As filed with the Securities and Exchange Commission on February 12, 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 December 31, 1998
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 February
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 February 15, 1999 was
984,727.
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RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of December 31,
1998 (unaudited) and June 30, 1998................................ 3
Consolidated Statements of Operations for the three and six months
ended December 31, 1998 and 1997 (unaudited) ...................... 4
Consolidated Statements of Changes in Stockholders' Equity for the
six months ended December 31, 1998 and 1997........................ 5
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997......................................... 6
Notes to the Consolidated Financial Statements .................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations .......................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 30
Item 2. Changes in Securities .................................................. 30
Item 3. Defaults Upon Senior Securities ........................................ 30
Item 4. Submissions of Matters to a Vote of Securities Holders ................. 30
Item 5. Other Information ...................................................... 30
Item 6. Exhibits and Reports ................................................... 31
SIGNATURES..................................................................................... 31
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and June 30, 1998
(Dollars in Thousands)
Assets
(Unaudited)
December 31, June 30,
1998 1998
------ ----
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Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $1,742 and $583, respectively $ 78,817 $ 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 55,623 59,006
Loans sold with recourse, net 13,789 15,781
Allowance for possible credit losses (16,337) (17,697)
---------------- -----------------
Total loans receivable, net 53,075 57,090
Investments in joint ventures 1,536 1,536
---------------- -----------------
Total real estate assets 135,428 145,111
Cash, due from banks and cash equivalents 14,350 12,532
Cash, due from banks - restricted 28,516 19,555
Investment securities available for sale 1,541 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 4,744 4,248
---------------- -----------------
Total Assets $ 192,561 $ 190,910
================ =================
Liabilities and Stockholders' Equity
Liabilities:
Increasing Rate Junior Subordinated Notes due 2006,
net of unamortized discount $ 10,555 $ -
Other borrowed funds 68,760 68,760
Other liabilities 15,369 14,967
---------------- -----------------
Total Liabilities 94,684 83,727
---------------- -----------------
Stockholders' equity:
15% non-cumulative preferred stock, Series A par value $1, liquidation value $25
(1,400,000 shares authorized, 984,727 issued and outstanding at December 31,
1998, 1,400,000
issued and outstanding at June 30, 1998) 985 1,400
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at December 31,
1998 and June 30, 1998) 7,100 7,100
Additional paid in capital 101,419 111,170
Accumulated deficit (10,870) (11,561)
Accumulated comprehensive income (757) (926)
---------------- -----------------
Total Stockholders' Equity 97,877 107,183
---------------- -----------------
Total Liabilities and Stockholders' Equity $ 192,561 $ 190,910
================ ================
See notes to Consolidated Financial Statements
</TABLE>
3
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended
December 31, 1998 and 1997
(Dollars in thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ----------- -----------
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REVENUE:
Rental revenue and operations:
Rental income and other property revenue $ 3,743 $ 3,336 $ 7,513 $ 6,609
Property operating and maintenance expense (2,625) (2,711) (5,189) (4,975)
Depreciation - real estate held for investment (608) (54) (1,185) (104)
------------ ------------ ----------- -----------
Net rental operations 510 571 1,139 1,530
Other property income (expense):
Net gain/(loss) on sale of real estate 1,243 (89) 1,731 (1,003)
Recovery (writedown) of investments in real estate 106 - 106 (350)
------------ ------------ ----------- -----------
Total other property income/(expense) 1,349 (89) 1,837 (1,353)
Other income:
Interest income:
Loans receivable 733 1,369 1,373 2,136
Investment securities - - - 55
Money market investments and other 126 95 353 154
------------ ------------ ----------- -----------
Total interest income 859 1,464 1,726 2,345
Realization of contingent participation revenues - - 1,000 769
------------ ------------ ----------- -----------
Total other income 859 1,464 2,726 3,114
------------ ------------ ----------- -----------
Total revenues 2,718 1,946 5,702 3,291
------------ ------------ ----------- -----------
EXPENSES:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 2 - 2 -
Other borrowed funds 987 1,535 2,413 3,172
Other 29 31 34 52
----------- ------------ ----------- -----------
Total interest expense 1,018 1,566 2,449 3,224
Other expenses:
Salaries and employee benefits 58 225 108 430
Legal and professional fees 569 596 771 1,341
Management fees 613 659 1,230 1,330
Other 73 95 138 196
------------ ------------ ----------- -----------
Total other expenses 1,313 1,575 2,247 3,297
------------ ------------ ----------- -----------
Total expenses 2,331 3,141 4,696 6,521
------------ ------------ ----------- -----------
Income (loss) before other income (expense) and before ------------ ------------ ----------- -----------
provision for income taxes 387 (1,195) 1,006 (3,230)
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 387 (1,195) 1,006 (1,533)
Provision for income taxes 145 50 314 101
------------ ------------ ----------- -----------
Net income /(loss) 242 (1,245) 692 (1,634)
Dividends declared on preferred stock - - - -
------------ ------------ ----------- -----------
Net income /(loss) applicable to common stock $ 242 $ (1,245) $ 692 $ (1,634)
============ ============ =========== ===========
Basic and diluted income /(loss) per common share $ 0.03 $ (0.18) $ 0.10 $ (0.23)
============ ============ =========== ===========
See Notes to Consolidated Financial Statements
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4
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Six months
ended December 31, 1998 and 1997
(dollars in Thousands)
(Unaudited)
Series A
Non-
cumulative
Perpetual Additional Retained Accumulated Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
------------ ---------- ------------- ------------- ------------------ --------------
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Balances at June 30, 1997 $ 1,400 $ 7,100 $ 111,170 $ (10,055) $ (1,105) $ 108,510
Net loss for the six months ended
December 31, 1997 - - - (1,634) - (1,634)
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - 179 179
------------ ---------- ------------- ------------- ------------------ --------------
Balances at December 31, 1997 $ 1,400 $ 7,100 $ 111,170 $ (11,689) $ (926) $ 107,055
============ ========== ============= ============= ================== ==============
Balances at June 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,561) $ (926) $ 107,183
Net income for the six months
ended December 31, 1998 - - - 692 - 692
Preferred stock dividends payable - - - - - -
Reduction in Stockholders' Equity
resulting from the Preferred Stock
Exchange Offer (Note 2) (415) - (9,751) (10,166)
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - 169 169
