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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 September 30, 1999
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ___________ To _______________
Commission file number 333-38673
RB ASSET, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
--------------
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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 of the Registrant's Common Stock, $.01 par value,
outstanding as of November 15, 1999 was 7,100,000. The number of shares of the
Registrant's 15% Non-cumulative Perpetual Preferred Stock, Series A, $.01 par
value, outstanding as of November 15, 1999 was 937,777.
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<PAGE>
RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Financial Condition as of
September 30, 1999 (unaudited) and June 30, 1999.................. 1
Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998
(unaudited)....................................................... 2
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended September 30, 1999 and
1998 (unaudited) ................................................. 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 1999 and 1998
(unaudited)....................................................... 4
Notes to the Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations ........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 19
Item 2. Changes in Securities ................................................ 19
Item 3. Defaults Upon Senior Securities ...................................... 20
Item 4. Submissions of Matters to a Vote of Securities Holders ............... 20
Item 5. Other Information .................................................... 20
Item 6. Exhibits and Reports on Form 8-K ..................................... 20
SIGNATURE................................................................................ 22
</TABLE>
-i-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and June 30, 1999
(Dollars in Thousands)
Assets
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $3,840 and $3,264, respectively $ 92,151 $ 92,438
Real estate held for disposal 2,040 2,040
Allowance for fair market value reserve under SFAS-121 (40) (40)
--------------------- ---------------------
Total real estate held for disposal, net 2,000 2,000
Real estate loans receivable:
Secured by real estate 30,242 53,697
Allowance for possible credit losses (15,518) (15,815)
--------------------- ---------------------
Total loans receivable, net 14,724 37,882
Investments in joint ventures 1,512 1,536
--------------------- ---------------------
Total real estate assets 110,387 133,856
Cash, due from banks and cash equivalents 13,891 14,780
Cash, due from banks - restricted 36,414 13,355
Investment securities available for sale 1,147 1,294
Commercial and consumer loans 10,306 10,314
Allowance for possible credit losses (2,340) (2,340)
--------------------- ---------------------
Commercial and consumer loans, net 7,966 7,974
Other assets 3,721 3,147
-------------------- ---------------------
Total Assets $ 173,526 $ 174,406
===================== =====================
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 $ 11,903 $ 11,375
Borrowed funds 50,557 50,557
Other liabilities 15,368 15,957
--------------------- ---------------------
Total Liabilities 77,828 77,889
--------------------- ---------------------
Stockholders' equity:
15% non-cumulative perpetual preferred stock, series A par value $1,
liquidation value $25 (1,400,000 shares authorized, 937,777
issued and outstanding at September 30, 1999 and June 30, 1999) 938 938
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at September 30,
1999 and June 30, 1999) 7,100 7,100
Additional paid in capital 100,439 100,439
Accumulated deficit (11,628) (10,956)
Accumulated comprehensive income (1,151) (1,004)
--------------------- ---------------------
Total Stockholders' Equity 95,698 96,517
--------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 173,526 $ 174,406
===================== =====================
</TABLE>
See notes to Consolidated Financial Statements
1
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 1999 and 1998
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------
1999 1998
------------------- ---------------------
<S> <C> <C>
Revenue:
Rental revenue and operations:
Rental income and other property revenue $ 4,031 $ 3,770
Property operating and maintenance expense (2,714) (2,564)
Depreciation - real estate held for investment (571) (577)
------------------- ---------------------
Net rental operations 746 629
Net gain on sale of real estate assets - 488
Other income:
Interest income:
Loans receivable 569 640
Money market investments and other 172 227
------------------- ---------------------
Total interest income 741 867
Realization of contingent participation revenues - 1,000
------------------- ---------------------
Total other income - 1,867
------------------- ---------------------
Total revenues 1,487 2,984
------------------- ---------------------
Expenses:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 288 -
Borrowed funds 659 1,426
Other 22 5
------------------- ---------------------
Total interest expense 969 1,431
Other expenses:
Salaries and employee benefits 51 50
Legal and professional fees 202 202
Management fees 578 617
Other 177 65
------------------- ---------------------
Total other expenses 1,008 934
------------------- ---------------------
Total expenses 1,977 2,365
------------------- ---------------------
------------------- ---------------------
(Loss) income before provision for income taxes (490) 619
------------------- ---------------------
Provision for income taxes 182 169
Net (loss) income (672) 450
Dividends declared on preferred stock - -
------------------- ---------------------
