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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From To
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Commission file number 333 - 38673
RB ASSET, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-5041680
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the company's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
As of August 16, 2000, there were 7,100,000 shares of Common Stock of the
registrant issued and outstanding, of which 2,826,693 shares were held by all
directors and principal officers. Mr. Alvin Dworman, the largest single holder
of the registrant's Common Stock, held 2,822,693 shares at August 16, 2000.
The Common Stock of the Company is traded in limited and sporadic transactions
in the inter-dealer over-the counter market, and bid and ask price quotations
are periodically available from the NASD Bulletin Board. Available quotations
reflect inter-dealer prices, without retail mark-up markdown or commission and
may not necessarily represent actual trading transactions and the availability
of quotations should not be considered an indication of the existence of an
established active and liquid market.
DOCUMENTS INCORPORATED BY REFERENCE
None
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RB ASSET, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PART I
Item 1. Business ................................................................. 3
Item 2. Executive Offices and Other Properties..................................... 13
Item 3. Legal Proceedings.......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................ 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ...... 15
Item 6. Selected Consolidated Financial Data....................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................ 19
Item 7(a) Quantitative and Qualitative Disclosures about Market Risk ................ 37
Item 8. Consolidated Financial Statements and Supplementary Data................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 38
PART III
Item 10. Directors and Principal Officers of the Registrant......................... 39
Item 11. Executive Compensation..................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 43
Item 13. Certain Relationships and Related Transactions............................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 48
SIGNATURES................................................................................ 50
CONSOLIDATED FINANCIAL STATEMENTS......................................................... F-1
FINANCIAL STATEMENT SCHEDULES............................................................. F-34
EXHIBIT INDEX............................................................................. E-1
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PART I
ITEM 1
BUSINESS
General
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 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 fiscal year ended June 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.
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 $48.3 million at June 30, 2000.
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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 June 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.
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 June 30, 1999
to $7.5 million at June 30, 2000.
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 fiscal year ended June 30, 2000, the Company reported net income
applicable to common shares of $449,000 or $0.06 per share. Significant factors
contributing to the Company's fiscal 2000 operating results include rental
income from real estate operations of $15.3 million, realization of contingent
participation interest and gains on the sale of real estate of $2.4 million and
$1.8 million, respectively, and a gain on the sale of branch contingencies in
the amount of $500,000. Partially offsetting these income items were real estate
property and maintenance expenses of $10.7 million, other operating expenses of
$4.2 million, depreciation expenses of $2.3 million, a loss on the satisfaction
of loan assets of $841,000, a net interest loss (interest expense on borrowed
funds in excess of interest income from loan assets), after provision for
possible credit losses, of $818,000 and provisions for income taxes of $651,000.
Real Estate Assets
At June 30, 2000, the Company held total real estate assets with a book value
(net of applicable reserves) of $102.8 million, which represented approximately
59.1% of the Company's total assets on that date.
Categorization of Real Estate Assets. The Company accounts for its real estate
assets in accordance with Statement of Financial Accounting Standards No. 121
(SFAS-121), "Accounting for the Impairment of Long-Lived Assets to be Disposed
of," issued by the Financial Accounting Standards Board (the "FASB"). SFAS-121
requires that long-lived assets be reviewed for impairment whenever
circumstances and situations change such that there is an indication that the
carrying amount of the asset may not be recoverable. In addition, SFAS-121
requires that long-lived assets to be disposed of be carried at the lower of
carrying value or fair value less the cost to sell. Under SFAS-121, the Company
is required to categorize its real estate assets as either real estate held for
investment or real estate held for disposal.
Real Estate Held for Investment. This category is comprised of the following
types of real estate assets:
Assets to Be Held and Used. This category is represented by
assets which the Company intends to hold until such time as
the Company determines that such assets are held for disposal.
No aggressive marketing activities would
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be commenced with respect to these assets until such time.
When, and if, the asset is marketed, it is expected that the
asset would be recategorized as real estate held for disposal.
Assets to Be Developed. This category is represented by assets
which the Company intends to develop over an extended period
of time. Certain costs (such as interest and overhead) will be
capitalized until the project is substantially complete. At
the completion of the development phase, the asset would
normally will be expected to be recategorized as real estate
assets held for disposal, or real estate held and used.
Real Estate Held for Disposal. This category is represented by assets for which
marketing activities are underway with a goal of consummating a sale within one
year. Real estate held for disposal may include entire real estate properties
held for disposal or separately saleable portions of properties, generally
described as Assets Held for Inventory. The Assets Held for Inventory category
primarily consists of co-operative apartment shares and condominium units. The
Company intends to sell such assets on a unit-by-unit basis in as expedient a
manner as possible. Marketing and sales activities are underway for this
category of assets. The portion of such real estate asset expected to be sold
within one year have been categorized as real estate held for disposal at June
30, 2000.
These categories identify the Company's asset management strategy with respect
to each individual real estate asset. See "Disposition Strategy." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality." and "Financial Statement Schedules" for more
detailed information with respect to the Company's individual investments in
real estate.
Under generally accepted accounting principles ("GAAP"), the Company is required
to depreciate real estate held for investment over the estimated useful life of
the assets. The depreciable portion of assets categorized as real estate held
for investment includes the accumulated costs of acquisition and/or development
of building structures and leasehold improvements. No depreciation charges are
made for the portion of the asset's historical cost attributable to land.
Depreciation for real estate held for investment is generally calculated on a
straight-line basis over a 30 year period or over the remaining term of the
lease for leasehold improvements, whichever period is less.
Real Estate Assets Composition. Tables that set forth information concerning the
Company's real estate portfolio at the dates indicated are included in a
separate section of this annual report on Form 10-K. See "Financial Statement
Schedules" for more detailed information with respect to the Company's portfolio
of real estate loans.
Lending Activities and the Real Estate Loan Portfolio. 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.
Loans Secured by Real Estate. At June 30, 2000, the Company's loans secured by
real estate consist of performing and non-performing loans secured by
multi-family residential properties. The Company's multi-family residential
loans consist primarily of loans secured by rental apartment buildings, unsold
condominium units, cooperative apartment buildings and unsold shares secured by
cooperative apartments. Multi-family residential loans may involve a substantial
risk of loss due to, among other things, the potentially negative effects of
changes in either property-specific or general economic conditions, which may
result in excessive vacancy rates, inadequate rental income levels and
volatility in real estate values.
The terms of the Company's multi-family residential real estate loans are most
commonly five to ten years. Certain of these loans have options to extend the
term of the loan at interest rates which may be fixed or adjusted upward for
one, or in certain instances two, additional five-year periods. These loans
include amortizing loans which require the monthly payment of interest and
principal. The amortization period for the payment of principal on such loans
generally is 20 to 30 years, with balloon payments of the remaining principal
amount due upon the maturity of the loan. The Company's commercial real estate
loans also were frequently made on an interest-only basis, with the payment of
the entire principal amount due at maturity. The multi-family residential loans
included in the Retained Assets are nearly all fixed interest rate loans.
Performing Loans Secured by Real Estate. Performing loans secured by real estate
at June 30, 2000 consist of loans secured by multi-family and single-family
residential loans which are wholly-owned by the Company. Approximately $17.9
million, or approximately 10.3% of the Company's total assets, are categorized
as performing loans secured by real estate as of June 30, 2000.
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Non-Performing Loans Secured by Real Estate. Non-performing loans consist of
multi-family residential, commercial real estate, commercial business loans and
student loans. Non-performing loans are those loans which have been placed on
non-accrual status. The Company generally places a loan which is delinquent 90
days or more on non-accrual status unless it is well secured and, in the opinion
of management, collection appears likely. In addition, the Company may place a
loan on non-accrual status even when it is not yet delinquent 90 days or more if
the Company makes a determination that such loan is not collectible. When loans
are placed on non-accrual status, any accrued but unpaid interest on the loan is
reversed and future interest income is recognized only if actually received by
the Company and collection of principal is not in doubt. Approximately $14.5
million, or approximately 8.3% of the Company's assets, are comprised of loans
categorized as non-performing as of June 30, 2000 and are all currently on
non-accrual status.
Real Estate Loan Portfolio Composition. Tables that set forth information
concerning the Company's loans secured by real estate portfolio at the dates
indicated are included in a separate section of this annual report on Form 10-K.
See also "Financial Statement Schedules" for more detailed information with
respect to the Company's loans secured by real estate.
Origination and Repayment of Loans. During the fiscal years ended June 30, 2000,
1999 and 1998, the Company advanced funds only to fund continuing construction
involving a limited number of loans and investments in real estate. The
multi-family residential and commercial real estate loans originated by the
Company in recent periods have been primarily in connection with the
restructuring/refinancing of existing loans and loans to facilitate the sale of
investments in real estate. Originations and loan repurchases from HSBC were
$11.1 million, $0 and $471,000 in the years ended June 30, 2000, 1999 and 1998,
respectively. Repayments of loans were $32.4 million, $5.5 million and $26.3
million in the years ended June 30, 2000, 1999 and 1998, respectively.
Concentrations of Loans Secured by Real Estate by Loan and by Borrower. At June
30, 2000, the Company's loans secured by real estate portfolio included two
loans aggregating $31.3 million with principal amounts greater than $10.0
million.
Real Estate Projects Under Development. At June 30, 2000 and 1999, the Company
held three real estate assets currently under development. Two of the projects
currently under development are multi-family residential projects and the
remaining project is a three-building office complex in Atlanta, Georgia. See
also "Consolidated Financial Statements- Note 11."
