================================================================================
As filed with the Securities and Exchange Commission on May 17, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
OR
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From To
----------- -------------------
Commission file number 333-38673
RB ASSET, INC.
--------------
(Exact name of registrant as specified in its charter)
Delaware 13-5041680
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
- --------------------------------------------------------------------------------
(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 or 15(d) 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 / /
The number of shares outstanding of the Registrant's Common Stock as of May 15,
1999 was 7,100,000. The number of shares outstanding of the Registrant's 15%
Non-cumulative Perpetual Preferred Stock, Series A as of May 15, 1999 was
951,777.
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<PAGE>
RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
INDEX
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1999 (unaudited) and June 30,
1998.............................................. 3
Consolidated Statements of Operations for the
three and nine months ended March 31, 1999 and
1998 (unaudited) ................................. 4
Consolidated Statements of Changes in
Stockholders' Equity for the nine months ended
March 31, 1999 and 1998 (unaudited) ........... 5
Consolidated Statements of Cash Flows for the
nine months ended March 31, 1999 and
1998(unaudited)................................... 6
Notes to the Consolidated Financial Statements.... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and the Results of Operations................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 27
Item 2. Changes in Securities ................................. 27
Item 3. Defaults Upon Senior Securities ....................... 27
Item 4. Submissions of Matters to a Vote of Securities Holder.. 27
Item 5. Other Information ..................................... 27
Item 6. Exhibits and Reports .................................. 27
SIGNATURES........................................................................ 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and June 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets
(Unaudited)
March 31, June 30,
1999 1998
------ ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $2,696 and $583, respectively $ 79,248 $ 82,835
Real estate held for disposal 2,000 5,013
Allowance for fair market value reserve under SFAS-121 - (1,363)
--------- ---------
Total real estate held for disposal, net 2,000 3,650
Real estate loans receivable:
Secured by real estate 54,013 59,006
Loans sold with recourse, net 13,976 15,781
Allowance for possible credit losses (16,213) (17,697)
--------- ---------
Total loans receivable, net 51,776 57,090
Investments in joint ventures 1,536 1,536
--------- ---------
Total real estate assets 134,560 145,111
Cash, due from banks and cash equivalents 14,824 12,532
Cash, due from banks - restricted 11,734 19,555
Investment securities available for sale 1,283 1,373
Commercial and consumer loans 10,322 10,431
Allowance for possible credit losses (2,340) (2,340)
--------- ---------
Commercial and consumer loans, net 7,982 8,091
Other assets 5,414 4,248
Total Assets $ 175,797 $ 190,910
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Increasing Rate Junior Subordinated Notes due 2006 $ 11,409 $ -
Other borrowed funds 52,664 68,760
Other liabilities 14,966 14,967
Total Liabilities 79,039 83,727
--------- --------
Stockholders' equity:
15% non-cumulative preferred stock, Series A par value $1,
liquidation value $25 (1,400,000 shares authorized, 951,777
issued and outstanding at March 31, 1999, 1,400,000
issued and outstanding at June 30, 1998) 952 1,400
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at March 31,
1999 and June 30, 1998) 7,100 7,100
Additional paid in capital 100,646 111,170
Accumulated deficit (10,924) (11,561)
Accumulated comprehensive income (1,016) (926)
----------- ---------
Total Stockholders' Equity 96,758 107,183
Total Liabilities and Stockholders' Equity $ 175,797 $ 190,910
========= =========
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS For the
Three and Nine Months Ended March
31, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
REVENUE:
Rental revenue and operations:
<S> <C> <C> <C> <C>
Rental income and other property revenue $3,696 $3,418 $11,210 $10,027
Property operating and maintenance expense (2,497) (3,073) (7,687) (8,047)
Depreciation - real estate held for investment (582) (52) (1,767) (156)
-------- -------- ------- -------
Net rental operations 617 293 1,756 1,824
Other property income (expense):
Net gain/(loss) on sale of real estate 997 (99) 2,729 (1,102)
Recovery (writedown) of investments in real estate - (756) 106 (1,106)
-------- -------- ------- -------
Total other property income/ (expense) 997 (855) 2,835 (2,208)
Other income:
Interest income:
Loans receivable 591 945 1,964 3,081
Investment securities - - - 55
Money market investments and other 123 130 476 284
------- ------- ------- ------
Total interest income 714 1,075 2,440 3,420
Realization of contingent participation revenues - 2,586 1,000 3,355
------- ------- ------- ------
Total other income 714 3,661 3,440 6,775
------- ------- ------- ------
Total revenues 2,328 3,099 8,031 6,391
------- ------- ------- ------
EXPENSES:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 246 - 248 -
Other borrowed funds 928 1,473 3,342 4,645
Other 11 23 44 75
------- ------- ------- ------
Total interest expense 1,185 1,496 3,634 4,720
Other expenses:
Salaries and employee benefits 32 300 140 730
Legal and professional fees 347 695 1,118 2,036
Management fees 613 612 1,844 1,942
Other 87 69 225 265
------- ------- ------- ------
Total other expenses 1,079 1,676 3,327 4,973
Total expenses 2,264 3,172 6,961 9,693
----- ----- ----- -----
Income (loss) before other income (expense) and before
------- ------- ------- ------
provision for income taxes 64 (73) 1,070 (3,302)
Other income (expense):
Net gains (losses) on sales of investment securities - - - 1,697
------- ------- ------- ------
Total other income (expense) - - - 1,697
Net income / (loss) after other income (expense) and before
------- ------- ------- ------
provision for income taxes 64 (73) 1,070 (1,605)
Provision for income taxes 118 125 432 226
------- ------- ------- ------
Net income / (loss) (54) (198) 638 (1,831)
Dividends declared on preferred stock - - - -
------- ------- ------- ------
Net income / (loss) applicable to common stock $(54) $(198) $638 $(1,831)
======= ======= ======= ========
Basic and diluted income / (loss) per common share $(0.01) $(0.03) $0.09 $(0.26)
======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended March 31, 1999 and 1998
(dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Series A
Non-
cumulative
Perpetual Additional Retained
Preferred Common Paid-in Earnings
Stock Stock Capital (Deficit)
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1997 $ 1,400 $ 7,100 $ 111,170 $ (10,055)
Net loss for the nine months ended
March 31, 1997 - - - (1,832)
Preferred stock dividends payable - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - -
---------- ---------- ---------- ----------
Balances at March 31, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,887)
========== ========== ============ =============
Balances at June 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,561)
Net income for the nine months
ended March 31, 1999 - - - 638
Preferred stock dividends payable - - - -
Reduction in Stockholder's Equity
resulting from the Preferred Stock
Exchange Offer (Note 2) (448) - (10,524)
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - -
---------- ---------- ---------- ----------
Balances at March 31, 1999 $ 952 $ 7,100 $ 100,646 $ (10,924)
========== ========== ============ =============
</TABLE>
See notes to Consolidated Financial Statements
Accumulated Total
Comprehensive Stockholders'
Income Equity
-------------- --------------
Balances at June 30, 1997 $ (1,105) $ 108,510
Net loss for the nine months ended
March 31, 1997 - (1,832)
Preferred stock dividends payable - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale 90 90
Balances at March 31, 1998 $ (1,015) $ 106,768
========= =========
Balances at June 30, 1998 $ (926) $ 107,183
Net income for the nine months