Net (loss) income applicable to common stock $ (672) $ 450
=================== =====================
Basic and diluted (loss) income per common share $ (0.09) $ 0.06
=================== =====================
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended September 30, 1999 and 1998
(dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Series A
Non-
cumulative
Perpetual Additional Retained Accumulated Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
----------- ---------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,561) $ (926) $ 107,183
Net income for the three months
ended September 30, 1998 - - - 450 - 450
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - (112) (112)
----------- ---------- ------------ ----------- ------------- ---------------
Balances at September 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,111) $ (1,038) $ 107,521
=========== ========== ============ =========== ============= ===============
Balances at June 30, 1999 $ 938 $ 7,100 $ 100,439 $ (10,956) $ (1,004) $ 96,517
Net loss for the three months
ended September 30, 1999 - - - (672) - (672)
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - (147) (147)
----------- ---------- ------------ ----------- ------------- ---------------
Balances at September 30, 1999 $ 938 $ 7,100 $ 100,439 $ (11,628) $ (1,151) $ 95,698
=========== ========== ============ =========== ============= ===============
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
Operating Activities:
Cash flows (used in) provided by Operating Activities:
Net (loss) income $ (672) $ 450
Adjustments to reconcile net (loss) income to cash
used in operating activities:
Net gain on sale of real estate assets - (488)
Depreciation and amortization 571 577
Amortization of capitalized issuance costs and accretion of
issuance discount - Increasing Rate Junior Subordinated Notes due 2006
40 -
Change in operating assets and liabilities:
Net decrease (increase) in accrued interest receivable 85 (11)
Net (decrease) increase in accrued interest payable, net of
accrued interest payable capitalized as additional principal -
Increasing Rate Junior Subordinated Notes due 2006 166 15
Net (decrease) increase in accrued income taxes (180) 505
Net (decrease) increase in accrued expenses
and other liabilities (179) (34)
Net (increase) decrease in prepaid expenses and other assets (659) 67
Cash effect of increases in allowance for possible credit losses - 86
-------------------- -------------------
Net cash (used in) provided by operating activities (828) 1,167
-------------------- -------------------
Investing Activities:
Cash flows provided by Investing Activities:
Net repayment (origination) of loans secured by real estate, net 23,279 3,164
Net repayment (reacquisition) of commercial and consumer loans 8 59
Proceeds from partnership distributions - investments in joint ventures 25 -
Proceeds related to sales of real estate held - 1,344
Additional fundings on real estate held (314) (309)
-------------------- -------------------
Net cash provided by investing activities 22,998 4,258
-------------------- -------------------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
(Continued from previous page)
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Financing Activities:
Cash flows used in Financing Activities:
Increase in restricted cash (23,059) (6,662)
------------------- -------------------
Net cash used in financing activities (23,059) (6,662)
------------------- -------------------
Net decrease in cash, due from banks and cash equivalents (889) (1,237)
Cash, due from banks and cash equivalents - June 30, 1999 14,780 12,532
------------------- -------------------
Cash, due from banks and cash equivalents - September 30, 1999 $ 13,891 $ 11,295
=================== ===================
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 1,251 $ 1,416
Federal, state and local taxes 387 152
Supplemental Disclosure of Non-cash Transactions
Accrued interest capitalized as additional principal - Increasing Rate
Junior Subordinated Notes due 2006 $ 487 $ -
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
1. Organization and Formation of the Company
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal
business is the management of its real estate assets, mortgage loans and
investment securities, under a business plan intended to maximize shareholder
value. As a result of the completion of reorganization steps (the
"Reorganization") in the fiscal year ended June 30, 1998, the Company succeeded
to the assets, liabilities and business of River Bank America ("River Bank" or
the "Predecessor Bank"). 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. This
report is for the three months ended September 30, 1999.
On May 22, 1998, under a plan that was approved by it's stockholders, River Bank
completed its Reorganization into a Delaware corporation named RB Asset, Inc.
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").
In connection with the Reorganization, on June 23, 1998, the Predecessor Bank
was dissolved and its legal existence terminated. Upon such dissolution, the
capital stock of River Bank was canceled and the stock transfer records of River
Bank were closed. On that date, common and preferred stockholders of River Bank
received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset,
Inc. was owned by the same stockholders, in the same proportions, as owned by
the Predecessor Bank on the record date. The transfer of assets, liabilities and
business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free
reorganization under the Internal Revenue Code and, as such, the Company expects
that certain tax attributes of the Predecessor Bank have been preserved.
On June 28, 1996, the Predecessor Bank had 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 HSBC
Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank.