At June 30, 2000 the multi-family residential real estate projects under
development consisted of two adjacent parcels of land located in the Bronx, New
York (the "Bronx Projects"). On that date, the Company's remaining investment in
the Bronx Projects totaled $15.6, including $11.3 million for one site ("Site
One") and $4.3 million for a second site ("Site Two"). The Bronx Projects
represent ownership and development rights for each of the parcels of land and
the Company's investment in construction in process, which has commenced for
both sites. Prior to June 30, 1998, development of the first phase of Site One,
involving the construction of 84 condominium units, was completed and all units
were sold. The remaining tracts of Site One were vacant on June 30, 1999 and
2000.
During October 1999, the Company, through a newly formed subsidiary, RB Castle
Hill Corp. formed a joint venture with an unrelated development company to
complete the development of Site Two. The new joint venture company will be
owned in equal proportions by RB Castle Hill Corp. and the unrelated joint
venture partner. Under the terms of the joint venture partnership, the Company
will sell the land in Site Two, which consists of approximately 143 home sites,
in not more than six phases. Due to site and existing utility parameters, the
land sell phases will range in size from 14 to 40 homesites. Land will be
transferred according to a benchmark schedule which provides for each
transferred phase to be 80% presold with bona fide contracts before a subsequent
phase can be acquired. The release price for each homesite will be $40,000. In
addition, the Company may contingently receive a portion of the final sales
price for each two-family home at a rate equal to 50% of the amount the home is
sold for in excess of an agreed upon base price. Certain expenses related to the
development of the site in preparation for the construction of the residential
units will be borne equally by the Company and its' joint venture partner. Site
Two was vacant on June 30, 1999 and 2000, but significant developmental efforts
have commenced at June 30, 2000.
In addition to the two multi-family real estate projects under development,
described above, the Company was also actively developing two buildings within a
three-building office complex located in Atlanta, Georgia. The fair value of
this asset at June 30, 2000 was $19.0 million. It is anticipated that this
development project will be fully completed by June 30, 2001 and that the
buildings under development will be fully occupied by that date. In order to
facilitate the development of this project, the Company has obtained a $23.5
million construction loan facility (the "Construction Loan") financed by Bank of
America and secured by the two buildings under development within this office
complex. At June 30, 2000, approximately $3.7 million had been advanced under
the Construction Loan.
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The Company also retained an interest in one residential unit within its
substantially completed multi-family residential development project located in
Wayne, New Jersey. The fair value of this residential unit, which will be
offered for sale at a future date, was $185,000 at June 30, 2000.
Other Joint Ventures. At June 30, 2000 and 1999, the Company held one investment
in a joint venture project, totaling $1.5 million. This joint venture project is
a shopping center located in Escondido, CA. Thirty-five percent of the joint
venture is owned by the Company. At June 30, 2000, the Company did not have any
material amounts left to be funded pursuant to legally binding commitments
relating to the joint venture, except certain ongoing operating expenses and
limited amounts of capital investment. Failure by the Company or its joint
venture partner to fund operating expenses, in the event that the underlying
property does not generate sufficient cash flow to meet its operating costs,
could result in the loss of the asset.
Other Assets
Cash, Due from Banks and Cash Equivalents. Included in cash, due from banks and
cash equivalents at June 30, 2000, are approximately $2.5 million in funds
maintained on deposit by wholly-owned subsidiaries and required to meet ongoing
cash flow requirements of those subsidiaries. At June 30, 2000, HSBC had
restricted a total of $7.5 million in funds, held on deposit with HSBC, in
accordance with the terms of the Branch Sale and the Facility agreements. At
June 30, 1999, HSBC had restricted a total of approximately $13.4 million.
Restricted funds held by HSBC are not available to the Company for the
settlement of any of the Company's current obligations. The restricted cash
reserves arose from the sale of assets which were pledged as primary or
additional collateral for the HSBC Facility. The restricted cash held by HSBC is
intended to serve as substitute collateral for the HSBC Facility until the
Company and HSBC negotiate the application or other use of the funds in
accordance with the Company's Asset Management Plan and the terms of the HSBC
Facility agreements. On October 1, 1998, a modification of the Company's loan
agreements with HSBC became effective. This loan modification effectively
reduced the rate of interest paid by the Company to HSBC by providing
compensating balance credits to the Company for funds it held on deposit with
HSBC. See "Sources of Financing."
Investment Securities. The following table sets forth the Company's investment
securities portfolio at carrying value at the dates indicated.
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June 30,
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2000 1999 1998
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(In Thousands)
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Securities:
Marketable Equity Securities $ 2,298 $ 2,298 $ 2,298
Valuation allowance under
SFAS No. 115 (1,128) (1,004) (926)
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Total Investment Securities, net (1) $ 1,170 $ 1,294 $ 1,372
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(1) At June 30, 2000, 1999 and 1998, all of the Company's investment
securities were classified as available for sale and carried at market
value in accordance with SFAS-115. See Note 1 to the Consolidated
Financial Statements.
At June 30, 2000, the Company's investment in common stock was comprised of
investment in the common stock of one corporate issuer. The Company held no debt
securities as of June 30, 2000, 1999 and 1998. For additional information
relating to the Company's investment securities, see Note 7 to the Consolidated
Financial Statements.
Commercial Business and Consumer Loans. The Company has been actively collecting
proceeds related to the portfolio of commercial business and consumer loans,
which have been reduced to a total of $7.2 million at June 30, 2000. During the
year ended June 30, 2000, the Company's portfolio of consumer loans was paid in
full. Commercial business and consumer loans totaled $10.3 million at June 30,
1999 and consisted of $8.4 million of commercial business loans, net of
provision for possible credit losses, and $1.9 million of consumer loans at that
date. Of the $7.2 million in commercial business loans $6.2 million, or 86.1%,
was classified as non-performing and maintained on non-accrual status.
The Company's commercial business loans previously consisted primarily of loans
which involved the buy out, acquisition or recapitalization of an existing
business (including management buy outs and corporate mergers and acquisitions).
Such loans involved a high degree of risk in their origination since such
transactions frequently resulted in a substantial increase in both the
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borrower's liabilities and its liabilities-to-assets leverage ratio, thus
increasing the prospects for default. At June 30, 2000, $6.2 million of the
Company's commercial business loans had fixed rates of interest and stated
maturities greater than five years.
Other assets. The Company held other assets equal to $2.4 million and $3.1
million at June 30, 2000 and 1999, respectively. At June 30, 2000, other assets
were primarily composed of accrued interest receivable, net of interest
reserves, and other prepaid assets. At June 30, 1999, other assets were
primarily composed of deposits securing asset sale recourse claims, accrued
interest receivable, net of interest reserves, and other prepaid assets. The
decrease in other assets of approximately $700,000 from June 30, 1999 to June
30, 2000 was primarily attributable to the collection of various receivable
balances related to subsidiary operations during fiscal 2000. See Note 13 to the
Consolidated Financial Statements.
Sources of Financing
Initial Facility with HSBC: The closing of the Branch Sale was conditioned upon
the Company's obtaining financing with terms reasonably acceptable to the
Company and determined to be adequate to permit consummation of the Branch Sale.
At June 28, 1996, the Company obtained from HSBC a loan facility (the
"Facility") consisting of eleven independent mortgage loans with additional
collateral, in an aggregate amount not to exceed of $100.0 million. As of June
30, 1996, HSBC had extended $89.8 million under the Facility to the Company.
Proceeds of the Facility were utilized by the Company to (i) refinance all or
part of the certain indebtedness secured by assets to be transferred to HSBC,
including all or a substantial part of the outstanding advances from the Federal
Home Loan Bank and (ii) provide additional funds for the development and
completion of two individual real estate assets as part of the Company's
operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts which are equal to 60% and 30% of the original aggregate amount of the
Facility and remaining fully current on all obligations and in compliance with
all covenants. The Company remained current on all obligations and remained in
compliance with all covenants related to the Facility. Accordingly, the
agreement was extended by mutual agreement between the Company and HSBC in June
1999 through June 30, 2000.
The Facility was secured by first priority mortgage liens on eleven of River
Bank's real estate assets approved by HSBC and collateral assignments of first
priority mortgages held by the Predecessor Bank (the "Primary Collateral"). Each
of the loans was cross defaulted with each other and cross collateralized by all
collateral for the Facility. As additional collateral for the Facility, each
loan was also secured by first priority mortgages (or, where applicable, a
collateral assignment of first priority mortgages held by the Company), stock
pledges and assignment of partnership interests and assignment of miscellaneous
interests on additional Bank assets (the "Additional Collateral"). The Company
collaterally assigned to HSBC all of the cash flow from the Primary Collateral
and the Additional Collateral. Substantially all net proceeds from the sale of
Primary Collateral assets by the Predecessor Bank and, later, the Company, were
applied to the prepayment of the Facility.
The Facility was priced at 175 basis points over LIBOR for the initial six
months following June 28, 1996, automatically increasing by 25 basis points at
the beginning of each of the subsequent three six month periods and will be
priced at 275 basis points over LIBOR for the third year of the Facility. In the
event that the Company elects to exercise its option to extend the initial term
of the Facility, the Facility will be priced at 300 basis points over LIBOR
during the initial one year extension and 325 basis points over LIBOR during the
second one year extension. Following maturity or an event of default, the
Facility will accrue interest at a specified default rate.
The terms of the Facility agreement required 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.
On October 1, 1998, a modification of the loan agreement between HSBC and the
Company became effective. This modification effectively reduced the rate of
interest paid by the Company to HSBC by providing compensating balance credits
to the Company for funds it held on deposit with HSBC. As a result of this
modification the average interest paid to HSBC declined from
8
<PAGE>
approximately 8.17% in 1998 to 6.53% in 1999 and declined further to 4.89% in
2000. The decline in the effective interest rate paid to HSBC for the facility
in 2000, as compared with 1999, was also partially attributable to a refinancing
of the Facility which took place in January 2000 (see below).
