================================================================================
As filed with the Securities and Exchange Commission on November 15, 2000
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, 2000
------------------
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
--------------------------------------------------------------------------------
(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 14, 2000 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 14, 2000 was 937,777.
================================================================================
<PAGE>
RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
INDEX
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30,
2000 (unaudited) and June 30, 2000................................ 3
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 (unaudited).......................... 4
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended September 30, 2000 and 1999 (unaudited) ...... 5
Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and 1999 (unaudited).......................... 6
Notes to the Consolidated Financial Statements .................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations ..................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................... 20
Item 2. Changes in Securities ............................................... 21
Item 3. Defaults Upon Senior Securities ..................................... 21
Item 4. Submissions of Matters to a Vote of Securities Holders .............. 21
Item 5. Other Information ................................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................... 21
SIGNATURE....... ..................................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and June 30, 2000
(Dollars in Thousands)
Assets
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
2000 2000
------ ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $6,146 and $5,550, respectively $ 101,249 $ 99,321
Real estate held for disposal 5,876 2,040
Allowance for fair market value reserve under SFAS-121 (40) (40)
----------------- -----------------
Total real estate held for disposal, net 5,836 2,000
Investments in joint ventures 1,454 1,454
----------------- -----------------
Total real estate assets 108,539 102,775
Loans receivable:
Secured by real estate 32,328 32,339
Commercial and consumer 7,247 7,247
Allowance for possible credit losses (13,341) (13,341)
----------------- -----------------
Total loans receivable, net 26,234 26,245
Cash, due from banks and cash equivalents 34,367 33,666
Cash, due from banks - restricted 7,500 7,500
Investment securities available for sale 1,316 1,170
Other assets 2,414 2,425
----------------- -----------------
Total Assets $ 180,370 $ 173,781
================= =================
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 $ 13,095 $ 12,527
Borrowed funds 57,517 52,033
Other liabilities 12,828 12,379
----------------- -----------------
Total Liabilities 83,440 76,939
----------------- -----------------
Commitments and contingencies (Note 3) Stockholders' equity:
15% non-cumulative preferred stock, Series A par value $1,
liquidation value $25 (1,400,000 shares authorized, 937,777
issued and outstanding at September 30, 2000 and June 30, 2000) 938 938
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at September 30,
2000 and June 30, 2000) 7,100 7,100
Additional paid in capital 100,439 100,439
Accumulated deficit (10,565) (10,507)
Securities valuation account (982) (1,128)
----------------- -----------------
Total Stockholders' Equity 96,930 96,842
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 180,370 $ 173,781
================= =================
See notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 2000 and 1999
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------------------
2000 1999
--------------- -----------------
<S> <C> <C>
Revenue:
Rental revenue and operations:
Rental income and other property revenue $ 4,020 $ 4,031
Property operating and maintenance expense (2,572) (2,714)
Depreciation - real estate held for investment (604) (571)
--------------- -----------------
Net rental operations 844 746
Net gain on sale of real estate 838 -
Interest income:
Loans receivable 334 569
Money market investments and other 194 172
--------------- -----------------
Total interest income 528 741
--------------- -----------------
Total revenues 2,210 1,487
--------------- -----------------
Expenses:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 318 288
Borrowed funds 686 659
Other 3 22
--------------- -----------------
Total interest expense 1,007 969
Other expenses:
Salaries and employee benefits 59 51
Legal and professional fees 299 202
Management fees 591 578
Other 86 177
--------------- -----------------
Total other expenses 1,035 1,008
Total expenses 2,042 1,977
--------------- -----------------
(Loss) income before provision for income taxes 168 (490)
--------------- -----------------
Provision for income taxes 226 182
Net (loss) income (58) (672)
Dividends declared on preferred stock - -
--------------- -----------------
Net (loss) income applicable to common stock $ (58) $ (672)
=============== =================
Basic and diluted (loss) income per common share $ (0.01) $ (0.09)
=============== =================
</TABLE>
See notes to Consolidated Financial Statements
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY Three months
ended September 30, 2000 and 1999
(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, 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
========= ========= ========== =========== ============= =========
Balances at June 30, 2000 $ 938 $ 7,100 $ 100,439 $ (10,507) $ (1,128) $ 96,842
Net loss for the three months
ended September 30, 2000 - - - (58) - (58)