ended March 31, 1999 - 638
Preferred stock dividends payable - -
Reduction in Stockholder's Equity
resulting from the Preferred Stock
Exchange Offer (Note 2) (10,972)
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale (90) (90)
-------- ---------
Balances at March 31, 1999 $ (1,016) $ 96,758
======== =========
5
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1999 and 1998
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
---------------------------
1999 1998
------------- --------
<S> <C> <C>
Operating Activities:
Cash Flows Provided by (Used in) Operating Activities:
Net (loss)/income $ 638 $ (1,831)
Adjustments to reconcile net (loss)/income to cash
used in operating activities:
Net (gain) loss on sale of real estate assets (2,736) 1,102
(Recoveries) write downs of real estate assets (106) 1,106
Depreciation and amortization 1,768 156
Net gain on sales of loans, other investments
and investment securities - (1,697)
Change in operating assets and liabilities:
Net decrease/(increase) in accrued interest receivable 58 (2,060)
Net (decrease)/increase in accrued interest payable 107 (459)
Net (decrease)/increase in accrued income taxes 409 (72)
Net (decrease)/increase in accrued expenses
and other liabilities (97) (4,126)
Net (increase)/decrease in prepaid expenses and other assets (1,224) 1,781
Cash effect of increases/(decreases) in allowance for
possible credit losses 330 857
Other 49 139
-------- -------
Net cash (used in)/provided by operating activities (804) (5,104)
-------- -------
Investing Activities:
Cash Flows Provided by (Used in) Investing Activities:
Proceeds from sales and maturities of investment
securities, available for sale - 8,568
Net repayment/(origination) of loans secured by real estate, net 4,468 12,180
Net repayment/(reacquisition) of commercial and consumer loans 61 (1,955)
Net decrease/(increase) in loans sold with recourse 654 6,828
Proceeds from sales of real estate held 6,713 10,334
Additional fundings on real estate held (524) (4,586)
-------- -------
Net cash provided by investing activities 11,372 31,369
-------- --------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
6
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1999 and 1998
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
(Continued from previous page)
Nine months ended
March 31,
-----------------------------
1999 1998
---------- --------
<S> <C> <C>
Financing Activities:
Cash Flows Provided by (used in) Financing Activities:
Decrease (increase) in restricted cash 7,820 (11,100)
Proceeds from borrowed funds - -
Repayment of borrowed funds (10,000) (5,720)
Decrease in borrowed funds secured by loans sold with
recourse, net of construction advances (6,096) (11,227)
---------- ---------
Net cash used in financing activities (8,276) (28,047)
---------- ---------
Net increase/(decrease) in cash and money market investments 2,292 (1,782)
Beginning cash 12,532 8,940
---------- ---------
Ending cash $ 14,824 $ 7,158
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 3,577 $ 5,493
Federal, state and local taxes 523 354
</TABLE>
See notes to Consolidated Financial Statements
7
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
1. Organization and Formation of the Company
RB Asset, Inc. (the "Company") is a Delaware corporation that, as a result of
the completion of reorganization steps (the "Reorganization," described in
detail below), on May 22, 1998, 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 three month period ended
March 31, 1999. 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 reconvened 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 on May 18, 1998, 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, 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
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 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 identical shares of capital stock of RB
Asset, Inc. 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.
8
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
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. Prior to dissolution, the
stock transfer records of River Bank were closed and upon such dissolution, the
capital stock of River Bank was canceled.
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 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.
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.
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 $50.6 million at March 31, 1999, with an additional $11.7 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.
9
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
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 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.
10
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
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").
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. 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 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 and the terms of the Marine Facility, subsequent
to June 28, 1996, the Predecessor Bank and the Company have not originated a
material amount of loans.
The Predecessor Bank had 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 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 have taken any action
regarding a quarterly dividend on the Company's Series A Preferred for any of
the quarterly periods ended from September 30, 1996 through March 31, 1999.
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.
2. Preferred Stock Exchange Offer
Summary. On November 25, 1998, the Company offered upon the terms and conditions
set forth in its Offering Circular and the related Letter of Transmittal (which
together constituted the "Exchange Offer"), to exchange $25.94 principal amount
of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated
Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual
Stock, Series A, par value $1.00 (the Series A Preferred Stock"), of which
1,400,000 shares were outstanding on that date.
Purposes of the Exchange Offer. In view of the changes in the nature of the
Company and its business as a result of the Reorganization described in Note 1,
the Board of Directors effected the Exchange Offer for the purpose of affording
all holders of the Series A Preferred Stock an opportunity to exchange their
shares of Series A Preferred Stock for the Subordinated Notes which may be, for
them , a more attractive investment. As more fully described in the Offering
Circular dated November 25, 1998, the Exchange Offer provided holders of the
Series A Preferred Stock with the opportunity to exchange perpetual preferred
stock
11
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
having a $25.00 per share liquidation value with non-cumulative dividend rights
and no mandatory redemption provisions for $25.94 principal amount of a debt
instrument maturing in seven years which requires (i) semi-annual payments of
interest, payable in kind or in cash, at the Company's option, for the first
three years and thereafter in cash, at rates increasing from an initial 8% per
annum rate and (ii) the repayment of principal in mandatory semi-annual
installments commencing after three years with increasing premiums on
installments paid after four years.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company's Series A Preferred Stock advised the Company that such holders
objected to the Reorganization. Specifically, such counsel alleged that the
Reorganization (i) constituted a "liquidation" of River Bank America in
violation of the terms of the Certificate of Designations of the Series A
Preferred Stock by failing to provide for the payment to the holders of the
Series A Preferred Stock of the liquidating distribution required by the
Certificate of Designations of $25.00 per share, plus all accrued, undeclared
and unpaid dividends thereon, (ii) was illegal under the New York Banking Law
(the "NYBL") which provides, in the case of a voluntary liquidation, that the
liquidating corporation shall distribute its remaining assets among its
shareholders according to their respective rights and interests, (iii) violated
a commitment made in River Bank's proxy statement, dated May 13, 1996, to retire
the Series A Preferred Stock following approval and finalization of the sale of
certain of its branches and assets to Marine and (iv) constituted a breach of
duty owed by River Bank's Board of Directors to the holders of the Series A
Preferred Stock.