------------ ---------- ------------- ------------- ------------------ --------------
Balances at December 31, 1998 $ 985 $ 7,100 $ 101,419 $ (10,870) $ (757) $ 97,877
============ ========== ============= ============= ================== ==============
</TABLE>
See notes to Consolidated Financial Statements
5
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1998 and 1997
(dollars in thousands)
(Unaudited)
Six months ended
December 31,
---------------------------------
1998 1997
---------------- ---------------
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Operating Activities:
Cash Flows Provided by (Used in) Operating Activities:
Net (loss)/income $ 692 $ (1,634)
Adjustments to reconcile net (loss)/income to cash
used in operating activities:
Net (gain) loss on sale of real estate assets (1,739) 1,003
(Recovery) writedowns of real estate assets (106) 350
Depreciation and amortization 1,186 104
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 79 (486)
Net (decrease)/increase in accrued interest payable (100) (642)
Net (decrease)/increase in accrued income taxes 407 (185)
Net (decrease)/increase in accrued expenses
and other liabilities 484 (2,836)
Net (increase)/decrease in prepaid expenses and other assets (575) 597
Cash effect of increases/(decreases) in allowance for
possible credit losses 331 774
Other 39 (160)
---------------- ---------------
Net cash (used in)/provided by operating activities 698 (4,812)
---------------- ---------------
Investing Activities:
Cash Flows Provided by (Used in) Investing Activities:
Proceeds from sales and maturities of investment
securities, available for sale - 6,871
Net repayment/(origination) of loans secured by real estate, net 3,383 1,404
Net repayment/(reacquisition) of commercial and consumer loans 61 (2,002)
Net decrease/(increase) in loans sold with recourse 842 4,794
Proceeds from sales of real estate held 6,105 8,458
Additional fundings on real estate held (309) (4,104)
---------------- ---------------
Net cash provided by investing activities 10,082 15,421
---------------- ---------------
(Continued on next page)
</TABLE>
See notes to Consolidated Financial Statements
6
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1998 and 1997
(dollars in thousands)
(Unaudited)
(Continued from previous page)
Six months ended
December 31,
--------------------------------
1998 1997
---------------- ---------------
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Financing Activities:
Cash Flows Provided by (used in) Financing Activities:
Increase in restricted cash (8,962) (196)
Proceeds from borrowed funds - 551
Repayment of borrowed funds - (6,936)
Increase/decrease in borrowed funds secured by loans sold with
recourse, net of construction advances - (6,493)
---------------- ---------------
Net cash used in financing activities (8,962) (13,074)
Net increase/(decrease) in cash and money market investments 1,818 (2,465)
Beginning cash 12,532 8,940
---------------- ---------------
Ending cash $ 14,350 $ 6,475
================ ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 2,546 $ 3,990
Federal, state and local taxes 395 268
</TABLE>
See notes to Consolidated Financial Statements
7
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RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(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
December 31, 1998. Unless the context otherwise requires, references to the
business, assets and liabilities of the Company prior to May 22, 1998 include
the business, assets and liabilities of the Predecessor Bank.
The Predecessor Bank was founded in 1848. In 1925, the Predecessor Bank adopted
the name "East River Savings Bank" which it continued to use in its retail
business through June 28, 1996. The Predecessor Bank converted to a stock-form
savings bank through a plan of conversion in 1985. Effective October 1, 1988,
East River Savings Bank formally changed its corporate name to "River Bank
America." On June 28, 1996, the Predecessor Bank sold its remaining eleven
branches ("the Branch Sale") to Marine Midland Bank ("Marine"), inclusive of the
name East River Savings Bank. Following consummation of the Branch Sale, all
retail banking operations of the Predecessor Bank ceased.
On May 22, 1998, River Bank completed its Reorganization into a Delaware
corporation named RB Asset, Inc., under a plan that was approved at the
Predecessor Bank's special meeting of stockholders 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. and the capital stock of River Asset outstanding and held by River
Bank prior to the merger was canceled. 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
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RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(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 $60.6 million at December 31, 1998, with an additional $28.3 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
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RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(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 stockholders 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
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RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(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
and 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, subsequent to June 28, 1996, the Predecessor
Bank has not originated a material amount of loans.
The Predecessor Bank has previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of
River Bank Series A Preferred Stock would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a Series A Preferred Stock
dividend for the quarter ending June 30, 1996, payment of which was subject to
the receipt of required approvals from the FDIC and the NYSBD (the Predecessor
Bank's regulators at the time), as well as Marine (the Predecessor Bank's and
the Company's principal lender). Primarily as a result of the above, neither the
Company's or the Predecessor Bank's Board of Directors has taken any action
regarding a quarterly dividend on the Company's Series A Preferred Stock for any
of the quarterly periods ended from September 30, 1996 through December 31,
1998. Although the Company is no longer subject to the jurisdiction of either
the FDIC or the NYSBD, declaration or payment of future dividends on the
Company's Series A Preferred Stock will continue to be subject to the approval
of Marine for so long as the Facility remains outstanding. The Company has
received notice from Marine that the approval necessary to declare or pay
dividends on the Company's Series A Preferred Stock will not be provided at this
time. There can be no assurance that the Board of Directors of the Company will
deem it appropriate to pay dividends on the Series A Preferred Stock, even if
permitted to do so by Marine.
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.
Description of the Subordinated Notes. The following narrative describes the
Subordinated Notes, issued by the Company on December 30, 1998:
Issue - Increasing Rate Junior Subordinated Notes due 2006 issued under an
indenture (the "Indenture"), as amended on February 1, 1999, between the Company
and La Salle National Bank, as trustee.
11
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
Principal Amount - $10,771,000, plus such additional principal amount of
Subordinated Notes as may be issued in payment of interest on the Subordinated
Notes from the date of their initial issuance until the semi-annual interest
period beginning January 16, 2002.
Interest Payment Dates - January 15 and July 15 of each year, commencing July
15, 1999.
Maturity - January 15, 2006.
