreclosures. Loans secured by
properties located outside of the Company's primary market area may involve a
higher degree of risk because the Company may not be as familiar with economic
conditions and other relevant factors as it would be in the case of loans
secured by properties in its primary market area.
759883.5
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<PAGE>
Non-performing loans are those loans placed on non-accrual status and loans
which are on accrual status but delinquent 90 days or more. The Company
generally places a loan which is delinquent 90 days or more on non-accrual
status unless it is well secured and, in the opinion of management, collection
appears likely. In addition, the Company may place a loan on non-accrual status
even when it is not yet delinquent 90 days or more if the Company makes a
determination that such loan is not collectible. When loans are placed on
non-accrual status, any accrued but unpaid interest on the loan is reversed and
future interest income is recognized only if actually received by the Company
and collection of principal is not in doubt.
The commercial business lending activities emphasized by the Company during the
mid-to late-1980s also involved a high degree of risk. These activities were
conducted primarily through Quest, a wholly-owned subsidiary of the Company
which was formed in 1986 to implement a program of secured and unsecured
commercial business lending. The loans, and in certain cases equity investments,
made by Quest generally involved the buyout, acquisition or recapitalization of
an existing business and included management buyouts and corporate mergers and
acquisitions. Such transactions frequently resulted in a substantial increase in
both the borrower's liabilities and its liabilities-to-assets leverage ratio,
thus increasing the prospects for default. The Company discontinued its new
commercial business lending activities in 1991 and, as a result, the Company's
gross commercial business loans decreased to $8.5 million at June 30, 1998, as
compared to $12.8 million at June 30, 1997. At June 30, 1998, the remaining
investments made through Quest consisted of $1.3 million of equity securities,
net.
759883.5
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<PAGE>
The following table summarizes the gross and net carrying values of the
Company's non-performing loan assets at June 30, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Writedowns Net Book Value
Gross Specific as a percentage of
Balance Reserves (1) Net Value Gross Balance
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $ 1,306 $ 194 $ 1,112 85.2%
Multi-family residential 14,724 6,485 8,239 56.0
Commercial real estate 6,611 3,900 2,711 41.0
--------- ----- ----- -----
Total non-performing real
estate loans 22,641 10,579 12,062 53.3
Commercial business 8,458 2,290 6,168 72.9
Consumer 1,973 50 1,923 97.5
Total non-performing
commercial business and
consumer loans 10,431 2,340 8,091 77.7
------ ----- ----- ----
Total non-performing loans
$ 33,072 $ 12,919 $ 20,153 60.9%
========== ======== ========= =====
</TABLE>
Non-performing Loan Activity. The following tables sets forth the activity in
the Company's non-performing loan assets during the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $ 47,948 $ 36,816 $ 57,550
Additions 3,266 16,033 27,662
Transfers to REO -- (34) (7,852)
Write-offs (8,917) -- (7,825)
Moved to performing loans (2,165) -- (14,738)
Satisfaction/sales (7,060) (4,867) (17,981)
-------------- --------------- ---------------
Ending balance $ 33,072 $ 47,948 $ 36,816
============== =============== ===============
</TABLE>
Non-performing loans decreased by $14.9 million or 31.0% during the year ended
June 30, 1998 following an increase of $11.1 million or 30.2% during the fiscal
year ended June 30, 1997. The decrease in non-performing loans in fiscal 1998
reflects continued efforts to liquidate assets. The increase in non-performing
loans in 1997 was the result of the continued deterioration in certain loans
placed in non-performing status.
Loans to Finance the Sale of Real Estate. The Company had previously financed
the sale of investments in real estate under appropriate circumstances. Such
financing was provided by the Company on what management of the Company
considered to be market terms, which generally were more flexible than the
Company's standard underwriting guidelines for multi-family residential and
commercial real estate loans. All loans to finance the sale of investments
759883.5
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<PAGE>
in real estate were approved in advance by the Board of Directors of the Company
and involve an amount of borrower equity and other terms which result in the
transaction constituting a sale of the property under generally accepted
accounting principles. At June 30, 1998 and 1997, the Company did not retain any
loans which had been made to finance the sale of investments in real estate,
except those reflected in loans sold, with recourse, net. (See "Asset Sales" and
Notes 8, 9 and 11 to the Consolidated Financial Statements).
Restructured Loans. The Company's asset resolution efforts previously included
the restructuring of loans primarily as a result of the financial condition of
the property which secures the loan. The Company encourages restructure
agreements only when it is in the best interest of the Company and it is
practical for the borrower.
The Work-Out Group, and after the Branch Sale RB Management, is responsible for
promptly responding to problem loans to determine if a restructuring is viable
or to commence foreclosure proceedings. Many problem loans are such due to
market conditions (particularly vacancies or market-driven rent reductions,
either of which may result in an impairment of the economic viability of the
underlying property). Therefore, non-performing loans may be restructured by an
agreement which recognizes that the borrower's inability to meet contractual
terms may be remedied through a modification which both protects the financial
interests of the Company and is economically feasible for the borrower.
At June 30, 1998, the Company had restructured loans which aggregated $23.0
million and were performing in accordance with their restructured terms. At the
same date, the Company's restructured loans had been outstanding or periods
which range from 17 months to approximately five years. The Company's
restructured loans generally have performed in accordance with their
restructured terms. At June 30, 1998, the Company had 3 restructured loans with
an aggregate balance of $15.8 million which were included in the Company's
non-performing loans. Payments on these loans are being made in accordance with
the restructured terms.
As a result of restructurings which reduced the initial interest rate on certain
loans, the Company's restructured loans had a weighted average rate of 7.08% at
June 30, 1998, as compared to an original weighted average rate of 10.16%. The
Company's restructured loans generally do not call for the payment of foregone
interest at a later date, although many of such loans provide for increases in
the interest rate over the life of the loan.
The Company's restructured loans may have been renegotiated to lower the
interest rate, to defer the payment of principal and/or interest or to effect
other concessions. Because restructured loans may include concessionary terms
related to interest rates, payment terms, loan-to-value ratios and debt service
coverage, however, such loans have a higher degree of credit risk than the
remainder of the performing loans in the Company's loan portfolio.
The following table sets forth information regarding the Company's restructured
loans at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family residential $ 22,499 $ 23,954 $ 27,167
Commercial real estate 500 500 2,675
Commercial business -- -- --
------------- ----------- ------------
Total $ 22,999 $ 24,454 $ 29,842
============= =========== ===========
Total restructured loans as a
percentage of total loans 33.12% 25.53% 34.65%
Total restructured loans as a
percentage of total assets 12.18% 11.55% 10.45%
</TABLE>
Allowance for Credit Losses. Although the process of evaluating the adequacy of
the Company's reserves involves a high degree of management judgment, such
judgment is based, in part, on systematic procedures deemed helpful in assessing
the adequacy of the Company's reserves. The Company's reserve analysis is
prepared quarterly in conjunction with the Company's internal asset
classification system and is used by management in determining if an additional
provision is required to maintain the allowance for credit losses at an
appropriate level or additional writedowns of equity investments and investments
in real estate are needed to reduce the carrying values of such assets in
accordance with the requirements of generally accepted accounting principles.
759883.5
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<PAGE>
The Company's reserve analysis is a computation of reserve requirements based
upon the risks inherent in the various asset portfolios. The various categories
of loans are grouped separately to recognize the various degrees of risk
associated with them. Loan portfolios are further stratified by internal asset
classification categories to assign higher risk weighted reserve percentages or
include targeted reserve definitions. Aggregated computed reserve balances are
compared to recorded reserves to measure the adequacy of reserve levels.
The Company's provisions for credit losses and writedowns of investments in real
estate have been significant in recent years. Such provisions and writedowns
aggregated $2.6 million, $20.7 million and $7.1 million during the years ended
June 30, 1998, 1997 and 1996 and contributed significantly to the Company's
recorded net losses (excluding the effects of the Branch Sale in 1996) during
those years.
At June 30, 1998, the Company's allowance for credit losses amounted to $20.0
million or 28.9% of total loans and 60.6% of non-performing loans, as compared
to $31.6 million or 33.0% of total loans and 65.9% of non-performing loans at
June 30, 1997. The decrease in the Company's allowance for credit losses in 1998
reflects the continued decrease in the size of the Company's loan portfolio and
management's internal analysis of the composition of its non-performing assets.
Of the $20.0 million allowance for credit losses at June 30, 1998, $12.9 million
or 64.5% were specific reserves relating to particular loans and $7.1 million or
35.5 were general reserves. See Note 10 to the Consolidated Financial
Statements.
Management of the Company, based on facts available to it, believes that the
Company's allowance for credit losses at June 30, 1998 was adequate and that the
net carrying value of the Company's investments in real estate equaled the lower
of cost or fair value minus estimated costs to sell. It is anticipated, however,
that the adverse effects of the high level of the Company's non-performing
assets, consisting of provisions for credit losses, net loan charge-offs, loss
of interest income on non-performing loans, writedowns of investments in real
estate and increased operating expenses as a result of the allocation of
resources to the collection and work-out of non-performing assets, will continue
to adversely affect the Company's operations. Because the nature and extent of
these adverse effects will be dependent on many factors outside the control of
the Company, including conditions in the relevant real estate markets and
prevailing interest rates, these adverse effects are not presently determinable
by the Company.
In establishing an appropriate level of loan loss reserves, the Company does not
attempt to predict whether or how much the real estate market and general
economy of its market area may decline in the future. However, the Company
continues to closely monitor the status of its loan portfolio in relation to the
economic and market conditions in the relevant area for any further signs of
weakening. If declining conditions in the relevant area continue, particularly
in the New York City metropolitan area, causing existing non-performing loan
situations to worsen and additional loans to be classified as non-performing,
significant additional provisions for credit losses may be required.
759883.5
-45-
<PAGE>
The following table sets forth information concerning the activity in the
Company's allowance for credit losses during the periods indicated.
<TABLE>
<CAPTION>
Fiscal
Six months Year ended
Fiscal Year Ended June 30, ended June 30, December 31,
------------------------ --------------------------- -------------- -------------
(Dollars in Thousands)
1998 1997 1996 1995 1994 1993
---------- --------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Average loans outstanding $ 86,139 $99,403 $1,018,477 $1,007,333 $1,080,317 $1,311,904
=========== ======= ========== ========== ========== ==========
Allowance at the beginning of the period $ 31,570 $34,142 $33,985 $41,076 $55,258 $92,589
Charge-offs:
Single-family residential loans (2,026) (3,523) (1,089) (1,302) (39) (2,046)
Multi-family residential loans (1,147) (1,287) (2,665) (850) (13,336) (11,060)
Commercial real estate loans (3,801) -- (6,795) (11,160) (1,518) (23,249)
Commercial business loans (3,773) (23) -- (1,380) (1,500) (442)
Consumer loans and other (2,827) -- (21) (9) (36) (13,917)
----------- ------- ------- ------- ------- -------
Total loans charged off (13,574) (4,833) (10,570) (14,701) (16,429) (50,714)
=========== ======= ========== ========== ========== ==========
Recoveries:
Single-family residential loans 204 98 40 10 -- --
Multi-family residential loans 3 704 -- 1,424 -- --
Commercial real estate loans 146 437 -- 1,135 347 555
Consumer loans and other 188 22 1 -- -- --
----------- ------- ------- ------- ------- -------
Total loans recovered 541 1,261 41 2,569 347 555
Net charge-offs (13,033) (3,572) (10,529) (12,132) (6,082) (50,159)
Additions charged to operating expenses 1,500 1,000 5,250 5,041 1,900 12,828
Additions charged to non-operating expenses -- -- 5,436 -- -- --
----------- ------- ------- ------- ------- -------
Allowance at end of period (1) $ 20,037 $31,570 $34,142 $33,985 $41,076 $55,258
=========== ======= ========== ========== ========== ==========
Ratio of net charge-offs to average
loans outstanding 15.13% 3.59% 1.03% 1.20% 4.05% 3.82%
Ratio of allowance to total loans at
end of period (1) 28.86 32.96 33.15 3.36 4.06 5.36
Ratio of allowance to non-performing
loans at end of period (1) 60.59 65.84 92.74 59.05 37.23 34.25
</TABLE>
(1) As noted above, the decrease in the Company's allowance for credit losses
in recent periods reflects the transfer of a substantial amount of
non-performing loans to investments in real estate and the Company's loan
restructuring activities, the continued decrease in the size of the
Company's loan portfolio and management's internal analysis of the
composition of its non-performing assets.
(2) Percentages for the six month period are computed on an annualized basis.
759883.5
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<PAGE>
The following table sets forth information concerning the allocation of the
Company's allowance for credit losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
------------------------------------------------------------------------------------------------
Percent Percent Percent
Of Total Of Total Of Total
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Single-family
residential $ 328 0.47% $ 1,294 1.86% $ 1,410 2.03%
Multi-family
residential 9,011 12.98 8,553 12.32 12,359 17.80
Commercial real
estate 7,290 10.50 16,543 23.82 10,822 15.59
Construction -- 0.00 -- 0.00 -- 0.00
Commercial
business 3,157 4.55 4,357 6.27 6,956 10.02
Consumer 251 0.36 823 1.19 2,595 3.74
---------- ---------- ---------
$ 20,037 $ 31,570 $ 34,142
========== ========== ==========
</TABLE>
June 30, 1995 June 30, 1994
----------------------------------------------------------
Percent Percent
Of Total Of Total
Loans by Loans by
Amount Category Amount Category
------ -------- ------ --------
Single-family
residential $ 986 0.42% $ 1,488 0.71%
Multi-family
residential 2,969 1.19 3,008 1.23
Commercial real
estate 21,302 4.59 30,248 6.19
Construction 2,746 51.80 717 11.65
Commercial
business 5,982 16.30 5,533 13.76
Consumer -- 0.00 82 0.53
--------- ---------
$ 33,985 $ 41,076
========== ==========
759883.5
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<PAGE>
Asset Carrying Values. Investments in real estate are recorded on the books of
the Company at the lower of the Company's historical cost, less applicable
depreciation for real estate held for investment, or the estimated fair value of
the property minus estimated costs to sell. Adjustments made to the value at
transfer are charged to the allowance for credit losses. See Notes 1, 10, 12 and
13 to the Consolidated Financial Statements.
The Company primarily utilizes two means of valuation in evaluating the carrying
value of its investments in real estate: (1) appraisals and (2) discounted cash
flows. The discounted cash flow ("DCF") is based on assumptions wherein the
forecasted future cash flow attributable to the benefits of ownership are
discounted, at a rate commensurate with the risk involved, to a present value.
The DCF is based on information from various sources, including: actual
operating results, recent appraisals, third party market information and current
investment parameters. The Company believes that the DCF approach generally is
the most accurate predictor of value of a real estate asset over time. This
approach is an accepted means of valuation under GAAP. Under GAAP, among other
things, the DCF method allows for adjustments when local markets are dominated
by forced or liquidation sales, or when properties have unusual characteristics,
so that value estimates can be based on rent levels and occupancy that are
reasonably estimated to be achieved over time. The Company utilizes management
judgement and does not generally make adjustments to appraisal assumptions using
worst case scenarios that are unlikely to occur, direct capitalization of
non-stabilized income flows or simple projections of current levels of operating
income if markets are depressed but can be expected over a reasonable period of
time to return to stabilized conditions. Generally, for purposes of the DCF
analysis, property cash flows will be extended until stabilization, as it is the
Company's intent is to sell investments in real estate as quickly as possible,
assuming a stabilized sales price can be achieved. Assumptions in the DCF model
are made to most accurately reflect the Company's asset disposition plan.
The Company's real estate loan appraisal policy generally requires that all
appraisals conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and
prepared by an appraiser who is either certified or licensed by the state in
which the property is located. Appraisals may be performed by an outside fee
appraiser or by a staff appraiser, provided that, among other things, such
appraiser is independent of the lending, investment and collection functions of
the Company.
The Company generally reviews the value of its investments in real estate on at
least a quarterly basis. In the event that such reviews indicate a decline in
the value of such investments, writedowns are recorded as appropriate.
Strategy. Following the Branch Sale, the Management Company assumed the duties
of the Predecessor Bank's former "Work-Out Group" which monitored the
Predecessor Bank's problem assets. The Management Company continues to monitor
the Company's problem assets and develop individual business plans, including
cash flow analysis, for each problem asset after inspections, analysis of
economic factors and meetings with the borrower and counsel. These plans are
then documented for approval of the Board of Directors of the Company. See
"Management."
Loans which become delinquent are analyzed to determine the nature and extent of
the problem and whether a restructuring of the loan or some other method of
resolution is appropriate under the circumstances. Every effort is made by the
Company to work with borrowers who are cooperative with the Company to effect a
restructuring that is economically feasible for both parties. When the Company
concludes that a restructuring is not economically feasible or where the
borrower does not demonstrate a willingness to cooperate, the Company pursues
available legal remedies. In most cases, the Company's strategy in recent years
has been to aggressively pursue the foreclosure process when a restructuring or
other resolution of a non-performing loan does not appear to be feasible or
otherwise in the best interests of the Company. This strategy has been pursued
so that the Company can acquire control of the security property as soon as
possible, and thereby implement a strategy designed by the Company for
disposition and ultimate resolution.
Loans that go through the foreclosure process, particularly in New York, are
subject to extensive delays before the Company can gain title to the property.
Non-judicial foreclosure generally is unavailable in New York, and the
procedures mandated by New York law can result in time-consuming litigation in
order to foreclose a mortgage loan. Moreover, the federal and state courts in
New York are overburdened with litigation and, as a result, decisions are often
delayed. Further complications occur when bankruptcy proceedings are involved.
For all these reasons, it can take an extended period of time, often two to six
years, for a lender to obtain title to property that secures a loan which is in
default. Although the foreclosure process can be long and complicated, the
Company aggressively pursues foreclosures or negotiates with borrowers to
acquire properties which secure problem loans by deed-in-lieu of foreclosure.
759883.5
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<PAGE>
The Company's general approach once it has acquired an investment in real estate
has been to seek to minimize further losses to the Company through active
management of the properties while they are held by the Company and by
developing disposition strategies tailored to the individual properties and
whose ultimate objective is to sell each property at, or above, its net book
value. The Company generally pursues a specific disposition strategy for each
investment in real estate because it believes that the depressed levels of the
real estate markets in which the Company has engaged in lending activities will
improve as national and regional economies recover and that it has the requisite
real estate expertise to individually address and resolve each problem asset.
Although the Company has evaluated bulk sales of non-performing assets from time
to time, it has not elected to pursue this strategy to date because it believes
that the discounts which are sought by potential purchasers are excessive, that
individual disposition strategies have the most potential for maximum recovery
and return to the Company and that the Company did not have sufficient equity
capital prior to and following the Offering to support such a strategy. There
can be no assurance, however, that the Company will be successful in its
disposition strategies.
The Company's approach with respect to a particular investment in real estate
generally falls into one of the following categories: (i) attempt to sell the
investment as soon as practicable, (ii) actively manage the property until the
cash flow and other relevant factors have been stabilized or (iii) develop the
property to facilitate sale. Each of these strategies generally involves some
investment by the Company to improve the property in order to make it more
saleable, which can range from minor fix-up costs to substantial costs to
develop the property. Each work-out strategy is reviewed and approved by the
Company's Board of Directors.
In most cases, the Company's strategy consists of an attempt to sell the
property as soon as practicable. The Company generally works closely with a real
estate brokerage firm in this regard, and frequently will specifically target
known investors which it believes may be interested in a particular property
which is owned by the Company. In addition, in a few cases during the year ended
December 31, 1993, the Company used the public auction process to offer for sale
certain investments in real estate. Such auctions can provide broader exposure
to potential purchasers than may be able to be obtained through listings by a
real estate brokerage firm in the area in which the property is located. Public
auctions involve the payment of fees to the auctioneer, which can vary based on,
among other things, whether the property is sold and on what terms.
In many cases it seeks to stabilize the cash flow from the property by investing
in necessary improvements and seeking to increase the occupancy of the property.
This approach increases the amount of time that the Company holds the property,
but may enhance the value of the property and be the best means of disposing of
the investment without further loss. In certain cases, the Company will have
made the investment and taken the actions necessary to stabilize the cash flow
from the property, but the real estate markets in the area in which the property
is located will not have stabilized or other factors will be present which
prevent the Company from selling the property at a price which is reflective of
its estimated value. In some cases, the cash flow from the property has been
stabilized such that it is providing a yield above the Company's cost of funds,
thus effectively making it an earning asset. Although such assets continue to be
classified by the Company as investments in real estate and, thus,
non-performing assets, the yield provided by the properties increases the
Company's flexibility to maximize their value in connection with a sale.
In a number of cases, the Company's strategy to dispose of an investment in real
estate has consisted of development of the property. Although this approach may
involve the best prospects for maximizing the return to the Company, it also may
involve more risk and, as a result, the Company generally does not pursue this
alternative unless other alternatives are clearly not preferable under the
circumstances. In most cases in which this alternative is pursued, development
previously has been initiated by the defaulted borrower prior to the Company's
acquisition of the property upon foreclosure or by deed-in-lieu thereof. On
occasion, however, the Company has commenced development of an investment in
real estate as a disposition strategy.
Liquidity
The Company must maintain sufficient liquidity to meet its funding requirements
for debt repayments related to asset sales, operating expenses, development
costs related to certain real estate projects, and to satisfy the regulatory
requirements described below.
At June 30, 1998, the Company had $68.8 million in borrowed funds. In connection
with the Branch Sale, the Company obtained financing with Marine (Initial
Facilities) which amounted to $60.6 million as of June 30, 1998.
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<PAGE>
Borrowed Funds related to Asset Sale Transactions amounted to $8.2 million at
June 30, 1998. The Company actively monitors and manages its cash inflows and
outflows in an attempt to maximize payment of its debt obligations to Marine and
to invest, to the extent possible, all cash balances.
The Company seeks to maintain liquidity within a range of 5% to 10% of total
assets. Liquidity for this purpose is defined as unrestricted cash. At June 30,
1998, the Company's liquidity ratio, as so defined, amounted to 6.6% which was
within the maintenance range.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts
accounting standards (generally referred to as Statements of Financial
Accounting Standards, or "SFASs") which set forth required generally accepted
accounting principles. Set forth below is a description of certain of the
accounting standards recently adopted by the FASB which are relevant to
financial institutions such as the Company.
SFAS No. 121. In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of." The statement requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The SFAS No. 121 definition of long-lived assets includes the
Company's other real estate owned and real estate held assets. There was no
material effect on the reported operations of the Company resulting from the
implementation of SFAS No. 121, which was adopted by the Company during the
fiscal year ended June 30, 1997.
SFAS No. 128. In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The implementation of SFAS No. 128 is not expected to have any
effect on the Company's primary earnings per share for the years ended June 30,
1997, 1996 and 1995.
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<PAGE>
SFAS No. 130. During June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which is required to be adopted for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all components
of comprehensive income be reported in a financial statement. The adoption of
this standard will not have a material impact on the Company's financial
position or results of operations.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial positions and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and increases in interest rates paid to depositors. Unlike most
commercial enterprises, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Over any given term, interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
Impact of Year 2000.
The Company has completed an assessment to modify or replace portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. Since the Company's accounting software
is maintained and supported by a third party, the total year 2000 cost is
estimated to be minimal.
The Company believes that modifications to existing software and conversions to
new software, the year 2000 issue will not pose significant operational problems
for its computer systems. Further, due to the limited number of assets managed
by the Company and the limited scope of the Company's continuing operations,
which could be managed and accounted for by methods not relying on the computer
systems currently employed by the Company, if such modifications are not made,
or if such modifications and conversions are not completed in a timely manner,
the year 2000 issue is unlikely to have a material impact on the operations of
the Company.
Risks Associated with Forward-Looking Statements.
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risk, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following,
which are discussed in greater detail in the "Risk Factors" section of the
Company's Registration Statement on Form S-4 (File No. 333-386730 and File No.
333-386730-01) filed with the SEC: general economic conditions, which will among
other things, affect demand for commercial and residential properties,
availability and credit worthiness of prospective tenants, lease rents and the
availability of financing: difficulty of locating suitable investments;
competition; risks of real estate acquisition, development, construction and
renovation; vacancies at existing commercial properties; dependence on rental
income from real property; adverse consequences of debt financing; risks of
investments in debt instruments, including possible payment defaults and
reductions in the value of collateral; illiquidity of real estate investments;
lack of prior operating history; and other risks listed from time to time in the
Company's reports filed with the SEC. Therefore, actual results could differ
materially from those projected in such statements.
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<PAGE>
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item and the reports of the
independent accountants thereon required by Item 14(a)(2) appear on pages 71 to
111. See accompanying Index to the Consolidated Financial Statements on page 70.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10
DIRECTORS AND PRINCIPAL OFFICERS OF THE REGISTRANT
Subsequent to the closing of the Branch Sale, although the Company has executive
officers under SEC requirements and New York Banking Law, which was formerly
applicable to the Predecessor Bank, the Company no longer maintains any
significant staff of employees to manage the Company's affairs. Rather, the
day-to-day management responsibilities of the Company are vested with the
Management Company, a newly-formed management company affiliated with Mr.
Dworman. A significant amount of services, necessary to manage and dispose of
the Company's assets, have been and will be provided by the Management Company
or third-party subcontractors who will not have any continuing fiduciary
obligations to the Company or the stockholders. The selection of third-party
subcontractors to provide various services to the Company will be made by the
Management Company, subject to the ratification by committees of the Board of
Directors but without stockholder approval. The Company's success in maximizing
returns from the disposition of its assets will depend on the efforts of the
Management Company and third-party contractors retained to provide services to
the Company.
Directors of the Company
The Company's Board of Directors is divided into three classes of directors,
serving staggered three-year terms. At the 1998 annual meeting of stockholders
of the Company, the holders of the Preferred Stock elected two directors to
serve for a term of one year. The right of holders of Preferred Stock to elect
such two directors continues until dividends on the Preferred Stock have been
paid for four consecutive quarterly dividend periods at which time such voting
rights will terminate.
The name, age as of September 21, 1998, position with the Company, if any, term
of office following the Annual Meeting, and period of service as a director, of
each of the Company's directors, nominees for election director and proposed
nominees for appointment as director are as follows:
<TABLE>
<CAPTION>
Name Age Position Class Director
---- --- -------- ----- --------
Term Since(1)
Expires
<S> <C> <C> <C> <C>
Robin Chandler Duke......... 74 Director, Vice President and 1999 1977
Secretary (2)
Alvin Dworman............... 72 Director (3) 2001 1998
William D. Hassett.......... 62 Director (3) (4) 2000 1976
James J. Houlihan........... 46 Director (4) 2001 1998
David J. Liptak............. 40 Director (5) --- 1998
Jerome R. McDougal.......... 70 Director and Chairman of the 2000 1991
Board (3)
Edward V. Regan............. 68 Director (2) 2001 1995
David A. Shapiro............ 47 Director (2)(4) 1999 1998
Jeffrey E. Susskind......... 45 Director (5) --- 1998
(1) Includes tenure with the Predecessor Bank.