Refinanced Facility with HSBC. 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
Facility over a term of 20 years and extended the maturity of the HSBC Facility
through January 31, 2005. The Facility is secured by a first lien on two
properties, certain cooperative shares in a third property 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 June 30, 1999
to $7.5 million at June 30, 2000.
Under the terms of the modified agreement, the Facility currently is subject to
a 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 the portion of
unrestricted funds that remain on deposit with HSBC.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding
under the Facility. 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.
Construction Loan Facility. 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 June 30, 2000, approximately $3.7
million had been advanced under the Construction Loan. 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, which has been added to the outstanding balance of the Construction Loan
and has also been accounted for as an addition to the Company's investment in
the office complex project.
Borrowed Funds Summary. The following table sets forth certain information
concerning the Company's borrowed funds at the dates indicated (in thousands).
<TABLE>
<CAPTION>
June 30,
------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
HSBC Facilities $ 48,327 $ 50,557 $ 60,557
Secured by Loans Sold with Recourse -- -- 8,203
Construction financing (Bank of
America) 3,706 -- --
--------- --------- ---------
$ 52,033 $ 50,557 $ 68,760
========= ========= =========
</TABLE>
For additional information relating to the Company's borrowed funds, see Note 14
to the Consolidated Financial Statements.
Subsidiaries
A substantial amount of the Company's activities in subsidiaries consists of
holding investments in real estate not held directly by the Company. The Company
has established a number of subsidiaries for the sole purpose of holding and/or
disposing of a single real estate asset. Real estate assets located in New York
City are generally held by subsidiaries of Rivercity Realty Corp. ("RRC"), and
those located in the eastern United States including New York State are held by
subsidiaries of Riverbank Properties, Inc. ("RPI")
9
<PAGE>
and certain other subsidiaries of the Company. RRC and RPI are New York
corporations. The Company's investments in real estate located in the western
United States are generally held by subsidiaries of Riverbank Financial Group
("RFG"), a California corporation which had an office in San Francisco. RPI, RRC
and RFG were originally formed to engage in real estate development and lending
activities.
Employees
At June 30, 2000, the Company had two employees who are engaged in
administrative duties. See "Directors and Principal Officers of the Registrant."
Taxation
Certain Tax Attributes. As of June 30, 2000, the Company had recorded a gross
deferred tax liability of approximately $29.9 million in its consolidated
financial statements. Also, as of June 30, 2000, the Company had recorded a
gross deferred tax asset of approximately $78.1 million, primarily attributable
to net operating loss carry forward attributes ("NOLs") of approximately $105.6
million, reserves for loan losses and real estate valuation allowances of
approximately $9.3 million and general business and alternative minimum tax
credits of approximately $9.3 million. The Company's ability to realize the
excess of the gross deferred tax asset over the gross deferred tax liability is
dependent upon its ability to earn taxable income in the future. As a result of
losses in recent fiscal years and other evidence, this realization is uncertain
and a valuation allowance has been established to reduce the deferred tax asset
to the amount that management of the Company believes will more likely than not
be realized. Accordingly, neither a net overall liability nor a net overall
asset was reflected in the Company's consolidated financial statements. The tax
attributes associated with the deferred tax assets have not been reviewed or
approved by the IRS. As described further below, the Equity Offering and related
transactions may have adversely affected the ability of the Company to realize
its deferred tax assets, with the effect that the Company would have an overall
net deferred tax liability and concomitant reduction to its stockholders'
equity. As a result, the Company could be subject to substantial increased
out-of-pocket tax expenditures.
Section 382 of the Code generally provides that if a corporation undergoes an
"ownership change," the amount of taxable income that the corporation may offset
after the date of the ownership change (the "Change Date") by NOLs (and certain
built-in losses, as described below) existing on the Change Date will be subject
to an annual limitation. In general, the annual limitation is equal to the
product obtained by multiplying (I) the fair market value of the corporation's
equity immediately prior to the Change Date (with certain adjustments, including
an exclusion of capital contributions made during the two years preceding the
Change Date), by (ii) the long-term tax-exempt bond rate determined for the
month in which the Change Date occurs, as published by the IRS. For "ownership
changes" occurring during June 1994, that rate is 6.01%. If an "ownership
change" of the Company took place during June 1994, the Company might be
permitted to use no more than approximately $865,000 of its NOLs annually to
offset taxable income realized after the Change Date, including income which
will be realized in connection with the Branch Sale. Accordingly, the Company's
ability to use its deferred tax assets may be reduced materially, resulting in
the recognition of additional tax expense and a reduction to its stockholders'
equity and the Company's liquidity.
Built-in losses, measured by the excess, if any, of the tax basis of each asset
of the corporation over its fair market value, also may be limited under Section
382, if, as is believed to be the case with respect to the Company, the
corporation had a net unrealized built-in loss in excess of the lesser of $10.0
million or 15% of the fair market value of its assets, and if the built-in
losses are recognized within five years after the Change Date. Certain
deductions that have accrued economically on the Change Date and would otherwise
have been taken after the Change Date (possibly including suspended passive
activity losses) may also be treated as built-in losses.
In general, an "ownership change" occurs with respect to a corporation if any of
its stockholders who own, directly or indirectly, five percent or more of the
stock of the corporation ("5-percent stockholders") increase their aggregate
percentage ownership of such stock by more than 50 percentage points over the
lowest percentage of stock owned by those stockholders at any time during a
three-year testing period. In applying Section 382, newly-issued stock generally
is considered to have been acquired by one or more 5-percent stockholders, even
if none of the persons acquiring that stock in fact owns (or owned) at least
five percent of the issuer's stock.
Based on current ownership information available to the Company, the Company is
of the view that no ownership change of the Company occurred within the three
years preceding and three years succeeding the Equity Offering. The Company
expects that the Equity Offering, when combined with prior changes in ownership
of stock of the Company and other contemplated transactions affecting ownership
of the capital stock of the Company occurring in connection with the Equity
Offering, did not result in an
10
<PAGE>
ownership change of the Company. However, the application of Section 382 is in
many respects uncertain. In assessing the effects of prior transactions and of
the Equity Offering 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 Equity Offering and the IRS could challenge the Company's determinations.
Although it may not have caused an ownership change, the Equity Offering caused
a significant increase in the percentage ownership of stock of the Predecessor
Bank by one or more new 5-percent stockholders. Specifically, the Company
believes that the Equity Offering resulted in 5-percent stockholders increasing
their ownership for purposes of Section 382 of the Code by approximately 49
percentage points. Therefore, the Equity Offering significantly increased the
likelihood that relatively small future issuances of, or transactions in or
affecting the direct or indirect ownership of, shares of Common Stock would
result in an ownership change.
As part of its efforts to avoid any limitation under Section 382 of the Code on
the use of its NOLs and other tax attributes, each of Mr. Dworman, Odyssey
Partners, L.P. and East River Partnership B agreed to certain restrictions on
the transfer of the Common Stock and any other security of the Company which is
deemed to be "stock" for purposes of Section 382 of the Code and regulations
promulgated thereunder for a five-year period following consummation of the
Equity Offering. These restrictions on transfer are intended to reduce, but do
not eliminate, the possibility that there may be a future ownership change
affecting the ability of the Company to use its then-existing losses, loss
carryovers and built-in losses. Mr. Dworman, as the largest stockholder of the
Company following the Equity Offering, may continue to exert substantial
influence over decisions made by the Company's Board, including its decisions as
to whether to approve a transfer of stock of the Company that could result in an
ownership change, with the above-described consequences.
Section 269(a)(1) of the Code generally provides that, if one or more persons
acquire control of a corporation and the principal purpose of the acquisition is
to evade or avoid federal income tax by securing the benefit of a deduction,
credit or other allowance which those persons or the corporation would not
otherwise enjoy, then the IRS may disallow the corporation's deductions, credits
or other allowances. For this purpose, "control" means ownership of stock
possessing either at least 50% of the voting power or at least 50% of the total
value of all classes of stock of the corporation. Although the Company's Equity
Offering resulted in one or more persons acquiring control of the Company, the
Company understands that the principal purpose of the investors for
participating in the Equity Offering was not to avail themselves of any tax
benefits of the Company. It is possible, however, that the IRS may challenge
this view. If any such challenge were successful, the Company could lose its
future ability to use its losses, loss carryovers and built-in losses to offset
its future income.
Federal Taxation. For federal income tax purposes, the Company reports its
income and expenses using the accrual method of accounting. The Company and
certain of its subsidiaries file consolidated federal income tax returns on a
fiscal year basis and are subject to federal income tax under the rules of the
Internal Revenue Code ("Code") in the same manner as other corporations. The
currently effective maximum federal corporate income tax rate increased to 35%.
In addition to regular income taxes, corporations such as the Company are
subject to an alternative minimum tax which is generally equal to 20% of the
excess of alternative minimum taxable income (taxable income, increased by tax
preference items and adjusted for certain other tax items) over regular income
taxes. A portion of alternative minimum taxes paid can be credited against
regular taxes due in later years, subject to certain limitations.
As of June 30, 2000, the Company had four existing tax attributes which could be
used to reduce federal tax liabilities in the current and future years. These
are its passive activity loss carry forwards and credits, net operating loss
(NOL) carry forwards, and general business and alternative minimum tax credits,
each of which is discussed below and in Note 17 to the Consolidated Financial
Statements.