The Company believes such allegations are without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders have discussed from time to time since the date of such letter,
certain proposals under which the Company would offer to exchange a new security
for the Series A Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. On October 27, 1998, 11 holders
of Series A Preferred Stock who claim to beneficially own, in the aggregate,
849,000 shares (approximately 60.6% of the outstanding shares) of Series A
Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome
Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in
Supreme Court of the State of New York, County of New York, Index No. 605226198
(the "Action" ), against the Company, certain of its predecessors and certain of
its directors (collectively, the "Defendants"). The complaint in the Action
alleged (the "Allegations"), among other things, that (i) the Defendants
breached the Certificate of Designations relating to the Series A Preferred
Stock by fraudulently transferring assets of River Bank and by illegally
amending the Certificate of Designations, (ii) the Defendants fraudulently
conveyed the assets of River Bank, thereby depriving the holders of a
liquidating distribution, (iii) the Defendants violated the NYBL by liquidating
River Bank without making the liquidating distribution required by the NYBL and
by denying holders appraisal rights to which they were entitled by the NYBL,
(iv) the Defendants breached their fiduciary duty to holders by depriving them
of their liquidating distribution, (v) the defendants breached their duty of
disclosure by omitting from the Proxy Statement dated March 27, 1998 material
facts relating to the holders' rights to receive a liquidating distribution,
their appraisal rights for their shares and the requirement that holders vote as
a class with respect to the amendment of the Certificate of Designations, (vi)
the Defendants' implementation of the liquidation of River Bank and the
amendment of the Certificate of Designations were ultra vires and should be
declared void and (vii) the intentionally tortious nature of the Defendants'
conduct bars them from seeking indemnification for their actions and, therefore,
the Defendants should be enjoined from seeking indemnification for damages or
attorney's fees relating to the action. The Company believes that the
Allegations are without merit and intends vigorously to oppose the Action.
Release of Claims. Holders of Series A Preferred Stock, including any of the
plaintiffs in the Action, whose shares were tendered and accepted by the Company
for exchange pursuant to the Exchange Offer have released the Company, its
predecessors and successors, and their respective parents, subsidiaries,
affiliates and assigns, and each of their respective officers, directors,
employees, partners, advisors, agents and representatives from all action,
causes of action, claims, judgements, contracts, agreements or understandings
whether individual or derivative in nature, which such holders had, ever had or
hereafter shall or may have
12
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
respect to the shares of Series A Preferred Stock exchanged pursuant to the
Offering Circular or any disclosures, rights or agreements relating thereto,
including, but not limited to, any claims made in the Action and any claims with
respect to the Reorganization and the transfer of assets from River Bank.
Waiver of Dividend. Each Holder (as defined in the Offering Circular) who
accepted the Exchange Offer was deemed to have waived all rights, with respect
to each share of Series A Preferred Stock exchanged, to receive the $.94 per
share quarterly dividend that was declared on shares of Series A Preferred Stock
for the quarter ended June 30, 1996 but which remains unpaid.
Proposed Equity Rights Offering. If within one year after expiration of the
Exchange Offer, the Company effects an equity enhancement plan through either a
rights offering to the holders of its Common Stock or the distribution to such
holders of Warrants to purchase additional shares of Common Stock, each holder
of Series A Preferred Stock whose shares were accepted by the Company for
exchange pursuant to the Exchange Offer will be entitled to participate in such
rights offering or distribution of Warrants on the basis of one subscription
right or Warrant for each share of Series A Preferred Stock so exchanged for
Subordinated Notes. The Company's Board of Directors has authorized management
to develop a proposal for such a rights offering or distribution of Warrants,
provided that, under the terms thereof, Alvin Dworman, Odyssey Partners, L.P.
and East River Partnership B., who currently own an aggregate of 50.8% of the
outstanding shares of Common Stock, will have the ability to avoid dilution of
their aggregate percentage ownership of the Common Stock outstanding upon
consummation thereof. While the Company presently intends to effect such a plan,
there can be no assurance that such rights offering or distribution of Warrants
plan will be effected or as to the terms and conditions thereof.
Conditions of the Exchange Offer. The Company obtained the consent of Marine to
effect the Exchange Offer. However, there can be no assurance that Marine will
provide any approval that may be requested by the Company in the future for the
payment in cash of any installments of interest or any prepayment of principal
and premium, if any, prior to the dates such cash payments are required to be
made under the terms of the Subordinated Notes.
Acceptance Results of the Exchange Offer. On December 28, 1998, the Company
announced that it had completed its offer to exchange $25.94 principal amount of
its newly-authorized Subordinated Notes for each outstanding share of its Series
A Preferred Stock properly tendered to, and accepted by, the Company in
accordance with the provisions of the Exchange Offer. At the expiration of the
Exchange Offer on December 24, 1998, 415,273 shares of the Series A Preferred
Stock (representing approximately 29.7% of the 1,400,000 shares of Series A
Preferred Stock outstanding before the commencement of the Exchange Offer) had
been properly tendered and accepted by the Company for exchange.
The Subordinated Notes will carry an interest rate of 8%, compounded
semi-annually, for the first 36 months following their issuance. The effective
date of the exchange was December 30, 1998. During the quarter ended December
31, 1998, accrued interest expense, in the amount of approximately $2 thousand,
was recognized for the one-day period from the effective date of the exchange to
the end of the quarter. During the quarter ended March 31, 1999 accrued interest
expense of approximately $229,000 was recognized. As a result of the tender of
415,273 shares of the Company's Series A Preferred Stock, the Company will
recognize additional interest expense of approximately $497,000, $1,056,000, and
$1.134,000 for the fiscal years ended June 30, 1999 (approximately one-half year
from December 30, 1998 to June 30, 1999), 2000 and 2001, respectively.
Subsequent Exchanges of Series A Preferred Stock. Subsequent to the expiration
of the Exchange Offer, the Company accepted private requests for the exchange of
its Series A Preferred Stock from individuals under terms identical to those of
the Exchange Offer. As a result, 32,950 shares of the Company's Series A
Preferred Stock were exchanged during the quarter ended March 31, 1999. As a
result of the exchange, the Company's total Stockholder's Equity was reduced by
$806,000 and its liabilities increased the same amount (composed of a net
increase in Increasing Rate Junior Subordinated Notes due 2006 of $837,000,
partially offset by a net decrease in other liabilities of $31,000). Subsequent
to March 31, 1999, an additional 10,200 shares of the Company's Series A
Preferred Stock will be exchanged and reported in the Consolidated Financial
Statements of the Company during the quarter ending June 30, 1999
13
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
3. Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of the Company
include all adjustments which management believes are necessary for a fair
presentation of the Company's financial condition at March 31, 1999, the results
of its operations for the three and nine months ended March 31, 1999 and 1998
and the statements of changes in stockholders' equity and cash flows for the
nine months ended March 31, 1999 and 1998. Adjustments are of a normal recurring
nature. These unaudited consolidated financial statements have been prepared in
conformity with the accounting principles and practices in effect as of June 30,
1998, as set forth in the consolidated financial statements of RB Asset, Inc.,
at such date. These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements of RB Asset,
Inc. as of June 30, 1998.
The consolidated financial statements include the accounts of RB Asset, Inc. 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, subject to periodic assessment of net realizable
value. Losses on sales or dispositions and any adjustments related to
redetermination of net realizable value are charged, as real estate charge-offs
to operations of the current period.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial condition
as of March 31, 1999, the results of operations for the three and nine months
ended March 31, 1999 and 1998, and changes in stockholders' equity and cash
flows for the nine months ended March 31, 1999 and 1998.
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, the valuation of
investments in real estate for investment.
Management believes that the allowance for possible credit losses is adequate
and that other real estate owned and real estate held for investment are
properly valued. While management uses available information to establish
reserves, future additions to the allowance or write downs of other real estate
owned or real estate held for investment may be necessary based on changes in
economic conditions, as well as changes in management strategies.