Interest Rate - Interest will accrue from the issuance date (December 30, 1998)
at the initial rate of 8% per annum (the "Initial Rate") until the interest
period beginning January 16, 2002 (the "Interest Increase Date") and will be
payable, at the option of the Company, either in cash or by issuance of
additional Subordinated Notes. Thereafter, interest will be payable
semi-annually in cash at an annual rate increasing from the Initial rate by
0.50% per annum each semi-annual interest payment period commencing with the
interest payment period beginning on the Interest Increase Date up to a maximum
of 12% per annum. The Company's ability to pay in cash any installment of
interest on, or principal or premium (if any) of, the Subordinated Notes is
currently subject to the approval of Marine under the terms of the Company's
Credit Agreement, dated June 28, 1996 (the "Credit Agreement"). However,
borrowings under the Credit Agreement mature on June 30, 1999, subject to the
right of the Company to extend for two successive one-year periods to June 30,
2001, which date is prior to the dates on which cash payments of interest and
principal are required to be made on the Subordinated Notes. There can be no
assurance that Marine will provide any such approval that may be requested by
the Company in the future for payment of cash of any installment 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.
Ranking - The Subordinated Notes constitute unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. At December 31, 1998, the Company had
approximately $68.8 million of Senior Indebtedness outstanding. The Indenture
will not limit the amount of additional indebtedness which the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create incur, assume or
guarantee.
Mandatory Redemption - The Company will be required to redeem 1/14th (7.14285%)
of the aggregate principal amount of the Subordinated Notes issued by the
Company (including any issued in payment of interest) semi-annually commencing
on July 15, 2002 and on each January 15, and July 15 thereafter to and including
July 15, 2005 at a price of 100% of the principal amount plus accrued and unpaid
interest plus, for redemptions effected after January 15, 2003, a premium as
noted below. The balance of the outstanding Subordinated Notes will mature on
January 15, 2006. All mandatory redemptions will be made on a pro rata basis.
Optional Redemption - The Subordinated Notes will be redeemable at the option of
the Company at any time in whole or in part, by lot or pro rata as determined by
the Company's Board of Directors (the "Board"), at the redemption price of 100%
of the principal amount plus accrued and unpaid interest plus, for redemptions
effected after January 15, 2003, a premium as noted below.
Premium - The redemption price for each redemption (mandatory or optional)
effected after January 15, 2003 and the payment at maturity will include a
premium based on the amount redeemed or paid. Such premium will consist of (i)
0.5% of the principal amount redeemed during the period from January 16, 2003
through and including July 15, 2003, (ii) 0.75% of the principal amount redeemed
during the period from July 16, 2003 through and including January 15, 2004 and
(iii) 1% of the principal amount redeemed during the period from January 16,
2004 through and including July 15, 2004, which premium will increase by 1% for
redemptions during each subsequent six month period beginning each July 16 and
January 16 thereafter until it reaches 4% of the principal amount for the period
from July 16, 2005 to January 15, 2006. Payments of a premium at maturity will
also be at the rate of 4% of the principal amount paid.
12
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
The following chart illustrates the amount of premium payable on each $1,000
principal amount of Subordinated Notes during the periods indicated:
If redeemed during the six month period beginning Premium
January 16, 2003 .................................... $ 5.00
July 16, 2003 ....................................... $ 7.50
January 16, 2004 .................................... $ 10.00
July 16, 2004 ....................................... $ 20.00
January 16, 2005 .................................... $ 30.00
July 16, 2005 ....................................... $ 40.00
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 have
been determined by them to be 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 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 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. Such proposal was not acceptable
to such holders and, 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 then 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
13
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
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 to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
plaintiffs responded to the motion and the motion is scheduled to be addressed
by the court on February 23, 1999.
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 actions,
causes of action, claims, judgments, contracts, agreements or understandings
whether individual or derivative in nature, which such holders had with 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 $0.94 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 and issue the Subordinated Notes. 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
14
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
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. No members of the Organized Group tendered any shares of the Series A
Preferred Stock in the Exchange Offer.
The Subordinated Notes carry an interest rate of 8%, compounded semi-annually,
for the first 36 months following December 30, 1998, the date of their issuance.
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
date of issuance of the Subordinated Notes to the end of the quarter. As a
result of the tender of 415,273 shares of the Company's Series A Preferred
Stock, assuming payment of interest on the Subordinated Notes by the issuance of
additional Subordinated Notes, the Company will recognize additional interest
expense of approximately $490,000 (approximately one-half year from December 30,
1998 to June 30, 1999), $968,000 and $1.05 million for the fiscal years ended
June 30, 1999, 2000 and 2001, respectively.
The following table sets forth the changes to the Company's liabilities and
stockholders' equity resulting from the exchange of 415,273 shares of Preferred
Stock and the associated accrued preferred dividend (declared at June 30, 1996
but not paid) for approximately $10.8 million in Subordinated Notes (dollars in
thousands):
<TABLE>
<CAPTION>
Liabilities and Liabilities and
Stockholders' Stockholders'
Equity Prior to Effect of Equity After
Preferred Preferred Preferred
Stock Stock Stock
Exchange Exchange Exchange
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Liabilities:
Increasing Rate Junior Subordinated Notes due
2006 (1) $ - $ 10,555 $ 10,555
Other borrowed funds 68,760 - 68,760
Other liabilities (2) 15,758 (389,318) 15,369
-------------------- --------------------- ---------------------
Total liabilities 84,518 10,166 94,684
-------------------- --------------------- ---------------------
Stockholders' Equity:
15% non-cumulative preferred stock, Series A par
value $1, liquidation value $25 $ 1,400 $ (415) $ 985
Common stock, par value $1 7,100 - 7,100
Additional paid-in capital 111,170 (9,751) 101,419
Accumulated deficit (10,870) - (10,870)
Accumulated comprehensive income (757) - (757)
-------------------- --------------------- ---------------------
Total Stockholders' Equity 108,043 (10,166) 97,877
-------------------- --------------------- ---------------------
Total Liabilities and Stockholders' Equity: $ 192,561 $ - $ 192,561
==================== ===================== =====================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
(1) - The following table sets forth a reconciliation of the principal amount
recognized under the line item caption Increasing Rate Junior Subordinated Notes
due 2006 at December 31, 1998:
<S> <C>
Principal transferred from Stockholders' Equity and due to holders of the
Subordinated Notes at December 31, 1998 $ 10,382
Add: Preferred stock dividend transferred from other liabilities (2) 389
-----------
Total amount transferred to Subordinated Notes and due to holders of the
Subordinated Notes at December 31, 1998 10,771
Less: Discount adjustment necessary to provide a level yield over the
estimated term of the debt (3) (216)
-----------
Net amount transferred to Subordinated Notes at December 31, 1998 $ 10,555
===========
</TABLE>
(2) - Amount deducted from other liabilities represents approximately 29.7% of
the $1,312,500 preferred stock dividend declared but not paid at June 30, 1996.