At June 30, 2000, the Company had suspended passive activity losses for federal
income tax purposes of approximately $2.3 million and suspended passive activity
credits (consisting of rehabilitation tax credits) which it has not been able to
utilize in prior periods and are subject to substantially similar limitations,
of approximately $5.5 million. In addition, tax credits of $555,000, and
$784,000, were generated in 1995 and 1994, respectively, and are considered non
passive. This credit is primarily attributable to the Company's investment in
the rehabilitation of an historic multi-family residential project located in
Philadelphia, Pennsylvania. See Note 17 to the Consolidated Financial Statements
for additional information. The primary source of the Company's "passive" losses
has been from losses incurred by subsidiaries of the Company in real estate
joint ventures, and certain losses incurred by the Company in connection with
real estate acquired through foreclosure. "Passive" losses from these sources
may be deducted against the Company's "active income" other than its "portfolio
income." For tax years in which the Company is considered to be "closely held"
within the meaning of the Code, passive activity losses and credits in excess of
the amounts currently allowed are suspended and may be carried forward
indefinitely to offset taxable income and liabilities from passive activities or
from an active trade or business in future years,
11
<PAGE>
or will generally be fully deductible (but not creditable) upon a complete
disposition of the underlying passive activity. These tax credits are only
utilizable against tax liability which would otherwise be incurred, and,
accordingly, can not be used until after the available deductible loss carry
forwards have been utilized.
The passive activity loss limitations applied to the Company in prior years
because the Company was considered to be "closely held" within the meaning of
the passive activity loss limitation rules set forth in the Code. The Company
was previously considered to be "closely held" for this purpose because more
than 50% of the value of its outstanding stock was owned, directly or
indirectly, by or for not more than five individuals. The determination of stock
ownership for the purposes of the passive activity loss limitation rules differs
from the requirements of Section 382 of the Code with regard to the ownership of
certain preferred stock (see Note 17 to the Consolidated Financial Statements).
As a result of the Equity Offering, the Company believes that it is not "closely
held" for purposes of the passive activity loss rules following consummation of
the Offering notwithstanding the absence of the occurrence of an "ownership
change" for purposes of Section 382 of the Code. The passive activity loss
limitation rules will continue to apply to losses and credits from any preceding
period during which the Company was "closely held," but current losses and
credits are not subject to treatment as passive activity losses.
At June 30, 2000, the Company had NOL carry forwards for federal income tax
purposes of approximately $105.6 million. The Company's NOLs may be carried
forward 15 or 20 years and will expire in 2006 through 2020.
The Company is subject to Federal income tax on its operations conducted after
the Branch Sale and will recognize gain or loss at the time of the disposition
of those of its assets not sold therein. Commencing with the taxable year of the
making of any liquidating distribution with regard to the Company Preferred
Stock, the Company will become subject to the passive activity loss limitation
rules and the "at-risk" rules of the Code and, if at least 60% of the Company's
"adjusted ordinary gross income" for any year is "personal holding company
income" (each as defined), the Company may be subject to a personal holding
company tax on its undistributed personal holding company income for such year.
The passive activity loss limitation and "at-risk" rules have not applied to the
Company during the period that the Series A Preferred Stock was outstanding
(although the Company has passive activity loss carryovers and credits arising
before that period) and the personal holding company rules have not applied to
the Company during the time that it has been a "Company" or a "domestic building
and loan association," each as defined in the relevant provisions of the Code.
At June 30, 2000, the Company had an alternative minimum tax credit carry
forward of approximately $2.5 million for federal income tax and financial
reporting purposes attributable to alternative minimum taxes paid in prior
periods. This tax credit is only utilizable against regular tax liabilities
which would otherwise be incurred, and, accordingly, can not be used until after
the available deductible loss carry forwards have been utilized.
The Company's federal income tax returns have been audited or closed without
audit by the IRS through its 1996 taxable year. For additional information
regarding Federal tax matters, see Note 17 to the Consolidated Financial
Statements.
State and Local Taxation. Prior to May 22, 1998, the Company was subject to the
New York State Franchise Tax on Banking Corporations and to the New York City
Banking Corporation Tax (collectively, the "Banking Tax" rules). The
reorganization on May 22, 1998, and the dissolution of the Predecessor Bank
under New York State Banking Law, resulted in the new organization becoming (on
that date) subject to the New York State and New York City Corporate tax rules,
as opposed to the Banking Tax rules. The Corporate tax rules impose a tax
calculated on the greater of either tax imposed on net income or capital tax
base, as defined in the regulations.
In addition to the foregoing, the New York State Tax Law also imposes a
Metropolitan Transportation Business Tax surcharge equal to 17% of the portion
of the net New York State franchise tax (after deduction of any allowable
credits against tax) otherwise payable which is attributable to the Company's
gross income within New York City and in several other New York counties in the
New York Metropolitan Area.
The Company files a combined New York State franchise tax return with several of
its currently active subsidiaries that do business in New York. The Company's
New York State tax returns have either been audited or closed without audit by
the New York State Department of Taxation and Finance through its 1991 taxable
year.
12
<PAGE>
REGULATION
The references to laws and regulations which are applicable to the Company set
forth below and elsewhere herein do not purport to be complete and are qualified
in their entirety by reference to such laws and regulations.
The Company is a Delaware corporation that succeeded to the assets, liabilities
and business of River Bank as a result of a reorganization consummated on May
22, 1998. Prior to the Reorganization, the Predecessor Bank was a stock-form
savings bank chartered under the laws of the State of New York, and its
remaining non-retail deposit accounts and escrow accounts were insured up to
applicable limits by the Bank Insurance Fund administered by the FDIC. The
Predecessor Bank was therefore subject to extensive regulation, examination and
supervision by the Banking Department and by the FDIC. As a Delaware
corporation, no longer engaged in banking activities, the Company is no longer
subject to regulation by the Banking Department or the FDIC. The Company remains
subject to the information and reporting requirements of the Exchange Act, as
amended, administered by the SEC.
ITEM 2
EXECUTIVE OFFICES AND OTHER PROPERTIES
During the year ended June 30, 1996 the Company terminated all remaining lease
obligations involving properties and executive offices. The Company is no longer
obligated under any material amounts of non-cancelable operating leases. During
2000, the Company paid rent in an aggregate amount that was not material to its
financial statements.
ITEM 3
LEGAL PROCEEDINGS
Litigation. The Company is involved in various legal proceedings occurring in
the ordinary course of business. Management of the Company, based on discussions
with litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be decided adversely to the Company's interests and
have a material adverse effect on the financial condition and operations of the
Company.
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
13
<PAGE>
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.
Environmental Matters. Under various federal, state and local laws, ordinances
and regulations, an owner, operator or manager of real property, including under
certain circumstances the directors and officers of such entities, may become
liable for the costs of removal or remediation of certain hazardous substances
and materials released on or in its property or as a result of the disposal of
such substances or materials on the owner's or another person's property. Such
loans can impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release of such hazardous substances. The
presence of such substances, or the failure to properly remediate such
substances when released, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. Under certain
circumstances secured lenders may become exposed to environmental liabilities
if, among other things, they take on an active management role with respect to
the real estate property that is the subject of their security interest. While
the Comprehensive Environmental Response, Compensation and Liability Act
provides certain exemptions from liability for secured lenders, the scope of
such exemptions are limited and may not be applicable to all the assets
currently or previously owned by the Company and its subsidiaries.
The Company has not been notified by any governmental authority of any material
noncompliance, liability or other claim in connection with any of the real
estate properties currently owned or classified as in-substance foreclosures by
the Company or its subsidiaries, but it is aware of the presence of certain
hazardous substances and materials on certain of its properties (foreclosed and
in-substance foreclosed), which it has taken into account in connection with the
appraisals of such properties. The Company believes that the expected costs of
remediation of such conditions are not significant and would not materially
impair the Company's ability to sell such properties. It is the Company's
general practice to take title to a property only if a Phase I environmental
audit (which involves only limited procedures) does not reveal a risk of a
material environmental condition and to establish a separate subsidiary to hold
each newly-foreclosed property. There can be no assurance, however, that such
audits reveal all potential environmental liabilities that might exist with
respect to a foreclosed property, that no prior owner created any material
unknown environmental condition, that future uses or conditions (including,
without limitation, changes in applicable environmental laws and regulations)
will not result in imposition of environmental liability on the Company or its
subsidiaries, or that the establishment of separate subsidiaries for foreclosed
properties will insulate the Company against potential environmental liability
relating to such properties.
ITEM 4
SUBMISSIONS OF MATTERS TO A VOTE OF STOCKHOLDERS
Not Applicable.
14
<PAGE>
PART II
ITEM 5
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Common Stock - The Common Stock of the Company is traded in limited and sporadic
transactions in the inter-dealer over-the-counter market, and bid and ask price
quotes are periodically available from the NASD Bulletin Board. Available
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual trading transactions and the
availability of quotations should not be considered an indication of the
existence of an established active and liquid market. Neither the Company nor
the Predecessor Bank have declared dividends on their respective common stock.
See "Consolidated Financial Statements - Note 16".