Management determines the appropriate classification of debt and equity
securities (collectively, "marketable" 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 gains and losses,
net of tax, reported in a separate component of stockholders' equity. The cost
of marketable 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 investments. Interest and dividends are included in
interest income from 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. At March 31, 1999, the balance of stockholders' equity included a $1.0
million unrealized loss on marketable securities classified as
available-for-sale.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the income (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. At March
31, 1999 the Company reviewed its potential current and deferred federal and
state tax liabilities in light of the results of operations for the Company
since June 30, 1998. As a result of this analysis, the Company recognized income
tax expense in the amount of $118,000 during the quarter ending March 31, 1999
and $432,000 for the nine months ending March 31, 1999.
14
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
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.
4. Commitments, Contingencies and Other
As of March 31, 1999, the Company had deferred tax assets that were primarily
attributable to NOLs, an allowance for loan losses and suspended passive
activity losses and credits which were partially offset by a deferred tax
liability in its consolidated financial statements. However, a valuation
allowance was set up equal to the amount of the difference between the tentative
deferred tax asset and the tentative deferred tax liability due to the
uncertainty of the Company's ability to utilize the deferred tax assets in the
future. Accordingly, neither a net overall asset nor a net overall liability was
reflected in the Company's consolidated financial statements.
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 Reorganization in Note 1 is deemed to be an ownership change, or
if, transactions in the Company's capital stock subsequent to the Reorganization
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 will be deemed to have occurred as a result of
the Reorganization or otherwise. However, the application of Section 382 is in
many respects uncertain. In assessing the effects of prior transactions and of
the Reorganization under Section 382, the Company has made certain legal
judgments and certain factual assumptions. The Company has not requested or
received any rulings from the IRS with respect to the application of Section 382
to the implementation of the Reorganization and the IRS could challenge the
Company's determinations.
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 any outstanding 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.
5. 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
15
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
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
nonmemeber 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.
6. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Accounting Standards No.
130, "Reporting Comprehensive Income " ("SFAS-130"). SFAS-130 establishes new
rules for the reporting and display of comprehensive income and its components.
However, the adoption of this Statement has had no effect on the Company's net
income or stockholders' equity. SFAS-130 requires unrealized gains or losses on
the Company's available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS-130.
During the three and nine months ended March 31, 1999, total comprehensive
income(loss) was $(313) and $548, respectively. During the three and nine months
ended March 31, 1998, total comprehensive income (loss) was $(109) and $(1,741),
respectively.
The following table describes the components of comprehensive income and
accumulated comprehensive income for the dates indicated:
<TABLE>
<CAPTION>
Components of Comprehensive
Income (Unaudited):
Three months ended March 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Net income $ (54) $ (198)
Unrealized gains (losses)on securities (259) 89
----------- -----------
Comprehensive income $ (313) $ (109)
============ ===========
Nine months ended March 31,
1999 1998
-------------------- --------------------
Net income $ 638 $ (1,831)
Unrealized gains (losses) on securities (90) 90
----------- -----------
Comprehensive income $ 548 $ (1,741)
=========== ============
Components of Accumulated
Comprehensive Income:
(Unaudited)
March 31, June 30,
1999 1998
Unrealized losses on securities $ (1,016) $ (926)
----------- -----------
Accumulated comprehensive income $ (1,016) $ (926)
=========== ===========
</TABLE>
16
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands)
(Unaudited)
7. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three and nine months ended March 31, 1999 and
1998, respectively. The Company had no securities outstanding that were
convertible to common stock at March 31, 1999 or 1998.
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128, "Earnings Per Share" ("SFAS-128"), which was
required to be adopted on December 31, 1997. At that time, the Company was
required to change the method it previously used to compute earnings per share
and to restate all prior periods. Under the new requirements of SFAS-128, the
dilutive effect of stock options was excluded. The implementation of SFAS-128
has not had any effect upon the Company's reported primary earnings per share
for the three and nine month periods ended March 31, 1999 and 1998, or for the
fiscal years ended June 30, 1998, 1997 and 1996.
8. Legal Proceedings
An action entitled Strome Global Income Fund et al. v. River Bank America et
al., Index No. 605226198, was commenced against the Registrant, its predecessors
and certain of its current and former directors in New York State Supreme Court,
New York County on October 27, 1998. Plaintiffs are holders of the Company's 15%
non-cumulative perpetual preferred stock, Series A, and were formerly holders of
River Bank America 15% non-cumulative perpetual preferred stock, Series A. The
complaint alleges various claims for breach of contract, fraudulent conveyance,
violations of Sections 604 and 605 of the New York Banking Law, breach of
fiduciary duty and the duty of disclosure and ultra vires acts based upon the
reorganization into the Registrant, and subsequent dissolution, of the
Registrant's predecessor, River Bank America, and an amendment made to River
Bank America's certificate of designations for the preferred stock in connection
with the reorganization. Among other things, plaintiffs claim that as a result
of the reorganization and dissolution they were entitled to receive a $25 per
share liquidation payment, as well as unpaid dividends, and were also entitled
to appraisal rights as dissenting shareholders. Plaintiffs seek judgment against
the defendants for the liquidation payment, other unspecified compensatory
damages, avoidance of the transfer of assets from River Bank America to the
Registrant, punitive damages and other relief. The Registrant believes that the
reorganization and dissolution of River Bank America was in the best interests
of all of the River Bank America stockholders and did not violate plaintiffs'
rights as preferred stockholders in any respect and intends to defend the
lawsuit vigorously.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition:
At March 31, 1999 the consolidated assets of the Company totaled $175.8 million,
a decrease of $15.1 million, or 7.9% from June 30, 1998.
Real estate held for investment, net of accumulated depreciation, declined $3.6
million, or 4.3%, from $82.8 million at June 30, 1998 to $ 79.2 million at March
31, 1999. The decline in real estate held for investment, net of accumulated
depreciation, at March 31, 1999 was attributable to gross sales of $3.0 million,
(for which gains of $909,000 were recognized, thereby reducing the recorded
value of the asset by $2.1 million), depreciation charges of $1.8 million and
transfers of $175,000 from real estate held for disposal, partially offset by
capitalized additions of $116,000. Of the $3.0 million in sales of real estate
held for investment, $2.3 million related to a shopping center complex in New
York City for which a net gain in the amount of $304,000 was recognized, and
$772,000 related to the sale of two condominium units at one of the Company's
multi-family housing projects for which a gain in the amount of $604,000 was
recognized.
Real estate held for disposal, net of allowance for fair market value reserve
under Statement of Accounting Standards No. 121 (SFAS-121), decreased $1.6
million, or 45.2%, from $3.6 million at June 30, 1998 to $2.0 million at March
31, 1999. The decline in real estate held for disposal was attributable to gross
sales of $3.7 million (for which gains of $1.8 million were recognized, thereby
reducing the recorded value of the asset by $1.9 million), and transfers of
$175,000 to real estate held for investment, partially offset by capitalized
additions of $408,000. During the quarter ended December 31, 1998, the Company
sold a multi-car parking garage adjacent to its office complex real estate
investment in Atlanta, GA. The parking garage was sold for approximately $1.6
million and the Company recognized a gain on that sale in the amount of
$523,000. Sales of real estate held for disposal also consisted of apartment
units sold from inventory held for disposal at June 30, 1998. Such sales totaled
$2.1 million during the nine months ended March 31, 1999, for which gains of
$1.3 million were recognized (thereby reducing the recorded value of the asset
by $800,000), partially offset by capitalized additions of $400,000. Offsetting
the effects of the sales on the book value of real estate held for disposal, net
at December 31, 1998 were transfers of additional apartment units from real
estate held for investment, net totaling $1.0 million. Apartment units
transferred into real estate held for disposal during the nine months ended
March 31, 1999 are expected to be sold within the next twelve months.