Following consummation of the Branch Sale, all retail banking operations of the
Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC
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 parties other than HSBC, aggregating $60.4 million,
composed of real estate assets, loans and other receivables (the "Asset Sale
Transactions"). The Asset Sale Transactions were structured to include ongoing
recourse to, and participation by, the Predecessor Bank with respect to the
assets sold, based upon the net proceeds realized on disposition of assets by
the purchasers. See Note 11 to the Consolidated Financial Statements at June 30,
1999.
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 assets retained after the Branch Sale primarily 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"). Over the five year period
preceding the Branch Sale, the Bank's primary loan origination focus was
single-family (one-to-four units) and, to a lesser extent, multi-family (five or
more units) residential loans secured by properties in the New York City
metropolitan area. Primarily as a result of conditions imposed by the NYSBD and
the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor
Bank and the Company have not originated a material amount of loans.
6
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
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.
At the time of the closing of the Branch Sale, the Predecessor Bank obtained
from HSBC a loan facility (the "Facility") consisting of eleven independent
mortgage loans with additional collateral, in an aggregate amount of
approximately $100.0 million. The Facility has been reduced by repayment
activity to $50.6 million at September 30, 1999.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending and
real estate transactions. The Company has requested that HSBC provide
availability up to the initial amount of the HSBC Facility of approximately
$100.0 million, or approximately $50.0 million in availability under the HSBC
Facility. Availability under the HSBC Facility would be used, in combination
with the restricted and unrestricted cash of the Company to invest in new
lending, investment and real estate activities, subject to the prior approval of
HSBC pursuant to a business plan intended to improve the future earnings and
cash flow of the Company.
The Predecessor Bank had previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of 15%
noncumulative perpetual Preferred Stock, Series A, par value $1.00 per share
("Predecessor Preferred Stock") would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock
dividend for the quarter ending June 30, 1996, payment of which was subject to
the receipt of required approvals from the FDIC and the NYSBD (the Predecessor
Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the
Company's principal lender). Primarily as a result of the above, neither the
Company's or the Predecessor Bank's Board of Directors have taken any action
regarding a quarterly dividend on the Predecessor Preferred Stock or the
Company's 15% noncumulative perpetual preferred stock, Series A, $1.00 par value
("Company Preferred Stock") for any of the quarterly periods ended from
September 30, 1996 through September 30, 1999. Although the Company is no longer
subject to the jurisdiction of either the FDIC or the NYSBD, declaration or
payment of future dividends on the Company Preferred Stock will continue to be
subject to the approval of HSBC for so long as the Facility remains outstanding.
The Company has received notice from HSBC that the approval necessary to declare
or pay dividends on the Company Preferred Stock will not be provided at this
time. There can be no assurance that the Board of Directors of the Company will
deem it appropriate to pay dividends on the Company Preferred Stock, even if
permitted to do so by HSBC.
2. 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 September 30, 1999, the
results of its operations for the three months ended September 30, 1999 and 1998
and the statements of changes in stockholders' equity and cash flows for the
three months ended September 30, 1999 and 1998. Adjustments are of a normal
recurring nature. These unaudited consolidated financial statements have been
prepared in conformity with the accounting principles and practices in effect as
of June 30, 1999, 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, 1999.
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 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 period in
which such charges occurred.
7
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
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 September 30, 1999, the results of operations for the three months ended
September 30, 1999 and 1998, and changes in stockholders' equity and cash flows
for the three months ended September 30, 1999 and 1998.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
investments in real estate.
Management believes that the allowance for possible credit losses is adequate
and that loans secured by real estate 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. 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 September 30, 1999, the balance of
stockholders' equity included a cumulative $1,151,000 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
September 30, 1999 the Company reviewed its potential current and deferred
federal and state tax liabilities in light of the results of operations for the
Company since June 30, 1999. As a result of this analysis, the Company
recognized income tax expense in the amount of $182,000, during the quarter
ending September 30, 1999.
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.
3. Commitments, Contingencies and Other
As of September 30, 1999, the Company had deferred tax assets that were
primarily attributable to NOLs, an allowance for loan losses and suspended
passive activity losses and credits which were partially offset by a deferred
tax liability in its consolidated financial statements. However, a valuation
allowance was set up equal to the amount of the difference between the tentative
deferred tax asset and the tentative deferred tax liability due to the
uncertainty of the Company's ability to utilize the deferred tax assets in the
future. Accordingly, neither a net overall asset nor a net overall liability was
reflected in the Company's consolidated financial statements.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Reorganization in Note 1 were to be deemed to be an ownership
change, or if, transactions in the Company's capital stock subsequent to the
Reorganization result in an ownership
8
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
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 tax regulations. The application of this
limitation could have a material effect on the Company's ability to realize its
deferred tax assets. The Company is of the view that no ownership change of the
Company will be deemed to have occurred as a result of the Reorganization or
otherwise. However, the application of Section 382 is in many respects
uncertain. In assessing the effects of prior transactions and of the
Reorganization under Section 382, the Company has made certain legal judgments
and certain factual assumptions. The Company has not requested or received any
rulings from the IRS with respect to the application of Section 382 to the
implementation of the Reorganization and the IRS could challenge the Company's
determinations.