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - 146 146
Balances at September 30, 2000 $ 938 $ 7,100 $ 100,439 $ (10,565) $ (982) $ 96,930
========= ========= ========== =========== ============= =========
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 2000 and 1999
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Operating Activities:
Cash flows provided by (used in) Operating Activities:
Net loss $ (58) $ (672)
Adjustments to reconcile net loss income to cash
provided by (used in) operating activities:
Net gain on sale of real estate assets (838) -
Depreciation and amortization 604 571
Amortization of capitalized issuance costs and accretion of
issuance discount - Increasing Rate Junior Subordinated Notes
due 2006 49 40
Change in operating assets and liabilities:
Net (increase) decrease in accrued interest receivable (110) 85
Net increase in accrued interest payable, net of accrued
interest payable capitalized as additional principal -
Increasing Rate Junior Subordinated Notes due 2006 254 166
Net increase (decrease) in accrued income taxes 169 (180)
Net increase (decrease) in accrued expenses and other
liabilities 537 (179)
Net decrease (increase) in prepaid expenses and other assets 121 (659)
Net cash provided by (used in) operating activities 728 828
---------------- ---------------
Investing Activities:
Cash flows provided by Investing Activities:
Net repayment of loans secured by real estate, net 11 23,279
Net repayment of commercial and consumer loans - 8
Proceeds from partnership distributions - investments in joint ventures - 25
Proceeds related to sales of real estate held for sale 1,048 -
Additional fundings on real estate held (6,570) (314)
Net cash (used in) provided by investing activities (5,511) 22,998
---------------- ---------------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
6
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 2000 and 1999
(dollars in thousands)
(Unaudited)
(Continued from previous page)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Financing Activities:
Cash flows used in Financing Activities:
Decrease in restricted cash - (23,059)
Proceeds from borrowed funds 6,179 -
Repayment of borrowed funds (695) -
---------------- ---------------
Net cash provided by (used in) financing activities 5,484 (23,059)
---------------- ---------------
Net increase(decrease) in cash, due from banks and cash equivalents 701 (889)
Cash, due from banks and cash equivalents - beginning of period 33,666 14,780
---------------- ---------------
Cash, due from banks and cash equivalents - end of period $ 34,367 $ 13,891
================ ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 660 $ 1,251
Federal, state and local taxes 138 387
Supplemental Disclosure of Non-cash Transactions
Accrued interest capitalized as additional principal - Increasing Rate 7
Junior Subordinated Notes due 2006 $ 518 $ 48
</TABLE>
See notes to Consolidated Financial Statements
7
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 prior fiscal year, 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, 2000.
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.
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.
8
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 39.8% of the outstanding Common Stock of the Company.
See "Management."
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 $47.6 million at September 30, 2000.
On January 31, 2000, the Company completed a refinancing of the outstanding
balance of the existing HSBC Facility. Under the terms of the refinancing the
principal balance was reduced by $1.3 to $49.5 million and the terms of the
refinancing provide for amortization of the HSBC Facility over a term of 20
years and extended the maturity of the HSBC Facility through January 31, 2005.
The HSBC Facility is secured by a first lien on two properties, certain
cooperative shares and a restricted cash collateral account (the "Special
Collateral") in the amount of $7.5 million. Under the terms of the HSBC
Facility, HSBC has retained the right to approve declaration or payment of
dividends on the Company's Preferred Stock as well as other capital
transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral
under the previous Facility agreement, other than specified above, including all
cash balances held by HSBC in excess of the $7.5 million Special Collateral was
released from all liens held by HSBC.
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, 2000. 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.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") as amended and is presently required
to file periodic reports and other information with the Securities Exchange
Commission (the "SEC").
During the three months ended September 30, 2000, the Company reported net loss
applicable to common shares of $58,000, or $(0.01) per share. Significant
factors contributing to the Company's operating results during the quarter
include real estate property and maintenance expenses of $2.6 million, a net
interest loss (interest expense on borrowed funds in excess of interest income
from loan assets) of $479,000, other
9
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Dollars in thousands)
(Unaudited)
operating expenses of $1.0 million, depreciation expenses of $604,000 and
provisions for income taxes of $226,000, partially offset by rental income from
real estate operations of $4.0 million and gains on the sale of real estate of
$838,000.
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, 2000, the
results of its operations for the three months ended September 30, 2000 and 1999
and the statements of changes in stockholders' equity and cash flows for the
three months ended September 30, 2000 and 1999. 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 September 30, 2000, 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, 2000.