(2) Member of the audit committee.
(3) Member of the executive committee.
(4) Member of the asset management committee.
(5) Elected by holders of Preferred Stock for a term of one year.
</TABLE>
The principal occupation for the last five years and selected biographical
information of each of the directors, nominees for director and executive
officers is set forth below.
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<PAGE>
Robin Chandler Duke. Ms. Duke is National Chairman of Population Action
International, and she serves as a director of International Flavors and
Fragrances and American Home Products Corporation. Ms. Duke has served in an
unsalaried capacity as Vice President and Secretary of the Company and the
Predecessor Bank since July 1996.
Alvin Dworman. Mr. Dworman is the founder and chairman of The ADCO Group, a
financial services, merchant banking and real estate company established in
1981. Mr. Dworman also has been a director of the Sequa Corporation since 1987
and has been serving as a member of the New York State Real Estate Advisory
Committee since 1985.
William D. Hassett. Mr. Hassett, a real estate investor and managing member of
Hassett-Belfer Senior Housing L.L.C. is also owner of W.D. Hassett, Inc., a real
estate management company. Mr. Hassett, formerly a director of Olympia & York
Holdings (USA), was the Chairman of the New York State Urban Development
Corporation from 1977 to 1981, Chairman of the Battery Park City Authority from
1979 to 1981, Chairman of the Board of the New York State Dormitory Authority
from 1985 to 1994 and is a former New York State Commerce Commissioner. He
presently serves as a member of the Real Estate Advisory Committee to the New
York State Common Retirement Fund.
James J. Houlihan. Mr. Houlihan has been a partner of Houlihan-Parnes Realtors,
LLC, a commercial real estate firm for more than the past five years. Mr.
Houlihan is president of JHP Realty Advisors, Inc., a real estate advisory firm
and a partner in each of Kislev Management Corp., a commercial real estate
management firm, and Real Estate Servicing, Inc. and C.C. Capital Servicing,
Inc., both mortgage servicing firms.
David J. Liptak. Mr. Liptak has been the President of West Broadway Partners,
Inc., which is the General Partner of West Broadway Partners, L.P. and the
investment manager of AIG International West Broadway Fund, Ltd for more than
the past five years. Mr. Liptak was previously a Senior Vice President at
Oppenheimer & Co., Inc.
Jerome R. McDougal. Mr. McDougal served as Chief Executive Officer of the
Company and the Predecessor Bank from April 1995 and as President from July 1997
until he retired from such positions in June 1998. Mr. McDougal served as
President and Chief Executive Officer of the Predecessor Bank from March 1991 to
April 1995, at which time he became Chairman of the Board and Chief Executive
Officer. Prior to joining the Company, Mr. McDougal was Chairman and Chief
Executive Officer of the Apple Company for Savings for four years. Prior to
joining Apple Company, Mr. McDougal held various positions, including management
positions in a manufacturing concern, operating a consulting company, and
running one of the largest automotive retail chains in the New York metropolitan
area.
Edward V. Regan. Mr. Regan is Chairman of the Municipal Assistance Corporation
and Policy Advisor for the Jerome Levy Economics Institute. Mr. Regan previously
served as the New York State Comptroller from 1979 to 1993.
David A. Shapiro. Mr. Shapiro has been a portfolio manager for Seneca Capital
Management LLC, an investment management firm since May 1995. Mr. Shapiro
founded Asset Holdings Group, a privately held originator of senior and
mezzanine commercial real estate loans formed in 1993. From 1991 to 1993, Mr.
Shapiro also served as an advisor to the Predecessor Bank in connection with the
restructuring and disposition of a portion of its commercial real estate
portfolio.
Jeffrey E. Susskind. Mr. Susskind has been a principal of Strome, Susskind
Investment Management, L.P., an investment management company located in Santa
Monica, California for more than the past five years. Mr. Susskind was
previously an investment manager with Kayne, Anderson & Co. Mr. Susskind is also
the Chairman of the Board of Sheridan Energy, Inc., a publicly traded domestic
independent energy company engaged in the production of oil and gas.
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<PAGE>
Board of Directors and Committees
The Company is managed by a nine-member Board of Directors. The Board of
Directors has three standing committees, an executive committee, an asset
management committee and an audit committee.
Executive Committee. The executive committee is comprised of Messrs. Dworman,
Hassett and McDougal. The executive committee oversees the management of the
day-to-day business and affairs of the Company and the implementation of the
management of the Company's assets.
Audit Committee. The audit committee is comprised of Messrs. Regan and Shapiro
and Ms. Duke. The audit committee reviews and provides recommendations to the
Board of Directors with respect to the engagement of the Company's independent
auditors, financial reporting practices and internal accounting and financial
controls and procedures of the Company and monitors the Company's compliance
with its policies and procedures. In addition, the audit committee also
administers and reviews all compensation policies and will provide
recommendations to the Board of Directors with respect thereto.
Asset Management Committee. The asset management committee is comprised of
Messrs. Hassett, Houlihan and Shapiro. The asset management committee oversees
the performance of the asset portfolio of the Company.
During fiscal year 1998, the Board of Directors (including meetings held by the
Board of Directors of the Predecessor Bank) held 17 meetings, including
telephonic meetings. The audit committee held 3 meetings during the fiscal year.
The asset management committee held 11 meetings. During fiscal year 1998, each
director attended 94% of the total number of meetings of the Board of Directors
and 100% percent of the total number of meetings of committees on which he or
she served.
The Company's Board of Directors may, from time to time, establish certain other
committees of the Board to facilitate the management of the Company.
Advisory Board: Upon consummation of the Branch Sale, the new Board of Directors
established an Advisory Board. The purpose of the Advisory Board is to provide
such additional support and advice to the Board of Directors as may from time to
time be requested by the Board of Directors. Members of the Advisory Board will
be selected annually. The initial members of the Advisory Board are Messrs.
Austin 'S. Murphy (Chairman), David L. Yunich, Thomas A. Coleman, Alan V.
Tishman and John T. Sargent, each of whom served as a director of the Company in
the previous year through June 28, 1996. During 1998, the Board of Directors
dissolved the Advisory Board and all members submitted their resignations.
Directors will be elected in a manner consistent with, and shall serve for a
term, as provided in the Company's Restated Organization Certificate as Amended
and By-Llaws.
The Management Company; The Management Agreement: The Company has engaged the
Management Company under a management agreement (the "Management Agreement") to
provide Company Management Services and Asset Management Services (each as
defined below). The responsibilities of the Management Company include, but are
not limited to, development and recommendation to the Company's Board of
Directors of strategies intended to maximize stockholder value. The Management
Company is responsible for developing, recommending and maintaining business
plans and operating budgets, individual asset and liability strategies and
decisions relating to sales and retentions of assets. The Management Company
reports to the Company's Board of Directors or its Asset Management Committee.
The Management Company was newly formed in 1996 and is controlled by Alvin
Dworman, who serves as its Managing Member. Mr. Dworman also owns 39.0% of the
outstanding Common Stock of the Company.
The Management Company has access to the expertise, resources and business
relationships accumulated by Mr. Dworman over 35 years in a wide variety of
general business activities. Mr. Dworman currently serves as a member of the
Real Estate Advisory Committee of the New York State Employee Retirement System
and is a member of the Board of Trustees of the New York Law School. As an
individual and as Chairman and Chief Executive Officer of the ADCO Financial
Group, Mr. Dworman maintains investments in a number of financial services,
banking and real estate entities. During his career, Mr. Dworman has founded,
developed, owned and managed a wide variety of entities throughout the United
States. Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B hold in
the aggregate 50.8% of the Common Stock. In connection with the equity
recapitalization offering in June 1994, Mr.
759883.5
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<PAGE>
Dworman, Odyssey Partners, L.P. and East River Partnership B agreed not to sell
their Common Stock for a period of three years. In addition, such agreement
provided that, for an additional two years, they would not sell their Common
Stock without the approval of the Board of Directors of the Company under
certain circumstances.
The terms of the Loan Agreement with Marine include a requirement that, while
any amount remains outstanding under the Facility, Mr. Dworman retain his 39%
common stock interest in the Company and remain actively involved in the
day-to-day management of the affairs of the Company and its assets.
The Management Company also employs certain individuals previously employed by
River Bank who were directly involved in managing the Company's real estate
portfolio.
"Company Management Services" includes the management of the general business
affairs of the Company, including:
1. Developing and recommending policies and procedures appropriate for
continuing the orderly disposition of the Company's assets and
implementation of all policies and procedures approved by the Company's
Board of Directors or the Asset Management Committee of the Board.
2. Providing quarterly and annual financial and operating reports and such
other information to the Company's Board of Directors and the Asset
Management Committee and Audit Committee as may be necessary and
reasonably requested by the Company's Board of Directors or such
committee.
3. Analyzing the Company's performance, including progress in continuing
the orderly disposition of the Company's assets and preparation of
financial forecasts and periodic variance analyses of actual performance
relative to plan.
4. Overseeing provision of all accounting and financial reporting services,
including maintenance and control of a general ledger, controlling
accounts payable and processing services and payroll processing
services, preparation of financial reports and regulatory compliance
reports and preparation and filing of tax returns, and establishing and
maintaining management information systems.
5. Providing treasury services and control functions, including: -
implementing cost and disbursement controls. - cash management and
investment of short-term funds.
- debt management, corporate finance and development and
implementation of alternative financing arrangement.
6. Overseeing legal and accounting services required by the Company.
7. Using best efforts to ensure compliance with any conditions imposed by
the Banking Department on the Company as a predicate to its approval of
the Branch Sale, including but not limited to, the preparation and
submission to the Banking Department of required reports.
"Asset Management Services" entails management of all of the Company's assets on
a day-to-day basis and include the following:
8. Maintaining and implementing individual business plans for each asset of
the Company, as modified from time to time to reflect changes in
conditions and circumstances.
9. Development, marketing, negotiation and execution of transactions
necessary to continue to effect the Company's asset disposition plans,
subject to the ongoing approval of the Banking Department.
10. Obtaining and overseeing marketing and brokerage activities relating to
real estate dispositions and property leasing.
11. Managing real estate activities, including retention and oversight of
third-party property managers.
12. Obtaining and overseeing third-party loan servicing, including ordinary
course monthly payment collections and pay-offs.
13. Providing loan administration services, including delinquency monitoring
and response and enforcement of rights under loan agreements.
14. Overseeing loan servicing activities for subordinated participations in
loans acquired by Marine in connection with the Branch Sale.
15. Administration of joint ventures and oversight of the business
activities the joint ventures.
The Management Company obtains and oversees the provision, on an outsourced
basis, of those services not provided directly by the Management Company. All
outsourcing arrangements is subject to prior review and recommendation as to
compensation terms by the Audit Committee and as to the other terms of the
engagement subject to prior approval
759883.5
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<PAGE>
by the Asset Management Committee of the Company's Board of Directors. The cost
of approved outsourced arrangements is borne by the Company.
The Management Company offers similar services to entities not affiliated with
Mr. Dworman, and also renders services to affiliates of Mr. Dworman.
The Management Company is paid an annual base fee for Company Management
Services in an amount not to exceed $1.25 million. The annual base fee is
reviewed no less frequently than annually by the Audit Committee of the Company
and adjusted based upon the costs expected to be incurred by the Management
Company to provide the Company Management Services. In addition, the Management
Company also receives an annual fee for Asset Management Services of 0.75% of
the average month-end book value of the Company's assets and an Asset
Disposition Success Fee of 0.75% of the proceeds from the sale or collection of
any asset sold by the Company.
During the year ended June 30, 1998, the Company accrued expenses for services
provided by the Management Company in the amount of $1,250,000 for the Base Fee
payable to the Management Company, $1,331,000 for the Asset Service Fee, and
$360,000 for Asset Disposition Fees in accordance with the fee schedule outlined
above. During 1998, the Company paid RB Management, LLC an aggregate amount of
$5,108,000. At June 30, 1998, the Company had a remaining payable to the
Management Company amount of approximately $42,000.
The Kenneth Leventhal Real Estate Group of Ernst & Young LLP, which was engaged
for this purpose by the Special Transactions Committee of the Predecessor Bank's
Board of Directors, reviewed the form and amount of the fees payable to the
Management Company and advised upon the comparability of the fees and terms to
similar arrangements negotiated on an arm's-length basis.
The Management Agreement has an initial term of three years, which will be
extended for up to two additional one-year terms if the Marine senior debt is so
extended. The Management Agreement is terminable by either party at any time on
180 days' notice with the consent of Marine or other senior lenders, as
applicable. In addition, the Company's Board of Directors, subject to the
consent of Marine, may terminate the Management Agreement without notice for
"Cause." "Cause" is defined as a material breach of the Management Agreement
and/or willful act or omission by the Management Company that is materially
detrimental to the best interests of the Company. In addition, the Management
Agreement may be terminated by the Company's Board of Directors during the last
year of any term 60 days after the sale of the last asset of the Company.
Upon any termination of the Management Agreement, the fees payable to the
Management Company will be pro rated for such year to the date of termination.
If the Management Agreement is terminated prior to the expiration of any term,
the Company also reimburses the Management Company for the reasonable costs
incurred by the Management Company in terminating its services to the Company
including, but not limited to, reasonable termination or severance payments made
to service providers or employees terminated by the Management Company as a
result of such termination.
Employees; Other Service Providers: In addition to retaining the Management
Company to provide the Company with the services described above, the Company,
subject to regulatory approval, terminated most of its employees and retained
third parties (including Fintek, Inc. and other entities controlled by Mr.
Dworman) to provide much of the administrative and non-real estate operating
functions of the Company's operations.
The Management Company has engaged Fintek, Inc. ("Fintek"), a firm 50%
beneficially owned by Mr. Dworman which has previously provided certain advisory
services to the Company, to continue to provide such services to the Company.
All fees paid to Fintek for such advisory services were the obligation of the
Management Company and were paid out of the fees received by the Management
Company from the Company. On June 28, 1996 Fintek and the Company mutually
agreed to the termination of the previous contract between Fintek and the
Company.
Persons or entities engaged by the Board of Directors, the Asset Management
Committee or by the Management Company on behalf of the Company entered into a
service contract with the Company and are compensated in accordance with market
rates for similar services. The terms of these contracts, including
compensation, were reviewed prior to execution by the Audit Committee of the
Board of Directors, and the Board of Directors engaged the Kenneth Leventhal
Real Estate Group of Ernst & Young LLP to review each service contract and to
advise the Audit Committee on the terms of the contracts and the comparability
to similar arrangements for similar services.
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<PAGE>
ITEM 11
MANAGEMENT COMPENSATION AND TRANSACTIONS
Executive Officers: Inasmuch as the Predecessor Bank had disposed of its
depository banking operations in connection with the sale of its branches and
transfer of its deposits to Marine Midland Bank in June 1996 (the "Branch
Sale"), the Company as successor does not require a large staff of officers or
employees to manage the business and affairs of the Company. Certain day-to-day
management functions are performed by RB Management Company LLC pursuant to the
terms of a management agreement. See "--Certain Relationships and Related
Transactions".
The Company's officers are Nelson L. Stephenson, who serves as president and
chief executive officer of the Company and Robin Chandler Duke, who serves
without compensation as the vice president and secretary of the Company. Set
forth below is certain biographical information for Mr. Stephenson.
Nelson L. Stephenson. Mr. Stephenson was elected to the offices of president and
chief executive officer of the Company in July 1998. For more than the past five
years, Mr. Stephenson has been President of Fintek Inc., a privately-held
financial advisory firm that provides services to the Company and the
Predecessor Bank. Mr. Stephenson is also President and a Director of
Coast-To-Coast Financial Corporation, a unitary savings and loan holding company
which owns Fintek, Inc. and Superior Bank FSB as well as other subsidiaries
engaged in consumer finance.
Remuneration of Executive Officers - Summary Compensation Table: The following
table discloses compensation received by the Company's chief executive officer
for the years indicated. The cash compensation amounts below reflect
compensation received from the Company and its subsidiaries. There were no other
executive officers who received compensation in 1998 from the Company (other
than director fees).
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other All Other
Executive Officer Base Salary Bonus Compensation Compensation
----------------- ----------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jerome R. McDougal Year ended $300,000 -- $63,214 (1) $123,110 (2)
Chairman of the June 30, 1998
Board and Chief
Executive Officer (3) Year ended 300,000 -- 66,990 (1) 117,296 (2)
June 30, 1997
Year ended 300,000 -- 84,988 (1) 112,431 (2)
June 30, 1996
</TABLE>
(1) Consists of a housing allowance, club dues, automobile and driver
expenses (aggregating $21,548, $25,324 and $42,760 for the 1998,
1997 and 1996 periods presented, respectively), certain tax
expense reimbursements and health insurance premiums.
(2) Consists of contributions of $9,000, $9,500 and $9,370 made by the
Company to its 401(k) Tax Deferred Savings Plan, accruals of and
earnings on deferred compensation in the amounts of $110,053,
$103,739 and $100,551 and payments of $4,057, approximately $4,057
and $2,400 for life and personal liability insurance premiums for
the 1998, 1997 and 1996 periods presented, respectively.
(3) Mr. McDougal retired as the company's Chief Executive Officer
effective June 30, 1998.
Employment Arrangement: Jerome R. McDougal was compensated pursuant to an
arrangement with the Predecessor Bank reached in 1991. The terms of Mr.
McDougal's employment were memorialized in the minutes of the Predecessor Bank's
January 22, 1991 Board of Directors meeting, which provided for an annual salary
of $375,000 and customary employee benefits commensurate with Mr. McDougal's
position at the Company. $75,000 of Mr. McDougal's annual salary was in the form
of deferred compensation. Mr. McDougal's annual deferred compensation accrues
quarterly in equal amounts and earns a variable rate of interest on the
cumulative balance. Prior to the Branch Sale, interest was compounded quarterly
at the highest rate offered on the predecessor's customer deposits each quarter
and was thereafter compounded at the prime rate. Mr. McDougal received
additional compensation in the form of a housing allowance, an automobile and
payment of club membership dues. The Company also reimbursed Mr. McDougal for
the amount of personal income taxes incurred as a result of the additional
benefits.
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<PAGE>
Mr. McDougal retired from his offices of president and chief executive officer
in June 1998 at which time he was granted severance equal to two years of his
$375,000 annual salary. As part of his severance package, the Company will
continue to fund his health insurance premiums for the two year severance period
and his automobile allowance until the lease term for his current vehicle
expires in November 1998. Mr. McDougal also elected to withdraw his deferred
compensation in the amount of $689,728 during the quarter ended June 30, 1998.
Mr. Stephenson is compensated pursuant to an arrangement with the Company that
provides for a salary of $2,000 per month.
Board of Directors Compensation: Effective July 1, 1998, directors of the
Company will receive an annual retainer of $20,000, plus $1,000 for each Board
meeting attended and $750 for each committee meeting attended.
Compensation Committee Interlocks and Insider Participation: Determinations
regarding compensation of the Company's employees were previously made by the
Compensation and Benefits Committee of the Board of Directors prior to the
Branch Sale. Mr. McDougal was a member of the Compensation and Benefits
Committee. Subsequent to the Branch Sale such determinations will be made by the
Audit Committee.
Retirement Plan: Effective April 30, 1992, the Company determined to suspend the
Company's Retirement Plan. As of the date of suspension, there have been no new
enrollments in the Retirement Plan and no further benefit accruals. As of June
30, 1998, Mr. McDougal was entitled to an accrued benefit of less than $5,000
pursuant to the terms of the Retirement Plan.
Payments to Officers and Employees Pursuant to Phantom Stock Plan: No awards
were granted under the Phantom Stock Plan during fiscal year 1997 or 1996. In
connection with the Branch Sale, the Phantom Stock Plan was terminated and
participants, all of whom were officers and/or employees of the Company received
cash payments in exchange for surrender of their performance units. The
following table details payments made to certain former officers and employees
subsequent to June 28, 1996:
Mr. Jerome R. McDougal $ --
Mr. John P. Sullivan --
Mr. Peter L. Dinardi 57,766 (1)(2)
Mr. Joseph Guastavino 85,525 (1)(3)
Mr. Edward Shugrue 175,050 (1)
All other officers and
employees as a group 422,704 (1)
-------
$741,045
========
(1) Amounts distributed on June 28, 1996.
(2) Mr. Dinardi resigned effective November 21, 1995 and received
one third of the value of his performance units granted under
the Phantom Stock Plan and severance payments of $208,000.
(3) Mr. Guastavino has resigned effective October 16, 1997 and was
entitled to receive severance payments of $144,200.
Subsequent to the payments described above, no units remained outstanding under
the Phantom Stock Plan. It is not anticipated at this time that the Board of
Directors will grant additional performance units in the future.
Termination of the Company's Predecessor's Former Severance Plan: The Board of
Directors has also approved a severance plan for designated key senior
management personnel which provides for the payment of one year's salary upon
termination for any reason other than cause, and including a change of control.
The Company also maintained a general severance plan for all other officers and
employees. In connection with the Branch Sale payments under the severance plans
were made on or after June 28, 1996 in an amount aggregating $2.5 million.
Indebtedness of Management: The Company's current policy is not to make loans to
its directors, executive officers or members of their immediate families,
although it did so from time to time in the past. All loans to directors and
executive officers and all other loans to the Company's employees were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and do
not
759883.5
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<PAGE>
involve more than the normal risk of collection or present other unfavorable
features. All such loans were transferred to Marine as Transferred Assets in
connection with the Branch Sale.
Transactions With Affiliates: The Company previously obtained certain services
from Fintek. Effective October 31, 1991, substantially all of the employees of
the Company's then-existing capital markets group became employees of Fintek, a
newly-formed corporation. At the same time, Nelson L. Stephenson, a Senior
Executive Vice President of the Company at the time, resigned as an officer of
the Company and became the President and Chief Executive Officer of Fintek, as
well as a director of Fintek. Fintek may be deemed to be under common control
with the Company as a result of interests of Mr. Dworman, and, in addition, an
adult child of Mr. Dworman's is a director of Fintek. Fintek, pursuant to a
written agreement approved by the Company's Board of Directors, provided certain
financial consulting, strategic planning and advisory services to the Company,
including providing advice and consulting services with regard to the Company's
treasury functions. The Company had the right to terminate the agreement (which
was for a term of one year with automatic annual renewals) by giving Fintek 180
days' notice of such termination. In addition, the Company had the right to
terminate the agreement by giving Fintek thirty days' notice prior to any
renewal.
At June 30, 1996, the Company had an accrued aggregate liability to Fintek in
the amount of $1,516,000 for services performed prior to that date. The services
performed by Fintek on behalf of the Company prior to June 30, 1996 were
primarily in connection with the Branch Sale. During 1998 the Company made
aggregate cash payments to Fintek in the amount of $706,000. At June 30, 1998,
the Company had a remaining aggregate liability to Fintek in the amount of
$223,000.
The Fintek Agreement was terminated by mutual consent of the Company and Fintek
on June 28, 1996. Fintek has been engaged by the Management Company to provide
similar services to RB Management and the Company subsequent to the Branch Sale.
See "Management."
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<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock and Preferred Stock by (i) each person
known by the Company to own beneficially or of record more than 5% of Common
Stock or Preferred Stock, (ii) each director, nominee for director and executive
officer of the Company, and (iii) all directors and executive officers as a
group. Unless otherwise indicated, each stockholder listed in the table has sole
voting and investment powers as of September 21, 1998 with respect to the shares
owned beneficially or of record by such person.
<TABLE>
<CAPTION>
Amount and Nature
Title of of Percent of
Name and Address of Beneficial Owner Class Beneficial Ownership Class
------------------------------------ ----------- -------------------- -----------
<S> <C> <C> <C>
Ariel Management Corp.(1) Common Stock 371,689 5.2%
450 Park Avenue
New York, New York 10022
East River Partnership B(3) Common Stock 415,800 5.9%
Madison Plaza
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Mr. J. Ezra Merkin(1) Common Stock 623,666 8.8%
450 Park Avenue
New York, New York 10022
Odyssey Partners, L.P.(4) Common Stock 415,800 5.9%
31 West 52nd Street
New York, New York 10019
Ms. Robin Chandler Duke Common Stock - *
Director
Mr. Alvin Dworman Common Stock 2,778,550 39.0%
Director
Mr. William D. Hassett Common Stock 2,150 *
Director
Mr. James J. Houlihan Common Stock - *
Director
Mr. David J. Liptak Common Stock - *
Director
Mr. Jerome R. McDougal Common Stock 4,000 *
Director**
Mr. Edward V. Regan Common Stock - *
Director
Mr. David A. Shapiro Common Stock - *
Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Title of of Percent of
Name and Address of Beneficial Owner Class Beneficial Ownership Class
------------------------------------ ----------- -------------------- -----------
<S> <C> <C> <C>
Mr. Nelson L. Stephenson Common Stock - *
President
Mr. Jeffrey E. Susskind Common Stock - *
Director
All directors and executive officers Common Stock
as a group (10 persons) 2,784,700 39.1%
</TABLE>
* Amount represents less than 1% of the Common Stock outstanding as of
June 30, 1998.
** Effective July 2, 1997 Mr. McDougal took on the additional title of
President with duties as described in the Company's By-Laws. Mr.
McDougal retired as Chief Executive Officer on June 30, 1998.