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
The following table sets forth selected consolidated financial and other data of
the Company at the dates and for the periods indicated. The data at June 30,
2000, 1999, 1998, 1997 and 1996 and for the years ended June 30, 2000, 1999,
1998, 1997 and 1996, have been derived from audited consolidated financial
statements of the Company, including the audited Consolidated Financial
Statements and related Notes included elsewhere herein and other schedules
prepared for item 6 of this document. The selected consolidated financial and
other data set forth below should be read in conjunction with, and is qualified
in its entirety by, the more detailed information included in the Consolidated
Financial Statements and related Notes, included elsewhere herein.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Total assets $ 173,781 $ 174,406 $ 190,910 $ 211,659 $ 285,478
Real estate held for investment 99,321 92,438 82,835 84,102 --
Real estate held for disposal, net 2,000 2,000 3,650 13,247 --
Investments in real estate, net (3) -- -- -- -- 146,440
Loans receivable:
Single-family residential 1,031 1,229 1,306 3,924 4,557
Multi-family residential 31,308 21,519 24,638 26,092 31,336
Commercial real estate -- 30,949 33,062 50,077 51,090
Commercial and consumer 7,247 10,314 10,431 15,677 16,022
Less: Allowance for credit losses (13,341) (18,155) (20,037) (31,570) (34,142)
---------- --------- -------- -------- ---------
Total loans receivable, net 26,245 45,856 49,400 64,200 68,863
Loans sold with recourse -- -- 15,781 24,451 29,914
---------- --------- --------- --------- ----------
Total loans, net and loans sold with recourse 26,245 45,856 65,181 88,651 98,777
Cash and due from banks and money
market instruments 41,166 28,135 32,087 14,036 17,129
Investment securities, net and investment
securities available for sale (2) 1,170 1,294 1,373 6,275 5,685
Mortgage-backed and related securities
and mortgage-backed and related
securities available for sale (2) -- -- -- -- 187
Deposits -- -- -- -- 3,032
Increasing Rate Junior Subordinated Notes due 2006 12,527 11,375 -- -- --
Borrowed funds 52,033 50,577 68,760 84,272 115,786
----------- ---------- ---------- ---------- -----------
Stockholders' equity (6) $ 96,842 $ 96,517 $ 107,183 $ 108,510 $ 138,520
=========== ========== ========== ========== ===========
Shares of Common Stock outstanding 7,100,000 7,100,000 7,100,000 7,100,000 7,100,000
Book value per common share (5) $ 10.34 $ 10.30 $ 10.17 $ 10.35 $ 14.58
=========== ========== ========== ========== ==========
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes on second following page)
15
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations Data (1):
Rental revenue and operations:
Rental income and other property revenue $ 15,258 $ 14,940 $ 13,779 $ 16,158 $ 18,530
Property operating and maintenance expense (10,667) (10,521) (10,884) (12,827) (7,734)
Depreciation - real estate held for investment (2,311) (2,338) (383) (200) (208)
--------- --------- --------- --------- ---------
Net rental operations 2,280 2,081 2,512 3,131 588
Other property income (expense):
Net gain (loss) on sale of real estate 1,816 3,194 1,998 (1,754) (3,499)
(Recovery)/Write downs of investment in real estate -- 107 (1,106) (19,745) (1,889)
--------- --------- --------- --------- ---------
Total other property income (expense) 1,816 3,301 892 (21,499) (5,388)
Other income:
Interest income:
Interest and dividend income 2,797 3,180 4,197 5,469 94,409
Provision for possible credit losses -- -- (1,500) (1,000) (5,250)
--------- --------- --------- --------- ---------
Total interest income 2,797 3,180 2,697 4,469 89,159
Realization of contingent participation revenues 2,400 1,500 3,356 -- --
Other (341) -- -- -- --
--------- --------- --------- --------- ---------
Total other income 4,856 4,680 6,053 4,469 89,159
--------- --------- --------- --------- ---------
Total revenues 8,952 10,062 9,457 (13,899) 84,359
Interest expense 3,615 4,759 6,109 7,360 61,794
Other expenses:
Deposit insurance expenses -- -- -- -- 2,533
Foreclosure costs -- -- -- -- 255
Other 4,237 4,148 6,117 7,369 33,996
--------- --------- --------- --------- ---------
Total other expenses 4,237 4,148 6,117 7,369 36,754
--------- --------- --------- --------- ---------
Total expenses 7,852 8,907 12,226 14,729 98,548
Net income (loss) before other income (expense) and before --------- --------- --------- --------- ---------
provision for income taxes 1,100 1,155 (2,769) (28,628) (14,189)
Other income (expense):
Banking fees, service charges and other net income -- -- -- -- 3,996
Gains on sale of offices and branches of the
Predecessor Bank (6) -- -- -- -- 77,560
Net gains (losses) on sale of investment securities -- -- 1,697 (1,495) (605)
Provision for HSBC Branch Sale
contingencies (4) -- -- -- (3,300) --
--------- --------- --------- --------- ---------
Total other income (expense) -- -- 1,697 (4,795) 80,951
--------- --------- --------- --------- ---------
Income (loss) before income tax expense (benefit) 1,100 1,155 (1,072) (33,423) 66,762
Income tax expense (benefit) 651 550 434 (3,300) 11,749
--------- --------- --------- --------- ---------
Income (loss) after income tax expense (benefit) 449 605 (1,506) (30,123) 55,013
Dividends declared on preferred stock -- -- -- -- 5,250
--------- --------- --------- --------- ---------
Net income (loss) applicable to Common Shares $ 449 $ 605 $ (1,506) $ (30,123) $ 49,763
========= ========= ========= ========= =========
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) per share (5) $ 0.06 $ 0.09 $ (0.21) $ (4.24) $ 7.01
========= ========= ========= ========= =========
Other Data (1)(7):
Average equity to average assets 55.82% 53.81% 54.37% 50.97% 5.51%
Equity to assets at period end (9) 55.73 55.34 56.14 51.35 48.52
Weighted average yield on interest earning assets (8) 3.52 3.33 4.21 4.90 7.42
Weighted average rate paid on
interest-bearing liabilities (8) 5.85 6.87 8.17 6.97 4.43
Interest rate spread (8) (2.33) (3.54) (3.96) (2.07) 2.99
Return on average assets (10) 0.26 0.32 (0.76) (1.27) 3.64
Return on stockholders' equity (10) 0.46 0.60 (1.40) (24.84) 66.12
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
(1) Reflects the sale, effective June 28, 1996, of the Company's remaining
eleven branch offices. As a result of such transaction, the Company's
total assets, loans receivable, net, and deposits decreased by $1,066.6
million, $1,034.9 million and $1,159.6 million, respectively, and the
Company recorded a pre-tax net gain of $77.6 million.
(2) At June 30, 1996, the most recent year end period in which the Company
held such assets, all of the Company's investment and mortgage backed
securities, were classified as available for sale in accordance with the
Company's asset management plan and may be sold in response to changes
in interest rates, prepayment risk, liquidity needs or similar factors
in connection with the Predecessor Bank's asset and liability management
strategy.
(3) For years prior to June 30, 1997, investments in real estate consist of
in-substance foreclosures, real estate held for disposal and real estate
held for investment, net of related reserves.
(4) During the year ended June 30, 1997, the Company and HSBC undertook an
overall review of the closing of the Branch Sale. As a result of such
review, the Company established a reserve of $3.3 million for potential
closing settlement adjustments and claims which it believes may be
asserted by HSBC related to certain assets acquired by HSBC in the
Branch Sale. The establishment of this reserve is reflected on the 1997
Statement of Operations as provision for HSBC Branch Sale contingencies.
The Company believes that the reserve for closing settlement adjustments
adequately provides for claims which may be asserted by HSBC.
(5) Per share information is based on the weighted average number of
outstanding shares of Common Stock during the period. The Company had no
securities outstanding that have a dilutive effect.
(6) Consists of a $77.6 million net pre-tax gain from the sale, in June
1996, of the Company's eleven branch offices, the 96th Street branch
office realty and related deposits.
(7) With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(8) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities (which do not include
non-interest-bearing demand accounts), and net interest margin
represents net interest income as a percent of average interest-earning
assets.
(9) Data is as of the end of the indicated periods.
(10) Net income for fiscal 1996 includes a $67.6 million after-tax net gain
from the Branch Sale in June 1996. Excluding this gain, return on
average assets and return on stockholders' equity for 1996 would have
been (0.83%) and (15.09%), respectively.
17
<PAGE>
The following table set forth selected data related to non-performing loans for
the periods indicated: (Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing Loans Data (1):
Non-performing loans (2):
Single-family residential (3) $ 1,006 $ 1,229 $ 1,306 $ 3,924 $ 4,557
Multi-family residential 13,444 13,718 14,724 16,790 19,658
Commercial real estate -- 5,500 6,611 11,557 3,113
Commercial business 6,247 8,459 8,458 12,806 6,817
Consumer -- 1,855 1,973 2,871 2,671
-------- -------- --------- --------- ---------
Total non-performing loans $ 20,697 $ 30,761 $ 33,072 $ 47,948 $ 36,816
-------- -------- --------- --------- ---------
Other asset Quality Data
Restructured loans (4) 31,308 20,882 22,999 24,454 29,842
Allowance for potential credit losses 13,341 18,155 20,037 31,570 34,142
Ratios: Loan Quality
Non-performing loans as a percentage
of total assets 11.91% 17.64% 17.52% 22.65% 12.90%
Non-performing loans as a percentage
of total loans 52.28 48.06 47.63 50.07 35.74
Allowance for credit losses as a percentage
of non-performing loans 64.46 59.02 60.59 65.84 92.74
Net charge-offs as a percentage of
average loans during the period ended 10.70 2.85 14.41 3.59 1.03
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-performing loans consist of loans for which the Company has ceased to
accrue interest income and has fully reserved against previously accrued
interest income.
(2) The Company's total non-performing loans decreased by $10.1 million or
32.7% to $20.7 million at June 30, 2000, as compared to $30.8 million at
June 30, 1999. Such net decreases were due primarily to the
sales/satisfactions of an aggregate of $8.9 million of non-performing loans
and a writeoff of $1.2 million of such loans.
(3) Prior to fiscal 1997, these loans primarily consisted of completed
single-family residential developments and lots for the development of
single-family residences. After June 30, 1996, such loans represent
non-accrual loans on 1-4 family residential properties for which interest
income is recognized only as received.
(4) Restructured loans consist of loans which have been restructured primarily
as a result of the financial condition of the property which secures the
loan and which are performing in accordance with their restructured terms.