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 fair value. Losses on sales or
dispositions and any adjustments related to redetermination of fair value are
charged, as real estate charge-offs to operations of the period in which such
charges occurred.
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, 2000, the results of operations for the three months ended
September 30, 2000 and 1999, and changes in stockholders' equity and cash flows
for the three months ended September 30, 2000 and 1999.
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, 2000, the balance of
stockholders' equity included a cumulative $982,000 unrealized loss on
marketable securities classified as available-for-sale.
10
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Dollars in thousands)
(Unaudited)
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, 2000 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, 2000. As a result of this analysis, the Company
recognized income tax expense in the amount of $226,000, during the quarter
ending September 30, 2000.
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 and Contingencies
As of September 30, 2000, 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 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 6.
11
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Dollars in thousands)
(Unaudited)
4. 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, 2000 and 1999,
respectively. The Company had no securities outstanding that were convertible to
common stock at September 30, 2000 or 1999.
5. 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, 2000 and 1999, total comprehensive
(loss) income was $88 and ($819), respectively. The following table describes
the components of comprehensive income and accumulated comprehensive income for
the dates indicated:
<TABLE>
<CAPTION>
Components of Comprehensive Income
(Unaudited):
Three months ended September 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Net (loss) income $ (58) $ (672)
Unrealized gains (losses) on securities 146 (147)
Comprehensive income (loss) $ 88 $ (819)
================ =================
Components of Accumulated
Comprehensive Income:
September 30, June 30,
2000 2000
Unrealized (losses) gains on securities $ (982) $ (1,128)
Accumulated comprehensive (loss) income $ (982) $ (1,128)
================ =================
</TABLE>
6. Legal Proceedings
The Company is involved in various legal proceedings occurring in the ordinary
course of business. Management of the Company, based on discussions with
litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be
12
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Dollars in thousands)
(Unaudited)
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operations of the Company.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company's 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 believed such allegations were without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders had 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. On October 27, 1998, 11 holders
of Company Preferred Stock who claimed to beneficially own, in the aggregate,
849,000 shares (approximately 60.6% of the 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 which
was argued before the court on March 23, 1999. The court issued its decision on
December 2, 1999. The court granted in part the Company's motion and dismissed
the causes of action based upon fraudulent conveyance, breach of fiduciary duty,
breach of duty of disclosure and ultra vires acts and ordered the remainder of
the Action to continue. Both the Plaintiffs and the Defendants have completed
discovery and filed motions for summary judgement on June 29, 2000. The motions
remain pending before the court.
13
<PAGE>
7. Subsequent Events
On October 17, 2000, one of the three buildings in Kingston, Atlanta was sold
for $8.2 million, which was received in cash. As a result, $3.8 million was
transferred from real estate assets held for investment to real estate held for
disposal at September 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition:
At September 30, 2000 the consolidated assets of the Company totaled $180.4
million, an increase of $6.6 million, or 3.8% as compared with total assets at
June 30, 2000 of $173.8 million.
Real estate held for investment, net of accumulated depreciation, increased $1.9
million, or 1.9%, from $99.3 million at June 30, 2000 to $101.2 million at
September 30, 2000. The increase in real estate held for investment, net of
accumulated depreciation at September 30, 2000 as compared with the balance at
June 30, 2000, was primarily attributable to funding for capital improvements of
$6.6 million, partially offset by depreciation charges of $604,000 and a
reclassification of $3.8 million to real estate held for disposal.
Real estate held for disposal, net of allowance for fair market value reserve
under Statement of Accounting Standards No. 121 (SFAS-121), increased by $3.8
million at September 30, 2000 from the balance of $2.0 million at June 30, 2000.
The increase in real estate held for disposal is primarily attributable to a
reclassification from real estate held for investments pertaining to a pending
sale of real estate. Assets categorized as real estate held for disposal at
September 30, 2000 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 $11,000, or .04%, from $26.24 million at June 30, 2000
to $26.23 million at September 30, 2000. The $11,000 decline in real estate
loans, net, during the quarter ended September 30, 2000, was primarily
attributable to the effects of normal scheduled principal repayments.
The Company's allowance for possible credit losses related to loans secured by
real estate remained unchanged at September 30, 2000 from the balance of $13.3
million at June 30, 2000. 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, 2000, the allowance for possible credit losses was 33.71% of total loans as
compared to 33.7% at June 30, 2000.