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of any outstanding legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company. See Note 7.
4. Regulatory capital requirements
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmemeber bank by the FDIC and the reorganization of the Predecessor Bank into
a Delaware corporation, the Company is no longer subject to the regulatory
capital requirements of either the FDIC or the Banking Department.
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three months ended September 30, 1999 and 1998,
respectively. The Company had no securities outstanding that were convertible to
common stock at September 30, 1999 or 1998.
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 quarters ended September 30, 1999 and 1998, total comprehensive
(loss) income was ($819) and $338, respectively. The following table describes
the components of comprehensive income and accumulated comprehensive income for
the dates indicated:
9
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
Components of Comprehensive Income
(Unaudited):
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Net (loss) income $ (672) $ 450
Unrealized losses on securities (147) (112)
-------------------- ---------------------
Comprehensive (loss) income $ (819) $ 338
==================== =====================
Components of Accumulated
Comprehensive Income:
(Unaudited)
September 30, June 30,
1999 1999
-------------------- ---------------------
Unrealized losses on securities $ (1,151) $ (1,004)
-------------------- ---------------------
Accumulated comprehensive income $ (1,151) $ (1,004)
==================== =====================
</TABLE>
7. Legal Proceedings
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.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company 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 Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor 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 Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor 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
Company 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 Company Preferred Stock
who claim to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company 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
10
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(dollars in thousands)
(Unaudited)
alleged (the "Allegations"), among other things, that (i) the Defendants
breached the certificate of designations relating to the Predecessor Preferred
Stock by fraudulently transferring assets of River Bank and by illegally
amending the certificate of designations, (ii) the Defendants fraudulently
conveyed the assets of River Bank, thereby depriving the holders of a
liquidating distribution, (iii) the Defendants violated the NYBL by liquidating
River Bank without making the liquidating distribution required by the NYBL and
by denying holders appraisal rights to which they were entitled by the NYBL,
(iv) the Defendants breached their fiduciary duty to holders by depriving them
of their liquidating distribution, (v) the Defendants breached their duty of
disclosure by omitting from the Proxy Statement dated March 27, 1998 material
facts relating to the holders' rights to receive a liquidating distribution,
their appraisal rights for their shares and the requirement that holders vote as
a class with respect to the amendment of the certificate of designations, (vi)
the Defendants' implementation of the liquidation of River Bank and the
amendment of the certificate of designations were ultra vires and should be
declared void and (vii) the intentionally tortious nature of the Defendants'
conduct bars them from seeking indemnification for their actions and, therefore,
the Defendants should be enjoined from seeking indemnification for damages or
attorney's fees relating to the Action.
The Company believes that the Allegations are without merit and intends 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
motion was argued before the court on March 23, 1999 and the court reserved
decision. The motion remains pending before the court.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition:
At September 30, 1999 the consolidated assets of the Company totaled $173.5
million, a decrease of $880,000, or 0.50% as compared with total assets at June
30, 1999.
Real estate held for investment, net of accumulated depreciation, declined
$287,000, or 0.31%, from $92.4 million at June 30, 1999 to $92.1 million at
September 30, 1999. The decline in real estate held for investment, net of
accumulated depreciation at September 30, 1999 as compared with the balance at
June 30, 1999, was primarily attributable to depreciation charges of $571,000,
partially offset by fundings for capital improvements of $314,000.
Real estate held for disposal, net of allowance for fair market value reserve
under Statement of Accounting Standards No. 121 (SFAS-121), remained unchanged
at September 30, 1999 from the balance of $2.0 million at June 30, 1999.
Apartment units categorized as real estate held for disposal at September 30,
1999 are expected to be sold within the next twelve months.
Total loans secured by real estate, net of the related allowance for possible
credit losses, declined $23.2 million, or 61.1%, from $37.9 million at June 30,
1999 to $14.7 million at September 30, 1999. The $23.2 million decline in real
estate loans, net, during the quarter ended September 30, 1999, was primarily
attributable to the full satisfaction of three loans secured by real estate,
totaling $23.2 million and the effects of normal scheduled principal repayments,
partially offset by a decline in the related allowance for possible credit
losses of $297,000.