18
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
General. Total assets decreased by $625,000, or 0.4% during the year ended June
30, 2000, following a decrease of $16.5 million or 8.6% during the year ended
June 30, 1999. Total liabilities decreased by $1.0 million, or 1.2% during the
year ended June 30, 2000 following a decrease of $5.8 million or 7.0% during the
year ended June 30, 1999. Decreases in assets and liabilities in recent periods
have been generally comprised of decreases in most of the principal categories
of assets and liabilities.
The following table sets forth the principal categories of the Company's assets
and liabilities at the dates indicated.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
June 30,
----------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
--------------------
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in real estate, net $ 101,321 $ 94,438 $ 86,485
Real estate loans receivable 32,339 53,697 59,006
Cash due from banks and money market
instruments 41,166 28,135 32,087
Commercial and consumer loans 7,247 10,314 10,431
Allowance for possible credit losses (13,341) (18,155) (20,037)
Investment securities available for sale 1,170 1,294 1,373
Total assets 173,781 174,406 190,910
Liabilities:
Increasing Rate Junior Subordinated Debt due 2006 12,527 11,375 --
Borrowed funds 52,033 50,557 68,760
Total liabilities 76,939 77,889 83,727
Stockholders' equity $ 96,842 $ 96,517 $ 107,183
---------------------------------------------------------------------------------------------------
</TABLE>
Investments in Real Estate, Net. Investments in real estate, which are comprised
of real estate held for investment and real estate held for disposal, net of
applicable fair market value reserves, increased by $6.9 million, or 7.3%, and
by $8.0 million, or 9.2%, during the years ended June 30, 2000 and 1999,
respectively. The net increase in investments in real estate during the year
ended June 30, 2000 was primarily due to investments made in three properties
held for development by the Company, totaling $10.2 million, net of dispositions
of multi-family residential property units held for sale totaling $1.0 million
and the effects of depreciation expense recorded during the year in the amount
of $2.3 million. The net increase in the investments in real estate during the
year ended June 30, 1999 resulted primarily from the reclassification of two
assets previously reported as loans sold with recourse, net of disposals of
investments in real estate during fiscal 1999. All disposals in 2000 and 1999
were made in accordance with the Company's asset management strategies.
During the year ended June 30, 1999, the Company disposed of two properties with
net book values totaling $2.6 million. In addition, investments in real estate,
excluding the reclassification into investments in real estate of $14.0 million
in loans sold with recourse, decreased, during the fiscal year ended June 30,
1999, as the result of sales of apartment units within the Company's two
multi-family residential developments totaling $1.7 million, and depreciation
affecting investments in real estate of $2.3 million. These disposals of
investments in real estate, totaling $6.6 million,
19
<PAGE>
were partially offset by additional asset fundings in the amount of $655,000
which were made during the year. For detailed information concerning the
Company's investments in real estate, see "Real Estate Assets" and Notes 1, 11
and 12 to the Consolidated Financial Statements.
Loans Secured by Real Estate. Total loans secured by real estate declined $21.4
million, or 39.8%, and $19.2 million, or 33.6%, during the fiscal years ended
June 30, 2000 and 1999, respectively. During the year ended June 30, 2000, nine
loans totaling $28.8 million were paid in full, for which losses of $841,000
were recorded, and an additional $2.9 million in principal repayments were
received. Partially offsetting these reductions in loans secured by real estate
was the acquisition from HSBC of a loan participation in the amount of $11.1
million for a loan secured by a multi-family residential apartment building. The
Company has held a participation in the portion of the loan not previously held
by HSBC. At June 30, 2000 the loan had an outstanding balance of $17.9 million,
all of which was due to the Company. During the year ended June 30, 1999, three
loans were paid in full, totaling $2.8 million and $14.0 million in loans sold
with recourse were reclassified to Investment in Real Estate as described in
Investments in Real Estate, Net above. In addition, the Company received
principal reduction payments of $2.7 million. See Notes 1, 8, 10 and 11 to the
Consolidated Financial Statements.
Commercial and Consumer Loans. Total commercial and consumer loans decreased
$3.1 million, or 29.7%, to $7.2 million and $117,000, or 1.1%, to $10.3 million,
during the fiscal years ended June 30, 2000 and 1999, respectively. The decline
in total commercial and consumer loans during the year ended June 30, 2000 was
due to the full satisfaction of $1.9 million in consumer loans and the
satisfaction of $1.2 million of commercial business loans. At June 30, 2000, the
Company no longer had any loans outstanding classified as consumer loans. The
decline in total commercial and consumer loans during the year ended June 30,
1999 was due to normal principal repayments and loan amortization.
Cash and Due from Banks and Money Market Instruments. Cash and due from banks
and money market instruments increased by $13.0 million, or 46.3%, to $41.2
million during the year ended June 30, 2000 following a decrease of $4.0
million, or 12.3%, to during the year ended June 30, 1999. For additional
information, see Note 5 to the Consolidated Financial Statements.
At June 30, 2000, HSBC had restricted a total of $7.5 million in funds, held on
deposit with HSBC, in accordance with the terms of the HSBC Facility agreements,
modified in February 2000. At June 30, 1999, HSBC had restricted a total of
approximately $13.4 million. Restricted funds held by HSBC are not available to
the Company for the settlement of any of the Company's current obligations. The
restricted cash reserves at June 30, 2000 was the result of the terms of a
renegotiated loan Facility agreement between The Company and HSBC dated February
2000. See "Borrowed Funds," above.
Investment Securities, Available for Sale. Total investment securities,
available for sale decreased $124,000, or 9.6%, during the year ended June 30,
2000, following a decrease of $78,000, or 5.8% during the year ended June 30,
1999. The decreases in investment securities, available for sale at June 30,
2000 and 1999 were due to a decline in market value of the securities in each of
those fiscal years.
Borrowed Funds. The Company's borrowed funds increased $1.5 million, or 2.9% to
$52.0 million in the year ended June 30, 2000, following a decrease of $18.2
million or 26.5% to $50.5 million during the year ended June 30, 1999. Borrowed
funds increased during the year ended June 30, 2000, primarily as the result of
the use of $3.7 million of the $23.5 million Construction Loan to facilitate the
development of the Company's office building development in Atlanta. Georgia.
Partially offsetting the $3.7 million increase in borrowed funds related to the
Construction Loan were paydowns totaling $2.2 million on the HSBC Facility.
Borrowed funds decreased during fiscal 1999 primarily as the result of repayment
transactions utilizing funds received from the liquidation of certain assets.
See "Borrowed Funds," above.
Stockholders' Equity. Total stockholders' equity increased $325,000, or 0.3%, to
$96.8 million in the year ended June 30, 2000, following a decrease of $10.7
million, or 10.0%, during the fiscal years ended June 30, 1999. The increase in
stockholder's equity in the year ended June 30, 2000 was the result of the
Company's reported net income of $449,000, partially offset by a decline in the
securities valuation account of $124,000.
The decline in stockholder's equity during the year ended June 30, 1999 was
primarily due to the effects of the Preferred Stock Exchange Offer. As a result
of the exchanges of preferred stock made under the Exchange Offer, total
stockholder's
20
<PAGE>
equity and other liabilities were reduced by $11.51 million and $432,000,
respectively, and its Subordinated Notes liability increased by $11.94 million.
See "Preferred Stock Exchange Offer" and Note 24 to the Consolidated Financial
Statements.
At June 30, 2000 and 1999, an aggregate of $1.1 million and $1.0 million,
respectively, were deducted from the Company's stockholders' equity under
Statement of Financial Accounting Standards No. 115 (SFAS-115) "Accounting for
Marketable Equity Securities," reflecting net unrealized losses on investment
securities classified as available for sale. See the consolidated statements of
changes to stockholders' equity in the Consolidated Financial Statements and
Note 16 to the Consolidated Financial Statements.
The following table summarizes the calculation of the Company's book value per
share at June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Year ended June 30,
---------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
--------------------
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total stockholders' equity $ 96,842 $ 96,517 $ 107,183
Less: liquidation value of preferred stock 23,444 23,444 35,000
------------ ------------ ------------
Net stockholders' equity $ 73,398 $ 73,073 $ 72,183
============ ============ ============
Total shares of Common Stock issued
and outstanding 7,100,000 7,100,000 7,100,000
Book value per common share $ 10.34 $ 10.30 $ 10.17
============ ============= ============
------------------------------------------------------------------------------------------------------------
</TABLE>
Results of Operations - Fiscal year ended June 30, 2000 compared to fiscal year
ended June 30, 1999
General. The Company reported net income attributable to common shares of
$449,000, or $0.06 per share, for the year ended June 30, 2000, as compared to
net income attributable to common shares of $605,000, or $0.09 per share, for
the fiscal year ended June 30, 1999. The primary reasons for the decline in the
Company's net income for the fiscal year ended June 30, 2000, as compared to the
previous year, was a reduction in total revenues of $1.1 million, or 11.03%,
from $10.1 million in fiscal 1999 to $9.0 million in fiscal 2000. This reduction
in total revenues was partially offset by a reduction in total pretax expenses
of $1.1 million, or 11.84%, in the year ended June 30, 2000 to $7.9 million from
$8.9 million during the year ended June 30, 1999. The primary factor causing the
reduction in total revenues for the year ended June 30, 2000, as compared with
the previous year, was a reduction in net gains on the sale of real estate in
the amount of $1.4 million, partially offset by an increase in other income of
$559,000. The primary factor causing the reduction in total pretax expenses for
the year ended June 30, 2000, as compared with the previous year, was a
reduction in interest expense of $1.1 million.