Cash, due from banks and cash equivalents increased by $701,000, or 2.1%, from
$33.7 million at June 30, 2000 to $34.4 million at September 30, 2000. Total
operating revenues and available asset sales proceeds exceeded scheduled asset
fundings and the payment of operating expenses, resulting in the increase in
unrestricted cash during the quarter ended September 30, 2000.
At September 30, 2000, HSBC had restricted a total of $7.5 million in funds,
held on deposit at HSBC, in accordance with the terms of the Branch Sale and the
Facility agreements. HSBC had restricted $7.5 million at June 30, 2000.
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.
Borrowed Funds increased by $5.5 million, or 10.5%, from $52 million at June 30,
2000 to $57.5 million at September 30, 2000. This increase was partially
attributable to additional borrowing on the construction loan facility of $6.2
million offset by a reduction of principal on the HSBC facility of $695,000.
14
<PAGE>
Other liabilities totaled $12.8 million at September 30, 2000, an increase of
$449,000, or 3.6%, from the June 30, 2000 balance of $12.4 million. The net
increase in other liabilities during the quarter ended September 30, 2000 was
primarily related to additional deposits received, increases in the tax
provision and changes in accounts payable due to timing. This increase is
partially offset by the capitalization of $518,000 in accrued interest payable
as additional principal Increasing Rate Junior Subordinated Notes due 2006 on
July 15, 2000, in accordance with the terms of the Notes. Primarily as a result
of this accrued interest capitalization, atSeptember 30, 2000, the balance of
the Company's Increasing Rate Junior Subordinated Notes due 2006 increased by
$568,000, or 4.5%, to $13.1 million, as compared with a balance of $12.5 million
at June 30, 2000.
During the three months ended September 30, 2000, total stockholders' equity
increased by $88,000, or 0.09%, to $96.9 million, as compared with $96.8 million
at June 30, 2000. This increase was due to the net loss recorded for the three
months ended September 30, 200 in the amount of $58,000 and an increase in the
securities valuation account (allowance for unrealized losses on marketable
securities) of $146,000.
The following table summarizes the calculation of the Company's book value per
share at September 30, 2000 and June 30, 2000.
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
----------------- ----------------
<S> <C> <C>
Total stockholders' equity $ 96,930,000 $ 96,842,000
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 23,444,000 23,444,000
----------------- ----------------
Net stockholders' equity $ 73,486,000 $ 73,398,000
================= ================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
================= ================
Book value per share $ 10.35 $ 10.34
================= ================
</TABLE>
Results of Operations:
General. The Company reported net loss attributable to common shares of $58,000,
or $(0.01) per basic and diluted share, for the three months ended September 30,
2000, an improvement of $614,000 as compared with a net loss attributable to
common shares of $672,000, or $(0.09) per share, for the three month period
ended September 30, 1999.
The primary reason for the increase in the Company's net operating results for
the quarter ended September 30, 2000, as compared to the same quarter in the
previous year, was the positive income effects of real estate sales transactions
in the quarter ended September 30, 2000, which resulted in the recording of
gains on asset sales and loan participations totaling $838,000. During the
quarter ended September 30, 1999, the Company recognized $ 0 in gains from the
sale of real estate.
In addition to the effects of the recorded real estate transactions in the
quarter ended September 30, 2000, as compared with the same quarter of the
previous year, interest income declined. The decline in interest income of
$213,000, or 28.7%, from $741,000 in the quarter ended September 30, 1999, to
$528,000 during the same quarter of the current year, was primarily attributable
to full satisfaction of loans, prior to the current period, which reduced the
average balance of loans held by the Company.
Partially offsetting the increases in income, cited above, for the quarter ended
September 30, 2000, as compared to the same quarter of the previous year, was an
increase in interest expense of $38,000. Interest expense increased from
$969,000 in the quarter ended September 30, 1999 to $1.0 million during the same
quarter of the current year, primarily as the result of the effects of an
increase in subordinated notes payable. (see "Interest Expense," below).
15
<PAGE>
Net Rental Operations. For the three months ended September 30, 2000, net rental
operations resulted in income of $844,000, an increase of $98,000, or 13.1%,
from $746,000 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.
Net (Loss) Gain on the Sale of Real Estate Assets. A net gain on the sale of
real estate of $838,000 was recorded for the quarter ended September 30, 2000.
The Company did not recognize any gain on the sale of real estate for the same
period of the previous year. For the quarter ended September 30, 2000, the
$838,000 net gain was attributable to the sale of residential units.