<TABLE>
<CAPTION>
Amount and Nature
Title of of Percent of
Name and Address of Beneficial Owner Class Beneficial Ownership Class
------------------------------------ ----------- -------------------- -----------
<S> <C> <C> <C>
Cargill Financial Services Preferred Stock 145,000 10.4%
Corporation(2)
6000 Clearwater Drive
Minnetonka, Minnesota 55343
Corbyn Asset Management, Inc.(2) Preferred Stock 322,700 23.1%
2330 West Joppa Road, Suite 108
Lutherville, Maryland 21093
Lutheran Brotherhood Research Preferred Stock 270,000 19.3%
Corp.(3)
625 Fourth Avenue South
Indianapolis, Minnesota 55415
State Street Research & Management Preferred Stock 200,000 14.3%
Company(2)
One Financial Center
Boston, Massachusetts 02111
Ms. Robin Chandler Duke Preferred Stock - *
Director
Mr. Alvin Dworman Preferred Stock - *
Director
Mr. William D. Hassett Preferred Stock - *
Director
Mr. James J. Houlihan Preferred Stock - *
Director
Mr. David J. Liptak Preferred Stock 110,000 7.9%
Director(5)
Mr. Jerome R. McDougal Preferred Stock 2,950 *
Director**
</TABLE>
759883.5
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<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Title of of Percent of
Name and Address of Beneficial Owner Class Beneficial Ownership Class
------------------------------------ ----------- -------------------- -----------
<S> <C> <C> <C>
Mr. Edward V. Regan Preferred Stock - *
Director
Mr. David A. Shapiro Preferred Stock - *
Director
Mr. Nelson L. Stephenson Preferred Stock - *
President
Mr. Jeffrey E. Susskind Preferred Stock 130,000 9.3%
Director(6)
All directors and executive officers Preferred Stock 242,950 17.4%
as a group (10 persons)
</TABLE>
* Amount represents less than 1% of the Preferred Stock outstanding as of
July 1, 1997.
** Effective July 2, 1997 Mr. McDougal took on the additional title of
President with duties as described in the Company's By-Laws. Mr.
McDougal retired as Chief Executive Officer on June 30, 1998.
---------------------
(1) Ariel Fund Limited, a Cayman Islands corporation ("Ariel Fund"), is the
holder of 371,689 shares of Common Stock. Gabriel Capital , L.P., a Delaware
limited partnership ("Gabriel"), is the holder of 251,977 shares of Common
Stock. Gabriel and Ariel Fund are managed investment vehicles and neither is the
beneficial owner of such shares. Ariel Management Corp., a Delaware corporation
("Ariel"), as investment advisor to Ariel Fund, has voting and dispositive power
over the 371,689 shares of Common Stock held by Ariel Fund and therefore, may be
deemed to be the beneficial owner of 371,689 shares of Common Stock. As the
general partner of Gabriel, J. Ezra Merkin has voting and dispositive power over
the 251,977 shares of Common Stock held by Gabriel. In addition, as the sole
shareholder and president of Ariel, Mr. Merkin may be deemed to have voting and
dispositive power over the 371,689 shares of Common Stock owned by Ariel Fund.
Accordingly, Mr. Merkin may be deemed to be the beneficial owner of 623,666
shares of Common Stock.
(2) Based solely on legal proxies received by the Company at the 1998 annual
meeting of stockholders.
(3) East River Partnership B is an Illinois general partnership, the general
partners of which are: (1) JAP Grandchildren Trust # 1, the co-trustees of which
are Marshall E. Eisenberg and Jay A. Pritzker; (2) Don Trust #25, the
co-trustees of which are Marshall E. Eisenberg and Thomas J. Pritzker; and (3)
R.A. Trust #25, the co-trustees of which are Marshall E. Eisenberg and Thomas J.
Pritzker.
(4) Odyssey Partners, L.P. is a Delaware limited partnership having six general
partners: Stephen Berger, Leon Levy, Jack Nash, Joshua Nash, Brian Wruble and
Nash Family Partnership, L.P. The general partners of Odyssey Partners,
excluding Nash Family Partnership, L.P., share voting and dispositive power over
all owned shares.
(5) As the President of West Broadway Partners, Inc., Mr. Liptak has voting and
dispositive power over the 110,000 shares of Preferred Stock held by West
Broadway Partners, Inc. See Note 1 above. Accordingly, Mr. Liptak may be deemed
to be the beneficial owner of 110,000 shares of Preferred Stock.
(6) As a principal of Strome, Susskind Investment Management, Inc., Mr. Susskind
has voting and dispositive power over the 130,000 shares of Preferred Stock held
by Strome, Susskind Investment Management, Inc. See Note 1 above. Accordingly,
Mr. Susskind may be deemed to be the beneficial owner of 130,000 shares of
Preferred Stock.
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<PAGE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Management Company; The Management Agreement: The Company has engaged the
Management Company under a management agreement (the "Management Agreement") to
provide Company Management Services and Asset Management Services (each as
defined below). The responsibilities of the Management Company include, but are
not limited to, development and recommendation to the Company's Board of
Directors of strategies intended to maximize stockholder value. The Management
Company is responsible for developing, recommending and maintaining business
plans and operating budgets, individual asset and liability strategies and
decisions relating to sales and retentions of assets. The Management Company
reports to the Company's Board of Directors or its Asset Management Committee.
The Management Company was newly formed in 1996 and is controlled by Alvin
Dworman, who serves as its Managing Member. Mr. Dworman also owns 39.0% of the
outstanding Common Stock of the Company.
The Management Company has access to the expertise, resources and business
relationships accumulated by Mr. Dworman over 35 years in a wide variety of
general business activities. Mr. Dworman currently serves as a member of the
Real Estate Advisory Committee of the New York State Employee Retirement System
and is a member of the Board of Trustees of the New York Law School. As an
individual and as Chairman and Chief Executive Officer of the ADCO Financial
Group, Mr. Dworman maintains investments in a number of financial services,
banking and real estate entities. During his career, Mr. Dworman has founded,
developed, owned and managed a wide variety of entities throughout the United
States. Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B hold in
the aggregate 50.8% of the Common Stock. In connection with the equity
recapitalization offering in June 1994, Mr. Dworman, Odyssey Partners, L.P. and
East River Partnership B agreed not to sell their Common Stock for a period of
three years. In addition, such agreement provided that, for an additional two
years, they would not sell their Common Stock without the approval of the Board
of Directors of the Company under certain circumstances.
The terms of the Loan Agreement with Marine include a requirement that, while
any amount remains outstanding under the Facility, Mr. Dworman retain his 39%
common stock interest in the Company and remain actively involved in the
day-to-day management of the affairs of the Company and its assets.
The Management Company also employs certain individuals previously employed by
River Bank who were directly involved in managing the Company's real estate
portfolio.
"Company Management Services" includes the management of the general business
affairs of the Company, including:
1. Developing and recommending policies and procedures appropriate for
continuing the orderly disposition of the Company's assets and
implementation of all policies and procedures approved by the
Company's Board of Directors or the Asset Management Committee of the
Board.
2. Providing quarterly and annual financial and operating reports and
such other information to the Company's Board of Directors and the
Asset Management Committee and Audit Committee as may be necessary
and reasonably requested by the Company's Board of Directors or such
committee.
3. Analyzing the Company's performance, including progress in continuing
the orderly disposition of the Company's assets and preparation of
financial forecasts and periodic variance analyses of actual
performance relative to plan.
4. Overseeing provision of all accounting and financial reporting
services, including maintenance and control of a general ledger,
controlling accounts payable and processing services and payroll
processing services, preparation of financial reports and regulatory
compliance reports and preparation and filing of tax returns, and
establishing and maintaining management information systems.
5. Providing treasury services and control functions, including:
- implementing cost and disbursement controls.
- cash management and investment of short-term funds.
- debt management, corporate finance and development and
implementation of alternative financing arrangement.
6. Overseeing legal and accounting services required by the Company.
7. Using best efforts to ensure compliance with any conditions imposed
by the Banking Department on the Company as a predicate to its
approval of the Branch Sale, including but not limited to, the
preparation and submission to the Banking Department of required
reports.
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<PAGE>
"Asset Management Services" entails management of all of the Company's assets
on a day-to-day basis and include the following:
8. Maintaining and implementing individual business plans for each asset
of the Company, as modified from time to time to reflect changes in
conditions and circumstances.
9. Development, marketing, negotiation and execution of transactions
necessary to continue to effect the Company's asset disposition
plans, subject to the ongoing approval of the Banking Department.
10. Obtaining and overseeing marketing and brokerage activities relating
to real estate dispositions and property leasing.
11. Managing real estate activities, including retention and oversight of
third-party property managers.
12. Obtaining and overseeing third-party loan servicing, including
ordinary course monthly payment collections and pay-offs.
13. Providing loan administration services, including delinquency
monitoring and response and enforcement of rights under loan
agreements.
14. Overseeing loan servicing activities for subordinated participations
in loans acquired by Marine in connection with the Branch Sale.
15. Administration of joint ventures and oversight of the business
activities of the joint ventures.
The Management Company obtains and oversees the provision, on an outsourced
basis, of those services not provided directly by the Management Company. All
outsourcing arrangements is subject to prior review and recommendation as to
compensation terms by the Audit Committee and as to the other terms of the
engagement subject to prior approval by the Asset Management Committee of the
Company's Board of Directors. The cost of approved outsourced arrangements is
borne by the Company.
The Management Company offers similar services to entities not affiliated with
Mr. Dworman, and also renders services to affiliates of Mr. Dworman.
The Management Company is paid an annual base fee for Company Management
Services in an amount not to exceed $1.25 million. The annual base fee is
reviewed no less frequently than annually by the Audit Committee of the Company
and adjusted based upon the costs expected to be incurred by the Management
Company to provide the Company Management Services. In addition, the Management
Company also receives an annual fee for Asset Management Services of 0.75% of
the average month-end book value of the Company's assets and an Asset
Disposition Success Fee of 0.75% of the proceeds from the sale or collection of
any asset sold by the Company.
During the year ended June 30, 1998, the Company accrued expenses for services
provided by the Management Company in the amount of $1,250,000 for the Base Fee
payable to the Management Company, $1,331,000 for the Asset Service Fee, and
$360,000 for Asset Disposition Fees in accordance with the fee schedule outlined
above. During 1998, the Company paid RB Management, LLC an aggregate amount of
$5,108,000. At June 30, 1998, the Company had a remaining payable to the
Management Company amount of approximately $42,000.
The Kenneth Leventhal Real Estate Group of Ernst & Young LLP, which was engaged
for this purpose by the Special Transactions Committee of the Predecessor Bank's
Board of Directors, reviewed the form and amount of the fees payable to the
Management Company and advised upon the comparability of the fees and terms to
similar arrangements negotiated on an arm's-length basis.
The Management Agreement has an initial term of three years, which will be
extended for up to two additional one-year terms if the Marine senior debt is so
extended. The Management Agreement is terminable by either party at any time on
180 days' notice with the consent of Marine or other senior lenders, as
applicable. In addition, the Company's Board of Directors, subject to the
consent of Marine, may terminate the Management Agreement without notice for
"Cause." "Cause" is defined as a material breach of the Management Agreement
and/or willful act or omission by the Management Company that is materially
detrimental to the best interests of the Company. In addition, the Management
Agreement may be terminated by the Company's Board of Directors during the last
year of any term 60 days after the sale of the last asset of the Company.
Upon any termination of the Management Agreement, the fees payable to the
Management Company will be pro rated for such year to the date of termination.
If the Management Agreement is terminated prior to the expiration of any term,
the Company also reimburses the Management Company for the reasonable costs
incurred by the Management Company in terminating its services to the Company
including, but not limited to, reasonable termination or severance
759883.5
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<PAGE>
payments made to service providers or employees terminated by the Management
Company as a result of such termination.
Employees; Other Service Providers: In addition to retaining the Management
Company to provide the Company with the services described above, the Company,
subject to regulatory approval, terminated most of its employees and retained
third parties (including Fintek, Inc. and other entities controlled by Mr.
Dworman) to provide much of the administrative and non-real estate operating
functions of the Company's operations.
The Management Company has engaged Fintek, Inc. ("Fintek"), a firm 50%
beneficially owned by Mr. Dworman which has previously provided certain advisory
services to the Company, to continue to provide such services to the Company.
All fees paid to Fintek for such advisory services were the obligation of the
Management Company and were paid out of the fees received by the Management
Company from the Company. On June 28, 1996 Fintek and the Company mutually
agreed to the termination of the previous contract between Fintek and the
Company.
Persons or entities engaged by the Board of Directors, the Asset Management
Committee or by the Management Company on behalf of the Company entered into a
service contract with the Company and are compensated in accordance with market
rates for similar services. The terms of these contracts, including
compensation, were reviewed prior to execution by the Audit Committee of the
Board of Directors, and the Board of Directors engaged the Kenneth Leventhal
Real Estate Group of Ernst & Young LLP to review each service contract and to
advise the Audit Committee on the terms of the contracts and the comparability
to similar arrangements for similar services.
Transactions With Affiliates: The Company previously obtained certain services
from Fintek. Effective October 31, 1991, substantially all of the employees of
the Company's then-existing capital markets group became employees of Fintek, a
newly-formed corporation. At the same time, Nelson L. Stephenson, a Senior
Executive Vice President of the Company at the time, resigned as an officer of
the Company and became the President and Chief Executive Officer of Fintek, as
well as a director of Fintek. Fintek may be deemed to be under common control
with the Company as a result of interests of Mr. Dworman, and, in addition, an
adult child of Mr. Dworman's is a director of Fintek. Fintek, pursuant to a
written agreement approved by the Company's Board of Directors, provided certain
financial consulting, strategic planning and advisory services to the Company,
including providing advice and consulting services with regard to the Company's
treasury functions. The Company had the right to terminate the agreement (which
was for a term of one year with automatic annual renewals) by giving Fintek 180
days' notice of such termination. In addition, the Company had the right to
terminate the agreement by giving Fintek thirty days' notice prior to any
renewal.
At June 30, 1996, the Company had an accrued aggregate liability to Fintek in
the amount of $1,516,000 for services performed prior to that date. The services
performed by Fintek on behalf of the Company prior to June 30, 1996 were
primarily in connection with the Branch Sale. During 1998 the Company made
aggregate cash payments to Fintek in the amount of $706,000. At June 30, 1998,
the Company had a remaining aggregate liability to Fintek in the amount of
$223,000.
The Fintek Agreement was terminated by mutual consent of the Company and Fintek
on June 28, 1996. Fintek has been engaged by the Management Company to provide
similar services to RB Management and the Company subsequent to the Branch Sale.
See "Management."
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<PAGE>
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included
elsewhere in this Form 10-K at the pages indicated and are
incorporated by reference: Page
Report of Independent Auditors 71
Consolidated Statements of Financial Condition
June 30, 1998 and 1997 72
Consolidated Statements of Operations
Years ended June 30, 1998, 1997, and 1996 73
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996 74
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996 75
Notes to Consolidated Financial Statements 77
(a)(2) Certain financial statement schedules are omitted due to
inapplicability or because the required financial information is shown in the
Consolidated Financial Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of the period covered
this report:
(i) Form 8-K, dated May 21, 1998, to report in Item 5 the consummation
of the Reorganization, as filed on May 29, 1998.
(c) Exhibits:
*2.1.-- Agreement and Plan of Merger, dated as of October 9, 1997, by and
between River Asset Sub, Inc. and River Distribution Sub, Inc.
**2.1b -- Amendment No. 1, dated as of May 15, 1998, to Agreement and Plan
of Merger, October 9, 1997, by and between River Asset Sub, Inc.
and River Distribution Sub, Inc.
*2.2-- Petition for a Closing Order, made by River Bank America to the
New York State Supreme Court, dated October 15, 1997.
*2.2b-- Notice of Settlement of Closing Order, made by River Bank America
to the New York State Supreme Court, dated December 8, 1997.
**2.2c-- Closing Order, signed by the New York State Supreme Court on
January 9, 1998 and entered on January 14, 1998.
*2.3-- Assignment and Assumption Agreement, dated as of May 11, 1998, by
and between River Bank America and River Asset Sub, Inc.
***3.1-- Certificate of Merger, dated May 18, 1998, of River Asset Sub,
Inc. and River Distribution Sub, Inc.
***3.2-- Certificate of Incorporation of the Company.
***3.3-- Certificate of Designation of the 15% Noncumulative Perpetual
Preferred Stock, Series A, $1.00 par value, of the Company.
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<PAGE>
***3.4 -- By-Laws of the Company.
*10.1 -- Credit Agreement dated as of June 28, 1996 among River Bank
America and other borrowers and Marine Midland Bank and related
loan documents.
**10.1b-- Consent of Marine Midland Bank to River Bank America's
Reorganization dated October 30, 1997.
*10.2-- Management Agreement dated as of June 28, 1996, by and between
River Bank America and RB Management Company LLC.
***21.1 -- Subsidiaries of the Company.
***27.1 -- Financial data schedule.
****99.1 -- Proxy and Information Statement with respect to 1998 Annual
Meeting of Stockholders.
****99.2 -- Proxy Card with respect to 1998 Annual Meeting of Stockholders.
- -------------------
* Incorporated by reference to the Registration Statement Form S-4 filed on
March 26, 1998.
** Incorporated by reference to the Registration Statement on Form S-4 filed
on February 24, 1998.
*** Previously filed with original Annual Report on Form 10-K amended hereby,
as filed with the the SEC on September 28, 1998.
**** These exhibits are not deemed "filed" with the Commission or otherwise
subject to the liabilities of Section 18 of the Act, and are not
incorporated by reference in any filing of the Company under the
Securities Act of 1993 or the Act, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filing.
Supplemental Information to Be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
The Company previously mailed a proxy and information statement and related
proxy card with respect to its 1998 Annual Meeting of Stockholders (copies of
which are filed hereto as Exhibits 99.1 and 99.2, respectively). The Company has
not mailed its 1998 annual report to stockholders which it intends to prepare
and mail as soon as practicable following the filing of this Report on Form
10-K.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: October 9, 1998 /s/ Nelson L. Stephenson
------------------------
Nelson L. Stephenson
President and Chief Executive Officer
(principal executive and accounting
officer)
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<PAGE>
FINANCIAL STATEMENTS
RB ASSET, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors 71
Consolidated Statements of Financial Condition
June 30, 1998 and 1997 72
Consolidated Statements of Operations
Years ended June 30, 1998, 1997, and 1996 73
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996 74
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996 75
Notes to Consolidated Financial Statements 77
Schedule III - Real Estate and Accumulated Depreciation 107
Schedule IV - Mortgage Loans on Real Estate 109
759883.5
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<PAGE>
Report of Independent Auditors
The Board of Directors
RB Asset, Inc.
We have audited the consolidated statements of financial condition of RB Asset,
Inc. (the "Company"), successor to River Bank America (see Note 1), as of June
30, 1998 and 1997 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1998. We have also audited the financial statement
schedules listed in the Index to Financial Statements included in the Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
June 30, 1998 and 1997 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company has adopted, as
of July 1, 1997, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long Lived Assets to be Disposed Of."
/s/ Ernst & Young LLP
New York, New York
July 21, 1998
759883.5
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<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $956 and $573, respectively (note 12) $ 82,835 $ 84,102
Real estate held for disposal 5,013 15,096
Allowance for fair market value reserve
Under SFAS-121 (note 13) (1,363) (1,849)
------------ -------------
Total real estate held for disposal, net 3,650 13,247
Loans receivable:
Secured by real estate (note 8) 59,006 80,093
Loans sold with recourse, net (note 11) 15,781 24,451
Allowance for possible credit losses (note 10) (17,697) (25,787)
------------ -------------
Total loans receivable, net 57,090 78,757
Investments in joint ventures 1,536 3,113
------------ -------------
Total real estate assets 145,111 179,219
------------ -------------
Cash, due from banks and cash equivalents (note 6) 12,532 8,940
Cash, due from banks - restricted cash (note 6) 19,555 5,096
Investment securities available for sale (note 7) 1,373 6,275
Commercial and consumer loans (note 9) 10,431 15,677
Allowance for possible credit losses (note 10) (2,340) (5,783)
------------ -------------
Commercial and consumer loans, net 8,091 9,894
Other assets (note 15) 4,248 2,235
------------ -------------
Total Assets $ 190,910 $ 211,659
============ =============
Liabilities and Stockholders' Equity
Borrowed funds (note 16) $ 68,760 $ 84,272
Other liabilities (note 17) 14,967 18,877
------------ ------------
Total Liabilities 83,727 103,149
------------ ------------
Stockholders' equity
15% non-cumulative perpetual preferred stock, Series A, par
value $1, liquidation value $25 (1,400,000 shares authorized, issued
and outstanding at June 30, 1998 and 1997) 1,400 1,400
Common stock, par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at June 30,1998 and
1997) 7,100 7,100
Additional paid-in capital 111,170 11,170
Accumulated deficit (note 18) (11,561) (10,055)
Securities valuation account (notes 1 and 7) (926) (1,105)
----------- -----------
Total stockholders' equity 107,183 108,510
----------- -----------
Total Liabilities & stockholders' Equity $ 190,910 $ 211,659
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
759883.5
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<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1998, 1997, and 1996
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rental revenue and operations:
Rental income and other property revenue $ 13,779 $ 16,158 $ 18,530
Property operating and maintenance expense (10,884) (12,827) (17,734)
Depreciation - real estate held for investment (383) (200) (208)
------------------ --------------- ----------------
Net rental operations 2,512 3,131 588
Other property income (expense):
Net gain/(loss) on sale of real estate 1,998 (1,754) (3,499)
Writedown of investments in real estate (1,106) (19,745) (1,889)
----------------- --------------- ----------------
Total other property income/(expense) 892 (21,499) (5,388)
Other income:
Interest income:
Loans receivable 3,680 4,504 76,614
Investment securities 55 574 9,347
Money market investments and other 462 391 8,448
Provision for possible credit losses (1,500) (1,000) (5,250)
----------------- --------------- ---------------
Total interest income 2,697 4,469 89,159
Realization of contingent participation revenues 3,356 -- --
---------------- --------------- ---------------
Total other income 6,053 4,469 89,159
Total revenues 9,457 (13,899) 4,359
---------------- --------------- ---------------
EXPENSES:
Interest expense:
Deposits liabilities of Predecessor Bank -- -- 47,719
Borrowed funds 6,026 7,132 14,026
Other 83 228 49
---------------- --------------- ---------------
Total interest expense 6,109 7,360 61,794
Other expenses:
Depreciation - other -- 15 951
Salaries and employee benefits 900 1,170 14,163
Legal and professional fees 2,305 1,892 4,521
Management fees 2,562 2,942 --
Other 350 1,350 17,119
----------------- ---------------- --------------
Total other expenses 6,117 7,369 36,754
----------------- ---------------- --------------
Total expenses 12,226 14,729 98,548
----------------- ---------------- --------------
Loss before other income (expense) and before
provision for income taxes (2,769) (28,628) (14,189)
Other income (expense):
Banking fees, service charges and other net income -- -- 3,996
Gains on sale of offices and branches of
Predecessor Bank -- -- 77,560
Net gains (losses) on sales of investment securities 1,697 (1,495) (605)
Provision for Marine Branch Sale contingencies -- (3,300) --
Total other income (expense) 1,697 (4,795) 80,951
Net (loss) / income after other income (expense) and before
provision for income taxes (1,072) (33,423) 66,762
---------------- --------------- --------------
Provision for (benefit from) income taxes 434 (3,300) 11,749
Net (loss) / income (1,506) (30,123) 55,013
Dividends declared on preferred stock -- -- 5,250
----------------- -------------- --------------
Net (loss) / income applicable to common stock $ (1,506) $ ( 30,123) $ 49,763
================= ============== ==============
Basic and diluted loss per common share $ (0.21) $ (4.24) $ 7.01
================= ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
759883.5
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<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY Years
ended June 30, 1998, 1997,
and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Series A
Non-
cumulative Total
Perpetual Additional Retained Stockholders'
Preferred Common Paid-in Earnings Securities Equity
Stock Stock Capital (deficit) Valuation Account
----- ----- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 $ 1,400 $ 7,100 $ 111,170 $ (29,695) $ 159 $90,134
Net income for the year
ended June 30, 1996 -- -- -- 55,013 -- 55,013
Preferred Stock dividends -- -- -- (5,250) (5,250)
---
Change in securities valuation
account -- -- -- -- (1,377) (1,377)
-------------- ------------- ------------ -------------- ---------- ------------
Balances at June 30, 1996 1,400 7,100 111,170 20,068 (1,218) 138,520
Net loss for the year ended
June 30, 1997 -- -- -- (30,123) -- (30,123)
Change in securities valuation
account -- -- -- -- 113 113
--------------- -------------- ------------ -------------- ----------- ------------
Balances at June 30, 1997 1,400 7,100 111,170 (10,055) (1,105) 108,510
Net loss for the year ended
June 30, 1998 -- -- -- (1,506) -- (1,506)
Change in securities valuation
account -- -- -- -- 179 179
--------------- -------------- ------------ -------------- ----------- ------------
Balances at June 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,561) $ (926) $ 107,183
============== ============== =========== ============ ========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
759883.5
-74-
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS Years ended June
30, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Cash Flows Provided by (Used in) Operating Activities:
Net (loss)/income $ (1,506) $ (30,123) $ 55,013
Adjustments to reconcile net (loss)/income to cash
used in operating activities
Provision for possible credit losses 1,500 1,000 5,250
Writedowns of real estate assets 1,106 19,745 1,889
Depreciation and amortization 383 215 1,159
Amortization of deferred fees and premiums -- -- (2,717)
Loan fees collected net of expenses deferred -- -- (761)
Net (gain)/loss on sales of loans, other investments
and investment securities (5,241) 3,249 605
Gain recorded on Branch Sale by Predecessor Bank -- (77,560)
Change in operating assets and liabilities:
Net decrease/(increase) in accrued interest and
preferred stock dividend receivable 405 (326) 5,939
Net (decrease)/increase in accrued interest payable (486) 964 (1,341)
Net (decrease)/increase in accrued income taxes 16 (5,019) 18,018
Net (decrease)/increase in accrued expenses
and other liabilities (3,439) (4,947) 4,944
Net (increase)/decrease in prepaid expenses and other assets (1,672) 1,195 398
Cash effect of increases/(decreases) in allowance for
possible credit losses 372 (23) --
Other 172 (330) (37)
--------------- ----------------- ------------------
Net cash (used in)/provided by operating activities (8,390) (14,400) 10,799
--------------- --------------- --------------
Investing Activities:
Cash Flows Provided by (Used in) Investing Activities
Proceeds from sales and maturities of investment
securities, available for sale 6,871 -- 285,084
Purchases of investment securities, available for sale -- -- (280,591)
Transfer of securities in Branch Sale -- -- 78,419
Proceeds from sales, collections and maturities of
mortgage-backed securities, available for sale -- 187 6,248
Transfer of loans in Branch Sale -- -- 1,067,472
Net repayment/(origination) of loans secured by real estate, net 18,812 4,252 (82,942)
Net (reacquisition)/repayment of commercial and consumer (1,579) 345 --
loans -- -- 21,188
Net originations of commercial and consumer loans 8,667 3,463 (29,914)
Net decrease/(increase) in loans sold with recourse -- 8,976 --
Redemption of FHLB Stock -- -- 6,913
Proceeds from sales of premises and other fixed assets -- -- (234)
Purchase of fixed assets 14,041 43,161 97,827
Proceeds from sales of real estate held (5,069) (14,270) (30,438)
---------------- ---------------- ---------------
Additional fundings on real estate held $ 41,743 $ 46,114 $ 1,139,032
------------- --------------- -----------
Net cash provided by investing activities
</TABLE>
See Notes to Consolidated Financial Statements.