Total real estate loans receivable, net of the related allowance for possible
credit losses declined $5.3 million, or 9.3%, from $57.1 million at June 30,
1998 to $51.8 million at March 31, 1999. The $5.3 million decline in real estate
loans, net, during the nine months ended March 31, 1999, was attributable to a
decline in loans receivable, secured by real estate of $5.0 million and a
decline in loans sold with recourse, net of $1.8 million, partially offset by a
decline in the related allowance for possible credit losses of $1.5 million.
The Company's loans secured by real estate decreased by $5.0 million, or 8.5%,
from $59.0 million at June 30, 1998 to $54.0 million at March 31, 1999. During
the nine months ended March 31, 1999, the Company received payments in
satisfaction of $5.2 million in loans secured by real estate, recognizing a net
loss of $48,000. This decrease in loans secured by real estate, net was
partially offset by $158,000 in loan fundings advanced during the nine month
period.
The Company's loans sold with recourse, net decreased by $1.8 million, or 11.4%,
from $15.8 million, at June 30, 1998 to $14.0 million at March 31, 1999. During
the nine months ended March 31, 1999, the Company sold $1.7 million in loans
sold with recourse, net, which was partially offset by additional asset fundings
of $1.0 million. In addition, $1.1 million in losses related to the asset sales
were charged against the allowance for possible credit losses, thereby reducing
the remaining book value of loans sold with recourse, net and the allowance for
possible credit losses by that amount.
The Company's allowance for possible credit losses related to loans secured by
real estate decreased by $1.5 million, or 8.4%, from $17.7 million, at June 30,
1998 to $16.2 million at March 31, 1999. The decrease resulted from chargeoffs
of $1.3 million net of recoveries of $300,000 for asset disposition transactions
previously provided for at June 30, 1998. In addition, the allowance for
possible credit losses was reduced during the nine months ended March 31, 1999
by $500,000 when a junior subordinated participation loan secured by real
estate, that had been fully reserved for at June 30, 1998, was repaid in full.
As a result of this
18
<PAGE>
transaction, the allowance for possible credit losses was reduced by $500,000
and a gain of $500,000 was recognized. The Company's allowance for possible
credit losses is maintained at a level which management considers adequate based
on its periodic review of the Company's loans secured by real estate portfolios
and certain individual loans, taking into consideration, among other things, the
likelihood of repayment, the diversity of the borrowers, the type of loan, the
quality of the collateral, current market conditions and the associated risks.
At March 31, 1999 and June 30, 1998, the allowance for possible credit losses
was 30.0% of real estate loans.
Cash and due from banks increased by $2.3 million, or 18.3%, from $12.5 million
at June 30, 1998 to $14.8 million at March 31, 1999. Allocations to restricted
cash, scheduled asset fundings and the payment of operating expenses were
exceeded by the total operating revenues and asset sales proceeds, resulting in
the increase in unrestricted cash during the nine months ended March 31, 1999.
At March 31, 1999, Marine had restricted a total of approximately $11.7 million
in funds, held on deposit at Marine, in accordance with the terms of the Branch
Sale and the Marine Facility agreements. Marine had restricted approximately
$19.6 million at June 30, 1998. Restricted funds held by Marine are not
available to the Company for settlements of any of the Company's current
obligations. The 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 to 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. See comments related to repayments of Borrowed Funds during the
quarter ended March 31, 1999 in the second paragraph below and also in "Liqudity
and Capital Resources," below.
Commercial and consumer loans, net of the related allowance for loan losses,
totaled $8.0 million at March 31, 1999, a decrease of $100,000, or 1.4%, from
the June 30, 1998 balance of $8.1 million. This decrease was primarily the
result of the effects of normal amortization and prepayment of individual loans
in the portfolio.
During the quarter ended March 31, 1999, the Company repaid advances from Marine
in the aggregate amount of $16.1 million. Accordingly, the outstanding borrowed
funds balance declined $16.1 million, or 23.4%, from $68.8 million at June 30,
1998 to $52.7 million at March 30, 1999. Borrowed funds were repaid from
restricted cash balances, previously held at Marine. Following the Marine
repayments, the Company has requested that Marine reactivate the Marine Facility
to provide the Company with access to fundings to be secured by assets from new
lending and real estate transactions. The Company has requested that Marine
provide availability up to the initial amount of the Marine Facility of $100
million, or approximately $50 million in availability under the Marine Facility.
Availability under the Marine Facility would be used, in combination with the
restricted and unrestricted cash of the Company to invest in new lending and
real estate activities, subject to the prior approval of Marine.
During the nine months ended March 31, 1999, total stockholders' equity
decreased by $10.4 million, or 9.7% to $96.8 million, as compared with $107.2
million at June 30, 1998. This decrease was primarily due to the effects of the
Company's Preferred Stock Exchange Offer (the "Exchange Offer") whereby the
Company exchanged 448,223 shares of its 15% non-cumulative preferred stock,
Series A, for approximately $11.4 million in newly-issued Increasing Rate Junior
Subordinated Notes due 2006 (see Note 2). This exchange resulted in an $11.0
million decline in stockholder's equity. This $11.0 million decline in
stockholder's equity and an additional $90,000 decline in stockholder's equity
due to an decrease in the securities valuation account (an increase in the
allowance for unrealized losses on marketable securities) at March 31, 1999, as
compared with June 30, 1998, were partially offset by the net income recorded
for the nine months ended March 31, 1999 in the amount of $638,000.
19
<PAGE>
The following table summarizes the calculation of the Company's book value per
share at March 31, 1999 and June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Total stockholders' equity $ 96,758 $ 107,183
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 23,794 35,000
------------ ----------
Net stockholders' equity $ 72,964 $ 72,183
============ ==========
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
============ ==========
Book value per share $ 10.28 $ 10.17
============ ==========
</TABLE>
Results of Operations:
General. The Company reported net (loss) income attributable to common shares of
$(54,000), or $(0.01) per share and $638,000, or $0.09 per share, for the three
and nine months ended March 31, 1999, respectively. For the same periods in
1998, the Company reported net losses of $198,000, or $0.03 per share and $1.8
million, or $0.26 per share, respectively.
The primary reason for the increase in the Company's net operating results for
the three months ended March 31, 1999, as compared to the same three month
period in the previous year, was the recording of other property income of $1.0
million in the three months ended March 31, 1999, an increase of $1.9 million,
as compared with a net loss from other property operations of $855,000 in the
same three month period of the previous year.