Rental Income. For the year ended June 30, 2000, rental income was $15.3
million, an increase of $318,000, or 2.1%, from $14.9 million for the year ended
June 30, 1999. The increase in rental income in the year ended June 30, 2000, as
compared with the previous fiscal year, was primarily attributable to increases
in rental income per unit at the Company's multi-family residential real estate
properties and, additionally, to increases in the overall occupancy rates at
those properties.
Property Operating and Maintenance Expenses. For the year ended June 30, 2000,
property operating and maintenance expenses ("property expenses") were $10.7
million, an increase of $146,000, or 1.3%, from $10.5 million for the year ended
June 30, 1999. The increase in property expenses was primarily attributable to
increases in overall operating costs associated with general maintenance and
repair expenses for the Company's real estate held for investment.
Depreciation - Real Estate Held for Investment. For the year ended June 30, 2000
and 1999, depreciation charges associated with real estate held for investment
were $2.3 million. Under SFAS-121, the Company is required to depreciate real
estate held for investment over the estimated useful life of the assets. No
depreciation charges are made for the portion of the assets attributable to land
values. See Note 1 to the Consolidated Financial Statements.
21
<PAGE>
Net Gain on the Sale of Real Estate. Net gain on the sale of real estate was
$1.8 million for the year ended June 30, 2000, a decrease of $1.4 million, or
43.14%, as compared with a net gain of $3.2 million in the year ended June 30,
1999. The $1.8 million net gain was attributable to sales of apartment units,
categorized as real estate held for disposal, in the amount of $2.9 million.
During the year ended June 30, 1999, the Company sold a parking garage adjacent
to its real estate investment in Atlanta, GA and a portion of the residential
units within two multi-family housing properties in New York, NY, realizing a
net gain on sale of $3.7 million. During the previous fiscal year, the Company
sold two properties realizing a net gain of $2.0 million.
Interest Income. For the year ended June 30, 2000, total interest income, net of
provisions for possible credit losses, was $2.8 million, a decrease of $383,000,
or 12.0%, from $3.2 million for the previous fiscal year. The decrease in total
interest income in fiscal 2000, as compared with the previous year, was
primarily due the full satisfaction of loans which reduced the average balance
of loans held by the Company by $21.1 million in fiscal 2000, as compared with
the previous year. Total performing loans declined due to the full satisfaction
of $26.4 million and $4.9 million in performing loans during the years ended
June 30, 2000 and 1999, respectively. Partially offsetting the decline in loans
in the year ended June 30, 2000 due to the satisfaction of loan assets, was the
acquisition of $11.1 million in loans assets from HSBC.
For the years ended June 30, 2000 and 1999, the Company's did not record any
provision for possible credit losses. Provisions for possible credit losses
result from management's ongoing evaluation of the adequacy of the allowance for
credit losses in light of, among other things, the amount of non-performing
loans, the risks inherent in the Company's loan portfolio and the markets for
real estate and economic conditions in the New York metropolitan area and other
areas in which the Company had engaged in lending activities. The provision for
credit losses in the fiscal 2000 and 1999 periods reflect management's internal
analysis of its loan assets. See Note 10 to the Consolidated Financial
Statements.
Other Income. During the year ended June 30, 2000, other income was $2.1
million, an increase of $559,000, or 37.27%, as compared with other income of
$1.5 million in fiscal 1999. Other income increased during fiscal 2000, as
compared with the previous year, primarily as a result of the realization of
contingent participation revenues in the amount of $2.4 million in 2000, as
compared with $1.5 million in the previous year and the recognition of $500,000
in gain resulting from the settlement of all remaining Branch Sale contingencies
during the year ended June 30, 2000. These increases in other income, totaling
$1.4 million, were partially offset by the recognition of net losses from the
satisfaction of loan assets in the amount of $841,000 in fiscal 2000, as
compared with $0 in the previous year.
Net Gain on Settlement of Branch Sale Contingencies. On January 31, 2000, the
Company entered into settlement agreement with HSBC related to the credit
indemnities provided to HSBC in the Branch Sale and claims related to the
compensating balance arrangement with HSBC. The terms of the settlement resulted
in a net cash gain on settlement of Branch Sale contingencies of $500,000
reflected in the results of operations for the year ended June 30, 2000.
Net Loss on the Satisfaction of Loan Assets. The Company recognized a net loss
on the satisfaction of loan assets in the amount of $841,000 and $0 for the
twelve months ended June 30, 2000 and 1999, respectively. The net loss on the
satisfaction of loan assets was the result of a $1.3 million loss taken in the
quarter ended March 31, 2000 on the liquidation of a non-performing loan,
described below, and a $431,000 gain taken in the quarter ended December 31,
1999 related to the repayment of a single non-performing loan for a combination
of cash and an irrevocable letter of credit totaling $1.5 million in the quarter
ended December 31, 1999. The irrevocable letter of credit received was in the
amount of $1 million, which bears interest at a rate of 8%, and will be redeemed
for cash in $500,000 increments in December 2000 and December 2001. Prior to the
satisfaction of this non-performing loan, the carrying value of the loan was
$1.1 million, net of a specific reserve of $1.1 million. As a result of this
$1.5 million satisfaction, the Company reduced its recorded balance in
commercial and consumer loans by a net $1.2 million and its allowance for
possible credit losses related to commercial and consumer loans by $1.1 million.
During the quarter ended March 31, 2000 the Company received a final liquidating
payment for a non-performing loan secured by an office building located in New
York State in the amount of $1.9 million. The non-performing loan had been
carried on the books of the Company at $2.1 million, net of applicable reserves.
At the time the non-performing loan was liquidated, the Company incurred various
costs, primarily associated with property taxes that were due on the loan's
collateral, totaling approximately $1.0 million. Accordingly, a total loss of
$1.3 million was recorded on this liquidation.
22
<PAGE>
Contingent Loan Participation Revenues. The Company recorded contingent
participation revenues of $2.4 million and $1.5 million in the twelve months
ended June 30, 2000 and 1999, respectively. During the year ended June 30, 2000,
received payments totaling $2.4 million in full satisfaction of two loan
participations that had been subordinated to HSBC's priority claims on all of
the proceeds associated with these loans. The loans had been fully reserved for
on the Company's books prior to their repayment. In addition, the Company
received approximately $700,000 in unaccrued interest income related to these
loans. This additional loan income was included in total interest income for the
year ended June 30, 2000. See "Interest Income," above.
During the previous year, contingent loan participation revenues of $1.5 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 subordinated participation loan had been sold to HSBC on
June 28, 1996 in connection with the Branch Sale. A total of $1.0 million,
representing a portion of the subordinated participation loan, unaccrued
participation revenues and the full amount of the junior participation loan had
been reserved for at the time of the Branch Sale. At June 30, 2000, the Company
no longer had any interests in any participation loans with either HSBC or any
other business entity.
Interest Expense. During the year ended June 30, 2000, the Company recorded
interest expenses in the amount of $3.6 million, a decline of $1.1 million, or
24.0%, as compared with interest expenses of $4.8 million in the previous fiscal
year. Interest expenses declined in 2000, as compared with 1999, primarily as a
result of declines in the average amount borrowed by the Company in fiscal 2000
as compared with fiscal 1999. During 2000, the Company borrowed an average of
$50.4 million, a decline of $14.7 million, or 22.6%, as compared with average
borrowings of $65.1 million during the year ended June 30, 1999. The decline in
the average amount of borrowed funds was attributable to the repayment of
outstanding obligations which occurred in fiscal 2000 and 1999. In addition,
interest expense declined as a result of increased compensating balances held at
HSBC, which effectively reduced the rate of interest paid by the Company to
HSBC. As a result of these factors, the annual rate of interest paid to HSBC
declined from approximately 6.53% in 1999 to 4.89% in 2000.
Other Expenses. Other expenses consist of the Company's general and
administrative expenses. Other expenses do not include direct real estate
operations expenses, which are included in "property operating and maintenance
expense," discussed above.
During the year ended June 30, 2000, the Company recorded other expenses in the
amount of $4.2 million, an increase of $89,000, or 2.2%, as compared with other
expenses of $4.1 million in the previous fiscal year. The following table sets
forth the components of the Company's other expenses during the periods
indicated.
---------------------------------------------------------------
Fiscal Year ended June 30,
2000 1999
---- ----
(Dollars in Thousands)
---------------------------------------------------------------
Salaries and employee benefits $ 219 $ 202
Legal and professional fees 1,307 1,460
Management fees 2,310 2,426
Other operating expenses 401 60
--------- ---------
Total $ 4,237 $ 4,148
========= =========
----------------------------------------------------------------
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
ongoing management 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 year ended June 30, 2000,
the Company accrued $2.6 million in fees payable to the Management Company, of
which $279,000 related to fees incurred upon disposition of assets. During the
year ended June 30, 1999, the Company accrued $2.6 million in fees payable to
the Management Company, of which $139,000 related to fees incurred upon
disposition of assets (which were accounted for as a reduction in the proceeds
from sale of those assets).
23
<PAGE>
At June 30, 2000, the Company had accrued fees payable to the Management Company
and its affiliate, Fintek, Inc., aggregating $225,000. See "Management."
For the year ended June 30, 2000, all other operating expenses, excluding the
management fee expenses discussed above, aggregated $1.9 million, an increase of
$205,000 as compared with the year ended June 30, 1999, in which these expense
totaled $1.7 million. During the year ended June 30, 1999, the Company received
a settlement in the amount of $240,000, related to property taxes previously
paid on the Predecessor Bank's former headquarters facility. These property tax
expenses had been charged to other operating expenses in prior periods and were
deducted from other expenses in that year. The collection of this settlement was
primarily responsible for the lower levels of other operating expenses in 1999
as compared with the current year.