Interest Income. For the three months ended September 30, 2000, total interest
income was $528,000, a decline of $213,000, from $741,000 for the same quarter
in the previous year. Loan interest declined $235,000, or 41%, in the quarter
ended September 30, 2000, 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 increased $22,000, or 12.8%, in the quarter
ended September 30, 2000 as compared with the quarter ended September 30, 1999.
The increase in other interest income in the quarter ended September 30, 2000,
as compared with the same quarter in the previous year, was primarily due to
increasing average cash balances.
Interest Expense. During the three months ended September 30, 2000, the Company
recorded interest expenses in the amount of $1.0 million, an increase of
$38,000, or 3.9%, as compared with interest expenses of $969,000 in the same
quarter of the previous year. The increase in interest expense is primarily
attributable the recognition of $318,000 in interest expense related to the
Company's Increasing Rate Junior Subordinated Notes due 2006, which were
initially issued in December 30, 1998.
During the quarter ended September 30, 2000, the Company borrowed an average of
$47.8 million, a decline of $2.8 million, or 5.6%, as compared with average
borrowings of $50.6 million during the quarter ended September 30, 1999. The
decline in the average amount of borrowed funds was attributable to the
repayment of outstanding obligations which occurred in fiscal 2000, primarily
funded by asset sales and loan repayments. The average interest rate paid to
HSBC on borrowed funds increased slightly from 5.21% for the three months ended
September 30, 1999 to 5.25% for the same three month period in the current year.
The increase in rates paid to HSBC in the three month period ended September 30,
2000, as compared with the same periods in the previous year, was primarily due
to an increase in prevailing interest rates. This average interest rate is
attributable to the renegotiation of the Company's interest rate with HSBC.
Under the 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. During the
quarter ended September 30, 2000 a reduction in interest expense on borrowed
funds of approximately $407,000 was recognized.
Other Expenses. During the quarter ended September 30, 2000, the Company
recorded total other expenses in the amount of $1.03 million, an increase of
$27,000, or 2.6%, as compared with other expenses of $1.0 million in the same
quarter of the previous year. Other expenses increased in the quarter ended
September 30, 2000, as compared with the quarter ended September 30, 1999,
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 39.8% of
the outstanding Common Stock of the Company. During the quarter ended September
30, 2000, the Company accrued $600,000 in fees payable to the Management
Company, of which $7,900 related to fees incurred for the successful disposition
of assets. 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. At September 30, 2000
the Company had accrued fees payable to the Management Company aggregating
$245,000.
16
<PAGE>
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, 2000 and 1999, the Company recorded a net
provision for income taxes of $226,000 and $182,000, respectively, primarily to
reflect the effects of operations on its current state and local income tax
liability at September 30, 2000 and 1999, 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, development
costs related to certain real estate projects, and to satisfy the regulatory
requirements described below.
On January 31, 2000, the Company completed a refinancing of the outstanding
balance of the existing HSBC Facility. Under the terms of the refinancing the
principal balance was reduced by $1.3 to $49.5 million and the terms of the
refinancing provide for amortization of the HSBC Facility over a term of 20
years and extended the maturity of the HSBC Facility through January 31, 2005.
The HSBC Facility is secured by a first lien on two properties, certain
cooperative shares and a restricted cash collateral account (the Special
Collateral) in the amount of $7.5 million. Under the terms of the HSBC Facility,
HSBC has retained the right to approve declaration or payment of dividends on
the Company's Preferred Stock as well as other capital transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral
under the previous Facility agreement, other than specified above, including all
cash balances held by HSBC in excess of the $7.5 million Special Collateral was
released from all liens held by HSBC. Accordingly, the balance of the Company's
unrestricted cash was increased $29.4 million by an offsetting reduction in the
Company's restricted cash of $29.4 million, from $36.9 million at September 30,
1999 to $7.5 million at September 30, 2000.
The HSBC Facility has an annual interest rate equal to the Prime lending rate,
or the three-month London Interbank Offered Rate (LIBOR) plus 2%, at the option
of the Company. Notwithstanding the foregoing, interest on the Facility shall
accrue at 2% per annum on the portion of the outstanding Facility balance that
is equal to the combined balances of the Special Collateral account and
unrestricted funds that remain on deposit with HSBC.