The primary reason for the increase in the Company's net operating results for
the nine months ended March 31, 1999, as compared to the same nine month period
in the previous year, was the recording of other property income of $2.8
million, in the nine months ended March 31, 1999, an increase of $5.0 million,
as compared with a net loss from other property operations of $2.2 million, in
the same nine month period of the previous year. Partially offsetting the
increases in other property income in the nine months ended March 31, 1999, as
compared with the same nine month period in 1998, were decreases in contingent
participation revenues of $2.4 million to $1.0 million in the nine months ended
March 31, 1999, as compared to $3.4 million in the same nine month period of the
previous year.
Interest expense also declined $300,000 and $1.1 million in the three and nine
months ended March 31, 1999, respectively, as compared with the same periods in
the previous year. Interest expense declined from $1.5 million and $4.7 million
in the three and nine month periods ended March 31, 1998, respectively, to $1.2
million and $3.6 million during the same three and nine month periods of the
current year.
Other expenses also declined $600,000 and $1.7 million in the three and nine
months ended March 31, 1999, respectively, as compared with the same periods in
the previous year. Other expenses declined from $1.7 million and $5.0 million in
the three and nine month periods ended March 31, 1998, respectively, to $1.1
million and $3.3 million during the same three and nine month periods of the
current year.
Partially offsetting the effects of increased other property income, increased
contingent participation revenues and reduced interest and operating expenses on
the results of operations reported for the nine months ended March 31, 1999, as
compared to the nine month period of the previous year, were reductions in net
rental operations and net gains on sales of investment securities of $1.8
million. Net rental operations declined from $1.8 million in the nine month
period ended March 31, 1998, to $1.7 million in the same nine month period of
the current year. In addition, net gains on sales of investment securities
declined from $1.7 million in the nine month period ended March 31, 1998 to $0
during the same nine month period in 1999.
20
<PAGE>
Net Rental Operations. For the three months ended March 31, 1999, net rental
operations resulted in income of $617,000, an increase of $324,000, or 110.6%,
from $293,000 for the same three month period in the previous year. The primary
reason for the increase in net rental operations income was the increase in
rental income of $278,000 and decrease in operating expense of $576,000,
partially offset by an increase in depreciation expense attributable to real
estate held for investment in excess of the amount recognized in the same period
of the previous year of $530,000.
For the three months ended March 31, 1999, depreciation charges associated with
real estate held for investment were $582,000, an increase of $530,000, or
1,019.2%, as compared with depreciation charges associated with real estate held
for investment in the quarter ended March 31, 1998 of $52,000. 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. Of the $582,000 in
depreciation charges recorded in the three months ended March 31, 1999,
approximately $528,000 represents depreciation of the capitalized costs of the
real estate held for investment (less land value) for four of the Company's five
real estate assets from the period July 1, 1998, to March 31, 1999. The
remaining $54,000 in depreciation charges recorded during the quarter ended
March 31, 1999 were for the fifth 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, net that had not been subject to depreciation charges in
prior periods.
For the nine months ended March 31, 1999, net rental operations resulted in
income of $1.7 million, a decrease of $100,000, or 3.7%, from $1.8 million for
the same nine month period in the previous year. The primary reason for the
decline in net rental operations income was the recognition of $1.6 million in
depreciation expense attributable to real estate held for investment in excess
of the amount recognized in the same period of the previous year. Excluding the
$1.6 million increase in depreciation charges recorded in the nine months ended
March 31, 1999, as compared with the same nine months in the previous year,
income from rental operations increased $1.5 million, or 84.6%, in the nine
months ended March 31, 1999 as compared to the nine months ended March 31, 1998.
This increase was due to various, individually immaterial operating factors
affecting aggregate rental income and expenses within the Company's rental
properties.
Other Property Income (Expense). Total other property income (expense) was $1.0
million for the quarter ended March 31, 1999, an increase of $1.9 million, as
compared with a net loss of $855,000 in the quarter ended March 31, 1998. For
the quarter ended March 31, 1999, the $1.0 million in other property income was
attributable to the sale of $2.3 million of real estate held, of which $2.1
million related to units in a multi-family apartment complex in New York City
for which a net gain in the amount of $1.2 million was recognized and the sale
of a condominium unit at another of the Company's multi-family housing projects
in New York City for $276,000, for which a gain in the amount of $251,000 was
recognized. These recorded gains were partially offset by $525,000 in
non-recurring expenses resulting from the full satisfaction of certain
liabilities related to operations of a New York City property that had been
disposed of in prior periods.
Total other property income (expense) was $2.8 million for the nine months ended
March 31, 1999, an increase of $5.0 million, as compared with a net loss of $2.2
million in the nine months ended March 31, 1998. The $2.8 million in other
property income (expense) recorded in the nine month period ended March 31, 1999
was due to the $1.0 million in gains from sales of real estate recorded during
the quarter ended March 31, 1999 (described above) and to the recognition of a
gain of $500,000, in the quarter ended September 30, 1998, resulting from the
full satisfaction of a junior subordinated participation loan secured by real
estate which had been fully reserved for in prior periods. In addition, $1.2
million related to sales in the New York City shopping center complex during the
first six months of the year. The company also recorded a gain in the amount of
$106,000 related to the recovery of certain sales proceeds related to a real
estate joint venture that had been fully written off in prior years.
For the nine months ended March 31, 1998, the net loss of $2.2 million in other
property income was primarily attributable to losses on the sale of real estate
in the amount of $1.1 million and write downs of
21
<PAGE>
a real estate joint venture asset in the amount of $1.1 million. The loss on the
sale of real estate, recorded in the quarter ended September 30, 1997, was
primarily attributable to the sale of one real estate property with a book value
of $3.3 million, which resulted in a net loss of $932,000.
Interest Income. For the three months ended March 31, 1999, total interest
income was $714,000, a decline of $361,000, or 33.6%, from $1.1 million for the
same quarter in the previous year. Loan interest declined $354,000, or 37.5%, in
the quarter ended March 31, 1999 as compared with the same quarter in the
previous year due to reduced average balances for loan assets resulting from
dispositions and the effects of normal amortization and repayment activity.
For the nine months ended March 31, 1999, total interest income, net of
provisions for possible credit losses, was $2.4 million, a decline of $980,000,
or 28.7%, from $3.4 million for the same nine month period in the previous year.
Loan interest declined $1.1 million, or 36.3%, in the nine month period ended
March 31, 1999 as compared with the same nine month period in the previous year
due to reduced average balances for loan assets resulting from dispositions and
the effects of normal amortization and repayment activity. Investment securities
interest declined $55,000 due to sales of securities. The decline in interest
income from loan and investment assets was partially offset by other interest
income, which increased $192,000 in the nine month period ended March 31, 1999
as compared with the nine month period ended March 31, 1998. The increase in
other interest income in the nine months ended March 31, 1999, as compared with
the same nine month period in the previous year was primarily due to increased
average cash balances in the quarter ended March 31, 1999, partially offset by
declines in the prevailing money market interest rates paid on those assets.