This amount was the portion of the total preferred stock dividend allocable to
the exchanged shares, which were added to the principal amount of the
Subordinated Notes outstanding at December 31, 1998 in accordance with the terms
of the Exchange Offer.
(3) - The repayment structure of the Subordinated Notes, described above,
includes both increasing rates at specified semi-annual periods and the
potential for increasing outstanding principal balances each semi-annual period
as interest payments are, at the option of the Company, made in the form of
additional Subordinated Notes. Under generally accepted accounting principals
("GAAP"), the Company's periodic interest cost must be determined using the
interest method based on the estimated outstanding term of the debt. Based upon
this estimation of the debt term and an analysis of interest rates paid on
similarly structured marketable debt securities, the Company has discounted the
Subordinated Notes approximately $216,000 at December 31, 1998. The discount
rate applied to determine this discount was 9.0%.
3. Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of the Company
include all adjustments which management believes necessary for a fair
presentation of the Company's financial condition at December 31, 1998, the
results of its operations for the three and six months ended December 31, 1998
and 1997 and the statements of changes in stockholders' equity and cash flows
for the six months ended December 31, 1998 and 1997. Adjustments are of a normal
recurring nature. These unaudited consolidated financial statements have been
prepared in conformity with the accounting principals 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 December 31, 1998, the results of operations for the three and six months
ended December 31, 1998 and 1997, and changes in stockholders' equity and cash
flows for the six months ended December 31, 1998 and 1997.
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
16
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
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 December 31, 1998, the balance of stockholders' equity included a
$757,000 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
December 31, 1998 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 $145,000 and $314,000, during the
three and six months ending December 31, 1998, respectively.
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 December 31, 1998, the Company had deferred tax assets that were primarily
attributable to federal income tax net operating loss carryforwards ("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
17
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
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
requested by the Company, intended to terminate the Company's status as an
insured state nonmember Bank on December 31, 1997.
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmember bank by the FDIC and the reorganization of the Predecessor Bank into a
Delaware corporation, the Company is no longer subject to the regulatory capital
requirements of either the FDIC or the Banking Department.
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 six months ended December 31, 1998, total comprehensive
income was $430 and $768, respectively. During the three and six months ended
December 31, 1997, total comprehensive income (loss) was $(1,066) and $(1,455),
respectively.
18
<PAGE>
<TABLE>
<CAPTION>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
The following table describes the components of comprehensive income and
accumulated comprehensive income for the dates indicated:
Components of Comprehensive Income (Unaudited):
Three months ended December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
Net income $ 242 $ (1,245)
Unrealized gains (losses) on securities 281 179
------------------ -----------------
Comprehensive income $ 523 $ (1,066)
================== =================
Six months ended December 31,
1998 1997
------------------ -----------------
Net income $ 692 $ (1,634)
Unrealized gains (losses) on securities 169 179
------------------ -----------------
Comprehensive income $ 861 $ (1,455)
================== =================
Components of Accumulated Comprehensive Income (Unaudited):
December 31, June 30,
1998 1998
------------------ -----------------
Unrealized losses on securities $ (757) $ (926)
------------------ -----------------
Accumulated comprehensive income $ (757) $ (926)
================== =================
</TABLE>
7. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three and six months ended December 31, 1998 and
1997, respectively. The Company had no securities outstanding that were
convertible to common stock at December 31, 1998 or 1997.
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 six month periods ended December 31, 1998 and 1997, or for the
fiscal years ended June 30, 1998, 1997 and 1996.
8. Legal Proceedings
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
then 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 (the "Allegations") alleged, 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
19
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(dollars in thousands)
(Unaudited)
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 to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
plaintiffs responded to the motion and the motion is scheduled to be addressed
by the court on February 23, 1999.
9. Subsequent Events
As disclosed in the Company's Annual Report on Form 10-K for the year ended June
30, 1998, dated September 21, 1998, the Company had been engaged in discussions
with the FDIC related to deposit insurance premiums that the FDIC had asserted
were due from the Company following the Branch Sale.
The Company transferred substantially all its deposits to Marine in connection
with the Branch Sale on June 28, 1996, and had not paid any FDIC deposit
insurance assessments for any assessment period following the Branch Sale. The
FDIC had asserted that the Company is liable for unpaid deposit insurance
assessments, plus accrued interest attributable to the Transferred Deposits and
certain other retained deposit liabilities for the semi-annual assessment period
that began on July 30, 1996 and ended on December 31, 1996 (the "Assessment
Period"). During the Assessment Period, the Company maintained only a minimal
amount of deposits. Therefore, the Company pursued administrative discussions
with the FDIC to have the FDIC withdraw its assertion that the Company is liable
for the deposit insurance assessment on the Transferred Deposits. If the Company
were to be unsuccessful in changing the FDIC's position with respect to this
matter, it would have been required to pay the contested assessment, together
with applicable interest.
On February 4, 1999, the Company and the FDIC reached a final settlement
agreement concerning this issue. Under this final settlement agreement the
Company will be required to pay the FDIC $1 thousand in administrative cost
reimbursements. As a result of this agreement, the matter has been closed and
each party has waived the right to further assertions related to this matter.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition:
At December 31, 1998 the consolidated assets of the Company totaled $192.6
million, an increase of $1.7 million, or 0.9% from June 30, 1998.
Real estate held for investment, net of accumulated depreciation, declined $4.0
million, or 4.9%, from $82.8 million at June 30, 1998 to $78.8 million at
December 31, 1998. The decline in real estate held for investment, net of
accumulated depreciation, at December 31, 1998 was attributable to gross sales
of $2.7 million (for which gains of $658,000 were recognized, thereby reducing
the recorded value of the asset by $2.0 million), depreciation charges of $1.2
million and transfers of $858,000 to real estate held for disposal, partially
offset by capitalized additions of $116,000. Of the $2.7 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 in the quarter ended December 31, 1998, and $496,000 related to the
sale of a condominium unit at one of the Company's multi-family housing projects
for which a gain in the amount of $354,000 was recognized in the quarter ended
December 31, 1998.
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
December 31, 1998. 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 for
which the Company recognized a gain on that sale in the amount of $523,000
(thereby reducing the recorded value of the asset by $1.1 million). During the
six months ended December 31, 1998, 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 $1.7 million during the six months ended December 31,
1998. 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 $858,000 and additional
capitalized fundings of $324,000. Apartment units transferred into real estate
held for disposal during the six months ended December 31, 1998 are expected to
be sold within the next twelve months.