The Company will make monthly payments to HSBC of interest, as calculated
according to the formula outlined above, and scheduled principal reductions
based on a hypothetical loan amount of $34.8 million. Minimum scheduled
principal reduction payments under this provision of the Facility agreement
approximate $800,000 per year.
17
<PAGE>
The Loan Agreement requires that while any amounts remain outstanding under the
Facility, the Company must receive HSBC's prior written consent to, among other
things, materially alter its charter or by-laws, incur additional corporate
indebtedness and liens, make any distributions to stockholders or repurchases or
redemptions of capital stock, acquire additional assets, exchange existing
assets with a third party or assume additional liabilities as a result of any
proposed merger transaction.
In order to facilitate the development of the Company's three-building office
complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million
construction loan facility (the "Construction Loan") financed by Bank of America
and secured by two buildings under development within this office complex. At
September 30, 2000, approximately $9.9 million had been advanced under the
Construction Loan, as compared with approximately $3.7 at June 30, 2000. The
completion of the development of this project is anticipated prior to June 30,
2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a
maturity date in May 2003. The loan allows for the deferral of interest until
May 2003 or such time as the collateral buildings are disposed of through sale.
The Company has incurred approximately $41,000 in interest during the year ended
June 30, 2000 and an additional $147,000 during the three months ended September
30, 2000 related to the Construction Loan, which have been accounted for as an
additional investment in the office complex.
At September 30, 2000, the Company had $47.6 million in borrowed funds
outstanding under the Facility provided by HSBC Bank and $9.9 million under the
Construction Loan provided by Bank of America. 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 seeks to maintain liquidity within a range of 5% to 10% of total
assets, above that considered necessary to meet the projected cash requirements
of endeavors such as real estate development. Liquidity for this purpose is
defined as unrestricted cash. At September 30, 2000, the Company's liquidity
ratio, as so defined, amounted to 19.06%.
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. In addition, other regulatory agencies, such as the
Securities Exchange Commission (the "SEC" ), may also, from time to time,
promulgate required generally accepted accounting principles. Set forth below is
a description of certain of the accounting standards recently adopted by the
FASB and the SEC which are relevant to financial institutions such as the
Company.
SFAS No. 133 and No. 137. 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, which was deferred until June 30, 2000 as a result of the
promulgation of SFAS-137, 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 does not have a significant effect on the
Company's results of operations or its financial condition.
Other Pronouncements. In December, 1999, the Securities and Exchange Commission
(the "SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition
("SAB No. 101"), to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. Specifically, SAB No. 101
provides guidance on lessors' accounting for contingent rent. SAB No. 101
explains the SEC staff's general framework for revenue recognition. SAB No. 101
does not change existing literature on revenue recognition, but rather clarifies
the SEC's position on preexisting literature. SAB No. 101 did not require the
Company to change existing revenue recognition policies and therefore had no
impact on the Company's financial position or results of operations at September
30, 2000. 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.
18
<PAGE>
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.
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; liquidity 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 $476,000 increase in interest expense based on
approximately $47.6 million outstanding at September 30, 2000. See Note 14,
"Borrowed Funds," contained within the Consolidated Financial Statements at June
30, 2000.
In addition, the Company has issued $13.5 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 24,
"Preferred Stock Exchange Offer," contained within the Consolidated Financial
Statements at June 30, 2000.
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 22, "Fair Value of Financial Instruments,"
within the Consolidated Financial Statements at June 30, 2000.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal proceedings occurring in the ordinary
course of business. Management of the Company, based on discussions with
litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be decided adversely to the Company's interests and
have a material adverse effect on the financial condition and operations of the
Company.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company's 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 believed such allegations were without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders had 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. On October 27, 1998, 11 holders
of Company Preferred Stock who claimed to beneficially own, in the aggregate,
849,000 shares (approximately 60.6% of the 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 which
was argued before the court on March 23, 1999. The court issued its decision on
December 2, 1999. The court granted in part the Company's motion and dismissed
the causes of action based upon fraudulent conveyance, breach of fiduciary duty,
breach of duty of disclosure and ultra vires acts and ordered the remainder of
the Action to continue. Both the Plaintiffs and the Defendants have completed
discovery and filed motions for summary judgement on June 29, 2000. The motions
remain pending before the court.
20
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
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 13, 2000 By: /s/ Nelson L. Stephenson
----------------- ----------------------------
Nelson L. Stephenson
President and Chief Executive Officer (principal
executive and principal financial officer)
22