Contingent Participation Revenues. The Company realized contingent participation
revenues of $1.0 million and $3.4 million in the nine months ended March 31,
1999 and 1998, respectively. The Company may realize contingent participation
income when a loan secured by real estate's underlying collateral property
achieves a level of predetermined economic performance sufficient to activate
contingency clauses in the loan agreement that allow the Company to share, on a
limited basis, in the economic performance of the collateral property. The
Company recognizes such revenues in the period when the loan is repaid and the
terms of all additional contingent payments are finalized.
Contingent participation revenues of $1.0 million were recognized on one
subordinated participation loan and one junior subordinated participation loan
made to the same borrower with a combined principal balance of $1.3 million.
These loans were paid in full during the quarter ended September 30, 1998. A
portion of the subordinated participation loan and the junior participation loan
had been sold to Marine on June 28, 1996 and the junior subordinated
participation loan was fully reserved for on the Company's books following the
Branch Sale. The full repayment of the junior subordinated participation loan
resulted in the recognition of an additional gain in the amount of $500,000
during the quarter ended September 30, 1998. See "Other Property Income
(Expense)," above.
During the nine months ended March 31, 1998, the Company realized contingent
loan participation fees resulting primarily from the satisfaction of a
significant loan secured by real estate. The loan agreement between the Company
and the borrower provided for supplemental revenues to be paid to the Company
contingently based upon the operating results of the commercial real estate
asset serving as collateral for the loan.
At March 31, 1999, the Company had a remaining contingent interest in two junior
subordinated participation loans in which the Company retains an interest of
approximately $2.4 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.
Interest Expense. During the three months ended March 31, 1999, the Company
recorded interest expenses in the amount of $1.2 million, a decline of $311,000,
or 20.8%, as compared with interest expenses of $1.5 million in the same quarter
of the previous year. Interest expenses declined in the quarter ended March 31,
1999 as compared with the quarter ended March 31, 1998, primarily as a result of
lower effective rates paid by the Company. During the quarter ended March 31,
1999, the Company's effective rate paid was 5.9% compared to 8.2% for the
quarter ended March 31, 1998.
22
<PAGE>
During the nine months ended March 31, 1999, the Company recorded interest
expenses in the amount of $3.6 million, a decline of $1.1 million, or 23.0%, as
compared with interest expenses of $4.7 million in the same nine month period of
the previous year. Interest expenses declined in the quarter ended March 31,
1999 as compared with the quarter ended March 31, 1998, primarily as a result of
declines in the average amount borrowed by the Company and lower effective rates
paid. During the nine months ended March 31, 1999, the Company borrowed an
average of $68.8 million, a decline of $5.5 million, or 7.4%, as compared with
average borrowings of $74.3 million during the nine months ended March 31, 1998.
The decline in the average amount of borrowed funds was attributable to the
repayment of outstanding obligations which occurred in fiscal 1998 primarily as
a result of asset dispositions. During the nine months ended March 31, 1999, the
Company's effective rate paid was 6.6% compared to 7.2% for the nine months
ended March 31, 1998.
Other Expenses. During the quarter ended March 31, 1999, the Company recorded
total other expenses in the amount of $1.1 million, a decline of $597,000, or
35.6%, as compared with other expenses of $1.7 million in the same quarter of
the previous year. Other expenses declined in the quarter ended March 31, 1999,
as compared with the quarter ended March 31, 1998, primarily as a result of
declines in salaries and employee benefits expenses of $268,000 and legal and
professional fees of $348,000.
Salaries and employee benefits expense declined in the quarter ended March 31,
1999, as compared with the same period in the previous year, as a result of the
continued reduction of staff employed by the Company. At March 31, 1999, the
Company employed one full time employee engaged in administrative duties.
During the nine months ended March 31, 1999, the Company recorded total other
expenses in the amount of $3.3 million, a decline of $1.6 million, or 33.1%, as
compared with other expenses of $5.0 million in the same nine month period of
the previous year. Other expenses declined in the quarter ended March 31, 1999,
as compared with the quarter ended March 31, 1998, primarily as a result of
declines in salaries and employee benefits expenses and legal and professional
fees of $590,000 and $918,000, respectively.
Salaries and employee benefits expense declined in the nine months ended March
31, 1999, as compared with the same period in the previous year, as a result of
the continued reduction of staff employed by the Company. At March 31, 1999, the
Company employed one full time employee engaged in administrative duties.
Legal and professional fees expense decreased $348,000, or 50.1%, to $347,000
during the three months ended March 31, 1999 from $695,000 during the same three
month period in the previous year, primarily as a result of the reduction of
professional fees incurred in connection with the Reorganization described in
Note 1. The Company recorded expenses of $232,000 in the quarter ended March 31,
1998 and $0 in the quarter ended March 31, 1999, for legal and professional fees
related to the Reorganization. In addition to this $232,000 reduction in accrued
professional fees related to the Reorganization, the Company incurred
approximately $116,000 more in other professional fees during the three months
ended March 31, 1998 than in the same quarter of the current year. The
additional fees incurred related to services such as actuarial evaluations and
tax preparation.
Legal and professional fees expense decreased $918,000, or 45.9%, to $1.1
million during the nine months ended March 31, 1999 from $2.0 million during the
same nine month period in the previous year, primarily as a result of the
reduction of professional fees incurred in connection with the Reorganization
described in Note 1. The Company recorded expenses of $916,000, in the nine
months ended March 31, 1998 and $0 in the nine months ended March 31, 1999, for
legal and professional fees associated with the Reorganization.
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 quarter ended March 31,
1999, the Company accrued $630,000 in fees payable to the Management Company, of
which $13,000 related to fees incurred for the successful disposition of assets.
During the quarter ended March 31, 1998, the Company accrued $792,000 in fees
payable to the Management Company, of which $156,000 related to fees incurred
for the successful disposition of assets.
During the nine months ended March 31, 1999, the Company accrued $2.0 million in
fees payable to the Management Company, of which $120,000 related to fees
incurred for the successful disposition of assets.
23
<PAGE>
During the nine months ended March 31, 1998, the Company accrued $2.3 million in
fees payable to the Management Company, of which $297,000 related to fees
incurred for the successful disposition of assets. At March 31, 1999 the Company
had accrued fees payable to the Management Company and its affiliate, Fintek,
Inc., aggregating approximately $732,000.
Other Income (Expense). The Company did not recognize any other income (expense)
in the three or nine months ended March 31, 1999, a decrease of $1.7 million as
compared with the same nine month period of the previous year. Other income
(expense) in the nine months ended March 31, 1998 was primarily due to the $1.8
million recorded gain on sale of the Company's largest preferred stock holding,
with a book value of approximately $5.0 million.
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.
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during prior periods, effectively eliminated federal
income tax liability for the three and nine month periods ended March 31, 1999
and 1998. 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.
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 three and nine months ended March 31, 1999, the Company recorded a net
provision for income taxes of $118,000 and $432,000, respectively. During the
three and nine months ended March 31, 1998, the Company recorded a net provision
for income taxes of $125,000 and $226,000, respectively. The increase in income
taxes recorded during the three and nine month periods ended March 31, 1999 as
compared with the same three and nine month periods of the previous year,
primarily reflects the effects of operations and asset dispositions on its
current state and local income tax liabilities at March 31, 1999 and 1998,
respectively.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for scheduled debt repayments, operating expenses (including current income
taxes payable) and for development costs related to certain real estate
projects.