Total loans receivable secured by real estate, net of the related allowance for
possible credit losses declined $4.0 million, or 7.0%, from $57.1 million at
June 30, 1998 to $53.1 million at December 31, 1998. The $4.0 million decline in
real estate loans, net, during the six months ended December 31, 1998, was
attributable to a decline in loans receivable, secured by real estate of $3.4
million and a decline in loans sold with recourse, net of $2.0 million,
partially offset by a decline in the related allowance for possible credit
losses of $1.4 million.
The Company's loans secured by real estate decreased by $3.4 million, or 5.7%,
from $59.0 million at June 30, 1998 to $55.6 million at December 31, 1998.
During the six months ended December 31, 1998, the Company received payments in
satisfaction of $3.5 million in loans secured by real estate, recognizing a net
gain of $500,000. This decrease in loans secured by real estate, net was
partially offset by $138,000 in loan fundings advanced during the six month
period.
The Company's loans sold with recourse, net decreased by $2.0 million, or 12.6%,
from $15.8 million, at June 30, 1998 to $13.8 million at December 31, 1998.
During the six months ended December 31, 1998, the Company sold $1.8 million in
loans sold with recourse, net, which was partially offset by additional asset
fundings of $855,000. 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 $1.4 million, or 7.7%, from $17.7 million, at June 30,
1998 to $16.3 million at December 31, 1998. The decrease resulted from
chargeoffs of $1.2 million net of recoveries of $330,000 for asset disposition
transactions previously provided for at June 30, 1998. In addition, the
allowance for possible credit losses was reduced during the six months ended
December 31, 1998 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 transaction, the allowance for possible
credit losses was reduced by $500,000 and a gain of $500,000 was
21
<PAGE>
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 December 31, 1998, the
allowance for possible credit losses was 29.4% of real estate loans as compared
to 30.0% at June 30, 1998.
Cash and due from banks increased by $1.8 million, or 14.5%, from $12.5 million
at June 30, 1998 to $14.3 million at December 31, 1998. 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 six months ended
December 31, 1998.
At December 31, 1998, Marine had restricted a total of approximately $28.5
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 "Liquidity and Capital Resources," below.
Commercial and consumer loans, net of the related allowance for loan losses,
totaled $8.0 million at December 31, 1998, 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.
Other liabilities totaled $15.4 million at December 31, 1998, an increase of
$402,000, or 2.7%, from the June 30, 1998 balance of $15.0 million. The net
increase in other liabilities during the six months ended December 31, 1998, as
compared to the same period in the previous year, was related to the relative
timing of payments for certain accrued liabilities during the current and
previous fiscal years.
During the six months ended December 31, 1998, total stockholders' equity
decreased by $9.3 million, or 8.7% to $97.9 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 415,273 shares of its 15% non-cumulative preferred stock,
Series A, for $10.8 million (discounted to $10.6 million) in newly-issued
Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated Notes,"
see Note 2 to the Consolidated Financial Statements). Of the $10.8 million in
Subordinated Notes issued at December 31, 1998, $10.4 million (discounted to
$10.2 million) was transferred from Stockholders' Equity. This $10.2 million net
decline in Stockholders' Equity was partially offset by the net income recorded
for the six months ended December 31, 1998 in the amount of $692,000, and by an
increase in the securities valuation account (allowance for unrealized losses on
marketable securities) of $169,000. The following table summarizes the
calculation of the Company's book value per share at December 31, 1998 and June
30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---------------------- ----------------------
<S> <C> <C>
Total stockholders' equity $ 97,877 $ 107,183
Less: liquidation value of preferred stock
($25 per share, 984,727 shares outstanding at
December 31, 1998 and 1,400,000 outstanding
at June 30, 1998 24,618 35,000
---------------------- ----------------------
Net stockholders' equity $ 73,259 $ 72,183
====================== ======================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
Book value per share $ 10.32 $ 10.17
====================== ======================
</TABLE>
22
<PAGE>
Results of Operations:
General. The Company reported net income attributable to common shares of
$242,000, or $0.03 per share and $692,000, or $0.10 per share, for the three and
six months ended December 31, 1998, respectively. For the same periods in 1997,
the Company reported net losses of $1.2 million, or $(0.18) per share and $1.6
million, or $(0.23) per share, respectively.
The primary reason for the increase in the Company's net operating results for
the quarter and six months ended December 31, 1998, as compared to the same
three and six month periods in the previous year, was the recording of other
property income of $1.3 million and $1.8 million, respectively, in the three and
six months ended December 31, 1998, an increase of $1.4 million and $3.2
million, respectively, as compared with a net loss from other property
operations of $89,000 and $1.4 million, respectively, in the same three and six
month periods of the previous year. In addition, contingent participation
revenues increased $231,000 to $1.0 million in the six months ended December 31,
1998, as compared to $769,000 in the same six month period of the previous year.
Interest expense also declined $548,000 and $775,000, in the three and six
months ended December 31, 1998, respectively, as compared with the same periods
in the previous year. Interest expense declined from $1.6 million and $3.2
million in the three and six month periods ended December 31, 1997,
respectively, to $1.0 million and $2.4 million during the same three and six
month periods of the current year.
Other expenses also declined $262,000 and $1.1 million in the three and six
months ended December 31, 1998, respectively, as compared with the same periods
in the previous year. Other expenses declined from $1.6 million and $3.3 million
in the three and six month periods ended December 31, 1997, respectively, to
$1.3 million and $2.2 million during the same three and six 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 three and six months ended December
31, 1998, as compared to the same three and six month periods of the previous
year, were reductions in net rental operations and net gains on sales of
investment securities of $61,000 and $2.1 million, respectively. Net rental
operations declined from $571,000 and $1.5 million in the three and six month
periods ended December 31, 1997, respectively, to $510,000 and $1.1 million in
the same six month period of the current year, respectively. In addition, net
gains on sales of investment securities declined from $1.7 million in the six
month period ended December 31, 1997 to $0 during the same six month period in
1998
Net Rental Operations. For the three months ended December 31, 1998, net rental
operations resulted in income of $510,000, a decrease of $61,000, or 10.7%, from
$571,000 for the same three month period in the previous year. The primary
reason for the decline in net rental operations income was the recognition of
$554,000 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 $554,000 increase in depreciation charges recorded in the quarter
ended December 31, 1998, as compared with the same quarter in the previous year,
income from rental operations increased $493,000, or 86.3%, in the quarter ended
December 31, 1998, as compared to the quarter ended December 31, 1997. This
increase was due to various, individually immaterial operating factors affecting
aggregate rental income and expenses within the Company's rental properties.