The Company's allowance for possible credit losses related to loans secured by
real estate decreased by $297,000, or 1.9%, from $15.8 million, at June 30, 1999
to $15.5 million at September 30, 1999. The decrease resulted from chargeoffs of
$297,000 for asset disposition transactions previously provided for at June 30,
1999. 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 September 30, 1999, the
allowance for possible credit losses was 51.3% of real estate loans as compared
to 29.5% at June 30, 1999.
Cash, due from banks and cash equivalents decreased by $889,000, or 6.0%, from
$14.8 million at June 30, 1999 to $13.9 million at September 30, 1999. Additions
to restricted cash, scheduled asset fundings and the payment of operating
expenses exceeded the total operating revenues and available asset sales
proceeds, resulting in the decrease in unrestricted cash during the quarter
ended September 30, 1999.
At September 30, 1999, HSBC had restricted a total of approximately $36.4
million in funds, held on deposit at HSBC, in accordance with the terms of the
Branch Sale and the Facility agreements. HSBC had restricted approximately $13.4
million at June 30, 1999. Restricted funds held by HSBC 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 HSBC Facility. The restricted cash
held by HSBC is intended to serve as substitute collateral for the HSBC
Facility, until such time as the HSBC Facility is reduced in accordance with the
Company's Asset Management Plan and the HSBC 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 September 30, 1999, a decrease of $8,000, or 0.1%, from
the June 30, 1999. This decrease was primarily the result of the effects of
normal amortization and repayment of individual loans in the portfolio.
Other liabilities totaled $15.4 million at September 30, 1999, a decrease of
$589,000, or 3.7%, from the June 30, 1999 balance of $16.0 million. The net
decrease in other liabilities during the quarter ended September 30, 1999 was
primarily related to the capitalization of $487,000 in accrued interest payable
as additional principal Increasing Rate Junior Subordinated Noted due 2006 on
July 15, 1999, in accordance with the terms of the Notes. Primarily as a result
of this accrued interest capitalization, at September 30, 1999, the balance of
the Company's Increasing Rate Junior Subordinated Notes due 2006 increased by
$528,000, or 4.6%, to $11.9 million, as compared with a balance of $11.4 million
at June 30, 1999.
12
<PAGE>
During the three months ended September 30, 1999, total stockholders' equity
decreased by $819,000, or 0.9%, to $95.7 million, as compared with $96.5 million
at June 30, 1999. This decrease was due to the net loss recorded for the three
months ended September 30, 1999 in the amount of $672,000 and a decrease in the
securities valuation account (allowance for unrealized losses on marketable
securities) of $147,000.
The following table summarizes the calculation of the Company's book value per
share at September 30, 1999 and June 30, 1999.
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
-------------------- --------------------
<S> <C> <C>
Total stockholders' equity $95,698,000 $96,517,000
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 23,444,000 23,444,000
-------------------- --------------------
Net stockholders' equity $72,254,000 $73,073,000
==================== ====================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
==================== ====================
Book value per share $ 10.18 $ 10.30
==================== ====================
</TABLE>
Results of Operations:
General. The Company reported a net loss attributable to common shares of
$672,000, or $(0.09) per basic and diluted share, for the three months ended
September 30, 1999, a decrease of $1.1 million as compared with net income
attributable to common shares of $450,000, or $0.06 per share, for the three
month period ended September 30, 1998.
The primary reason for the decrease in the Company's net operating results for
the quarter ended September 30, 1999, as compared to the same quarter in the
previous year, was the positive income effects of nonrecurring transactions in
the quarter ended September 30, 1998, which resulted in the recording of gains
on asset sales and loan participations totaling $1.5 million. During the quarter
ended September 30, 1998, the Company recognized $1.0 million in contingent loan
participation revenues and $488,000 in gains on the sale of real estate assets,
that were nonrecurring in nature. During the quarter ended September 30, 1999,
the Company recognized no contingent loan participation revenues and no gains on
the sale of real estate assets.
In addition to the effects of the nonrecurring transactions on income in the
quarter ended September 30, 1998, total income also declined in the quarter
ended September 30, 1999, as compared with the same quarter of the previous
year, due to a decline in interest income. Interest income declined $126,000, or
14.5%, from $867,000 in the quarter ended September 30, 1998, to $741,000 during
the same quarter of the current year, primarily as a result of loan repayments
which occurred during the quarter ended September 30, 1999.
Partially offsetting the decreases in income, cited above, for the quarter ended
September 30, 1999, as compared to the same quarter of the previous year, was a
reduction in interest expense of $462,000. Interest expense declined from $1.4
million in the quarter ended September 30, 1998 to $969,000 during the same
quarter of the current year, primarily as the result of the effects of the
compensating balance agreement renegotiated with HSBC in December 1998 (see
"Interest Expense," below).