At March 31, 1999, the Company had $52.7 million in borrowed funds, excluding
the Increasing Rate Junior Subordinated Notes due 2006. In connection with the
Branch Sale, the Company obtained financing with Marine (Initial Facilities)
totaling $89.8 million. At March 31, 1999, the remaining outstanding balance of
the Initial Facilities due to Marine was $50.6 million. Borrowed Funds related
to Asset Sale Transactions amounted to $2.1 million at March 31, 1999. 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.
Following the Marine repayments, described in more detail above, the Company has
requested that Marine reactivate the Marine Facility to provide the Company with
access to fundings to be secured by assets from new lending and real estate
transactions. The Company has requested that Marine provide availability up to
the initial amount of the Marine Facility of $100 million, or approximately $50
million in availability under
24
<PAGE>
the Marine Facility. Availability under the Marine Facility would be used, in
combination with the restricted and unrestricted cash of the Company to invest
in new lending and real estate activities, subject to the prior approval of
Marine.
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 March 31,
1999, the Company's liquidity ratio, as so defined, amounted to 7.7% which was
within the targeted 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. 130. As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income " ("SFAS-130"). SFAS-130 establishes new rules for the
reporting and display of comprehensive income and its components. However, the
adoption of this Statement has had no effect on the Company's net income or
stockholders' equity. SFAS-130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
SFAS No. 133. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999.
SFAS-133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates that, due
to the Company's limited use of derivative instruments, the adoption of SFAS-133
will not have a significant effect on the Company's results of operations or its
financial condition.
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 on borrowed funds. Over any
given term, however, interest rates do not necessarily move in the same
direction or in the same magnitude as changes in prices for goods and services.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems. The Year 2000 issue
is the result of computer programs being written using two digits rather than
four digits to define the applicable year. Any of the Company's computer
programs or hardware that have date-sensitive software or embedded computer chip
technology may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
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
25
<PAGE>
conversions are not completed in a timely manner, the Year 2000 issue is
unlikely to have a material impact on the operations, liquidity or capital
resources of the Company. In addition, the Company believes that the
implementation of modifications to components of the building systems, affecting
the operations of its properties held as investments in real estate, is unlikely
to have a material affect on the operations, liquidity or capital resources of
the Company.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase. The Company's plan to resolve the Year 2000
issue involves four phases: assessment, and where necessary, remediation,
testing and implementation.
To date, the Company has completed an assessment of all systems that could be
significantly affected by the Year 2000. The Company's completed assessment
indicated the need 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 has been, and is expected
to be, minimal.
In addition, the Company has completed the assessment of all systems related to
the operations of its properties held as investments in real estate. Such
assessments were performed to ensure that remediation of building equipment
(such as security systems and elevators) could be completed and tested prior to
the year 2000. The Company's completed assessment indicated the need to modify
or replace portions of its buildings' systems so that these systems will
function properly with respect to dates in the year 2000 and thereafter. All
necessary remediation is expected to be completed as an integral part of
regularly scheduled building maintenance and repair activities. As a result, the
cost of such remediation is expected to be immaterial to the operations,
liquidity or capital resources of the Company.
Nature and Level of Third Parties and their Exposure to the Year 2000 Issue. The
Company has queried its significant suppliers and subcontractors that provide
accounting or information processing services to the Company (external agents).
To date, the Company is not aware of any external agent with a Year 2000 issue
that would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of absolutely ensuring that
external agents will be Year 2000 ready. 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 and services currently provided by external agents 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, liquidity or capital
resources of the Company.
Contingency Plans. The Company has contingency plans for all critical
applications and systems. These contingency plans involve, among other planned
actions, the use of alternative manual procedures, the temporary use of
increased or alternative third party services and adjusting staffing strategies.
Risks Associated with Forward-Looking Statements
This Form 10-Q, 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 Securities and Exchange Commission ("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.
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
An action entitled Strome Global Income Fund et al. v. River Bank America et
al., Index No. 605226198, was commenced against the Registrant, its predecessors
and certain of its current and former directors in New York State Supreme Court,
New York County on October 27, 1998. Plaintiffs are holders of the Company's 15%
non-cumulative perpetual preferred stock, Series A, and were formerly holders of
River Bank America 15% non-cumulative perpetual preferred stock, Series A. The
complaint alleges various claims for breach of contract, fraudulent conveyance,
violations of Sections 604 and 605 of the New York Banking Law, breach of
fiduciary duty and the duty of disclosure and ultra vires acts based upon the
reorganization into the Registrant, and subsequent dissolution, of the
Registrant's predecessor, River Bank America, and an amendment made to River
Bank America's certificate of designations for the preferred stock in connection
with the reorganization. Among other things, plaintiffs claim that as a result
of the reorganization and dissolution they were entitled to receive a $25 per
share liquidation payment, as well as unpaid dividends, and were also entitled
to appraisal rights as dissenting shareholders. Plaintiffs seek judgment against
the defendants for the liquidation payment, other unspecified compensatory
damages, avoidance of the transfer of assets from River Bank America to the
Registrant, punitive damages and other relief. The Registrant believes that the
reorganization and dissolution of River Bank America was in the best interests
of all of the River Bank America stockholders and did not violate plaintiffs'
rights as preferred stockholders in any respect and intends to defend the
lawsuit vigorously.
Item 2. Changes in Securities
Subsequent to the expiration of the Exchange Offer, the Company accepted private
requests for the exchange of its Series A Preferred Stock from individuals under
terms identical to those of the Exchange Offer. As a result, 32,950 shares of
the Company's Series A Preferred Stock were exchanged during the quarter ended
March 31, 1999. As a result of the exchange, the Company's total Stockholder's
Equity was reduced by $824,000 and its liabilities increased the same amount
(composed of a net increase in Increasing Rate Junior Subordinated Notes due
2006 of $837,000, partially offset by a net decrease in other liabilities of
$13,000). Subsequent to March 31, 1999, an additional 14,200 shares of the
Company's Series A Preferred Stock will be accepted for exchange and reported in
the Consolidated Financial Statements of the Company during the quarter ending
June 30, 1999.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RB ASSET, INC.
(Registrant)
Date: May 17,1999 By: /s/ Nelson L. Stephenson
----------- -------------------------------
Nelson L. Stephenson
President and Chief Executive Officer (principal
executive and principal financial officer)
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial extracted from the
financial statements of RB Asset, Inc. for the 9 months
ended March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Mar-31-1999
<CASH> 26,558
<SECURITIES> 1,283
<RECEIVABLES> 78,311
<ALLOWANCES> 18,553
<INVENTORY> 0
<CURRENT-ASSETS> 29,841
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 175,797
<CURRENT-LIABILITIES> 0
<BONDS> 11,409
0
952
<COMMON> 7,100
<OTHER-SE> 88,706
<TOTAL-LIABILITY-AND-EQUITY> 175,797
<SALES> 0
<TOTAL-REVENUES> 17,485
<CGS> 0
<TOTAL-COSTS> 9,454
<OTHER-EXPENSES> 3,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,634
<INCOME-PRETAX> 1,070
<INCOME-TAX> 432
<INCOME-CONTINUING> 638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 638
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