759883.5
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<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS Years ended June
30, 1998, 1997, and 1996
(Dollars in Thousands)
(Continued from previous page)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Financing Activities:
Cash Flows Provided by (used in) Financing Activities:
Increase in restricted cash $ (14,459) $ (5,096) $ --
Interest credited to time deposits and savings accounts -- -- 47,719
Dividends paid on preferred stock -- -- (5,250)
Net decrease in deposit accounts -- (3,022) (56,611)
Deposits transferred in Branch Sale -- -- (1,159,616)
Proceeds from borrowed funds -- 4,459 89,760
Repayment of borrowed funds (5,509) (30,179) (177,035)
Increase/(decrease) in borrowed funds secured by loans
sold with recourse, net of construction advances (9,793) (5,794) 24,000
Net increase/(decrease) in escrow deposits -- (271) (4,209)
----------------- --------------- -------------
Net cash used in financing activities (29,761) (39,903) (1,241,242)
--------------- ------------- ----------
Net increase/(decrease) in cash and money market investments 3,592 (8,189) (91,411)
Beginning cash 8,940 17,129 108,540
--------------- ------------- ------------
Ending cash $ 12,532 $ 8,940 $ 17,129
============= ============= ============
Supplemental Disclosure of Cash Flow Information
Non-cash investing and financing activities:
Net transfer of mortgage loans to real estate held for
investment and real estate held for disposal $ -- $ -- $ 7,852
Loans to facilitate real estate sales -- -- 23,436
Changes in securities valuation account 179 113 (1,377)
Cash paid for:
Interest 6,594 7,682 61,429
Federal, state and local taxes 433 1,952 3,675
</TABLE>
See Notes to Consolidated Financial Statements.
759883.5
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<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
1. Organization, summary of significant accounting policies and accounting
change
RB Asset, Inc. (the "Company") is a Delaware corporation which, on May 22, 1998,
completed a reorganization whereby the Company succeeded to the assets,
liabilities and business of River Bank ("River Bank" or the "Predecessor Bank").
The Company's principal business continues to be the management of its real
estate assets, mortgage loans and investment securities, under a business plan
intended to maximize shareholder value.
Through a series of reorganization steps, more fully described in Note 2 to the
Consolidated Financial Statements, all of the issued and outstanding shares of
common stock and 15% noncumulative perpetual preferred stock, Series A of the
Company were distributed to stockholders of the dissolved Predecessor Bank on a
share-for-share basis such that each holder of River Bank's common stock
received one share of the Company's common stock, for each share held by the
stockholder and each holder of River Bank's Series A preferred stock received
one share of the Company's Series A preferred stock, for each share held by the
stockholder.
In connection with the reorganization steps, on May 19, 1998, a petition for an
order of dissolution declaring River Bank dissolved and its legal existence
terminated was filed in the Supreme Court of the State of New York. The Supreme
Court issued the order on June 1, 1998 and, upon the filing of the order of
dissolution with the Banking Department, the Predecessor Bank was dissolved and
its legal existence terminated. Upon such dissolution, the capital stock of
Predecessor Bank was canceled and the stock transfer records of the Predecessor
Bank were closed.
Prior to its reorganization into a Delaware corporation, River Bank was a New
York State chartered stock savings bank, founded in 1848. In 1925, the
Predecessor Bank adopted the name "East River Savings Bank" which it continued
to use in its retail business through June 28, 1996. River Bank converted to a
stock-form savings bank through a plan of conversion in 1985. Effective October
1, 1988, East River Savings Bank formally changed its corporate name to "River
Bank." On June 28, 1998, the Predecessor Bank sold its remaining eleven branches
("the Branch Sale") to Marine Midland Bank ("Marine"), inclusive of the name
East River Savings Bank. See Note 3 to the Consolidated Financial Statements.
Following consummation of the Branch Sale, all retail banking operations of the
Predecessor Bank ceased.
Basis of presentation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation. Due to the anticipated
short-term nature of such investments, investments in unconsolidated real estate
partnerships are generally carried at cost, which results do not differ
materially from generally accepted accounting principles, subject to periodic
assessment of net realizable value. Gains on sales or dispositions of such
investments are recognized dependent upon the terms of the transaction. Losses
on sales or dispositions and any adjustments related to redetermination of net
realizable value are charged to operations of the current period.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
Money market investments: Money market investments are carried at cost, which
approximates market value.
Investment and mortgage-backed securities: In accordance with Statement of
Financial Accounting Standards No. 115 (SFAS-115), "Accounting for Certain
Investments in Debt and Equity Securities," at June 30, 1998, the balance of
stockholders' equity included a $926 unrealized loss on securities classified as
available for sale.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Available for sale securities are stated at estimated fair value, with
unrealized
759883.5
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<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
gains and losses, net of tax, reported in a separate component of stockholders'
equity. The cost of debt securities classified as available for sale is adjusted
for amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-backed securities, over the estimated life of the security
using a method approximating the level yield method. Such amortization is
included in interest income from these investments. Interest and dividends are
included in interest income from the respective investments. Realized gains and
losses, and declines in value judged to be other-than-temporary, are included in
net securities gains and losses. The cost of securities sold is based on the
specific identification method.
Loans receivable, interest, and loan origination fees and costs: Loans
receivable are stated at principal balances, net of deferred fees and costs.
Interest on loans is accrued based on principal amounts outstanding. Loans are
placed on non-accrual status when they become 90 days past due or at any time
collection of principal or interest is doubtful unless, in the opinion of
management, collection appears likely. Accrued but unpaid interest on such loans
is reversed and interest income is subsequently recognized only to the extent
that payments are received and when no doubt exists as to the collectibility of
the remaining book balance of the asset. Interest is subsequently accrued when
such loans return to full current status and have had a period of performance in
accordance with a loan's terms.
Loan origination fees and certain loan origination direct costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income over
the approximate lives of the related loans, adjusted for estimated prepayments
as appropriate to provide a level interest yield.
Allowance for possible credit losses: The allowance for possible credit losses
is provided by charges to operations. Credit losses, net of recoveries, are
charged directly to the allowance for possible credit losses. Additions to the
allowance are based on management's periodic review and evaluation of the
Company's assets, the potential for loss in light of the current composition of
the Company's assets, and economic conditions.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
other real estate owned and real estate held for investment. A substantial
portion of the Company's loans are collateralized by real estate and,
accordingly, the performance of such loans may be affected by market conditions
for real estate. As of June 30, 1998, most of the Company's real estate held for
investment is located in New York. The Company has 61% of its total assets in
five real estate properties and loans. Accordingly, the ultimate collectibility
of these assets collateralized by real estate is particularly susceptible to
changes in local market conditions. Management believes that the allowance for
possible credit losses is adequate and that other real estate owned and real
estate held for investment is properly recorded.
Real estate: The Company accounts for its real estate assets in accordance with
Statement of Accounting Standard No. 121 (SFAS-121), "Accounting for the
Impairment of Long Lived Assets to be Disposed Of," issued by the Financial
Accounting Standards Board (the "FASB"). SFAS-121 requires that a loss is
recorded for assets held for investment when events and circumstances indicate
impairment and the undiscounted future cash flow generated by the investment in
real estate is less than the related carrying amount. When the carrying amount
of the asset may not be recoverable, the asset balance must be directly written
down as part of the recorded loss. In addition, SFAS- 121 requires long-lived
assets held for sale to be carried at the lower of carrying value or fair value
less the costs to sell. Fair value is defined in SFAS-121 as the amount at which
an asset could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
Depreciation: Under generally accepted accounting principals ("GAAP"), SFAS-121,
the Company is required to depreciate real estate held for investment over the
estimated useful life of the assets. The depreciable portion of assets
categorized as real estate held for investment includes the accumulated costs of
acquisition and/or development of building structures and leasehold
improvements. No depreciation charges are made for the portion of the asset's
759883.5
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<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
historical cost attributable to land. Depreciation for real estate held for
investment is generally calculated on a straight-line basis over a 30 year
period or over the remaining term of the lease for leasehold improvements,
whichever period is less. On May 22, 1998, as a consequence of the
Reorganization, the Company was no longer subject to the categorization and
depreciation regulations for investments in real estate previously imposed by
the Predecessor Bank's regulators. Accordingly, as of that date, the Company
began to record depreciation charges, as required by GAAP, for all real estate
held for investment, that had not been subject to depreciation charges in prior
periods.
Retirement plan: The Company has a contributory 401(k) plan and a
non-contributory pension plan (the "Plan") covering substantially all of its
employees. During 1992, the Company adopted an amendment to the Plan which
ceased the accrual of benefits under the Plan ("Plan suspension") effective
April 30, 1992. The Plan was further amended to exclude employees hired on or
after April 30, 1992 from participating in the Plan.
Income taxes: For federal income tax purposes, the Company files a consolidated
tax return with its subsidiaries on a calendar-year basis. The Company files
combined New York State and New York City income tax returns with various
subsidiaries. In addition, certain subsidiaries file on a separate basis in New
York and the Company and certain subsidiaries file income and franchise tax
returns in various other states.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of deferred tax assets, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates which are expected to be applicable to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Recent Accounting Pronouncements:
SFAS No. 121. In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." The statement
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. SFAS No. 121 definition of
long-lived assets includes the Bank's other real estate owned and real estate
held assets. There was no material effect on the reported operations of the Bank
resulting from the implementation of SFAS No. 121, which was adopted by the bank
during the fiscal year ended June 30, 1997.
SFAS No. 128. In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which was required to be adopted on December 31, 1997. At that time, the
Company was required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options was
excluded. The implementation of SFAS No. 128 is not expected to have any effect
on the Company's primary earnings per share for the years ended June 30, 1998,
1997 and 1996.
SFAS No. 130. During June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which is required to be adopted for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The adoption of this
standard will not have a material impact on the Company's financial position or
results of operations.
759883.5
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<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
2. Reorganization
On May 22, 1998, the Predecessor Bank, a New York State chartered stock savings
bank, completed its reorganization (the "Reorganization") into a Delaware
corporation named RB Asset, Inc. under a plan that was approved at the
Predecessor Bank's special meeting of stockholders on May 1, 1998. RB Asset,
Inc., as the successor in the Reorganization, succeeded to the assets,
liabilities and business of the Predecessor Bank. As a result of the
reorganization and related dissolution discussed below, the capital stock of
River Bank was canceled and, as of the close of business on May 22, 1998, River
Bank's stock transfer records were closed.
As a New York State chartered stock savings bank, the Predecessor Bank was
regulated by the New York State Banking Department ("the Banking Department" or
the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance
Corporation (the "FDIC"). Following the Reorganization of the Predecessor Bank
into a Delaware corporation, which was completed on May 22, 1998, the Company
intends to manage its business and assets without the regulatory constraints
previously imposed on the Predecessor Bank by the Banking Department.
Following stockholder approval of the Reorganization, all of the Predecessor
Bank's assets, liabilities and business were transferred to, or assumed by, the
Predecessor Bank's wholly-owned subsidiary, River Asset Sub, Inc., on May 11,
1998, pursuant to the terms of an assignment and assumption agreement and
related transfer documents. Thereafter, on May 18, 1998, the Board of Directors
declared distribution of the capital stock of its wholly-owned subsidiary, River
Distribution Sub, Inc. ("River Distribution"), payable on a book-entry basis to
the Predecessor Bank's stockholders of record on May 22, 1998. At the time of
such distribution the capital stock of River Distribution had no value.
In the distribution, all of the issued and outstanding shares of common stock
("River Distribution Common Stock") and 15% noncumulative perpetual preferred
stock, series A of River Distribution ("River Distribution Series A Preferred
Stock") held by the Predecessor Bank were distributed to the Predecessor Bank's
stockholders on a share-for-share basis such that each holder of the common
stock of River Bank ("River Bank Common Stock") received one share of River
Distribution Common Stock for each share of River Bank Common Stock held by such
stockholder and each holder of River Bank 15% noncumulative perpetual preferred
stock, series A ("River Bank Series A Preferred") received one share of River
Distribution Series A Preferred Stock for each share of River Bank Series A
Preferred Stock held by such stockholder.
Finally, upon book-entry payment of the distribution, on May 22, 1998, River
Distribution merged with and into River Asset whereupon the stockholders of
River Distribution became stockholders of the surviving corporation which
changed its name to RB Asset, Inc. In the merger, the shares of capital stock of
River Distribution were converted into shares of identical capital stock of RB
Asset, Inc., the renamed surviving corporation in the merger. Accordingly,
subsequent to the merger, the capital stock of River Bank had no value. Stock
certificates representing shares of capital stock of RB Asset, Inc. were then
distributed to holders of record as of May 22, 1998.
In connection with the reorganization steps, on May 19, 1998, a petition for an
order of dissolution declaring River Bank dissolved and its legal existence
terminated was filed in the Supreme Court of the State of New York. The Supreme
Court issued the order on June 18, 1998 and, upon the filing of the order of
dissolution with the Banking Department, on June 23, 1998, the Predecessor Bank
was dissolved and its legal existence terminated. Upon such dissolution, the
capital stock of River Bank was canceled on the closed transfer records of the
Predecessor Bank.
3. Purchase of Assets and Liability Assumption Agreement
On June 28, 1996, the Predecessor Bank consummated the transactions (the "Branch
Sale") contemplated by the Purchase of Assets and Liability Assumption Agreement
(the "Branch Sale Agreement") by and between the Predecessor Bank and Marine.
Pursuant to the terms of the Branch Sale Agreement, Marine assumed $1,159.6
million of deposit liabilities (the "Assumed Deposits") and acquired assets with
an aggregate carrying value of $1,066.6 million (the
759883.5
-80-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
"Transferred Assets"). The Transferred Assets consisted primarily of loans
secured by real estate, mortgage-backed and investment securities, and 11 Bank
branch offices. Included in the Transferred Assets was approximately $32.4
million amount of loans in which the Predecessor Bank was granted subordinated
participation interests. Also included in the Transferred Assets were the
proceeds of dispositions from five individual asset sale transactions with third
parties, aggregating $60.4 million composed of real estate assets, loans and
other receivables (the "Asset Sale Transactions"). The Asset Sale Transactions
were structured to include ongoing recourse to, and participation by, the
Predecessor Bank with respect to the assets sold, based upon the net proceeds
realized on disposition of assets by the purchasers. See "Asset Sale
Transactions" and Notes 1 and 11 to the Consolidated Financial Statements.
The Assumed Deposits exceeded the Transferred Assets by approximately $93.0
million, which amount represents the premium received by the Predecessor Bank in
the Branch Sale. Marine also purchased the Predecessor Bank's branch office
realty at 96th Street in Manhattan for $1.3 million. The Predecessor Bank
recorded a net pre-tax gain on the sale of offices and branches of $77.6 million
reflecting the deposit premium of $93.0 million, partially offset by Branch Sale
transaction costs of $5.8 million, professional fees of $3.2 million, employee
benefits and severance costs of $4.6 million, net losses on the sale of assets
of $1.1 million and other net costs of $700,000. During the year ended June 30,
1997, the indemnification agreements with Marine were amended and a $3.3 million
contingency reserve was recorded.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans; the balance of
the retained assets consisted of performing loans (including loans sold with
recourse, subordinated participations, junior subordinated participations, loans
to facilitate the sale of real estate owned and mortgage and other loans) and a
modest amount of cash and investment securities (collectively, the "Retained
Assets"). The Predecessor Bank continued substantially the same management and
disposition strategy for Retained Assets subsequent to the Branch Sale as was
previously employed by the Predecessor Bank.
The closing of the Branch Sale was conditioned upon the Predecessor Bank's
obtaining financing with terms and in an amount reasonably acceptable to the
Predecessor Bank and determined to be reasonably adequate to permit consummation
of the Branch Sale. The Predecessor Bank obtained from Marine a facility (the
"Facility") consisting of eleven independent mortgage loans with additional
collateral, in an aggregate amount not to exceed $99.1 million. As of June 30,
1996, Marine had extended $89.8 million under the Facility to the Predecessor
Bank, which has been reduced by repayment activity to $60.6 million at June 30,
1998. Proceeds of the Initial Facilities were utilized by River Bank to (i)
refinance all or part of the certain indebtedness secured by assets to be
transferred to Marine, including all or a substantial part of the outstanding
advances from the Federal Home Loan Bank ("FHLB") and (ii) provide additional
funds for the development and completion of two individual real estate assets as
part of the Company's operations subsequent to the Branch Sale.
The Predecessor Bank held certain non-retail deposits at June 30, 1996,
following the Branch Sale described above. Marine assumed substantially all of
the Predecessor Bank's retail deposits in connection with the Branch Sale. In
addition, the Predecessor Bank ceased accepting retail deposits on the date of
the Branch Sale. During 1997, the Predecessor Bank arranged for the assumption
by other insured depository institutions of its remaining non-retail deposits.
Accordingly, the Predecessor Bank held no deposit liabilities at June 30, 1997.
However, at June 30, 1997, the Predecessor Bank continued to be regulated by the
FDIC and the NYSBD. On October 31, 1996 the Predecessor Bank requested that the
FDIC terminate its insurance of accounts in accordance with the requirements of
the NYSBD's approval of the Branch Sale. On April 14, 1997, the Predecessor Bank
received notice that the FDIC, as requested by the Predecessor Bank, intended to
terminate the Predecessor Bank's status as an insured state nonmember Bank on
December 31, 1997. Upon the issuance of this order by the FDIC, the Predecessor
Bank was no longer subject to banking regulation by the FDIC. In connection
therewith, the Predecessor Bank also received from the Banking Department a
waiver of any applicable New York State deposit insurance requirements.
Conditions imposed in connection with the NYSBD's approval of the Branch Sale
included: (i) the Predecessor Bank's agreement to file an application with the
Banking Department, within one year of the closing of the Branch Sale, for
759883.5
-81-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
approval of a plan of dissolution; (ii) the Predecessor Bank's agreement to file
with the Supreme Court of the State of New York an application for a closing
order within 13 months of the closing of the Branch Sale and an application for
a final order of dissolution within five months following the filing of an
application for a closing order; (iii) increased levels of minimum regulatory
capital requirements; (iv) the Predecessor Bank's agreement to continue to
submit its proposed capital transactions to the NYSBD for prior approval; (v)
the continuation of the Predecessor Bank's then-current periodic reporting
obligations with respect to its retained assets, as well as in connection with
its ongoing activities subsequent to the Branch Sale; and (vi) such other
conditions and obligations as the Banking Department may have deemed
appropriate.
In June 1997, the Predecessor Bank submitted an alternate proposal (the
"Alternate Proposal") to the NYSBD pursuant to which the Predecessor Bank would
implement Conditions No. 1 and No. 2 of the approval of the Branch Sale
described above. The Predecessor Bank proposed to adopt a plan under which it
would transfer all of its assets and liabilities, including all contingent
liabilities, to a successor corporation ("Successor") incorporated under
Delaware General Corporation Law. Successor would acquire all of the assets of
the Predecessor Bank and continue all of the business of the Predecessor Bank
under the same business plan as adopted by the Predecessor Bank. Following the
transfer of its assets and liabilities to Successor, the Predecessor Bank would
surrender its banking charter and dissolve. The implementation of the proposed
plan would result in a mere change of form from a banking corporation to a
corporation incorporated under the Delaware General Corporation Law, which would
not be subject to the jurisdiction of the Banking Department. The proposed
transfer was expected to qualify as a tax-free reorganization under the Internal
Revenue Code and, as such, the Company expected (and continues to expect) that
certain of the Predecessor Bank's tax attributes would be preserved. In
connection with the Alternate Proposal, common and preferred shareholders of
River Bank would receive shares of Successor on a share-for-share basis so that
Successor would be owned by the same stockholders, in the same proportions, as
owned the Predecessor Bank on the record date.
Prior to June 30, 1997, the Predecessor Bank received the NYSBD's letter
indicating their conditional approval of the Alternate Proposal as meeting the
Conditions of the Banking Department's approval of the Branch Sale, if
implemented by the Predecessor Bank on a timely basis. The NYSBD's conditional
approval of the Alternate Proposal and related modification of Condition No. 1
of the Approval of the Branch Sale provided that the approval of shareholders of
the Alternate Proposal not later than September 30, 1997 would be deemed to
satisfy Condition No. 1. Condition No. 2 of the Banking Department's approval of
the Branch Sale would be deemed to be satisfied if the petition required by
Condition No. 2 was filed by the Bank by October 15, 1997. The Predecessor Bank
met Condition No. 1 and Condition No. 2 on a timely basis. A copy of the
Alternate Proposal and the NYSBD's letter indicating their conditional approval
of the Alternate Proposal have been included as Exhibits 14 and 15 to FDIC Form
F-2, dated June 30, 1997.
The Company will continue to be subject to the requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") as amended and will be required to
file periodic reports and other information with the Securities Exchange
Commission (the "SEC").
Subsequent to the closing of the Branch Sale, the Company continued to have an
executive officer, under New York Banking Law. However, the Company no longer
retained a significant number of employees to manage the Company's affairs.
Rather, the day-to-day management responsibilities of the Company have been
obtained from RB Management Company ("RB Management), a newly-formed management
company affiliated with Mr. Dworman.
After the closing of the Branch Sale, a significant amount of services necessary
to manage the Retained Assets were provided by RB Management or third-party
subcontractors who do not have any continuing fiduciary obligations to the
Company or the stockholders. It is anticipated that such services will continue
to be provided by RB Management and third-party subcontractors. The selection of
third-party subcontractors to provide various services to the Company will be
made by RB Management Company, subject to the ratification by committees of the
Board of Directors but without stockholder approval. The Company's success in
maximizing returns through management of the Retained Assets will depend on the
efforts of RB Management and third-party contractors retained to provide
services to the Company.
759883.5
-82-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
4. Regulatory capital requirements
Prior to the reorganization of the Predecessor Bank into a Delaware corporation,
which was completed on May 22, 1998, the Banking Department had advised the
Predecessor Bank that the Predecessor Bank's minimum capital requirement, set at
$115 million in the NYSBD's approval of the Branch Sale and subsequently amended
to $106 million in May 1997, was to remain at $106 million until the Predecessor
Bank's final dissolution, unless the Banking Department shall provide prior
approval of the Company's written request to amend the Company's minimum capital
requirement. So long as the Company's deposit accounts were insured by the FDIC,
as a Federally-insured state-chartered bank, the Company was required to
maintain minimum levels of regulatory capital. Under those FDIC regulations,
insured state-chartered banks were generally required to maintain (i) a ratio of
Tier 1 leverage capital to total assets of at least 4.0% to 5.0% (3.0% for the
most highly-rated banks) and (ii) a ratio of Tier 1 capital to risk weighted (as
defined by regulation) assets of at least 4.0% and a ratio of total capital to
risk weighted assets of at least 8.0%.
On October 31, 1996, the Company requested that the FDIC terminate its insurance
of accounts as a result of having transferred all of its remaining non-retail
deposits and mortgage escrow accounts to other insured institutions or servicing
entities. On April 14, 1997, the Company received notice that the FDIC, as
requested by the Company, intended to terminate the Company's status as an
insured state nonmember Bank on December 31, 1997.
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmember bank by the FDIC and the reorganization of the Predecessor Bank into a
Delaware corporation, the Company is no longer subject to the regulatory capital
requirements of either the FDIC or the Banking Department.
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the years ended June 30, 1998, 1997, and 1996,
respectively. The Company had no securities outstanding that were convertible to
common stock at June 30, 1998, 1997 and 1996.
In 1997, the Financial Accounting Standards Board issued Statement of Accounting
Standards No. 128, "Earnings Per Share" ("SAS-128"). SAS-128 replaced previously
promulgated GAAP regarding the calculation of, and reporting requirements for,
earnings per share information. Specifically, SAS-128 replaced primary and fully
diluted earnings per share, as previously defined under GAAP, with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any delusive effects of options, warrants and convertible
securities. Under SAS-128, diluted earnings per share is very similar to the
previously-reported fully-diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to SAS-128 requirements.
6. Cash due from banks and cash equivalents
Included in Cash, due from banks and cash equivalents at June 30, 1998, are
approximately $3.0 million in Funds maintained on deposit by wholly-owned
subsidiaries and required to meet ongoing cash flow requirements of those
subsidiaries. At June 30, 1998, Marine had restricted a total of $19.6 million
in funds, held on deposit with Marine, in accordance with the terms of the
Branch Sale and the Marine Facility agreements. At June 30, 1997, Marine had
restricted a total of approximately $5.1 million. Restricted funds held by
Marine are not available to the Company for the settlement of any of the
Company's current obligations. Of the $19.6 million cash balance restricted by
Marine at June 30, 1998, $5.0 million relates to reserve amounts specified under
the Branch Sale Agreement. The remaining restricted cash reserves arose from the
sale of assets which had served as primary collateral for the Marine Facility.
The restricted cash held by Marine is intended to serve as substitute collateral
for the Marine Facility, until such time
759883.5
-83-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
the Marine Facility, until such time as the Marine Facility is reduced in
accordance with the Company's Asset Management Plan and the Marine Facility
agreements.
7. Investment securities available for sale, net
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Equity securities $ 2,299 $ -- $ (926) $ 1,373
================ ================ ================ ============
</TABLE>
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C>
Equity securities $ 7,380 $ -- $ (1,105) $ 6,275
=============== =============== ============== ==========
</TABLE>
8. Loans receivable, secured by real estate
Loans secured by real estate at June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------ -----
<S> <C> <C>
One-to-four family residential $ 1,306 $ 3,924
Multi-family residential 24,638 26,090
Commercial 33,062 50,079
------------ -----------
$ 59,006 $ 80,093
============ ===========
</TABLE>
In accordance with SFAS No. 114 (SFAS-114), "Accounting by Creditors for
Impairment of a Loan," the Company considers a loan impaired if, based on
current information and events, it is probable that all amounts due under the
loan agreement are not collectable. Impairment is measured based upon the fair
value of the underlying collateral.
At June 30, 1998 and 1997, the recorded investment in loans that are considered
to be impaired under SFAS-114 were $19,130 and $24,791, respectively (of which
$19,130 and $24,791 were on a non-accrual basis). The related allowance for
credit losses is $7,679 and $8,396. The average recorded investment in impaired
loans during the years ended June 30, 1998 and June 30, 1997, were $22,952 and
$25,024, respectively. . For the years ended June 30, 1998 and June 30, 1997,
the Company recognized interest income on those impaired loans of $41 and $161,
respectively, using the cash basis of income recognition.