Net Rental Operations. For the three months ended September 30, 1999, net rental
operations resulted in income of $746,000, an increase of $117,000, or 18.6%,
from $629,000 for the same three month period in the previous year. This
increase was due to various, individually immaterial operating factors affecting
aggregate rental income and expenses within the Company's rental properties.
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<PAGE>
Net (Loss) Gain on the Sale of Real Estate Assets. A net loss on the sale of
real estate of $31,000 was recorded for the quarter ended September 30, 1999, a
decrease of $519,000, as compared with net income of $488,000 in the quarter
ended September 30, 1998. For the quarter ended September 30, 1999, the $31,000
net loss was attributable to adjustments made related to the final closing
prices of certain residential unit sales, which were sold in prior periods. For
the quarter ended September 30, 1998, the $488,000 gain on the sale of real
estate assets was primarily attributable to the recognition of a gain of
$500,000 resulting from the full satisfaction of a junior subordinated
participation loan secured by real estate which had been fully reserved for in
prior periods.
Interest Income. For the three months ended September 30, 1999, total interest
income was $741,000, a decline of $126,000, from $867,000 for the same quarter
in the previous year. Loan interest declined $71,000, or 11.1%, in the quarter
ended September 30, 1999, as compared with the same quarter in the previous
year, due to reduced average balances for loan assets resulting from
satisfactions and the effects of normal amortization and repayment activity. In
addition, other interest income decreased $55,000, or 24.3%, in the quarter
ended September 30, 1999 as compared with the quarter ended September 30, 1998.
The decrease in other interest income in the quarter ended September 30, 1999,
as compared with the same quarter in the previous year, was primarily due to the
effects of a renegotiation of the HSBC Facility agreement which occurred in the
quarter ended December 31, 1998. Under the renegotiated agreement, funds held on
deposit at HSBC no longer earn interest income, but are, instead, now used to
reduce the interest expense for funds borrowed from HSBC under the Facility. See
"Interest Expense," below.
Contingent Loan Participation Revenues. The Company realized contingent
participation revenues of $0 and $1.0 million in the quarters ended September
30, 1999 and 1998, respectively. During the quarter ended September 30, 1998,
contingent loan 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 HSBC 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.
At September 30, 1999, the Company had a remaining contingent interest in two
junior subordinated participation loans in which the Company retains an interest
of approximately $2.4 million in principal amount, which are fully reserved for
(100%) by the Company. All of such loans have been modified since origination
and are currently performing in accordance with their terms.
Interest Expense. During the three months ended September 30, 1999, the Company
recorded interest expenses in the amount of $969,000, a decline of $462,000, or
32.3%, as compared with interest expenses of $1.4 million in the same quarter of
the previous year. These reductions in interest expense for borrowed funds were
partially offset by the recognition of $288,000 in interest expense related to
the Company's Increasing Rate Junior Subordinated Notes due 2006, which were
initially issued in December 30, 1998.
Interest expenses paid on borrowed funds declined $767,000, or 53.8%, to
$659,000 in the quarter ended September 30, 1999, as compared with interest
expense of $1.4 million recorded the same quarter in 1998. This decline in
interest expense recorded for borrowed funds was the result of declines in the
average amount borrowed by the Company from HSBC and reductions in the interest
rate paid by the Company on borrowed funds, under the renegotiated terms of the
Facility.
During the quarter ended September 30, 1999, the Company borrowed an average of
$50.6 million, a decline of $18.2 million, or 26.5%, as compared with average
borrowings of $68.8 million during the quarter ended September 30, 1998. The
decline in the average amount of borrowed funds was attributable to the
repayment of outstanding obligations which occurred in fiscal 1999, primarily
funded by asset sales and loan repayments.
The average interest rate paid to HSBC on borrowed funds declined from 8.5%for
the three months ended September 30, 1998 to 5.21% for the same three month
period in the current year. The decline in rates paid to HSBC in the three month
period ended September 30, 1999, as compared with the same periods in the
previous year, was primarily due to a renegotiation of the Company's interest
ratewith HSBC. Under the
14
<PAGE>
terms of the renegotiated interest rate agreements with HSBC, which became
effective October 1, 1998, the Company receives interest rate reductions for
borrowed funds, calculated using a formula that considers certain compensating
balances held in bank accounts with HSBC. The interest expense rate reductions
received under the new rate schedule agreement with HSBC are in lieu of interest
income that had been earned on those deposited funds. See "Interest Income,"
above. This new interest rate agreement with HSBC reduced the Company's interest
earned on deposits with HSBC approximately $137,000 in the quarter ended
September 30, 1999, as compared with the same quarter in 1998. This was more
than offset by a reduction in interest expense on borrowed funds of
approximately $434,000, as compared with the interest expense that would have
been paid to HSBC under the interest rate agreement in effect during the quarter
ended September 30, 1998.