For the three months ended December 31, 1998, depreciation charges associated
with real estate held for investment were $608,000, an increase of $554,000, or
1,025.9%, as compared with depreciation charges associated with real estate held
for investment in the quarter ended December 31, 1997 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 $608,000 in
depreciation charges recorded in the three months ended December 31, 1998,
approximately $554,000 represents depreciation of the capitalized costs of the
real estate held for investment (less land value) for five of the Company's six
real estate assets from the period October 1, 1998, to December 31, 1998. The
remaining $54,000 in depreciation charges recorded during the quarter ended
December 31, 1998 were for the sixth property, consistent with depreciation
charges taken in prior periods for that property. On May 22, 1998, as a
consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation
23
<PAGE>
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 six months ended December 31, 1998, net rental operations resulted in
income of $1.1 million, a decrease of $391,000, or 25.6%, from $1.5 million for
the same six month period in the previous year. The primary reason for the
decline in net rental operations income was the recognition of $1.1 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
$1.1 million increase in depreciation charges recorded in the quarter ended
December 31, 1998, as compared with the same quarter in the previous year,
income from rental operations increased $690,000, or 45.1%, in the quarter ended
December 31, 1998 as compared to the quarter ended December 31, 1997. This
increase was due to various, individually immaterial operating factors affecting
aggregate rental income and expenses within the Company's rental properties.
For the six months ended December 31, 1998, depreciation charges associated with
real estate held for investment were $1.2 million, an increase of $1.1 million,
or 1,039.4%, as compared with depreciation charges associated with real estate
held for investment in the six months ended December 31, 1997 of $104,000. 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 $1.2 million
in depreciation charges recorded in the six months ended December 31, 1998,
approximately $1.1 million represents depreciation of the capitalized costs of
the real estate held for investment (less land value) for five of the Company's
six real estate assets from the period July 1, 1998, to December 31, 1998. The
remaining $104,000 in depreciation charges recorded during the quarter ended
December 31, 1998 were for the sixth property, consistent with depreciation
charges taken in prior periods for that property. On May 22, 1998, as a
consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators.
Other Property Income (Expense). Total other property income (expense) was $1.3
million for the quarter ended December 31, 1998, an increase of $1.4 million, as
compared with a net loss of $89,000 in the quarter ended December 31, 1997. For
the quarter ended December 31, 1998, the $1.2 million income was primarily
attributable to the sale of $2.7 million of real estate held for investment, of
which $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, $496,000 related to
the sale of a condominium unit at one of the Company's multi-family housing
projects for which a gain in the amount of $354,000 was recognized, and the sale
of multi-car parking garage adjacent to the Company's office complex real estate
investment in Atlanta, GA for approximately $1.7 million for which a gain of
$523,000 was recognized. In addition, during the three months ended December 31,
1998, the Company 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.
Total other property income (expense) was $1.8 million for the six months ended
December 31, 1998, an increase of $3.2 million, as compared with a net loss of
$1.4 million in the six months ended December 31, 1997. The $1.8 million in
other property income (expense) recorded in the six month period ended December
31, 1998 was due to the $1.2 million in gains from sales of real estate recorded
during the quarter ended December 31, 1998 (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, during the three months ended December 31, 1998, the Company 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 six months ended December 31, 1997, the net loss of $1.4 million in
other property income was primarily attributable to losses on the sale of real
estate in the amount of $914,000 and a write down of a real estate joint venture
asset in the amount of $350,000. 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 December 31, 1998, total interest
income, net of provisions for possible credit losses, was $859,000, a decline of
$605,000, or 41.3%, from $1.5 million for the same quarter in the previous year.
Loan interest declined $636,000, or 46.5%, in the quarter ended December 31,
1998 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. This decline in
24
<PAGE>
interest income from loan assets was partially offset by other interest income,
which increased $31,000 in the quarter ended December 31, 1998 as compared with
the quarter ended December 31, 1997. The increase in other interest income in
the quarter ended December 31, 1998, as compared with the same quarter in the
previous year was primarily due to increased average cash balances in the
quarter ended December 31, 1998, partially offset by declines in the prevailing
money market interest rates earned on those assets.
For the six months ended December 31, 1998, total interest income, net of
provisions for possible credit losses, was $1.7 million, a decline of $619,000,
or 26.4%, from $2.3 million for the same six month period in the previous year.
Loan interest declined $763,000, or 35.7%, in the six month period ended
December 31, 1998 as compared with the same six 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. This decline in
interest income from loan assets was partially offset by other interest income,
which increased $199,000 in the six month period ended December 31, 1998 as
compared with the six month period ended December 31, 1997. The increase in
other interest income in the six months ended December 31, 1998, as compared
with the same six month period in the previous year was primarily due to
increased average cash balances in the quarter ended December 31, 1998,
partially offset by declines in the prevailing money market interest rates
earned on those assets.
Contingent Participation Revenues. The Company realized contingent participation
revenues of $1.0 million and $769,000 in the six months ended December 31, 1998
and 1997, 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 quarter ended September 30, 1997, contingent participation revenues
of $769,000 were realized on one junior participation loan, which was paid in
full during the period. A portion of the loan had been sold to Marine on June
28, 1996 as part of the Branch Sale. The Company had retained a contingent
interest in the underlying property's economic performance and an interest in
the loan's unpaid principal balance approximating $10.1 million following the
Branch Sale.
At December 31, 1998, 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 December 31, 1998, the Company
recorded interest expenses in the amount of $1.0 million, a decline of $548,000,
or 35.0%, as compared with interest expenses of $1.6 million in the same quarter
of the previous year. Interest expenses declined in the quarter ended December
31, 1998 as compared with the quarter ended December 31, 1997, primarily as a
result of declines in the average amount borrowed by the Company. During the
quarter ended December 31, 1998, the Company borrowed an average of $68.8
million, a decline of $6.6 million, or 8.8%, as compared with average borrowings
of $75.4 million during the quarter ended December 31, 1997. 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 six months ended December 31, 1998, the Company recorded interest
expenses in the amount of $2.4 million, a decline of $775,000, or 24.0%, as
compared with interest expenses of $3.2 million in the same six month period of
the previous year. Interest expenses declined in the quarter ended December 31,
1998 as compared with the quarter ended December 31, 1997, primarily as a result
of declines in the average
25
<PAGE>
amount borrowed by the Company. During the six months ended December 31, 1998,
the Company borrowed an average of $68.8 million, a decline of $8.6 million, or
10.8%, as compared with average borrowings of $77.5 million during the six
months ended December 31, 1997. 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.