759883.5
-84-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
At June 30, 1998 and 1997, the Company had restructured 5 loans, secured by real
estate which aggregated $22,999 and $24,454, respectively. The gross interest
income that would have been recorded if those loans had been current in
accordance with their original terms and had been outstanding throughout the
years ended June 30, 1998 and 1997 is $2,411 and $2,559 respectively. The amount
of interest on these loans that was included in interest income for the year
ended June 30, 1998, and 1997 is $1,679 and $1,783.
9. Commercial and consumer Loans
Commercial and consumer loans at June 30, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------ -----
<S> <C> <C>
Commercial loans:
Secured $ 2,520 $ 2,520
Unsecured 5,939 10,286
-------------- ------------
8,459 12,806
Consumer loans:
Student education loans 1,972 2,504
Other -- 367
1,972 2,871
-------------- ------------
Total commercial and consumer $ 10,431 $ 15,677
============== ============
loans
</TABLE>
10. Allowance for possible credit losses
The following is an analysis of the allowance for possible credit losses for the
years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at July 1, 1997 and 1996 $ 31,570 $ 34,142
Provision charged to operations 1,500 1,000
Charge-offs, net of recoveries (13,033) (3,572)
------------ ------------
Balance at June 30, 1998 and 1997 $ 20,037 $ 31,570
============ ============
</TABLE>
Charge-offs, net of recoveries, relate to losses incurred and recoveries
realized in the sale or liquidation of assets.
At June 30, 1998, the total provisions for possible credit losses were allocated
to real estate loans in the amount of $17,697 and to commercial and consumer
loans in the amount of $2,340. At June 30, 1997, the total provisions for
possible credit losses were allocated to real estate loans in the amount of
$25,787 and to commercial and consumer loans in the amount of $5,783.
759883.5
-85-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
11. Loans sold with recourse, net.
Loans sold with recourse, were carried at $15,781 and $24,451, net of valuation
allowances of $4,901 and $4,901 at June 30, 1998 and 1997, respectively. At June
30, 1998 and 1997, loans sold with recourse consist of loans and contracts of
sale related to three multi-family residential developments, including a parcel
of undeveloped land.
Asset Sale Transactions
In connection with, and to facilitate the closing of, the Branch Sale, the
Company consummated $60.4 million of Asset Sale Transactions. The Asset Sale
Transactions, which were arranged by RB Management Company LLC, were structured
to include ongoing recourse to, and participation by, the Company with respect
to the assets sold, based upon the proceeds realized by the purchasers. The
assets included within each pool of assets sold and the nature of related
recourse provisions are described below.
The Asset Sale Transactions were entered into with five entities, each of which
was independent of the Company and Alvin Dworman, who owns 39% of the common
stock of the Company. In connection with the Asset Sale Transactions, entities
controlled by Mr. Dworman loaned $12.8 million to the five entities on a
non-recourse basis.
Assets included within each pool sold were, with the exception of Pool C,
believed by the Company and the purchasers to be in the final process of
disposition by the Company. In essence the Asset Sale Transactions resulted in
disposition proceeds which the Company expected to realize on the included
assets within the fiscal year following the Company's 1996 fiscal year.
In each of the Asset Sale Transactions, the Company sold a pool of assets and
received a 20% cash down payment and non-recourse purchase money notes (the
"Purchase Money Notes") which approximated 80% of the sale price. In all cases,
except for Pool C, the Purchase Money Notes had maturity dates, including any
extension options, of less than one year from June 30, 1996. The maturity date
on the Pool C Purchase Money Note was three years. The Company also received
additional contingent proceeds notes for each of the five pools which provided
the Company with rights to receive proceeds from subsequent asset sales by
purchasers in excess of the initial sales price after the purchaser had received
a return of 8%, a transaction fee of 25 basis points and reimbursement of
certain transaction expenses. In the event that proceeds of subsequent assets
sales exceed specified amounts for each pool, such amounts were to be retained
by the purchaser.
The Company received aggregate cash down payments of $12.8 million in connection
with the Asset Sale Transactions. The Purchase Money Notes, aggregating $47.6
million, were included in the assets delivered to Marine in connection with the
Branch Sale.
The Company made representations and warranties ( the "Recourse Provisions")
with respect to the assets sold which included, among other things, the present
condition of each asset, the nature of disposition arrangements which had been
entered into by the Company prior to June 28, 1996 and that each of the assets
was free of any liens or encumbrances. The Recourse Provisions also included
representations with respect to certain of the assets that the Company had taken
all actions to effect specific proposed dispositions or had made arrangements
with third parties to complete actions required to effect such dispositions.
For accounting purposes the Company accounted for the Asset Sale Transactions
included in Pools B and C as financings, primarily due to their longer-term
nature and the more substantial risks related to ongoing construction for the
assets included in each of the Pools. Pool B and C Asset Sale Transactions have
been included in the Company's consolidated financial statements as Loans sold
with recourse. Related financing for such assets has been included in the
Company's consolidated financial statements as Borrowed Funds, secured by assets
sold with recourse. The
759883.5
-86-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
Company believes that it has made adequate provision at June 30, 1998 for all
recourse amounts expected to result from the sale of the assets included in
Pools B and C.
For accounting purposes the Company accounted for the Asset Sale Transactions
included in Pools A, D, and E as sale transactions since each of the financial
receivables, asset sale contracts or other proceeds included in these pools
represented reasonably estimable amounts, including related recourse claims, in
transaction with limited duration. Substantial proceeds from dispositions
conducted within Pools A, D and E were realized by the purchasers during the
fiscal year ended June 30, 1997 with the reminder being realized during the
fiscal year ended June 30, 1998.
Assets included in Asset Sale Transactions, and a description of the assets
sold, were as follows:
Pool A
Pool A originally included $13.8 million in assets, composed of $12.0 million of
receivables related to the collection of certain federally guaranteed, defaulted
student loans and other student loan related claims from the Student Loan
Marketing Agency ("SLMA") (collectively, the "Student Loan Receivables") and
$1.8 million related primarily to delinquent single family residential loans
(collectively the "Single Family Receivables").
The Company's aggregate investment in the Student Loan Receivables and the
Single Family Receivables prior to the Asset Sale Transactions approximated
$12.4 million and $7.1 million, respectively.
During the year ended June 30, 1998, the Company elected to satisfy its debt to
the purchaser and reacquire, under the recourse terms of the Asset Sale
Transaction, the remaining unsold assets sold to the purchaser on June 26, 1998.
This action was undertaken to reduce the Company's ongoing interest expense and
related obligations under the debt agreement with the purchaser. As a result of
this action, and the realization of asset disposition proceeds during the 1998
fiscal year, at June 30, 1998 the purchaser had realized all anticipated
proceeds from its participation in the Asset Sale Transactions and all debt
associated with the transaction had been retired by the Company.
At June 30, 1998, the remaining Student Loan Receivables balance, net of
applicable reserves, was $1.9 million. This balance is carried by the Company as
a component of it commercial and consumer loans. This balance represented claims
which had been filed with state processing agencies for reimbursement for which
the Company expected to receive reimbursement. At June 30, 1998, the remaining
Single Family Receivables balance, net of applicable reserves was $1.3 million
and were in the process of being disposed of through amortization and sales of
individual loans or, to a lesser degree, sales of real estate owned to bulk
buyers or individuals. This balance is carried by the Company as a component of
its loans secured by real estate portfolio.
Pool B
At June 30, 1996, Pool B was composed of a mortgage loan in the amount of $13.0
million secured by land and construction in process related to a single-family
condominium project in Wayne, New Jersey (the "Wayne Project"). The Company's
aggregate investment in the Wayne Project prior to the Asset Sale Transactions
approximated $13 million.
At June 30, 1998, the Wayne Project is in the final phase of a three-phase
development and all remaining units are under contract to be sold. The Company
believes that the Wayne Project will be fully completed and all individual units
sold prior to June 30, 1999. The Company's remaining investment in the Wayne
Project, net of applicable reserves, was $3.0 million at June 30, 1998. At June
30, 1998, all Marine debt related to this asset has been repaid and $2.1 million
of recourse debt remained payable to a third party.
759883.5
-87-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
Pool C
Pool C included contracts of sale, in the amount of $11.0 million for two
adjacent parcels of land located in the Bronx, New York (the "Bronx Projects").
The Company's investment in the Bronx Projects prior to the Asset Sale
Transactions aggregated $17.7 million, including $12.1 million for one site
("Site One") and $5.6 million for a second site ("Site Two"). The sale contract
for the Bronx Projects represented the sale of ownership and development rights
for each of the parcels of land and, for Site One, the Company's investment at
June 28, 1996 in construction in process.
At June 30, 1998, the Company's remaining investment in the Bronx Projects
aggregated $12.7 million, including $9.0 million for Site One and $3.7 million
for Site Two. At June 30, 1998, development of the first phase of Site One,
involving the construction of 84 condominium units, was completed and all units
were sold. Site Two was vacant on June 30, 1998 with no development yet
commenced. At June 30, 1998, the Company was evaluating various development and
distribution strategies with respect to these properties. Such strategies would
include, but not be limited to, sales of one or both of the sites and various
arrangements for the sale and development of subparcels of the sites.
Payments made to reduce the remaining recourse claims related to the Pool C sale
were made from Bronx Projects condominium unit sales proceeds to Marine and to a
third-party lender aggregating $2.1 million and $2.2 million, respectively, in
the year ended June 30, 1998 and $600,000 and $0, respectively, in the year
ended June 30, 1997. Such payments reduced the outstanding amount payable to
Marine and the third-party lender to $6.1 million and $0, respectively, at June
30, 1998 and to $8.2 million and $2.2 million, respectively, at June 30, 1997.
Pool D
Pool D, with an aggregate sales price of $14.3 million, included six individual
real estate properties, located in New York State, New Jersey and California
(collectively, the "Real Estate Properties"). The Company's aggregate investment
in the Real Estate Properties prior to the Asset Sale Transactions aggregated
$16.1 million. Each of the properties included in Pool D were either under
contract of sale or contracts of sale for the remaining assets were being
actively negotiated. All properties were disposed of during 1997 with the
exception of one property. This property had a remaining asset balance of
approximately $2.0 million at June 30, 1998.
During the year ended June 30, 1998, the Company elected to satisfy its debt to
the purchaser and reacquire, under the recourse terms of the Asset Sale
Transaction, the remaining unsold asset sold to the purchaser on June 26, 1996.
This action was undertaken to reduce the Company's ongoing interest expense and
related obligations under the debt agreement with the purchaser. As a result of
this action, at June 30, 1998 the purchaser had realized all anticipated
proceeds from its participation in the Asset Sale Transactions and all debt
associated with the transaction had been retired by the Company.
Pool E
Pool E, with an aggregate sales price of $8.3 million, included the rights to
proceeds from sale of two joint venture projects, the sale of which was
scheduled to close within 90 days, rights to proceeds of sale of 35 condominium
projects located in New York City, a mortgage secured by cooperative apartment
units in New York City and a mortgage secured by a multi-family apartment
complex in New York State (collectively, the "Venture Proceeds and Residential
Mortgages Pool"). The Company's aggregate investment in the Venture Proceeds and
Residential Mortgages Pool prior to the Asset Sale Transactions aggregated $11.6
million. Each of the assets included in Pool E was disposed of during fiscal
1997 and consequently, the purchaser had realized all anticipated proceeds from
its participation in the Asset Sale Transactions and all debt associated with
this transaction had been retired by the Company prior to June 30, 1997.
759883.5
-88-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
12. Real estate held for investment
Real estate held for investment at June 30, 1998 and 1997, respectively,
consists of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
Number Number
of Amount of Amount
Properties Properties
<S> <C> <C> <C> <C>
Multi-family 2 $ 62,426 2 $ 63,266
Commercial real estate:
Office buildings 2 17,616 2 19,502
Shopping centers 1 1,966 1 68
Other 1 827 1 1,266
--- ----------- --- ------------
6 $ 82,835 6 $ 84,102
=== =========== === ===========
</TABLE>
At June 30, 1998, the Company's principal real estate held for investment
properties consists of a multi-family apartment complex located in Philadelphia,
PA, an office building complex in Atlanta, GA and co-operative apartment shares
in New York, NY. The book values of the three properties are $56.0 million,
$12.4 million and $6.4 million, respectively.
The Company has used currently available information to establish valuations for
real estate held for investment at June 30, 1998. Future writedowns of real
estate held for investment may be necessary based on changes in economic
conditions, the receipt of newly-available information involving specific
properties, or changes in management strategies.
For the year ended June 30, 1998, the company has conformed to SFAS 121;
therefore all previously stated valuation allowances are now considered direct
writedowns of the real estate held for investment.
759883.5
-89-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
13. Real estate held for disposal
Real estate held for disposal, net of $1,363 and $1,849 valuation allowance at
June 30, 1998 and 1997, respectively, consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
Number of Number of
Properties Amount Properties Amount
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
One-to-four family including
single-family developments -- $ -- 2 $ 596
Multi-family 1 2,000 3 12,651
Commercial real estate:
Office buildings 1 1,650 -- --
--------- ---------- ---------- ----------
2 $ 3,650 5 $ 13,247
========== ========== ========== ==========
</TABLE>
Activity in the valuation allowance for real estate held for disposal for the
years ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------ -----
<S> <C> <C>
Beginning balance - July 1, 1997 and $ 1,849 $ 1,701
1996 -- 8,445
Provisions charged to operations (486) (8,297)
------------ -----------
Charge-offs $ 1,363 $ 1,849
============ ===========
Ending balance - June 30
</TABLE>
At June 30, 1998, the Company's principal real estate held for disposal
properties consists of a parking garage adjacent to an office building complex
in Atlanta, GA and co-operative apartment shares in New York, NY. The related
rental income and expenses for these properties are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------ -----
<S> <C> <C>
Rental income $ 83 $ 1,656
Less: Rental and other property (6) (1,817)
expenses -- (1,300)
------------- -----------
Writedowns of asset value $ 77 $ (1,461)
============= ===========
Net income
</TABLE>
Management believes that the allowance for possible losses is adequate and that
real estate held for disposal is properly valued. The Company has used currently
available information to establish reserves and resultant net valuations for
real estate held for disposal at June 30, 1998.
759883.5
-90-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
14. Salaries and Employee Benefits
Due to the general cessation of all loan origination activities in anticipation
of and subsequent to the Branch sale, salaries and employee benefits were not
reduced by any capitalized direct loan origination costs in the years ended June
30, 1998, 1997, and 1996.
15. Other assets
Other assets at June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Accrued interest receivable $ 388 $ 792
Deposit against asset sale recourse claims 2,107 -
Prepaid pension expenses and other 1,753 1,443
---------- ----------
$ 4,248 $ 2,235
========== ==========
</TABLE>
16. Borrowed funds
Borrowed funds and weighted average year-end interest rates at June 30, 1998 and
1997 consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
Weighted Weighted
Year-end Average Year-end Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Initial facilities (Marine) $ 60,557 8.20% $ 66,066 8.25%
Borrowed funds secured by loans
sold with recourse (note 11) 8,203 8.00 18,206 8.25
----------- -----------
$ 68,760 $ 84,272
=========== ===========
Average cost of funds during the 8.17% 8.25%
year ended ===== =====
</TABLE>
Borrowed funds secured by loans sold with recourse: In June 1996, the Company
financed the sale of loans, in the amount of $24,000, in connection with and to
facilitate the closing of the Branch Sale. These loans were sold to third
parties, with recourse and have been accounted for as financings. See "Asset
Sales," and Note 11.
Borrower funds secured by loans sold with recourse bear interest at the prime
rate (or, at the Company's option, in LIBOR based rate). See Note 11 for more
information concerning the three properties securing this information.
Initial Facility with Marine: The closing of the Branch Sale was conditioned
upon the Company's obtaining financing with terms and in an amount reasonably
acceptable to the Company and determined to be reasonably adequate to permit
consummation of the Branch Sale. The Company obtained from Marine the Facility,
consisting of eleven independent mortgage loans with additional collateral, in
an aggregate amount not to exceed $99.1 million. As of June 30, 1998, Marine had
extended $60.6 million under the Facility to the Company.
759883.5
-91-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
Proceeds of the Facility were utilized by the Company to (i) refinance all or
part of the certain indebtedness secured by assets to be transferred to Marine,
including all or a substantial part of the outstanding advances from the Federal
Home Loan Bank ("FHLB") and (ii) provide additional funds for the development
and completion of two individual real estate assets as part of the Company's
operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts which are equal to 60% and 30% of the original aggregate amount of the
Facility and remaining fully current on all obligations and in compliance with
all covenants.
The Facility was priced at 175 basis points over LIBOR for the initial six
months following June 28, 1996, automatically increasing by 25 basis points at
the beginning of each of the subsequent three six month periods and will be
priced at 275 basis points over LIBOR for the third year of the Facility. In the
event that the Company elects to exercise its option to extend the initial term
of the Facility, the Facility will be priced at 300 basis points over LIBOR
during the initial one-year extension and 325 basis points over LIBOR during the
second one-year extension. Following maturity or an event of default, the Senior
Debt Financing will accrue interest at a specified default rate.
The Facility is secured by first priority mortgage liens on eleven of River
Bank's real estate assets approved by Marine and collateral assignments of first
priority mortgages held by River Bank (the "Primary Collateral"). Each of the
loans is cross defaulted with each other and cross collateralized by all
collateral for the Facility. As additional collateral for the Facility, each
loan is also secured by first priority mortgages (or, where applicable, a
collateral assignment of first priority mortgages held by the Company), stock
pledges and assignment of partnership interests and assignment of miscellaneous
interests on additional Bank assets (the "Additional Collateral"). The Company
collaterally assigned to Marine all of the cash flow from the Primary Collateral
and the Additional Collateral. All of the net cash flow from the Primary
Collateral and Additional Collateral will be applied to the prepayment of the
Facility. In addition, all net proceeds from the sale of any Primary Collateral,
and the proceeds from the sale of any Additional Collateral, shall be applied to
the prepayment of the Facility subject to the Company's right to establish
reserves for its operating needs. The Company will be permitted to prepay the
Facility in whole or in part at any time without prepayment penalty or premium
(subject to customary LIBOR breakage provisions).
The Loan Agreement requires that while any amounts remain outstanding under the
senior debt financing, the Company must receive Marine's prior written consent
to, among other things, materially alter its charter or by-laws, incur
additional corporate indebtedness and liens, make any distributions to
stockholders or repurchases or redemptions of capital stock, acquire additional
assets, exchange existing assets with a third party or assume additional
liabilities as a result of any proposed merger transaction.
759883.5
-92-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
17. Other liabilities
Other liabilities at June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------ -----
<S> <C> <C>
Accrued interest payable $ 479 $ 964
Accrued income taxes 5,787 5,771
Accounts payable and accrued expenses 3,036 6,101
Postretirement benefits obligation 4,352 4,728
Preferred Stock dividend, declared and unpaid 1,313 1,313
---------- ----------
$ 14,967 $ 18,877
========== ==========
</TABLE>
18. Stockholders' equity
On June 30, 1994, the Predecessor Bank consummated the placement ("Offering") of
5,500,000 shares of its common stock, par value $1.00 per share ("Predecessor
Common Stock), and 1,400,000 shares of 15% noncumulative perpetual preferred
stock, series A, par value $1.00 per share ("Predecessor Preferred Stock") which
resulted in net proceeds to the Predecessor Bank of $78,200. The issuance price
of the offered stock was $9 per share for the Predecessor Common Stock and $25
per share for the Predecessor Preferred Stock. The Predecessor Bank's Restated
Organization Certificate was amended prior to consummation of the Offering in
order to authorize the issuance of up to 30,000,000 shares of Predecessor Common
Stock and 10,000,000 shares of Predecessor Preferred Stock. Prior to the
Offering, the Predecessor Bank had 1,000,000 shares of Predecessor Common Stock
issued and outstanding, plus warrants to purchase an additional 690,000 shares
of Predecessor Common Stock. The Predecessor Bank also had 200,000 shares of 3%
Noncumulative Senior Preferred Stock and 130,000 shares of 4% Noncumulative
Preferred Stock issued and outstanding (each of which series of preferred stock
had a liquidation value of $100 per share). Substantially concurrently with the
Offering these shares were exchanged for 600,000 shares of Predecessor Common
Stock and outstanding warrants to purchase Predecessor Common Stock were
canceled. The Predecessor Bank had 7,100,000 shares of its Predecessor Common
Stock and 1,400,000 shares of its Predecessor Preferred Stock outstanding at
June 30, 1997 and 1996.
In connection with the Reorganization (See Note 2), the stockholders of the
Predecessor Bank received substantially identical capital stock of the Company
(with substantially identical rights and privileges) on a share-for-share basis
and as a result the Company had 7,100,000 shares of its common stock, $1.00 par
value ("Company Common Stock"), and 1,400,000 shares of its 15% non-cumulative
perpetual preferred stock, series A, $1.00 par value ("Company Preferred
Stock"), outstanding at June 30, 1998. An investor continues to be the largest
stockholder of the Company with 2,768,400 shares or 39% of the Company Common
Stock outstanding.
The Company's certificate of incorporation authorizes the issuance of up to
30,000,000 shares of Company Common Stock and 10,000,000 shares of preferred
stock, of which 1,400,000 have been designated and issued as the Company
Preferred Stock pursuant to the certificate of designation with respect thereto.
This Company Preferred Stock is perpetual and is not subject to any sinking fund
or other obligation of the Company to redeem or retire it.
The board of directors of the Company has the power from time to time to issue
additional shares of Company Common Stock or preferred stock authorized by its
certification of incorporation without obtaining approval of the Company's
stockholders. The board of directors has the power to fix various terms with
respect to additional shares of preferred stock, including voting powers,
designations, preferences, price, dividend rate, conversion and exchange
provisions, redemption provisions and the amounts that holders are entitled to
receive upon any dissolution, liquidation or winding up of the Company.
759883.5
-93-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The Company may pay dividends as declared from time to time by the board of
directors. Except as provided with respect to any series of preferred stock, the
holders of Company Common Stock possess exclusive voting rights in the Company.
Each holder of Company Common Stock is entitled to one vote for each share held
on all matters voted upon by stockholders. Stockholders are not permitted to
cumulate votes in elections of directors. Subject to the prior rights of the
holders of any shares of the Company's outstanding preferred stock, in the event
of any liquidation, dissolution or winding up of the Company, the holders of the
Company Common Stock would be entitled to receive, after payment of all debts
and liabilities of the Company, all assets of the Company available for
distribution.
The Company Preferred Stock ranks prior to the Company Common Stock with respect
to dividend rights and rights upon the voluntary or involuntary dissolution,
liquidation or winding up of the Company, and to all other classes and series of
equity securities of the Company hereafter issued, other than any class or
series of equity securities of the Company expressly designated as being on a
parity with or senior to the Company Preferred Stock with respect to dividend
rights or rights upon any such dissolution, liquidation or winding up. The
Company Common Stock and any other classes or series of equity securities of the
Company not expressly designated as being on a parity with or senior to the
Company Preferred Stock are referred to hereafter as "Junior Stock." The rights
of holders of shares of Company Preferred Stock are subordinate to the rights of
the Company's creditors, including its depositors. The Company may not issue any
capital stock that ranks senior to the Company Preferred Stock without the
approval of holders of at least 66% of the outstanding shares of Company
Preferred Stock, voting as a class.
Holders of Company Preferred Stock will be entitled to receive, when, as and if
declared by the board of directors of the Company, out of funds legally
available therefor, noncumulative cash dividends at the rate of 15% per annum.
The right of holders of Company Preferred Stock to receive dividends is
noncumulative. Accordingly, if the board of directors does not declare a
dividend payable in respect of any quarterly dividend period (a "Dividend
Period"), then holders of Company Preferred Stock will have no right to receive,
and the Company will have no obligation to pay, a dividend in respect of such
Dividend Period, whether or not dividends are declared payable in respect of any
future Dividend Period. No full dividends may be declared or paid or set aside
for payment as dividends on any class or series of equity securities ranking, as
to dividends, on a parity with the Company Preferred Stock for any Dividend
Period unless full dividends on the Company Preferred Stock for such Dividend
Period shall have been paid or declared and set aside for payment.
Dividends on the Company Preferred Stock will not be declared and paid if
payment of such dividends is then restricted by (i) laws, rules, regulations or
regulatory conditions applicable to the Company or (ii) orders, judgments,
injunctions or decrees issued by, or agreements with, federal or state
authorities with respect to the Company. The Company is not permitted to declare
or pay dividends (whether in cash, stock or otherwise) on its Company Common
stock without the prior written consent of Marine.
The Predecessor Bank previously received notice that the approvals necessary to
declare or pay dividends on the Predecessor Bank's outstanding shares of
Predecessor Preferred Stock would not be provided. In June 1996, the Predecessor
Bank's board of directors declared a Predecessor Preferred Stock dividend for
the quarter ending June 30, 1996, payment of which was subject to the receipt of
required approvals from the Predecessor Bank's regulators at the time, the FDIC
and the NYSBD, as well as Marine (the Predecessor Bank's and the Company's
principal lender). Primarily as a result of the above, neither the Company's nor
the Predecessor Bank's respective boards of directors has taken any action
regarding a quarterly dividend on the Predecessor Preferred Stock or the Company
Preferred Stock, as the case may be, for any of the quarterly periods ended from
September 30, 1996 through June 30, 1998. Although the Company is no longer
subject to the jurisdiction of either the FDIC or the NYSBD, declaration or
payment of future dividends on the Company Preferred Stock will continue to be
subject to the approval of Marine for so long as the Facility remains
outstanding. The Company has received notice from Marine that the approval
necessary to declare or pay dividends on the Company Preferred Stock will not be
provided at this time. There can be no assurance that the board of directors of
the Company will deem it appropriate to pay dividends on the Company Preferred
Stock even if permitted by Marine.
759883.5
-94-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
Holders of the Company Preferred Stock are not entitled to vote in the election
of directors and on matters put to a vote for stockholder action generally.
Holders of the Company Preferred Stock, however, are entitled to elect two
members of the Company's Board to fill two newly-created directorships upon the
occurrence of a "Voting Event." A Voting Event occurs if the Company or the
Predecessor Bank fails to pay full dividends on the Company Preferred Stock or
the Predecessor Preferred Stock (or to declare such full dividends and set apart
a sum sufficient for payment thereof) with respect to each of any six Dividend
Periods, whether consecutive or not. A Voting Event has occurred and two
nominees for director will be nominated by certain holders of the Company
Preferred Stock and will be elected to the Company's board of directors upon
exercise of the foregoing voting rights at the Company's 1998 annual meeting of
stockholders to be held on September 16, 1998.