Other Expenses. During the quarter ended September 30, 1999, the Company
recorded total other expenses in the amount of $977,000, an increase of $43,000,
or 4.6%, as compared with other expenses of $934,000 in the same quarter of the
previous year. Other expenses increased in the quarter ended September 30, 1999,
as compared with the quarter ended September 30, 1998, primarily as a result of
differences in the timing of certain non-recurring expense payments.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a newly
formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0% of
the outstanding Common Stock of the Company. During the quarter ended September
30, 1999, the Company accrued $754,000 in fees payable to the Management
Company, of which $176,000 related to fees incurred for the successful
disposition of assets. During the quarter ended September 30, 1998, the Company
accrued $664,000 in fees payable to the Management Company, of which $46,000
related to fees incurred for the successful disposition of assets. At September
30, 1999 the Company had accrued fees payable to the Management Company and its
affiliate, Fintek, Inc., aggregating $247,000.
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 quarters ended September 30, 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 quarters ended September 30, 1999 and 1998, the Company recorded a net
provision for income taxes of $182,000 and $169,000, respectively, primarily to
reflect the effects of operations on its current state and local income tax
liability at September 30, 1999 and 1998, respectively.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for debt repayments related to asset sales, operating expenses and development
costs related to certain real estate projects.
15
<PAGE>
At September 30, 1999, the Company had $50.6 million in borrowed funds
outstanding under the Facility provided by HSBC Bank. The Company actively
monitors and manages its cash inflows and outflows in the management of the
Facility with HSBC and invests, to the extent possible, all available cash
balances.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending,
investment and real estate transactions. The Company has requested that HSBC
provide availability up to the initial amount of the HSBC Facility of
approximately $100.0 million, or approximately $50.0 million in availability
under the HSBC Facility. Availability under the HSBC Facility would be used, in
combination with the restricted and unrestricted cash of the Company to invest
in new lending, investment and real estate activities, subject to the prior
approval of HSBC.
The Company seeks to maintain liquidity, in the form of unrestricted cash,
within a range of 5% to 10% of total assets. At June 30, 1999, the Company's
liquidity ratio, as so defined, amounted to 8.0%, 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.
FASB Interpretation No. 43. FASB Interpretation No. 43, "Real Estate Sales,"
interprets and amends Statement of Financial Accounting Standards No. 66,
"Accounting for Sales of Real Estate." FASB Interpretation No. 43 clarifies the
sales and income recognition criteria for sales involving real estate with
property improvements or integral equipment such as manufacturing facilities.
FASB Interpretation No. 43 is effective for all sales of real estate with
property improvements or integral equipment entered into after June 30, 1999.
Management has evaluated the provisions of this Interpretation and has concluded
that the adoption of this Interpretation will have no effect on the Company's
results of operations and 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 position 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, generally, 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 conversions are not completed in a timely manner,
the Year 2000 issue is unlikely to have a material impact
16
<PAGE>
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 the assessment, remediation, testing and
implementation of all internal systems that could be significantly affected by
the Year 2000. The Company's costs have been minimal, since all accounting
software use by the Company is maintained and supported by a third party.
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.
17
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk facing the company is interest rate risk on its borrowed
funds, mortgage notes and notes receivable. The Company does not hedge interest
rate risk using financial instruments nor is the Company subject to foreign
currency risk.
The Company has assessed the market risk for its variable rate debt and believes
that a 1% increase in interest rates (as measured by changes in the LIBOR rate)
would result in an approximate $506,000 increase in interest expense based on
approximately $50.6 million outstanding at June 30, 1999. See Note 16, "Borrowed
Funds," contained within the Consolidated Financial Statements.
In addition, the Company has issued $12.48 million in Increasing Rate Junior
Subordinated Notes due 2006. The Subordinated Notes provide for a steadily
increasing interest cost after December 15, 2001. A substantial increase in
general interest rates would potentially prevent the Company from refinancing
the Subordinated Notes at a rate favorable to the Company. See Note 27,
"Preferred Stock Exchange Offer" and Note 28, "Increasing Rate Junior
Subordinated Notes," contained within the Consolidated Financial Statements at
June 30, 1999.