The average interest rate paid to Marine on borrowed funds declined from 8.15%
and 8.19% for the three and six months ended December 31, 1997, respectively, to
6.57% and 7.02% for the same three and six month periods in the current year,
respectively. The decline in rates paid to Marine in the three and six month
periods ended December 31, 1998, as compared with the same periods in the
previous year, was primarily due to a negotiated restructuring of the Company's
interest rate schedules with Marine. Under the terms of the restructured rate
schedule agreements with Marine, which became effective October 1, 1998, the
Company will receive interest rate reductions against its borrowed funds
interest expense for certain compensating balances held in bank accounts with
Marine. The interest expense rate reductions received under the new rate
schedule agreement with Marine will be in lieu of interest income formerly
earned on those deposited funds. This new rate schedule agreement with Marine
reduced the Company's interest earned on deposits with Marine approximately
$225,000 in the quarter ended December 31, 1998 as compared with the previous
quarter. This was more than offset by a reduction in interest expense on
borrowed funds of approximately $270,000, as compared with the interest expense
that would have been paid to Marine under the previous rate schedule agreement.
The new rate schedule agreement with Marine is expected to have a similar
positive effect on the Company's net interest margin (interest income less
interest expense) in future periods.
Other Expenses. During the quarter ended December 31, 1998, the Company recorded
total other expenses in the amount of $1.3 million, a decline of $262,000, or
16.6%, as compared with other expenses of $1.6 million in the same quarter of
the previous year. Other expenses declined in the quarter ended December 31,
1998, as compared with the quarter ended December 31, 1997, primarily as a
result of declines in salaries and employee benefits expenses of $167,000.
Salaries and employee benefits expense declined in the three months ended
December 31, 1998, as compared with the same period in the previous year, as a
result of the continued reduction of staff employed by the Company. At December
31, 1998, the Company employed one full time employee engaged in administrative
duties.
During the six months ended December 31, 1998, the Company recorded total other
expenses in the amount of $2.2 million, a decline of $1.1 million, or 31.9%, as
compared with other expenses of $3.3 million in the same six month period of the
previous year. Other expenses declined in the quarter ended December 31, 1998,
as compared with the quarter ended December 31, 1997, primarily as a result of
declines in salaries and employee benefits expenses and legal and professional
fees of $322,000 and $570,000, respectively.
Salaries and employee benefits expense declined in the six months ended December
31, 1998, as compared with the same period in the previous year, as a result of
the continued reduction of staff employed by the Company. At December 31, 1998,
the Company employed one full time employee engaged in administrative duties.
Legal and professional fees expense decreased $570,000, or 42.5%, to $771,000
during the six months ended December 31, 1998 from $1.3 million during the same
six 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 accrued and paid $290,000 and $159,000, respectively, in the
quarter ended December 31, 1997 and $0 and $0, respectively in the quarter ended
December 31, 1998, for legal and professional fees associated with the
Reorganization. In addition to this $290,000 reduction in accrued professional
fees related to the Reorganization, the Company incurred approximately $253,000
more in other professional fees during the six months ended December 31, 1997
than in the same quarter of the current year. The additional fees incurred in
the six months ended December 31, 1997, as compared with the same quarter of the
current year, primarily related to services such as actuarial evaluations and
tax preparation which were primarily related to the finalization of the
Company's employee- and tax-related affairs as a business entity that had
operated as an insured depository institution.
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
26
<PAGE>
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 December 31, 1998, the Company accrued
$670,000 in fees payable to the Management Company, of which $57,000 related to
fees incurred for the successful disposition of assets. During the quarter ended
December 31, 1997, the Company accrued $678,000 in fees payable to the
Management Company, of which $19,000 related to fees incurred for the successful
disposition of assets.
During the six months ended December 31, 1998, the Company accrued $1.3 million
in fees payable to the Management Company, of which $102,000 related to fees
incurred for the successful disposition of assets. During the six months ended
December 31, 1997, the Company accrued $1.5 million in fees payable to the
Management Company, of which $140,000 related to fees incurred for the
successful disposition of assets. At December 31, 1998 the Company had accrued
fees payable to the Management Company and its affiliate, Fintek, Inc.,
aggregating approximately $1.4 million.
Other Income (Expense). The Company did not recognize any other income (expense)
in the three or six months ended December 31, 1998, a decrease of $1.7 million
as compared with the same six month period of the previous year. Other income
(expense) in the six months ended December 31, 1997 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 the periods, effectively eliminated federal income
tax liability for the three and six month periods ended December 31, 1998 and
1997. 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 six months ended December 31, 1998, the Company recorded a net
provision for income taxes of $145,000 and $314,000, respectively. During the
three and six months ended December 31, 1997, the Company recorded a net
provision for income taxes of $50,000 and $101,000, respectively. The increase
in income taxes recorded during the three and six month periods ended December
31, 1998 as compared with the same three and six 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 December 31, 1998 and 1997,
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 December 31, 1998, the Company had $68.8 million in borrowed funds. In
connection with the Branch Sale, the Company obtained financing with Marine
(Initial Facilities) totaling $89.8 million. At September 30, 1998, the
remaining outstanding balance of the Initial Facilities due to Marine was $60.6
million.
27
<PAGE>
Borrowed Funds related to Asset Sale Transactions amounted to $8.2 million at
December 31, 1998. The Company actively monitors and manages its cash inflows
and outflows in an attempt to maximize payment of its debt obligations to Marine
and to invest, to the extent possible, all cash balances.
The Company seeks to maintain liquidity within a range of 5% to 10% of total
assets. Liquidity for this purpose is defined as unrestricted cash. At December
31, 1998, the Company's liquidity ratio, as so defined, amounted to 7.5% which
was within the maintenance range.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts
accounting standards (generally referred to as Statements of Financial
Accounting Standards, or "SFASs") which set forth required generally accepted
accounting principles. Set forth below is a description of certain of the
accounting standards recently adopted by the FASB which are relevant to
financial institutions such as the Company.