The Company Preferred Stock is perpetual and is not redeemable prior to July 1,
2004. The Company Preferred Stock is redeemable by the Company at its option at
any time on or after July 1, 2004, in whole or in part, at the per share
redemption prices set forth below in cash, plus in each case an amount in cash
equal to accrued but unpaid dividends for the then-current Dividend Period up
to, but excluding, the date fixed for redemption (the "Redemption Date") without
the accumulation of unpaid dividends for prior Dividend Periods:
July 1, 2004 to June 30, 2005 $27.50
July 1, 2005 to June 30, 2006 27.25
July 1, 2006 to June 30, 2007 27.00
July 1, 2007 to June 30, 2008 26.75
July 1, 2008 to June 30, 2009 26.50
July 1, 2009 to June 30, 2010 26.25
July 1, 2010 to June 30, 2011 26.00
July 1, 2011 to June 30, 2012 25.75
July 1, 2012 to June 30, 2013 25.50
July 1, 2013 to June 30, 2014 25.25
July 1, 2014 and thereafter 25.00
If fewer than all the outstanding shares of Company Preferred Stock are to be
redeemed, the shares to be redeemed shall be selected pro rata or by lot or by
such other method as the board of directors of the Company, in its sole
discretion, determines to be equitable.
In the event of a change of control, the acquirer ("Note Issuer") may, at its
option, exchange (the "Note Exchange") all or part of the outstanding Company
Preferred Stock for subordinated notes (the "Notes") of the Note Issuer.
Pursuant to a Note Exchange, each $1,000 in liquidation value of the shares of
Company Preferred Stock covered thereby will be exchangeable for $1,000
principal amount of Notes. Such Notes shall have the terms, covenants and
conditions set forth under "Description of Notes" below. The rate of interest on
the Notes shall be 15%, the maximum principal amount of the Notes shall be 100%
of the aggregate liquidation preference of the Company Preferred Stock to be
exchanged and the principal of such Notes shall not be payable prior to July 1,
2004.
759883.5
-95-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
19. Income taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
SFAS No. 109 (SFAS-109), "Accounting for Income Taxes."
At June 30, 1998, the Company had a net operating loss ("NOL") carryforward for
federal income tax purposes of approximately $88.9 million attributable to
operating losses incurred in 1991 through 1998. The Company's NOL's may be
carried forward 15 years and will expire in years 2006 through 2013.
For income tax purposes, certain deductions of "closely held" corporations from
"passive activities" are generally deductible only against either income from
passive activities or net income from an active trade or business. Passive
activity losses in excess of the amounts currently allowed are suspended and may
be carried forward indefinitely to offset taxable income from passive activities
or from an active trade or business in future years, or will generally be fully
deductible upon a complete disposition of the underlying passive activity. At
June 30, 1998, the Company had suspended passive activity losses for federal
income tax purposes of approximately $277,000, suspended passive activity
credits, which are subject to similar limitations, of approximately $8.2 million
and additional non-passive credits of $784, $555 and $429 which were generated
in 1997, 1996 and 1995, respectively, and will expire in the years 2009 to 2012
if not used. Alternative minimum tax payments of $2.5 million may be carried
forward as a credit to offset regular federal tax liabilities in future years,
subject to certain limitations.
The Reorganization was structured and implemented in a manner intended to
constitute a tax-free "reorganization" for Federal income tax purposes, within
the meaning of section 368 of the Code. Assuming that the Reorganization did
constitute such a "reorganization," the following consequences would pertain:
1. The transaction would be treated for Federal income tax purposes as
though River Bank had transferred substantially all of its assets to
the Company in exchange for RB Asset, Inc. capital stock followed by a
distribution of the RB Asset, Inc. capital stock by River Bank to its
stockholders in exchange for their River Bank capital stock in
constructive liquidation of River Bank.
2. No gain or loss would be recognized to a holder of River Bank Common
Stock who is deemed to exchange such stock for RB Asset, Inc. common
stock ("RB Asset Common Stock"). No gain or loss would be recognized
to a holder of River Bank Series A Preferred Stock who is deemed to
exchange such stock for RB Asset, Inc. series A preferred stock ("RB
Asset Preferred Stock"). The basis of any RB Asset Common Stock or RB
Asset Preferred Stock would continue to be the same as that of the
River Bank Common Stock or River Bank Series A Preferred Stock,
respectively, deemed exchanged therefor. In determining the period for
which a holder of RB Asset Common Stock or RB Asset Preferred Stock
has held such stock received in the Reorganization, there will be
included the period for which such holder held the River Bank Common
Stock or River Bank Series A Preferred Stock deemed exchanged
therefor. The foregoing conclusions do not address taxation to holders
of the River Bank Series A Preferred Stock of the dividend declared,
but not paid, for the quarter ended June 30, 1996; those holders
should consult their own tax advisers concerning the tax treatment of
such dividends.
3. No gain or loss will be recognized by River Bank on its disposition or
distribution of property in connection with the Reorganization. The
basis of the property of River Bank acquired by RB Asset, Inc. shall
be the same as it would be in the hands of River Bank. RB Asset, Inc.
will succeed to and take into account various tax attributes of River
Bank (including net operating loss carryovers, to the extent not used
to offset income or gain of River Bank, and accumulated earnings and
profits).
The Reorganization was reasonably characterized as a tax-free "reorganization."
However, the ability of the Reorganization to qualify as a tax-free
reorganization turns on certain unresolved and complex issues of tax law as to
which there are no clearly established legal precedents and for which the
Company has not requested a ruling from the IRS. As a result, the IRS or a court
could determine that the Reorganization did not constitute a tax-free
759883.5
-96-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
reorganization. If such a determination were made and sustained, certain of the
tax consequences described above would not apply. In particular, the Predecessor
Bank's stockholders would be required to recognize gain upon the deemed
exchanges of River Bank capital stock for RB Asset Common Stock and RB Asset
Preferred Stock to the extent that the fair market value of any RB Asset capital
stock received exceeded the basis of the River Bank capital stock deemed
exchanged therefor, and their holding period would begin on the date of the
exchange. Recognition of loss on such deemed exchanges might not be allowed
until the stockholders dispose of some or all of their RB Asset, Inc. capital
stock. Moreover, the Predecessor Bank would be required to recognize gain on its
disposition and distribution of property in connection with the Reorganization
and any loss on such disposition and distribution may be required to be deferred
until RB Asset, Inc. were to sell the assets to an unrelated third party, and,
to the extent its tax attributes were not used to offset any gain, RB Asset,
Inc. would not succeed to them.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Offering discussed in Note 18 is deemed to result in an ownership
change, the subsequent utilization of net operating loss carryforwards,
suspended passive activity losses and credits, alternative minimum tax credit
carryforwards and certain other built-in losses would be subject to an annual
limitation as prescribed by current regulations. The application of this
limitation could have a material effect on the Company's ability to realize its
deferred tax assets. The Company is of the view that no ownership change of the
Company has occurred as a result of the Offering. The Company believes that the
Offering, when combined with prior changes in ownership of stock of the Company
and other transactions affecting ownership of the capital stock of the Company
which occurred in connection with the Offering, also did not result in an
ownership change of the Company. However, the application of Section 382 is in
many respects uncertain. In assessing the effects of prior transactions and of
the Offering under Section 382, the Company made certain legal judgments and
certain factual assumptions. The Company has not requested nor received any
rulings from the IRS with respect to the application of Section 382 to the
Offering and the IRS could challenge the Company's determinations.
759883.5
-97-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The significant components of the net tax effects of temporary differences and
carryforwards that give rise to the deferred tax assets and liabilities at June
30, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 31,136 $ 35,074 $ 10,375
Allowance for credit losses and valuation allowances 12,213 4,718 20,320
Suspended passive activity losses 277 277 933
Suspended passive activity credit carryforward 8,236 5,391 5,391
Non-passive activity credit carryforward -- 2,015 1,339
Interest accrued on non-performing loans 9,854 758 6,043
Alternative minimum tax credit carryforward 2,500 2,500 2,500
Non-deductible reserves and contingencies 4,129 5,197 2,387
Other 341 514 880
----------- ----------- ----------
Total gross deferred tax assets 68,686 56,444 50,168
Less: Valuation allowance 49,456 36,874 34,059
----------- ----------- ----------
Net deferred tax assets $ 19,230 $ 19,570 $ 16,109
=========== =========== ==========
Deferred tax liabilities:
Tax losses on partnership ventures $ 18,863 $ 18,184 $ 14,754
Tax over book depreciation 367 1,386 1,355
----------- ----------- ----------
Total deferred tax liabilities $ 19,230 $ 19,570 $ 16,109
=========== =========== ==========
</TABLE>
The Company's ability to realize the excess of the gross deferred tax asset over
the gross deferred tax liability is dependent upon its ability to earn taxable
income in the future. As a result of recent losses and other evidence, this
realization is uncertain and a valuation allowance has been established to
reduce the deferred tax asset to the amount that management of the Company
believes will more likely than not be realized. The valuation allowance
increased during the fiscal year ended June 30, 1998 by $12.6 million. This
increase relates to the increase in the excess of the gross deferred tax assets
over the gross deferred tax liability.
The components of the provision for income taxes for the fiscal years ended June
30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 1,000
State and local (benefit) 434 (3,300) 10,749
Deferred -- -- --
--------------- ---------------- -------------
$ 434 $ (3,300) $ 11,749
============== ============ =============
</TABLE>
The provision for state income taxes for the year ended June 30, 1997 includes a
current tax benefit in the amount of $3.3 million. The credit is the result of
the Company's redetermination of its state income tax liability at June 30,
1997. During the year ended June 30, 1997, the Company completed a review of its
potential current and deferred
759883.5
-98-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
federal and state tax liability in light of the Branch Sale and its related tax
effects. As a result of the review of its potential current and deferred tax
liabilities and the results of operations for the year ended June 30, 1997, the
Company reduced its provision for state and local income taxes by $3.3 million.
Additionally, the Company reduced its estimated current state and local income
tax liability at June 30, 1997 to reflect the effect of the Branch Sale and
subsequent disposition transactions completed during the fiscal year.
The table below presents a reconciliation between the expected tax expense
(benefit) and the recorded tax provision for the fiscal years ended June 30,
1998, 1997 and 1996 which have been computed by applying the statutory federal
income tax rate (35%) to loss before provision for income taxes.
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense (benefit at statutory rates) $ (528) $ (10,543) $ 23,364
Increases/(reductions) in tax resulting from:
State and local income taxes (benefit), net of federal
income tax effect 283 (2,145) 7,939
Effect of net operating loss currently utilized -- -- (19,559)
Effect of net operating loss not currently
recognized 245 12,688 --
Other, net -- -- 5
----------- ----------- ---------
$ -- $ -- $ 11,749
=========== =========== =========
</TABLE>
20. Leases
The Company is no longer obligated under any material amounts of non-cancelable
operating leases.
21. Other operating expenses
During the year ended June 30, 1998, the Company accrued expenses for services
provided by RB Management, LLC in the amount of $1,250 for Bank Management
Services, $1,312 for Asset Management Services, and $397 for Asset Disposition
Fees in accordance with a fee schedule agreement between the two entities.
During 1998, the Company paid RB Management, LLC an aggregate $5,037. At June
30, 1998, the Company had a remaining payable balance due to RB Management, LLC
in the amount of $43, including interest, which is included in accrued
liabilities on the Statement of Condition.
22. Retirement and other employee benefits
The Company maintains a noncontributory defined benefit retirement plan (the
"Plan") in which substantially all employees participated.
759883.5
-99-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The net periodic pension benefit of the Company's Plan for the years ended June
30, 1998, 1997 and 1996 includes the following components:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 397 381 375
Actual return on plan assets (279) (436) (331)
Net amortization and (107) 33 (61)
---------- ----------- -----------
deferral $ 11 $ (22) $ (17)
========== =========== ===========
Net periodic pension
benefit
</TABLE>
Assumptions used in accounting were:
<TABLE>
<CAPTION>
June June June
30, 30, 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Weighted average discount rates 7.25% 7.25% 7.25%
Expected weighted average long-term rate of return on assets 7.25% 7.25% 7.25%
</TABLE>
The funded status of the Company's Plan at June 30, 1998, June 30, 1997 and June
30, 1996 is as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Actuarial value of benefit obligations
Vested benefit obligation $ (5,691) $ (5,481) $ (5,402)
Non-vested benefit obligation -- -- --
---------- ------------ -----------
Accumulated benefit obligation (5,691) (5,481) (5,402)
Effect of projected future salary increases -- -- --
---------- ------------ -----------
Projected benefit obligation (5,691) (5,481) (5,402)
Plan assets at fair value (excluding receivables) 5,800 5,872 5,749
---------- ------------ -----------
Funded status 109 391 347
Unrecognized net losses 1,180 908 931
Unrecognized prior service cost -- -- --
Unrecognized net obligation -- -- --
---------- ------------ -----------
Prepaid pension expense $ 1,289 $ 1,299 $ 1,278
========== ============ ===========
</TABLE>
In connection with contractual termination agreements, certain former officers
of the Company have been granted additional retirement benefits, net of amounts
provided by the Plan, based in part on additional years of service and early
retirement subsidies. These retirement benefits are accounted for as deferred
compensation arrangements. The liability for these retirement benefits at June
30, 1998, 1997 and 1996 aggregated $746, $554 and $791, respectively. The
related expense for the years ended June 30, 1998, 1997, and 1996 was $192, $58
and $58, respectively.
759883.5
-100-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
Retirement benefits are also provided through a 401(k) plan which, through
December 1993, allowed participants to contribute up to 6% of their compensation
to the plan. The Company matched 100% of employee contributions. In January
1994, the 401(k) plan was amended to allow "non-highly compensated" participants
to contribute up to 15% of their compensation to the Plan with the Company
matching 100% of the contributions up to 6% of their compensation. In addition,
the Company provides for the cost of administering the 401(k) plan. The costs of
providing such benefits are not material to the results of operations.
In addition to providing retirement benefits, the Company provides various
health care and life insurance benefits for retired employees. These benefits
are provided through insurance companies and health care organizations and are
primarily funded by contributions from the Company and its employees. Subsequent
to December 31, 1993, the Company amended its retiree health care which became
effective April 1, 1994 to require contributions from retirees including
deductibles, co-insurance and reimbursement limitations.
23. Postretirement benefits other than pensions
The Company sponsors a voluntary, unfunded defined benefit postretirement
medical and a funded postretirement life insurance plan to all full time
employees who retired from the Company prior to July 1, 1991. In addition, full
time active employees with ten years of service as of July 1, 1991 and who
retire early with at least twenty years of service, or retire on or after age 65
are eligible to participate.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" as of July 1, 1994.
The funded status of the Company's Plan at June 30, 1998, 1997, and 1996 is as
follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $ (3,784) $ (3,968) $ (5,203)
Fully eligible plan participants -- -- (383)
Other active plan participants -- -- (545)
------------ ----------- -----------
Unfunded postretirement benefit obligation (3,784) (3,968) (6,131)
Unrecognized net (gains) / losses (568) (760) 1,047
Unrecognized transition obligation -- -- 4,273
------------ ----------- -----------
Accrued postretirement benefit liability $ (4,352) $ (4,728) $ (811)
============ =========== ===========
</TABLE>
759883.5
-101-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The net periodic postretirement benefit cost of the Company's Plan for the years
ended June 30, 1998, 1997, and 1996 include the following components:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Service cost $ -- $ -- $ 28
Interest cost 207 302 425
Amortization of transition obligation (13) (29) 277
---------- ---------- ----------
Net periodic postretirement benefit cost $ 194 $ 273 $ 730
========== ========== ==========
</TABLE>
For measurement purposes, an 8.0% and 8.8% annual increase in the per capita
cost of covered health care benefits was assumed for fiscal 1998 and 1997,
respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed health
care cost trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of June 30, 1997 by $331 and
the aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for fiscal 1997 by $24.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for the years ended June 30, 1998
and 1997. As the plan is unfunded, no assumption was needed as to the long term
rate of return of assets.
24. Former management incentive plan and bonus plan
In April 1994, the Board of Directors of the Company approved a phantom stock
plan (the "Phantom Stock Plan") for the Company. The Phantom Stock Plan provides
for the grant of 200,000 performance units, which will vest at the rate of 33%
per year on each anniversary of the date of grant and become fully vested after
three years, to key employees selected by the Compensation Committee of the
Board of Directors. Vesting of the performance units would be accelerated upon a
change in control of the Company, as defined in the Phantom Stock Plan, or upon
death or disability. Upon the third anniversary of the date of grant, a
recipient of performance units would be entitled to receive from the Company an
amount equal to the book value of a share of Common Stock as of the date of
grant of such performance unit, as determined by the independent accountants for
the Company, plus the accretion to the value, or minus the loss of value of such
performance unit since the date of grant, calculated based upon the Company's
earnings or loss per share in the second and third years following the date of
grant, and disregarding the Company's earnings or loss per share in the first
year following the date of grant. In the event of an earlier change in control
of the Company, as defined, or upon death or disability, the value of the
performance units would be calculated in relation to the Company's earnings or
loss per share since the date of grant. The amount payable pursuant to each
performance unit would never be less than (i) the book value per share of the
Company's Common Stock at the time of a payment or (ii) the book value of a
share of common stock of the Company on the date of grant ($11.67). As of July
1, 1994, 127,000 performance unit awards were granted under the Phantom Stock
Plan. During the fiscal year ended June 30, 1995, two participants terminated
employment with the Company and, as a result, forfeited 48,500 performance units
which were not vested. A new participant was granted 3,500 performance units
during the same period. During the fiscal year ended June 30, 1996, two
participants terminated employment with the Company and, as a result, forfeited
13,500 performance units which were not vested. At June 30, 1996, no performance
units were granted and outstanding due to the accelerated vesting and payment of
the Phantom Stock Plan due to the closing of the Branch Sale. The vesting of
these performance units resulted in compensation expense to the Company over the
three-year vesting period. Compensation expense of $319 and $319 relating to the
vesting of performance units was recorded for the years ended June 30, 1996 and
June 30, 1995, respectively.
759883.5
-102-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The Board of Directors of the Company approved a bonus plan ("Bonus Plan") which
provided for a payment of a total amount of $350,000 during March 1995 or upon a
change of control of the Company, if earlier, to certain executive and other
senior officers of the Company as determined by the Compensation Committee of
the Board of Directors. These payments were recorded as compensation expense
during the fiscal year ended June 30, 1995. No amounts were approved under the
Bonus Plan during fiscal year 1998 or 1997.
25. Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose estimated fair values for its financial instruments.
SFAS No. 107 defines fair value of financial instruments as the amount at which
the instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 uses the same
definition for a financial instrument as SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk". SFAS No. 105 defines
a financial instrument as cash, evidence of ownership interest in an entity, or
a contract that imposes on an entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other financial
instruments on potentially favorable terms with the second entity and conveys to
that second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax amounts and
office premises and equipment. In addition, there are intangible assets that
SFAS No. 107 does not recognize, such as the value of "core deposits", the
Company's branch network and other items generally referred to as "goodwill".
759883.5
-103-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and due from banks $ 32,087 $ 32,087 $ 14,036 $ 14,036
Money Market investments -- -- -- --
Investment securities available for sale, net 1,373 1,373 6,275 6,275
Mortgage backed securities available for
sale, net -- -- -- --
Accrued interest receivable 388 388 2,047 2,047
Gross loans receivable:
Secured by real estate 59,006 59,006 80,093 80,093
Consumer 1,972 1,972 2,871 2,871
Loans sold with recourse, net 15,781 15,781 24,451 24,451
Demand deposits -- -- -- --
Borrowed funds 68,760 68,760 84,272 84,272
Mortgage escrow deposits -- -- -- --
Accrued interest payable 479 479 964 964
</TABLE>
June 30, 1996
Carrying Estimated
Amount Fair Value
------ ----------
Cash and due from banks $ 13,129 $ 13,129
Money Market investments 4,000 4,000
Investment securities available for sale, net 5,685 5,685
Mortgage backed securities available for
sale, net 187 187
Accrued interest receivable 943 943
Gross loans receivable:
Secured by real estate 86,983 79,154
Consumer 3,038 2,951
Loans sold with recourse, net 29,914 29,914
Demand deposits 3,022 3,022
Borrowed funds 115,786 115,786
Mortgage escrow deposits 271 271
Accrued interest payable -- --
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Short term instruments: For short term financial instruments, defined as
those with remaining maturities of 90 days or less, the carrying amount was
considered to be a reasonable estimate of fair value. The following
instruments were predominately short term: cash and due from banks, money
market investments, U.S. Treasury obligations, demand deposits, accrued
interest receivable and payable, mortgage escrow deposits and other
financial liabilities.
Debt and equity securities (including mortgage-backed securities): Estimated
fair values for securities are based on quoted market prices, if available.
If quoted market prices are not available, fair values are estimated using
discounted cash flow analyses, using interest rates currently being offered
for investments with similar terms and credit quality.
Loans receivable: Fair values of performing loans receivable, secured by
real estate, is calculated by discounting the contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources adjusted to reflect the credit risk inherent in the loans.
Fair values of non-performing loans, secured by real estate, are based on
recent appraisals of the underlying real estate or discounted cash flow
analyses. The fair value of consumer loans is based on a third party offer.
Approximately $8,459, $12,806 and $12,984, of the Company's $65,181, $95,770
and $132,919 total loans receivable relate to commercial loans at June 30,
1998, 1997 and 1996, respectively. The Company believes that dollar amounts
relating to commercial loans are relatively small in comparison to total
loans receivable at June 30, 1998, 1997 and 1996, and that an estimate of
fair value of commercial loans cannot be made without incurring excessive
costs. Therefore, the Company concludes that it is not practicable to
estimate the fair value of its commercial loan portfolio.
759883.5
-104-
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30, 1998,
1997, and 1996
(Dollars in thousands, except per share data)
The Company's estimates of impairment due to collectibility concerns related
to these loans are included in the allowance for possible credit losses. The
weighted average of the effective interest rates and the weighted average
maturity dates of commercial loans are 8.22% and 2.09 years, 9.32% and 3.09
years and 9.31% and 3.73 years at June 30, 1998, 1997 and 1996,
respectively.
Deposit liabilities: Fair values of time deposits maturing in excess of 90
days are calculated using contractual cash flows discounted at rates equal
to current rates offered in the market for similar deposits with the same
remaining maturities. These fair value estimates do not include the
intangible value of the existing customer base.
Borrowed funds: Fair values of borrowed funds are based on the discounted
values of contractual cash flows. The discount rate is estimated using the
rates currently offered for borrowed funds of similar remaining maturities.
26. Commitments and contingencies
Standby letters of credit and financial guarantees outstanding are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The amount of collateral obtained upon extension of credit varies and is based
on management's credit evaluation of the counterparty.
At June 30, 1998, 1997 and 1996, the Company and its wholly-owned subsidiaries
had arranged letters of credit aggregating $0, $1,197 and $3,225, respectively.
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of such legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company.
759883.5
-105-
<PAGE>
FINANCIAL SCHEDULES
RB ASSET, INC.
Index to Consolidated Financial Schedules
Page
Real Estate and Accumulated Depreciation (Schedule III) 107
Year ended June 30, 1998
Mortgage Loans on Real Estate (Schedule IV) 109
Year ended June 30, 1998
759883.5
-106-
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Initial cost to complete Cost capitalized subsequent to acquisition
------------------------ ------------------------------------------
Buildings an
Description Encumbrances Land improvements Improvements Deductions Description
----------- ------------ ---- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alden Park $ 42,339 $ 11,220 $ 39,769 $5,113 $ --
Multi-family apartment bldg.
Philadelphia, PA
Royal York 7,792 1,479 20,099 3,424 16,537 Unit sales
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 2,775 370 5,616 -- --
Office complex
North Woodmere, NY
Middletown Commons -- 394 1,576 -- --
Shopping Center
New York, NY Unit sales
86 West -- 166 1,100 -- 437
Condominium Writedown
New York, NY
Kingston Atlanta -- 2,488 22,901 -- 11,300(4)
Mixed use commercial
Atlanta, GA
--------- --------- -------- --------- ------------ -------------
Totals $ 52,906 $ 16,117 $ 91,061 $ 28,274
</TABLE>
<TABLE>
<CAPTION>
Life on which
Gross amount at which carried depreciation in
at close of period, June 30,1998 latest income
Buildings statement is
and Accumulated Date of Date computed
Land improvements Total Depreciation Construction Acquired (years)
---- ------------ ----- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Alden Park $ 11,220 $ 44,882 $ 56,102 $ 125 ( 1) ( 1) 30
Multi-family apartment bldg.
Philadelphia, PA
Royal York 1,479 6,986 8,465 16 ( 1) ( 1) 30
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 370 5,616 5,986 781 ( 1) ( 1) 25
Office complex
North Woodmere, NY
Middletown Commons 394 1,576 1,970 4 ( 1) ( 1) 30
Shopping Center
New York, NY
86 West 166 663 829 2 ( 1) ( 1) 30
Condominium
New York, NY
Kingston Atlanta 2,488 11,601 14,089 28 ( 1) ( 1) 30
Mixed use commercial
Atlanta, GA
-------- --------- -------- ------- -------- -------- --------
Totals $ 16,117 $ 71,324 $ 87,441 $ 956
</TABLE>
The aggregate cost for Federal income tax purposes was approximately $116.1
million at June 30, 1998.
<TABLE>
<CAPTION>
The changes in real estate for each of
the three years ended June 30, 1998 July 1, 1997 to July 1, 1996 to July 1, 1995 to
are as follows: June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period $ 97,349 $ 146,440 $ 148,851
Improvements 3,366 9,838 2,832
Re-acquired assets 2,095 -- --
Sales/Writedowns (16,325) (58,929) (5,243)
Other -- -- --
--------------- --------------- -------------
Balance at end of period $ 86,485 $ 97,349 $ 146,440
--------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
The changes in accumulated real estate
depreciation for the three years ended July 1, 1997 to July 1, 1996 to July 1, 1995 to
June 30, 1998 are as follows: June 30, 1998 June 30, 1997 June 1, 1996
------------- ------------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 573 $ 373 $ 173
Depreciation for the period 383 200 200
Disposals, including write-off
of fully depreciated building
improvements -- -- --
-------------- -------------- -------------
Balance at end of period $ 956 $ 573 $ 373
-------------- -------------- -------------
</TABLE>
See notes to this schedule on the following page.