The fair value of the Company's long term debt, mortgage notes, notes receivable
and other financial assets is estimated based on discounting future cash flows
at interest rates that management believes reflect the risks associated with
long term debt, mortgage notes, notes receivable and other financial assets of
similar risk and duration. See Note 25, "Fair Value of Financial Instruments,"
within the Consolidated Financial Statements at June 30, 1999.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company 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 Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor 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 Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor 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
Company 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 Company Preferred Stock
who claim to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company 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 Predecessor Preferred Stock by fraudulently
transferring assets of River Bank and by illegally amending the certificate of
designations, (ii) the Defendants fraudulently conveyed the assets of River
Bank, thereby depriving the holders of a liquidating distribution, (iii) the
Defendants violated the NYBL by liquidating River Bank without making the
liquidating distribution required by the NYBL and by denying holders appraisal
rights to which they were entitled by the NYBL, (iv) the Defendants breached
their fiduciary duty to holders by depriving them of their liquidating
distribution, (v) the Defendants breached their duty of disclosure by omitting
from the Proxy Statement dated March 27, 1998 material facts relating to the
holders' rights to receive a liquidating distribution, their appraisal rights
for their shares and the requirement that holders vote as a class with respect
to the amendment of the certificate of designations, (vi) the Defendants'
implementation of the liquidation of River Bank and the amendment of the
certificate of designations were ultra vires and should be declared void and
(vii) the intentionally tortious nature of the Defendants' conduct bars them
from seeking indemnification for their actions and, therefore, the Defendants
should be enjoined from seeking indemnification for damages or attorney's fees
relating to the Action.
The Company believes that the Allegations are without merit and intends 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
motion was argued before the court on March 23, 1999 and the court reserved
decision. The motion remains pending before the court.
Item 2. Changes in Securities
None.
19
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company held its annual meeting of stockholders on October 20, 1999. The
holders of common stock, $1.00 par value, of the Company ("Common Stock")
considered proposals to:
1. elect Robin Chandler Duke and David A. Shapiro as directors to serve for a
term of three years or until such directors' successors are elected and shall
have qualified ("Proposal 1"); and
2. ratify the appointment of Ernst & Young LLP as the independent auditors of
the Bank for fiscal year 2000 ("Proposal 2").
The holders of 15% non-cumulative preferred perpetual stock, series A, $1.00 par
value, of the Company ("Series A Preferred Stock") considered a proposal to:
1. elect David J. Liptak and Jeffrey E. Susskind as directors for a term of one
year or until such directors' successors are elected and have been qualified
("Proposal 3").
According to the records of the Company and American Stock Transfer & Trust
Company, the Company's transfer agent ("AST"), there were a total of 7,100,000
shares of Common Stock and 937,777 shares of Preferred Stock that could be voted
at the meeting. 5,217,716 shares of Common Stock and 852,020 shares of Preferred
Stock were represented at such meeting by the holders thereof or by proxy, which
constituted a quorum with respect to all proposals.
The following table sets forth the number of votes in favor, the number of votes
opposed, and the number of abstentions (or votes withheld in the case of the
election of directors) with respect to each of the foregoing proposals:
<TABLE>
<CAPTION>
Abstentions
Proposal Votes in Favor Votes Opposed (Withheld)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proposal 1
Robin Chandler Duke 5,217,716 -- --
David A. Shapiro 5,217,716 -- --
- ---------------------------------------------------------------------------------------------------------
Proposal 2 5,217,716 -- --
- ---------------------------------------------------------------------------------------------------------
Proposal 3
David J. Liptak 852,020 -- --
Jeffrey E. Susskind 852,020 -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
--------------- --------------
27.1 Financial Data Schedule
20
<PAGE>
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1999, the Company filed
the following Current Reports on Form 8-K:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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: November 15, 1999 By: /s/ Nelson L. Stephenson
Nelson L. Stephenson
President and Chief Executive Officer (principal
executive and principal financial officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial extracted from the financial statements
of RB Asset, Inc. for the 3 months ended September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 50,305
<SECURITIES> 1,147
<RECEIVABLES> 40,548
<ALLOWANCES> 17,858
<INVENTORY> 0
<CURRENT-ASSETS> 53,452
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 173,526
<CURRENT-LIABILITIES> 0
<BONDS> 11,903
0
938
<COMMON> 7,100
<OTHER-SE> 87,660
<TOTAL-LIABILITY-AND-EQUITY> 173,526
<SALES> 0
<TOTAL-REVENUES> 4,772
<CGS> 0
<TOTAL-COSTS> 3,285
<OTHER-EXPENSES> 1,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 969
<INCOME-PRETAX> (490)
<INCOME-TAX> 182
<INCOME-CONTINUING> (672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (672)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