SFAS No. 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
28
<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.
29
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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
then 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 (the "Allegations") alleged, 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 America ("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 New York Banking Law (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 to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
plaintiffs responded to the motion and the motion is scheduled to be addressed
by the court on February 23, 1999.
Item 2. Changes in Securities
(c) On December 30, 1998, the Company issued an aggregate of $10,771,000
principal amount of its newly-authorized Increasing Rate Junior Subordinated
Notes due 2006 ("Subordinated Notes") in exchange for 415,273 shares of the
Company's outstanding 15% Non-Cumulative Perpetual Preferred Stock, Series A,
par value $1.00 ("Series A Preferred Stock") upon consummation of an Exchange
Offer made by the Company to holders of the Series A Preferred Stock. No
commissions or other remuneration were paid or given directly or indirectly for
soliciting such exchange which was made with existing security holders of the
Company exclusively. Exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), with respect to the issuance of
the Subordinated Notes is claimed pursuant to Section 3 (a) (9) of the Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of, or
incorporated by reference into this Quarterly Report on Form
10-Q:
4.1 Conformed Copy of Indenture, dated as of December 30,
1998, by and between the Company and LaSalle National
Bank, as Trustee (the "Indenture" (filed as Exhibit
(b) (2) to the Company's Schedule 13-E4/A Issuer
Tender Offer Statement Dated December 31, 1998 and
incorporated herein by reference).
4.2 First Supplemental Indenture, dated as of February 1,
1999, to the Indenture.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) Form 8-K, dated October 27, 1998, reporting under Item
5 information disclosed in Part II, Item 1 of the Form
10-Q, as filed on November 4, 1998.
(2) Form 8-K, dated January 6, 1999, reporting under Item
5, information with respect to the completion of the
Preferred Stock Exchange Offer.
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: February 10, 1999 By: /s/ Nelson L. Stephenson
----------------- ------------------------
Nelson L. Stephenson
President and Chief Executive Officer (principal
executive and principal financial officer)
31
Exhibit 4.2
RB ASSET, INC.
Increasing Rate Junior Subordinated Notes
due 2006
--------------------
FIRST SUPPLEMENTAL
INDENTURE
--------------------
Dated as of February 1, 1999
LaSalle National Bank
Trustee
FIRST SUPPLEMENTAL INDENTURE, dated as of February 1, 1999 between RB
Asset, Inc., a Delaware corporation (the "Company"), and LaSalle
National Bank, a national banking association, as trustee (the
"Trustee").
WHEREAS, the Company and the Trustee have previously entered into an
Indenture dated as of December 30, 1998 (the "Indenture") pursuant to which the
Company's Increasing Rate Junior Subordinated Notes due 2006 (the "Securities")
were issued;
WHEREAS, Section 8.01 of the Indenture provides that the Company and
the Trustee may, without the written consent of the holders of the outstanding
Securities, amend the Indenture as provided herein;
WHEREAS, the Board of Directors of the Company has consented to this
First Supplemental Indenture; and
WHEREAS, all acts and things prescribed by the Certificate of
Incorporation and Bylaws (each as now in effect) necessary to make this First
Supplemental Indenture a valid instrument legally binding on the Company for the
purposes herein expressed, in accordance with its terms, have been duly done and
performed;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Company
and the Trustee hereby agree for the benefit of each other and the equal and
ratable benefit of the holders of the Securities as follows:
1. Amendment of Section 2.02. The first sentence of the fifth paragraph
of Section 2.02 of the Indenture is hereby amended by deleting the text of
clause (ii) thereof and by inserting, in lieu thereof, the following text: "(ii)
additional securities issued pursuant to this Indenture as interest on the
Securities (not to exceed $9,900,000) (the "Additional Securities"), in each
case upon an Order of the Corporation."
2. Effect of First Supplemental Indenture. The Indenture, as
supplemented and amended by this First Supplemental Indenture, is in all
respects ratified and confirmed, and the Indenture and the First Supplemental
Indenture shall be read, taken and construed as one and the same instrument.
Except as otherwise set forth herein, the Indenture shall continue in full force
and effect in accordance with its terms.
3. Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction hereof.
<PAGE>
4. Successors and Assigns. All covenants and agreements in this First
Supplemental Indenture by the parties hereto shall bind their respective
successors and assigns and inure to the benefit of their respective successors
and assigns, whether so expressed or not.
5. Benefit of Supplemental Indenture. Nothing in this First
Supplemental Indenture, express or implied, shall give to any Person, other than
the parties hereto, any Security Registrar, any Paying Agent and their
successors hereunder, and the holders of the Securities, any benefit or any
legal or equitable right, remedy or claim under this First Supplemental
Indenture.
6. Counterparts. This First Supplemental Indenture may be executed in
any number of counterparts, each of which when so executed shall be deemed to be
an original, but all such counterparts shall together constitute but one and the
same instrument.
7. Governing Law. The internal laws of the State of New York shall
govern this First Supplemental Indenture.
8. Entire Agreement. This First Supplemental Indenture and the
Indenture as amended and supplemented hereby constitute the entire agreement and
understanding between the parties hereto and supersede any and all prior
agreements and understandings relating to the subject matter hereof.
IN WITNESS WHEREOF, the Company and the Trustee have caused this First
Supplemental Indenture to be duly executed as of the date first above
written.
RB ASSET, INC. ATTEST:
By:/s/Nelson L. Stephenson By:/s/Shiela Boyd
----------------------- --------------
Name: Nelson L. Stephenson Name: Shiela Boyd
Title: President Title:
LASALLE NATIONAL BANK ATTEST:
By:/s/ Eric A. Lindhal By:/s/ Susan M. Cepiel
----------------------- -------------------
Name: Eric A. Lindhal Name: Susan M. Cepiel
Title: Trust Officer Title:
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial extracted from the
financial statements of RB Asset, Inc. for the 6 months
ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001047958
<NAME> RB Asset, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,866
<SECURITIES> 1,541
<RECEIVABLES> 79,734
<ALLOWANCES> 18,677
<INVENTORY> 0
<CURRENT-ASSETS> 46,407
<PP&E> 0
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<TOTAL-ASSETS> 192,561
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<BONDS> 10,555
0
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<COMMON> 7,100
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<TOTAL-LIABILITY-AND-EQUITY> 192,561
<SALES> 0
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