759883.5
-107-
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 1998
(dollars in thousands)
Notes to Real Estate and Accumulated Depreciation Schedule (previous page)
Note 1 - Property acquired, in substantially completed form, through foreclosure
or transfer and satisfaction of obligations of borrowers prior to 1996.
Note 2 - Improvements totaling $3,424 were made to refurbish individual units in
preparation for sale during the three-year period ended June 30, 1998. Proceeds
of unit sales during the same three-year period, after selling costs other than
refurbishment costs, were $16,537. Accordingly, net proceeds of unit sales,
after selling and refurbishment costs, were $13,113 during the three-year period
ended June 30, 1998.
Note 3 - Improvements totaling $5,113 were made to complete a rehabilitation
project related to this asset, subsequent to the asset's acquisition by the
Company.
Note 4 - For additional information related to this writedown of the asset's
carrying value, see "Management Discussion and Analysis - Results of Operations"
contained within the RB Asset, Inc. annual report on Form 10-K, dated June 30,
1998.
759883.5
-108-
<PAGE>
RB ASSET, INC.
FORM 10-K
MORTGAGE LOANS ON REAL ESTATE (SCHEDULE IV)
JUNE 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Final Periodic
Interest Maturity payment Prior
Description rate Date terms liens
----------- ---- ---- ----- -----
<S> <C> <C> <C> <C>
Residential 1-4 family and other
real estate loans 7%-10% 5/1/99 Amortizing over 15-30
New York, NY years
Anita Terrace 7.00% 5/1/09 Interest only, balloon
Co-op payment at maturity
Rego Park, NY
Anita Terrace 7.00% 5/1/09 Interest only, balloon Subordinated
Co-op payment at maturity participation
Rego Park, NY
7402 Bay Ridge Parkway 10.25% 6/13/01 Interest only, balloon
Multi-family apartment payment at maturity
NY
236 East 46th Street 7.75% 8/27/98 Interest only, balloon Subordinated
Multi-family apartment payment at maturity participation
New York, NY
715 Associates 9.25% 3/30/00 $200 principal annually
Condominium
New York, NY
Washington Group 7.67% 6/30/97 - Amortizing over 30
Office complex extension years, balloon payment
NY agreement under at maturity
negotiation
Lohmaier Lane 7.50% 9/1/98 Non-accrual loan,
Office complex principal and interest
NY not being received
333 West 39th Street 8.50% 1/1/00 Principal and interest Junior subordinated
Office complex contingently receivable participation
New York, NY loan is fully reserved
589 8th Avenue 8.50% 1/1/00 Principal and interest Junior subordinated
Office complex contingently receivable participation
New York, NY loan is fully reserved
Hawthorne 8.50% 10/15/00 Principal and interest Junior subordinated
Hotel contingently receivable participation
SC loan is fully reserved
</TABLE>
<TABLE>
<CAPTION>
Face amount Carrying Principal amount of loans
of amount of subject to delinquent principal
Description Mortgages mortgages or interest
----------- --------- --------- --------------------------------
<S> <C> <C> <C>
Residential 1-4 family and other
real estate loans $ 1,352 $ 1,158 $ 590 (1)
New York, NY
Anita Terrace 14,724 8,239 14,724 (2)
Co-op
Rego Park, NY
Anita Terrace 6,804 6,804 -
Co-op
Rego Park, NY
7402 Bay Ridge Parkway 997 997 -
Multi-family apartment
NY
236 East 46th Street 1,501 1,501 -
Multi-family apartment
New York, NY
715 Associates 611 611 -
Condominium
New York, NY
Washington Group 21,803 21,803 -
Office complex
NY
Lohmaier Lane 3,100 2,100 3,100
Office complex
NY
333 West 39th Street 1,700 - (3) -
Office complex
New York, NY
589 8th Avenue 700 - (3) -
Office complex
New York, NY
Hawthorne 500 - (3) -
Hotel
SC
</TABLE>
(continued on next page)
759883.5
-109-
<PAGE>
RB ASSET, INC.
FORM 10-K
MORTGAGE LOANS ON REAL ESTATE (SCHEDULE IV)
JUNE 30, 1998
(continued from previous page) (dollars in thousands)
<TABLE>
<CAPTION>
Final Periodic
Interest Maturity payment Prior
Description rate Date terms liens
----------- ---- ---- ----- -----
<S> <C> <C> <C> <C>
Camarillo 7.50% 3/22/05 Interest only, balloon Subordinated
Shopping Center payment at maturity participation
CA
5619 Broadway 8.50% 11/1/99 Interest only, balloon Subordinated
Shopping Center payment at maturity participation
New York, NY
Crossroads 8.50% 12/22/98 Interest only, balloon Subordinated
Shopping Center payment at maturity participation
CA
153 West 57th Street 7.00% 10/1/98 Interest only, balloon Subordinated
Mixed use commercial payment at maturity participation
New York, NY
Flotilla Street 6.89% 12/31/98 Interest only, balloon Subordinated
Industrial Complex payment at maturity participation
CA
Hawthorne 8.50% 10/15/00 Interest only, balloon Subordinated
Hotel payment at maturity participation
SC
Cromwell-Louisville 6.18% 6/30/09 Interest only, balloon Subordinated
Garage payment at maturity participation
Louisville, KY
Totals
</TABLE>
<TABLE>
<CAPTION>
Face amount Carrying Principal amount of loans
of amount of subject to delinquent
Description Mortgages mortgages principal or interest
<S> <C> <C> <C>
Camarillo 625 625 -
Shopping Center
CA
5619 Broadway 620 620 -
Shopping Center
New York, NY
Crossroads 399 399 -
Shopping Center
CA
153 West 57th Street 613 613 -
Mixed use commercial
New York, NY
Flotilla Street 360 360 -
Industrial Complex
CA
Hawthorne 809 809 -
Hotel
SC
Cromwell-Louisville 1,788 1,788 -
Garage
Louisville, KY
Totals $ 59,006 $ 48,427 $ 18,414
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Reconciliation of mortgages July 1,1997 to July 1, 1996 to July 1, 1995 to
receivable at their carrying values: June 30, 1998 June 30, 1997 June 30, 1996
Balance at beginning of period $ 65,499 $ 69,522 $ 76,393
Advances made 649 1,910 59,592
Capitalization of interest/expense -- --
Collections of properties (16,413) (4,933) (62,560)
Transfers of foreclosed properties -- --
Charged to provision (1,308) (1,000) (3,903)
--------------- --------------- --------------
Balance at end of period $ 48,427 $ 65,499 $ 69,522
=============== =============== ==============
</TABLE>
See notes to this schedule on the following page.
759883.5
-110-
<PAGE>
RB ASSET, INC.
FORM 10-K
MORTGAGE LOANS ON REAL ESTATE (SCHEDULE IV)
JUNE 30, 1998
(dollars in thousands)
Notes to Investments in Real Estate Assets Schedule (previous page)
Note 1 - The Company's 1-4 family residential loans are carried as non-accrual
assets, whereby interest income is recognized only when received. At June 30,
1998 there were loans aggregating $590 in outstanding principal balance that
were delinquent 60 days or longer.
Note 2 - This loan asset has been categorized as a non-accrual loan. Accrued
interest related to this loan has been fully reserved for at June 30, 1998. Loan
principal continues to be repaid from the proceeds of apartment unit sales of
the property serving as collateral for this loan.
Note 3 - The loan is fully reserved for by the Company at June 30, 1998,
although the loan continues to perform in accordance with its contractual terms.
Principal and interest related to these loans is contingently receivable,
following the satisfaction of all other lien holder's positions.
759883.5
-111-
RB ASSET, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on September 16, 1998
To the Stockholders of RB Asset, Inc.:
NOTICE IS HEREBY GIVEN that the 1998 annual meeting of stockholders (the
"Annual Meeting") of RB Asset, Inc., a Delaware corporation ("RB Asset" or the
"Company"), will be held at the Grand Hyatt of New York Hotel, Park Avenue at
Grand Central, New York, New York, 10017 on Wednesday, September 16, 1998, at
10:00 a.m., local time, for the following purposes, all of which are more
completely set forth in the accompanying proxy and information statement:
1. To consider and vote upon a proposal to elect two directors
nominated by the board of directors to serve for a term of three years
or until such directors' successors are elected and shall have
qualified;
2. To consider and vote upon a proposal to ratify the appointment
of Ernst & Young LLP as the independent auditors of the Company for
fiscal year 1999;
3. To consider and vote upon a proposal to elect two directors
nominated by holders of Preferred Stock (as defined below) to serve
for a term of one year or until such directors' successors are elected
and shall have qualified; and
4. The transaction of such other business as may properly come
before the Annual Meeting or at any adjournment or postponement
thereof.
The board of directors has fixed the close of business on August 26, 1998
as the record date (the "Record Date") for the determination of stockholders
entitled to receive notice of, and to vote at, the Annual Meeting and any
adjournment or adjournments thereof. Holders of common stock, $1.00 par value,
of the Company (the "Common Stock") and holders of 15% non-cumulative perpetual
preferred stock, series A, $1.00 par value, of the Company (the "Preferred
Stock) at the close of business on the Record Date are entitled to notice of,
and to vote at, the Annual Meeting and any adjournment or postponement thereof.
By order of the board of directors,
Jerome R. McDougal
Chairman of the Board
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. THE
COMPANY IS NOT SOLICITING PROXIES FROM HOLDERS OF PREFERRED STOCK. HOLDERS OF
COMMON STOCK ARE REQUESTED, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE
MEETING, TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
STAMPED AND ADDRESSED ENVELOPE ENCLOSED FOR YOUR CONVENIENCE. HOLDERS OF COMMON
STOCK CAN HELP THE COMPANY AVOID UNNECESSARY EXPENSE AND DELAY BY PROMPTLY
RETURNING THE ENCLOSED PROXY CARD.
- --------------------------------------------------------------------------------
August 31,1998
746603.6
<PAGE>
RB ASSET, INC.
--------------------
PROXY AND INFORMATION STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 16, 1998
---------------------
INTRODUCTION
This proxy and information statement ("Proxy and Information Statement") is
being furnished by and on behalf of the board of directors (the "Board of
Directors") of RB Asset, Inc., a Delaware corporation ("RB Asset" or the
"Company"), in connection with the solicitation of proxies from holders of
Common Stock (as defined below) to be voted and the action to be taken by
holders of Preferred Stock (as defined below) at the 1998 annual meeting of
stockholders (the "Annual Meeting") to be held at the Grand Hyatt of New York
Hotel, Park Avenue at Grand Central, New York, New York, 10017 on Wednesday,
September 16, 1998, at 10:00 a.m., local time, and at any adjournment or
postponement thereof. This Proxy and Information Statement (and, in the case of
the holders of Common Stock, the enclosed proxy card) are being sent to
stockholders on or about August 31, 1998.
At the Annual Meeting, holders of common stock, $1.00 par value, of RB
Asset ("Common Stock") will consider and vote upon proposals (i) to elect Edward
V. Regan and James J. Houlihan (the "Board Nominees") as directors to serve for
a term of three years or until such directors' successors are elected and shall
have qualified ("Proposal 1") and (ii) to ratify the appointment of Ernst &
Young LLP as the independent auditors of the Company for fiscal year 1998
("Proposal 2").
In addition, at the Annual Meeting, holders of RB Asset 15% non-cumulative
perpetual preferred stock, series A, $1.00 par value ("Preferred Stock"), will
consider and vote upon a proposal to elect two individuals as directors
nominated by holders of Preferred Stock to serve for a term of one year or until
such directors' successors are elected and shall have qualified ("Proposal 3").
The holders of the Preferred Stock are entitled to elect two directors because
dividends on the Preferred Stock are in arrears and unpaid for six full
quarterly dividend periods (including the period of arrears on similar preferred
stock of the Company's predecessor, River Bank America (the "Predecessor")). The
Company has received written communication from persons representing that they
are the beneficial holders of 85% of the total number of shares of Preferred
Stock nominating Jeffrey E. Susskind and David J. Liptak (the "Preferred Stock
Nominees") as directors to fill the director positions automatically created as
a result of the Company's failure to pay or declare and set aside for payment
the dividends in arrears. THE BOARD OF DIRECTORS DOES NOT TAKE ANY POSITION WITH
RESPECT TO THE ELECTION OF ANY OF THE PREFERRED STOCK NOMINEES AND IS NOT
SOLICITING ANY PROXIES IN CONNECTION WITH THE ANNUAL MEETING AND DOES NOT MAKE
ANY RECOMMENDATION "FOR" OR "AGAINST" THE ELECTION OF ANY SUCH NOMINEE.
Stockholders will also transact such other business as may properly come
before the Annual Meeting or at any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on August 26, 1998
as the record date (the "Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting and any adjournment or
postponement thereof.
The mailing address of Company's principal executive offices is 645 Fifth
Avenue, 8th Floor, New York, New York 10022, and the telephone number at that
address is (212) 848-0201.
746603.6
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL
OF PROPOSALS 1 AND 2 FOR UPON WHICH HOLDERS OF COMMON STOCK ARE ENTITLED TO VOTE
AT THE ANNUAL MEETING.
THE COMPANY REQUESTS HOLDERS OF COMMON STOCK, WHETHER OR NOT YOU PLAN TO
ATTEND THE ANNUAL MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES YOU
OWN, TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE
ENCLOSED PRE-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. YOU MAY, OF COURSE, ATTEND THE ANNUAL MEETING, REVOKE YOUR PROXY AND
VOTE IN PERSON EVEN IF YOU HAVE ALREADY RETURNED YOUR PROXY CARD.
Voting Rights and Vote Required
Only holders of record of Common Stock and Preferred Stock issued and
outstanding as of the close of business on the Record Date will be entitled to
vote at the Annual Meeting or any adjournment or postponement thereof. As of the
Record Date, there were 7,100,000 shares of Common Stock and 1,400,000 shares of
Preferred Stock issued and outstanding held by approximately eight and four
holders of record, respectively.
Holders of record of Common Stock at the close of business on the Record
Date are entitled to one vote per share upon Proposals 1 and 2 submitted to a
vote of the holders of Common Stock at the Annual Meeting or any adjournment or
postponement thereof. Holders of record of Preferred Stock at the close of
business on the Record Date are entitled to one vote per share upon Proposal 3
submitted to a vote of holders of Preferred Stock at the Annual Meeting or any
adjournment or postponement thereof. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of Common Stock entitled to vote
at the meeting is necessary to constitute a quorum to transact business on
Proposals 1 and 2 at the Annual Meeting. Inasmuch as the Certificate of
Designation is silent on the voting requirements and procedures with respect to
the election of the Preferred Stock Nominees, the Company has determined to
apply to Proposal 3 provisions of the Company's bylaws applicable to the
election of directors and the conduct of stockholder meetings generally. Thus,
the presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Preferred Stock entitled to vote at the meeting is
necessary to constitute a quorum to transact business on Proposal 3 at the
Annual Meeting. Stockholders voting or abstaining from voting on any matter will
be counted as present for purposes of constituting a quorum. If a quorum is not
present at the Annual Meeting, the holders of a majority of the shares Common
Stock in the case of Proposals 1 and 2, or the holders of a majority of the
shares of Preferred Stock in the case of Proposal 3 present in person or by
proxy and entitled to vote at the Annual Meeting may, by majority vote, adjourn
the Annual Meeting from time to time.
The election of the Company Nominees as directors requires a plurality of
the votes cast by the holders of Common Stock at the Annual Meeting. The
ratification of the appointment of the Company's independent auditors requires a
majority of the votes cast by the holders of Common Stock at the Annual Meeting.
The election of the Preferred Stock Nominees as directors requires a plurality
of the votes cast by the holders of Preferred Stock at the Annual Meeting.
Abstentions will be considered in determining the presence of a quorum for
action on the proposals considered at the Annual Meeting, but will not be
counted as votes cast on any matter presented for a vote at the meeting. Since
the election of directors pursuant to Proposals 1 and 3 requires a plurality of
the votes cast and the ratification of the appointment of Ernst & Young LLP
pursuant to Proposal 2 requires a majority of the votes cast at the Annual
Meeting at which a quorum is present, abstentions will be excluded from the vote
on such matters.
Alvin Dworman, East River Partnership B and Odyssey Partners, L.P., holders
of Common Stock who own an aggregate of 3,600,000 or 50.8% of the outstanding
shares of Common Stock, have advised the Company that they intend to vote in
favor of Proposals 1 and 2.
746603.6
-2-
<PAGE>
Voting of Proxies; Revocation; Solicitation
All shares of Common Stock which are entitled to vote and are represented
at the Annual Meeting by properly executed proxies received prior to or at the
Annual Meeting and not revoked will be voted at the Annual Meeting in accordance
with the instructions indicated on such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH PROXIES WILL BE VOTED IN FAVOR OF PROPOSALS 1 AND 2 DESCRIBED
HEREIN. The Board of Directors knows of no matters to be presented at the Annual
Meeting other than those described in this Proxy and Information Statement. If
any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Annual Meeting to another time and/or place, the persons named in
the enclosed form of proxies and acting thereunder will have discretion to vote
on such matters in accordance with their best judgment. The Company's by-laws
provide that the Annual Meeting may be adjourned for later consideration of
Proposals 1 and 2 by a majority vote of the stockholders present or represented
by proxy and entitled to vote thereat from time to time without notice other
than announcement at the meeting. Thus, an adjournment with respect to Proposals
1 and 2 will require a majority vote of the holders of Common Stock and an
adjournment with respect to Proposal 3 will require a majority vote of the
holders of Preferred Stock.
Any proxy given by a holder of Common Stock pursuant to this solicitation
may be revoked by the person giving it at any time before it is voted. Proxies
may be revoked by (i) giving the President or the Secretary of the Company, at
the address of the Company set forth in the notice of meeting, written notice of
such revocation; (ii) executing a later-dated proxy; or (iii) attending the
meeting and giving notice of such revocation in person. Mere attendance at the
Annual Meeting will not, in and of itself, constitute revocation of a proxy. Any
written notice of revocation or subsequent proxy should be sent to the Company
at 645 Fifth Avenue, 8th Floor, New York, New York 10022, Attention: President,
so as to be delivered at or before the taking of the vote at the Annual Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing of this Proxy and Information Statement, will be borne by the Company.
In addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made with brokerage firms and other custodians, nominees and fiduciaries
for the forwarding of proxy solicitation material to certain beneficial owners
of the shares of the Common Stock and Preferred Stock, and the Company will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
746603.6
-3-
<PAGE>
PROPOSAL 1 -- ELECTION OF COMPANY NOMINEES
Board of Directors and Nominees for Director
RB Asset's Board of Directors is divided into three classes of directors,
serving staggered three-year terms. There are currently two vacancies in the
Board of Directors. Edward V. Regan and James J. Houlihan have been nominated
for election as directors at the Annual Meeting to serve for a three-year term
ending on the date of the 2001 annual meeting of stockholders and until their
successors shall be elected or qualified. The election of Mr. Houlihan will
leave the Company with one vacancy; however, following the Annual Meeting,
Robert N. Flint intends to resign as a director. The Board of Directors intends
to appoint Alvin Dworman and David A. Shapiro to fill the remaining current
vacancy and the additional vacancy created by Mr. Flint's resignation.
The Board of Directors has been informed that its nominees for director are
willing to serve as director but, if they should decline or be unable to act as
a director, the individuals named in the Company proxy card as proxies will vote
for the election of such other person or persons as they, in their discretion,
may choose. The Board of Directors has no reason to believe that nominees will
be unable or unwilling to serve.
The election to the Board of Directors of the Company Nominees for director
will require the affirmative vote of the holders of a plurality of the shares of
Common Stock present in person or represented by proxy at the Annual Meeting and
entitled to vote assuming a quorum is present. In tabulating the vote,
abstentions will be disregarded. The Board of Directors unanimously recommends
that holders of Common Stock vote FOR the election of its nominees for director
to the Board of Directors.
The name, age as of August 31, 1998, position with the Company, if any,
term of office following the Annual Meeting, and period of service as a
director, of each of the Company's directors, nominees for election director and
proposed nominees for appointment as director are as follows:
<TABLE>
<CAPTION>
Class Term Director
Name Age Position Expires Since (1)
<S> <C> <C> <C>
Robin Chandler Duke............ 74 Director, Vice President and 1999 1977
Secretary (2)
Alvin Dworman.................. 72 Nominee for appointment as 2000 --
Director
Robert N. Flint................ 77 Director (2)(3) 1999 1976
James J. Houlihan.............. 46 Nominee for election as Director 2001 --
William D. Hassett............. 62 Director (3) 2000 1976
Jerome R. McDougal............. 70 Director, Chairman of the Board, 2000 1991
Chief Executive Officer and
President (3)
David A. Shapiro............... 47 Nominee for appointment as 1999 --
Director
Edward V. Regan................ 68 Director (2)(3) 2001 1995
- --------------------------
</TABLE>
(1) Includes tenure with the Predecessor.
(2) Member of the audit committee.
(3) Member of the asset management committee.
746603.6
-4-
<PAGE>
The principal occupation for the last five years and selected biographical
information of each of the directors, nominees for director and executive
officers is set forth below.
Robin Chandler Duke. Ms. Duke is National Chairman of Population Action
International, and she serves as a director of International Flavors and
Fragrances and American Home Products Corporation. Ms. Duke has served in an
unsalaried capacity as Vice President and Secretary of the Company and the
Predecessor since July 1996.
Alvin Dworman. Mr. Dworman is the founder and chairman of The ADCO Group, a
financial services, merchant banking and real estate company established in
1981. Mr. Dworman also has been a director of the Sequa Corporation since 1987
and has been serving as a member of the New York State Real Estate Advisory
Committee since 1985.
Robert N. Flint. Mr. Flint has been retired since 1984. Prior to his
retirement, he served as senior vice president and comptroller of American
Telephone and Telegraph Company.
William D. Hassett. Mr. Hassett, a real estate investor and managing member
of Hassett-Belfer Senior Housing L.L.C. is also owner of W.D. Hassett, Inc., a
real estate management company. Mr. Hassett, formerly a director of Olympia &
York Holdings (USA), was the Chairman of the New York State Urban Development
Corporation from 1977 to 1981, Chairman of the Battery Park City Authority from
1979 to 1981, Chairman of the Board of the New York State Dormitory Authority
from 1985 to 1994 and is a former New York State Commerce Commissioner. He
presently serves as a member of the Real Estate Advisory Committee to the New
York State Common Retirement Fund.
James J. Houlihan. Mr. Houlihan has been a partner of Houlihan-Parnes
Realtors, LLC, a commercial real estate firm for more than the past five years.
Mr. Houlihan is president of JHP Realty Advisors, Inc., a real estate advisory
firm and a partner in each of Kislev Management Corp., a commercial real estate
management firm, and Real Estate Servicing, Inc. and C.C. Capital Servicing,
Inc., both mortgage servicing firms.
Jerome R. McDougal. Mr. McDougal served as Chief Executive Officer of the
Company and the Predecessor from April 1995 and as President from July 1997
until he retired from such positions in June 1998. Mr. McDougal served as
President and Chief Executive Officer of the Predecessor from March 1991 to
April 1995, at which time he became Chairman of the Board and Chief Executive
Officer. Prior to joining the Company, Mr. McDougal was Chairman and Chief
Executive Officer of the Apple Company for Savings for four years. Prior to
joining Apple Company, Mr. McDougal held various positions, including management
positions in a manufacturing concern, operating a consulting company, and
running one of the largest automotive retail chains in the New York metropolitan
area.
Edward V. Regan. Mr. Regan is Chairman of the Municipal Assistance
Corporation and Policy Advisor for the Jerome Levy Economics Institute. Mr.
Regan previously served as the New York State Comptroller from 1979 to 1993.
David A. Shapiro. Mr. Shapiro has been a portfolio manager for Seneca
Capital Management LLC, an investment management firm since May 1995. Mr.
Shapiro founded Asset Holdings Group, a privately held originator of senior and
mezzanine commercial real estate loans formed in 1993. From 1991 to 1993, Mr.
Shapiro also served as an advisor to the Predecessor in connection with the
restructuring and disposition of a portion of its commercial real state
portfolio.
Board of Directors and Committees
The Board of Directors has two standing committees, an asset management
committee and an audit committee. The audit committee is comprised of Messrs.
Flint (Chairman) and Regan and Ms. Duke and the asset management committee is
comprised of Messrs. Hassett (Chairman), McDougal and Regan. Following the
Annual
746603.6
-5-
<PAGE>
Meeting, the resignation of Mr. Flint and the appointment of Messrs. Dworman and
Shapiro, the function of the asset management committee will be changed so that
oversite of the day-to-day management of the Company will be transferred to an
executive committee of the Board of Directors. The executive committee will be
comprised of Messrs. Dworman, Hassett and McDougal. In addition, it is expected
that Mr. Regan will become chairman of the audit committee and Mr. Shapiro will
become a member of such committee filling the vacancy created by Mr. Flint's
resignation.
The asset management committee (and after the Annual Meeting, the executive
committee) oversees the management of the day-to-day business and affairs of the
Company and the implementation of the management of the Company's assets. The
asset management committee, to be comprised of Messrs. Hassett, Houlihan and
Shapiro, will oversee the performance of the asset portfolio of the Company and
will be chaired by Mr. Hassett. The audit committee reviews and provides
recommendations to the Board of Directors with respect to the engagement of the
Company's independent auditors, financial reporting practices and internal
accounting and financial controls and procedures of the Company and monitors the
Company's compliance with its policies and procedures. In addition, the audit
committee also administers and reviews all compensation policies and will
provide recommendations to the Board of Directors with respect thereto.
During fiscal year 1998, the Board of Directors (including meetings held by
the Board of Directors of the Predecessor) held 17 meetings, including
telephonic meetings. The audit committee held 3 meetings during the fiscal year.
The asset management committee held 11 meetings. During fiscal year 1998, each
director attended 94% of the total number of meetings of the Board of directors
and 100% percent of the total number of meetings of committees on which he or
she served.
Compensation of Directors
Directors of the Company receive an annual retainer of $20,000, plus $1,000
for each board meeting attended and $750 for each committee meeting attended.
Executive Officers
Inasmuch as the Predecessor had disposed of its depository banking
operations in connection with the sale of its branches and transfer of its
deposits to Marine Midland Bank in June 1996 (the "Branch Sale"), the Company as
successor does not require a large staff of officers or employees to manage the
business and affairs of the Company. Certain day-to-day management functions are
performed by RB Management Company LLC pursuant to the terms of a management
agreement. See "--Certain Relationships and Related Transactions".
The Company's officers are Jerome R. McDougal, who serves as the chairman
of the board, Nelson L. Stephenson, who serves as president and chief executive
officer of the Company, and Robin Chandler Duke, who serves without compensation
as the vice president and secretary of the Company. Set forth is certain
biographical information for Mr. Stephenson.
Nelson L. Stephenson. Mr. Stephenson was elected to the offices of
president and chief executive officer of the Company in July 1998. For more than
the past five years, Mr. Stephenson has been President of Fintek Inc., a
privately held financial advisory firm that provides services to the Company and
the Predecessor. Mr. Stephenson is also President and a Director of
Coast-To-Coast Financial Corporation, a unitary savings and loan holding company
which owns Fintek, Inc. and Superior Bank FSB as well as other subsidiaries
engaged in consumer finance.
Executive Compensation
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the chief executive
officer of the Company (and the Predecessor) for services rendered in all
746603.6
-6-
<PAGE>
capacities to Company (and the Predecessor) and subsidiaries thereof during such
period. There were no other executive officers who received any compensation
from the Company (and the Predecessor) (other than director fees).
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation
All Other
Name and Principal Other Compensation
Position Year Salary($) Bonus($) Compensation($) ($)
- -------- ---- --------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Jerome R. McDougal 1998 $300,000 -- $63,214(1) $123,110 (2)
Chairman of the Board, 1997 300,000 -- 66,990 (1) 117,296(2)
Chief Executive Officer 1996 300,000 -- 84,988 (1) 112,431(2)
and President
</TABLE>
- ----------------------
(1) Consists of a housing allowance, club dues, automobile and driver
expenses (aggregating $21,548, $25,324 and $42,760 for the 1998, 1997
and 1996 periods presented, respectively), certain tax expense
reimbursements and health insurance premiums.
(2) Consists of contributions of $9,000, $9,500 and $9,370 made by The
Company to its 401(k) Tax Deferred Savings Plan, accruals of and
earnings on deferred compensation in the amounts of $110,053, $103,739
and $100,551 and payments of $4,057, $4,057 and approximately $2,400
for life and personal liability insurance premiums for the 1998, 1997
and 1996 periods presented, respectively.
Employment Arrangement
Jerome R. McDougal, was compensated pursuant to an arrangement with the
Predecessor reached in 1991. The terms of Mr. McDougal's employment were
memorialized in the minutes of the Predecessor's January 22, 1991 Board of
Directors meeting, which provided for an annual salary of $375,000 and customary
employee benefits commensurate with Mr. McDougal's position at the Company.
$75,000 of Mr. McDougal's annual salary was in the form of deferred
compensation. Mr. McDougal's annual deferred compensation accrues quarterly in
equal amounts and earns a variable rate of interest on the cumulative balance.
Prior to the Branch Sale, interest was compounded quarterly at the highest rate
offered on the predecessor's customer deposits each quarter and was thereafter
compounded at the prime rate. Mr. McDougal received additional compensation in
the form of a housing allowance, an automobile and payment of club membership
dues. The Company also reimbursed Mr. McDougal for the amount of personal income
taxes incurred as a result of the additional benefits.
Mr. McDougal retired from his offices of president and chief executive
officer in June 1998 at which time he was granted severance equal to two years
of his $300,000 annual salary. As part of his severance package, the Company
will continue to fund his health insurance premiums for the two year severance
period and his automobile allowance until the lease term for his current vehicle
expires in November 1998. Mr. McDougal also elected to withdraw his deferred
compensation in the amount of $689,728 during the quarter ended June 30, 1998.
Mr. Stephenson is compensated pursuant to an arrangement with the Company
that provides for a salary of $2,000 per month.
Certain Relationships and Related Transactions
Arrangements with RB Management LLC. The Company succeeds to a management
agreement, dated as of June 28, 1996 (the "Management Agreement"), with RB
Management Company LLC ("RB Management"), a firm
746603.6
-7-
<PAGE>
100% owned by Alvin Dworman, the Company's largest stockholder who owns 39% of
the outstanding shares of Common Stock and a nominee for appointment as
director. Pursuant to the Management Agreement, RB Management is engaged
exclusively as an independent contractor to provide the Company with prescribed
general management services and asset management services. The general
management services provided by RB Management include the management of the
general business affairs and corporate activities of the Company and the
oversight of third party service subcontractors providing services not provided
directly by RB Management to the Company. Such services include, but are not
limited to: (I) developing and implementing policies and procedures for the
ordinary day-to-day management of the Company and the disposition of its assets
as approved by the Board of Directors; (ii) managing corporate activities,
including (a) preparing and maintaining business plans, (b) providing treasury
and tax services, (c) providing financial and accounting services, (d)
monitoring the Company's progress (with e.g. internal controls, internal audits
and operational audits) and (e) monitoring portfolio progress (e.g. reviewing
asset business plans, loan status and restructuring plans); and (iii) providing,
obtaining and overseeing third party services when required, such as loan
servicing, general ledger, legal, accounting and audit services (collectively,
the "General Management Services").
The asset management services provided by RB Management pursuant to the
Management Agreement include the management of the Company's assets, properties
and loans and the oversight of third party service subcontractors providing
services with respect thereto. Such services include, but are not limited to:
(i) managing assets, properties and loans, including (a) troubleshooting the
loan portfolio (with respect to e.g. delinquencies and loan status), (b)
reviewing loans to determine, develop and recommend loan plans, restructures or
litigation strategies, (c) restructuring loans (including planning, implementing
and monitoring), (d) foreclosing assets (including hiring attorneys, obtaining
title and commencing management), (e) preparing asset business plans (including
enhancement strategies), (f) managing and monitoring real estate owned
(including site visits, liaison with brokers and property managers, reviewing
property reports and leasing), disposing of real estate owned (including
solicitation, review and recommendation of offers and negotiation and closing of
sale), and (h) providing financial and operating reports (including monthly
reports, quarterly analysis, financial statements and reports to the Board of
Directors); and (ii) providing, obtaining and overseeing third party services
when required, such as property management, loan marketing, brokerage, leasing,
legal, accounting and audit (collectively, the "Asset Management Services").
Pursuant to the Management Agreement, for the General Management Services,
RB Management is paid an annual base fee, payable monthly, not to exceed
$1,250,000 (the "Base Fee"). The Base Fee is determined on the basis of the
costs expected to be incurred by RB Management in providing the General
Management Services. The agreement requires that the Base Fee be reviewed no
less frequently than annually by the audit committee of the Board of Directors
and adjusted based on costs expected to be incurred as aforesaid. The agreement
requires that the Base Fee be adjusted in the event a third party service
subcontractor is engaged to provide a function required of RB Management under
the agreement.
Pursuant to the Management Agreement, for the Asset Management Services, RB
Management is paid (I) an annual fee, payable monthly, equal to .75% of the
average month-end book value of the Company's assets (the "Asset Service Fee")
and (ii) an asset disposition success fee equal to .75% of the proceeds from the
sale or collection or refinancing of any Company asset (the "Asset Disposition
Fees"). Any fees payable under the Management Agreement not paid within 30 days
of the date billed bear interest at the prime rate published by CitiBank NA.
During the year ended June 30, 1998, the Company accrued $1,250,000 in
expenses for the Base Fee payable to RB Management, $1,331,000 for the Asset
Service Fee and $360,000 for the Asset Disposition Fees. The Company paid
$5,108,000 of the foregoing fees, including $1,998,000 outstanding at June 30,
1997, during the 1998 fiscal year. The Base Fee for fiscal year 1999 is
$1,250,000.
Pursuant to the Management Agreement, RB Management may retain, subject to
the approval of the audit and asset management committees of the Board of
Directors, third party service subcontractors to provide services not provided
directly by RB Management. The agreement provides that RB Management is to be
reimbursed for all bills arising out of approved third party service agreements.
RB Management is also reimbursed for reasonable out-
746603.6
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<PAGE>
of-pocket expenses incurred in connection with rendering the General Management
Services. As contemplated in the Management Agreement, during fiscal year 1998,
RB Management retained Fintek Inc. ("Fintek"), a firm which is 50% beneficially
owned by Mr. Dworman and for which an adult child of Mr. Dworman serves as a
director. Fintek was retained to continue to provide the advisory services that
it had previously provided to the Company pursuant to direct arrangements with
the Company. In accordance with the Management Agreement, all payments to Fintek
are the obligation of RB Management and were paid out of fees received by RB
Management from the Company pursuant to the Management Agreement.
The Management Agreement has a term of three years that shall automatically
be extended for an additional one year term if the Company's senior secured loan
facility with Marine Midland Bank (the "Marine Senior Loan") remains outstanding
upon the termination of the initial term and thereafter for an additional one
year, if at the termination of the initial extension term, the Marine Senior
Loan remains outstanding. Subject to the consent of Marine Midland, the
agreement may be terminated by either party for any reason upon 180 days written
notice to the other party, by RB Management in the event of a payment default by
the Company, by the Company for cause as prescribed in the agreement and by
mutual written consent. The agreement may also be terminated by RB Management
upon 60 days written notice that all of the assets of the Company have been
sold. The Management Agreement provides for proration of the fees payable to RB
Management in the event of termination and for reimbursement of any reasonable
costs incurred by RB Management as a result of the termination, including
termination or severance payments made to third party service subcontractors or
employees terminated by RB Management as a result of such termination. In
addition, in the event of termination, RB Management is entitled to Asset
Disposition Fees on any proposed asset dispositions in process if such assets
are disposed of within six months from such termination
Arrangements with Fintek Inc. During the period October 1, 1991 through
June 28, 1996, Fintek provided certain financial consulting, strategic planning
and advisory services to the Company's predecessor (the "Services Arrangement"),
including providing advice and consulting services with regard to the Company's
treasury functions. Fintek earned hourly rate-based fees under the Services
Arrangement. During the year ended June 30, 1995 and the six month period ended
December 31, 1995, The Company paid $116,000 and $65,000, respectively, to
Fintek for services provided under the Services Arrangement.
In September 1995, the Company's predecessor engaged Fintek to provide
certain advisory services in connection with the Branch Sale and related
transactions (the "Transaction Engagement"). Under the terms of the Transaction
Engagement, Fintek earned hourly rate-based fees and was reimbursed for its
reasonable out-of-pocket expenses incurred in performing its services. Fintek
was also entitled to receive a success fee, upon consummation of the Branch
Sale, equal to the sum of (a) 0.6% of the excess of assumed liabilities over
transferred assets under the Branch Sale agreement (the "Base Fee") and (b) 0.6%
of any principal payments received by the Company's predecessor with respect to
the junior subordinated participation interests (the "Participation-based Fee").
The Base Fee was payable 20% on the closing date of the Branch Sale and 20% on
each of the next four anniversary dates of the closing, with quarterly interest
payments on any deferred amounts accrued at an annual rate equal to the prime
rate of Chemical Bank in effect from time to time. The Participation-based Fee
is to be paid when and to the extent such principal payments are collected.
Pursuant to the Transaction Engagement, Fintek earned a Base Fee equal to
$558,000.
At June 30, 1996, the Predecessor had payables due Fintek in the aggregate
amount of approximately $1,516,000, which represented $558,000 Base Fee and
$696,000 in hourly fees and expense reimbursements under the Transaction
Engagement and $262,000 in hourly fees under the Services Arrangement. During
fiscal years 1998 and 1997, the Company made payments in the amount of
approximately $531,000 and $762,000, respectively, to reduce the foregoing
payables. At June 30, 1998, the Company had outstanding payables of $223,000
with respect to the foregoing.
746603.6
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<PAGE>
The Company believes that the terms reached with respect to each of the
foregoing related party service agreements and arrangements represent terms that
are at least as favorable to the Company and the Predecessor as could be
obtained from unaffiliated parties providing comparable services.
Report on Executive Compensation(1)
The audit committee of the board of directors administers and reviews all of the
compensation policies of the Company.
Since the Company no longer requires a large staff of officers or employees to
manage the business and affairs of the Company, the Company no longer
administers an executive compensation program.
Jerome R. McDougal, chairman of the board and until June 1998 chief executive
officer and president of the Company and the Predecessor, was the only officer
compensated by the Company in fiscal year 1998. Robin Chandler Duke, who serves
as vice-president and secretary, is not paid any compensation in such capacities
by the Company. The base salary (and deferred compensation) of Mr. McDougal,
which has not changed since the commencement of his original employment as the
president of the Predecessor in 1991, was determined through employment
negotiations and was believed to be comparable to salaries paid to principal
executive officers by other companies in the banking industry. The severance
package granted Mr. McDougal was determined by the committee to be appropriate
of his years and level of service to the Company and the Predecessor.
Robin Chandler Duke
Edward V. Regan
- -----------------
(1) The material in this report is not "solicitation material," is not
deemed filed with the Commission, and is not incorporated by reference
in any filing of the Company under the Securities Act or the Exchange
Act, whether made before or after the date hereof and irrespective of
any general incorporation language in any filing.
- --------------------------------------------------------------------------------
Performance Graph
The Company has omitted from this proxy and information statement since
trading prices and quotations for the Company's Common Stock are not currently
available.
746603.6
-10-
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of Common Stock by (I) each person known by the Company to
own beneficially or of record more than 5% of Common Stock, (ii) each director,
nominee for director and executive officer of the Company, and (iii) all
directors, nominees for director and executive officers as a group. Unless
otherwise indicated, each stockholder listed in the table has sole voting and
investment powers as of August 2, 1998 with respect to the shares owned
beneficially or of record by such person.
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Common Stock
- ------------------ -------------------- ------------
Mr. Alvin Dworman 2,768,400 39.0%
645 Fifth Avenue
New York, New York 10022
East River Partnership B(1) 415,800 5.9%
Madison Plaza
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Odyssey Partners, L.P.(2) 415,800 5.9%
31 West 52nd Street
New York, New York 10019
Mr. J. Ezra Merkin(3) 623,666 8.8%
450 Park Avenue
New York, New York 10022
Ariel Management Corp.(4) 371,689 5.2%
450 Park Avenue
New York, New York 10022
Ms. Robin Chandler Duke -- --
Mr. Robert N. Flint 4,000 *
Mr. William D. Hassett 2,150 *
James J. Houlihan -- --
Mr. Jerome R. McDougal 4,000 *
Mr. Edward V. Regan -- --
David A. Shapiro -- --
All directors, nominees for director and 2,778,550 *
executive officers as a group (8 persons)
- ----------------
* Less than .1%.
(1) East River Partnership B is an Illinois general partnership, the
general partners of which are: (1) JAP Grandchildren Trust # 1, the
co-trustees of which are Marshall E. Eisenberg and Jay A. Pritzker;
(2) Don Trust #25, the co-trustees of which are Marshall E. Eisenberg
and Thomas J. Pritzker; and (3) R.A. Trust #25, the co-trustees of
which are Marshall E. Eisenberg and Thomas J. Pritzker.
746603.6
-11-
<PAGE>
(2) Odyssey Partners, L.P. is a Delaware limited partnership having six
general partners: Stephen Berger, Leon Levy, Jack Nash, Joshua Nash,
Brian Wruble and Nash Family Partnership, L.P. The general partners of
Odyssey Partners, excluding Nash Family Partnership, L.P., share
voting and dispositive power over all owned shares.
(3) Gabriel Capital , L.P., a Delaware limited partnership ("Gabriel"), is
the holder of 251,977 shares of Common Stock. Ariel Fund Limited, a
Cayman Islands corporation ("Ariel Fund"), is the holder of 371,689
shares of Common Stock. Gabriel and Ariel Funds are managed investment
vehicles and neither is the beneficial over such shares. Ariel
Management Corp., a Delaware corporation ("Ariel"), as investment
advisor to Ariel Fund, has voting and dispositive power over the
371,689 shares of Common Stock held by Ariel Fund. As the general
partner of Gabriel, Mr. Merkin has voting and dispositive power over
the 251,977 shares of Common Stock held by Gabriel. In addition, as
the sole shareholder and president of Ariel, Mr. Merkin may be deemed
to have voting and dispositive power over the 371,689 shares of Common
Stock owned by Ariel Fund. Accordingly, Mr. Merkin may be deemed to be
the beneficial owner of 623,666 shares of Common Stock.
(4) Ariel, as investment advisor to Ariel Fund, has voting and dispositive
power over the 371,689 shares of Common Stock held by Ariel Fund and
therefore may be deemed to be the beneficial owner of such 371,689
shares of Common Stock. In addition, as the sole shareholder and
president of Ariel, Mr. Merkin may also be deemed to have voting and
dispositive power over the 371,689 shares of Common Stock owned by
Ariel Fund and therefore, he may be deemed to be the beneficial owner
of the 371,689 shares of Common Stock held by Ariel. See Note 3 above.
746603.6
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<PAGE>
PROPOSAL 2 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending June 30, 1999, and has
further directed that the selection of such auditors be submitted for
ratification by the holders of Common Stock at the Annual Meeting. The Company
has been advised by Ernst & Young LLP that neither that firm nor any of its
associates has any relationship with the Company or its subsidiaries other than
the usual relationship that exists between independent certified public
accountants and clients. Ernst & Young LLP will have a representative at the
Annual Meeting who will have an opportunity to make a statement, if he or she so
desires, and who will be available to respond to appropriate questions.
Stockholder ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's restated
organization certificate, amended and restated by-laws or otherwise. However,
the Board of Directors is submitting the appointment of Ernst & Young LLP to the
stockholders for ratification as a matter of what it considers to be good
corporate practice. If the stockholders fail to ratify the appointment, the
Board of Directors will reconsider whether or not to retain that firm. Even if
the appointment is ratified, the Board of Directors in its discretion may direct
the appointment of a different independent accounting firm at any time during
the year if the Board of Directors determines that such a change would be in the
best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR
FISCAL YEAR 1999.
746603.6
-13-
<PAGE>
PROPOSAL 3 -- ELECTION OF THE PREFERRED STOCK NOMINEES
THE BOARD OF DIRECTORS DOES NOT TAKE ANY POSITION WITH RESPECT TO THE
ELECTION OF ANY OF THE PREFERRED NOMINEES AND IS NOT SOLICITING ANY PROXIES IN
CONNECTION WITH THE ANNUAL MEETING AND DOES NOT MAKE ANY RECOMMENDATION "FOR" OR
"AGAINST" THE ELECTION OF ANY SUCH NOMINEE.
Introduction
The Company's Preferred Stock is designated and issued pursuant to a
certificate of designation (the "Certificate of Designation") that provides that
the holders of Preferred Stock will have the right to elect two directors if the
Company or its predecessor shall have failed to make the payment of full
dividends on the Preferred Stock or the substantially identical preferred stock
of the predecessor (or to make a declaration of such full dividends and set
apart of a sum sufficient for the payment thereof) with respect to six (6)
dividend periods, whether consecutive or not (a "Voting Event"). The Company and
its predecessor have not paid a quarterly dividend on its preferred stock since
March 30, 1996 and thus a Voting Event has occurred.
Now that a Voting Event has occurred, the holders of Preferred Stock have
the exclusive right to elect two directors at the Annual Meeting to fill two
newly-created directorships that were created without further action upon the
occurrence of the Voting Event pursuant to the terms of the Certificate of
Designation. Directors so elected serve until the next annual meeting of
stockholders of the Company when such directors terms expire. The right of
holders of Preferred Stock to elect directors continues until dividends on the
Preferred Stock have been paid for four consecutive dividend periods at which
time such voting rights will, without further action, terminate subject to
revesting in the event of a subsequent Voting Event. Upon such termination the
number of directors constituting the directors of the Company will, without
further action, be reduced by two.
Preferred Stock Nominees
The Company has received written communications from the following persons
representing that they are holders of Preferred Stock: Cargill Financial
Services Corporation, Corbyn Asset Management, Inc., Lutheran Brotherhood
Research Corp., State Street Research & Management Company, Strome, Susskind
Investment Management, L.P. and West Broadway Partners, Inc. (collectively, the
"Nominating Preferred Stockholders"). The Nominating Preferred Stockholders
represent that they hold in the aggregate 85% of the total number of shares of
Preferred Stock. The Nominating Preferred Stockholders have nominated Jeffrey E.
Susskind and David J. Liptak as the Preferred Stock Nominees to fill the two
directorships created as a result of the Voting Event.
The Certificate of Designation is silent on the vote necessary to elect the
two directors to be filled by the holders of Preferred Stock as a result of the
Voting Event. As discussed elsewhere herein, the Company has determined to apply
to the election of the two directors by the holders of Preferred Stock the
general vote and quorum requirements contained in its bylaws for the election of
directors by the holders of Common Stock. Therefore, the election to the Board
of Directors of the Preferred Stock Nominees for directors will require the
affirmative vote of the holders of a plurality of the shares of Preferred Stock
present in person or represented by proxy at the Annual Meeting and entitled to
vote assuming a quorum is present. In tabulating the vote, abstentions will be
disregarded.
Certain biographical information with regard to Preferred Stock Nominees
provided by the Nominating Preferred Stockholders is set forth below. The
Company assumes no responsibility for the accuracy or completeness of any
information provided by the Nominating Preferred Stockholders regarding the
biographies of the Preferred Stock Nominees set forth below and makes no
representation as to the qualifications or fitness of the Preferred Stock
Nominees to serve as directors.
746603.6
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<PAGE>
Name Age Position, Principal Occupation, Business
Experience and Directorships Held
David J. Liptak 40 Mr. Liptak has been the President of West
Broadway Partners, Inc., which is the General
Partner of West Broadway Partners, L.P. and
the investment manager of AIG International
West Broadway Fund, Ltd for more than the
past five years. Mr. Liptak was previously a
Senior Vice President at Oppenheimer & Co.,
Inc.
Jeffrey E. Susskind 45 Mr. Susskind has been a principal of Strome,
Susskind Investment Management, L.P., an
investment management company located in
Santa Monica, California for more than the
past five years. Mr. Susskind was previously
an investment manager with Kayne, Anderson
& Co. Mr. Susskind is also the Chairman of
the Board of Sheridan Energy, Inc., a publicly
traded domestic independent energy company
engaged in the production of oil and gas.
Contact with Nominating Preferred Stockholders
Since May 1998, representatives of the Company have had various contacts
with representatives of certain of the Nominating Preferred Stockholders (the
"Organized Group"). Such contacts have taken the form of written communications,
in person meetings and telephone conference calls. Representatives of the
Company and the Organized Group have discussed certain proposals under which the
Company would offer to exchange a new security for the Preferred Stock. While
the Company and the Organized Group have discussed such proposals and continued
the dialogue with regard to the same, the Company to date has not formally
extended such proposals. As of the date of this Proxy and Information Statement,
the Company continues to engage in a dialogue with representatives of the
Organized Group on the subject of an exchange. There can be no assurance,
however, that the dialogue will continue or that it will result in any offer to
exchange a new security for the Preferred Stock.
746603.6
-15-
<PAGE>
STOCKHOLDERS PROPOSALS
Any proposal which a stockholder wishes to have presented at the Company's
next annual meeting of stockholders, if any, must be received at the Company's
office located at 645 Fifth Avenue, New York, New York 10022, no later than May
16, 1999.
ANNUAL REPORT
The Company intends to distribute a copy of the Company's 1998 Annual
Report to Stockholders (which includes the Company's Annual Report on Form 10-K
for the year ended June 30, 1998) as soon as practicable following the filing of
the Form 10-K with the Commission.
ADDITIONAL INFORMATION
UPON RECEIPT OF A WRITTEN REQUEST, THE COMPANY WILL FURNISH TO ANY
STOCKHOLDER WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1998 REQUIRED TO BE FILED WITH THE COMMISSION UNDER
THE EXCHANGE ACT. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO THE CORPORATE
SECRETARY, RB ASSET, INC., 645 FIFTH AVENUE, NEW YORK, NEW YORK 10022.
OTHER MATTERS
The Company is not aware of any business to come before the Annual Meeting
other than those matters described above in this proxy and information
statement. However, if any other matters should properly come before the Annual
Meeting, it is intended that proxies solicited hereby will be voted with respect
to those other matters in accordance with the judgment of the persons voting the
proxies.
New York, New York By the Order of the Board of Directors
Robin Chandler Duke
Secretary
746603.6
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<PAGE>
---------------------
/ Common Stock Proxy /
---------------------
RB ASSET, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF RB ASSET, INC. FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON WEDNESDAY, SEPTEMBER 16,
1998.
The undersigned, as a holder of Common Stock, $1.00 par value (the "Common
Stock"), of RB Asset, Inc. (the "Company"), hereby appoints [ ], and each of
them, with full power of substitution, to vote all shares of Common Stock for
which the undersigned is entitled to vote through the execution of a proxy with
respect to the Annual Meeting of Stockholders of the Company to be held at the
Grand Hyatt of New York Hotel, Park Avenue at Grand Central, New York, New York,
10017 on Wednesday, September 16, 1998 at 10:00 a.m., local time, or any
adjournment or adjournments thereof, and authorizes and instructs said proxies
to vote in the manner directed below.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE
FOLLOWING
1. Election of Directors.
FOR WITHHELD Nominees: Edward V. Regan James J. Houlihan
/ / / /
For, except vote withheld for the following nominee(s):
----------------------------------------------
2. On the proposal to ratify the appointment of Ernst & Young LLP as the
independent auditors of the Company for fiscal year 1999.
(check one box) / / For / / Against / / Abstain
3. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting, or any adjournment thereof,
or upon matters incident to the conduct of the meeting.
You may revoke this proxy at any time by forwarding to the Company a
subsequently dated proxy received by the Company prior to the Annual Meeting.
(Continued and to be signed on the reverse side)
748245.1
<PAGE>
Returned proxy cards will be voted (1) as specified on the matters listed above;
(2) in accordance with the Board of Directors' recommendations where no
specification is made; and (3) in accordance with the judgment of the proxies on
any other matters that may properly come before the meeting. Please mark your
choice like this: x
The shares represented by this Proxy will be voted in the manner directed and,
if no instructions to the contrary are indicated, will be voted FOR the election
of the named nominees and approval of the proposals set forth in the Notice of
the Annual Meeting of Stockholders.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and the proxy statement furnished therewith.
Print and sign your name below exactly as it appears hereon and date this card.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title, as such. Joint owners should each sign. If a corporation,
please sign as full corporate name by president or authorized officer. If a
partnership, please sign in partnership name by authorized person.
Date: ____________________________, 1998
-------------------------------------------------
Signature (title, if any)
-------------------------------------------------
Signature, if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TODAY. YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO THE TAKING OF A
VOTE ON THE MATTERS HEREIN.
748245.1