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 carry forwards, 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 carry
forwards may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carry forwards, 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 fiscal 1998, fiscal 1997, and fiscal 1996. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax. For
additional information, see Note 17 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 2000, the Company recorded a net deferred tax asset
of approximately $29.8 million and deferred tax liabilities of $29.8 million.
The net deferred tax asset reflects gross deferred tax assets of $78.1 million
and a valuation allowance of $48.2 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carry
forwards. Generally, the amount of a company's net deferred tax asset may serve
to increase its net worth under generally accepted accounting principles.
However, because of the net losses incurred by the Company in recent years, the
Company established a $48.2 million valuation allowance, resulting in a net
deferred tax asset of $29.8 million. The valuation allowance increased by
approximately $2.0 million during the fiscal year ended June 30, 2000.
Realization of the net deferred tax asset is expected to occur upon reversal of
existing taxable temporary differences for which deferred tax liabilities of
$29.8 million have been recorded.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 2000, the Company recorded a net provision for income
taxes of $651,000, primarily to reflect the effects of operations and asset
dispositions on its current state and local income tax liability at June 30,
2000.
Results of Operations - Fiscal year ended June 30, 1999 compared to fiscal year
ended June 30, 1998
General. The Company reported net income attributable to common shares of
$605,000, or $0.09 per share, for the year ended June 30, 1999, as compared with
a net loss applicable to Common Shares of $1.5 million, or ($0.21) per share,
for the fiscal year ended June 30, 1998. The primary reasons for the increase in
the Company's net income for the fiscal year ended June 30, 1999, as compared to
the previous year, was a reduction in total pretax expenses of $3.3 million, or
27.15%, in the year ended June 30, 1999, as compared with the previous year.
This reduction in total pretax expenses in fiscal 1999, as compared with the
previous year, was also accompanied by an increase of total revenues in fiscal
1999, as
24
<PAGE>
compared with fiscal 1998, in the amount of $605,000, or 6.40%. The primary
factors causing the reduction in total pretax expenses were a reduction in
interest expense of $1.4 million, or 22.10%, and a reduction in other operating
expenses of $2.0 million, or 32.19%. The primary factors causing the increase in
total revenues during the year ended June 30, 1999, as compared with the
previous year, was an increase in net gain on sale of real state gains of $1.2
million, 59.86%, and a reduction in writedowns of real estate charged to
operations in the amount of $1.2 million, partially offset by reduced
realizations of contingent participation revenues in the amount of $1.8 million,
or 55.30%.
Rental Income. For the year ended June 30, 1999, rental income was $14.9
million, an increase of $1.2 million, or 8.4%, from $13.8 million for the year
ended June 30, 1998. The increase in rental income in the year ended June 30,
1999, as compared with the previous fiscal year, was primarily attributable to
increases in rental income per unit at the Company's multi-family residential
real estate properties and, additionally, to slight increases in the overall
occupancy rates at those properties.
Property Operating and Maintenance Expenses. For the year ended June 30, 1999,
property operating and maintenance expenses ("property expenses") were $10.5
million, a decline of approximately $363,000, or 3.3%, from $10.9 million for
the year ended June 30, 1998. The decline in property expenses was primarily
attributable to reductions in overall operating costs associated with general
maintenance and repair expenses for the Company's real estate held for
investment.
Depreciation - Real Estate Held for Investment. For the year ended June 30,
1999, depreciation charges associated with real estate held for investment were
$2.3 million, an increase of approximately $1.9 million, or 510.4%, as compared
with depreciation charges associated with real estate held for investment in the
previous year of $383,000. Under SFAS-121, the Company is required to depreciate
real estate held for investment over the estimated useful life of the assets. No
depreciation charges are made for the portion of the assets attributable to land
values. During the year ended June 30, 1999, the Company recorded a full year's
depreciation expense of approximately $2.1 million for five real estate assets,
within the Real Estate Held for Investment categorization. Depreciation expenses
for the same properties for which depreciation in the amount of $183,000 was
recorded during the previous year from the period May 22, 1998 to June 30, 1998.
The remaining $208,000 in depreciation charges recorded during the years ended
June 30, 1999 and 1998 were for the sixth property, consistent with depreciation
charges taken in prior periods for that property. On May 22, 1998, as a
consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation charges, as required by SFAS-121,
for all Real Estate Held For Investment, that had not been subject to
depreciation charges in prior periods. See Note 1 to the Consolidated Financial
Statements.
Net Gain on the Sale of Real Estate. Net gain on the sale of real estate was
$3.2 million for the year ended June 30, 1999, an increase of $1.2 million, or
59.86%, as compared with a net gain of $2.0 million in the year ended June 30,
1998. During the year ended June 30, 1999, the Company sold a parking garage
adjacent to its real estate investment in Atlanta, GA and a portion of the
residential units within two multi-family housing properties in New York, NY,
realizing a net gain on sale of $3.7 million. During the previous fiscal year,
the Company sold two properties realizing a net gain of $2.0 million.
Recovery (Writedown) of Investments in Real Estate. During the year ended June
30, 1999, the Company recovered amounts related to real estate that had been
written down in prior periods in the amount of $107,000. During the year ended
June 30, 1998, the Company wrote down investments in real estate in the amount
of $1.1 million. This amount represents a decrease in writedowns for investments
in real estate of $18.6 million, or 94.4%, as compared with writedowns taken in
fiscal 1997, totaling $19.7 million. During 1998, the Company wrote down two
investments in joint ventures, totaling $1.1 million.
Interest Income. For the year ended June 30, 1999, total interest income, net of
provisions for possible credit losses, was $3.2 million, an increase of
$483,000, or 17.9%, from $2.7 million for the previous fiscal year. The increase
in total interest income in fiscal 1999, as compared with the previous year, was
primarily due to a decrease in the provision for possible credit losses of $1.5
million in fiscal 1999, as compared with the previous year.
Without regard to the effects of the provision for possible credit losses on
total interest income, total interest income declined $1.0 million, or 24.2%,
from $4.2 million during the year ended June 30, 1998, to $3.2 million during
the current fiscal year. The decline in total interest income was due to the
full satisfaction of $4.9 million and $16.4 million in performing loans during
the years ended June 30, 1999 and 1998, respectively.
25
<PAGE>
For the year ended June 30, 1999, the Company's provision for possible credit
losses was $0, a decrease of $1.5 million from the $1.5 million provision taken
in the previous fiscal year. These provisions resulted from management's ongoing
evaluation of the adequacy of the allowance for credit losses in light of, among
other things, the amount of non-performing loans, the risks inherent in the
Company's loan portfolio and the markets for real estate and economic conditions
in the New York metropolitan area and other areas in which the Company had
engaged in lending activities. The provision for credit losses in the fiscal
1999 and 1998 periods reflect management's internal analysis of its loan assets.
See Note 10 to the Consolidated Financial Statements.
Realization of Contingent Participation Revenues. During the year ended June 30,
1999, contingent participation revenues were $1.5 million, a decrease of $1.9
million, or 55.30%, as compared with income of $3.4 million in fiscal 1998.
Contingent participation revenues were realized on one junior participation loan
and two junior participation loans, which were paid in full during fiscal 1999
and 1998, respectively. Each of the loans had been sold to HSBC on June 28, 1996
and were fully reserved for on the Company's books following the Branch Sale.
The Company retained a contingent interest in these two loans approximating $3.3
million in principal amount following the Branch Sale.
Interest Expense. During the year ended June 30, 1999, the Company recorded
interest expenses in the amount of $4.8 million, a decline of $1.4 million, or
22.1%, as compared with interest expenses of $6.1 million in the previous fiscal
year. Interest expenses declined in 1999, as compared with 1998, primarily as a
result of declines in the average amount borrowed by the Company in fiscal 1999
as compared with fiscal 1998. During 1999, the Company borrowed an average of
$65.1 million, a decline of $8.2 million, or 11.2%, as compared with average
borrowings of $73.3 million during the year ended June 30, 1998. The decline in
the average amount of borrowed funds was attributable to the repayment of
outstanding obligations which occurred in fiscal 1999 and 1998. In addition,
interest expense declined as a result of a decline in general interest rates and
as a result of the modification of the terms of the loan agreements between HSBC
and the Company which effectively reduced the rate of interest paid by the
Company to HSBC. This modification, which became effective on October 1, 1998,
provided compensating balance credits to the Company for funds it held on
deposit with HSBC. As a result of these factors, the average annual rate of
interest paid to HSBC declined from approximately 8.20% in 1998 to 6.49% in
1999.
Other Expenses. Other expenses consist of the Company's general and
administrative expenses. Other expenses do not include direct real estate
operations expenses, which are included in "property operating and maintenance
expense," discussed above.
During the year ended June 30, 1999, the Company recorded other expenses in the
amount of $4.1 million, a decline of approximately $2.0 million, or 32.2%, as
compared with other expenses of $6.1 million in the previous fiscal year. Other
expenses declined in the year ended June 30, 1999, as compared with the previous
year, primarily as a result of declines in salaries and employee benefit
expenses, legal and professional fees, and other operating expenses in fiscal
1999 as compared with fiscal 1998. The following table sets forth the components
of the Company's other expenses during the periods indicated.
------------------------------------------------------------------------
Fiscal Year ended June 30,
1999 1998
---- ----
(Dollars in Thousands)
------------------------------------------------------------------------
Salaries and employee benefits $ 202 $ 900
Legal and professional fees 1,460 2,305
Management fees 2,426 2,562
Other operating expenses 60 350
------ --------
Total $ 4,148 $ 6,117
======= ========
------------------------------------------------------------------------
Legal and professional fees expense decreased from $2.3 million during the year
ended June 30, 1998 to $1.5 million in fiscal 1999 primarily as a result of a
reduction in expenses incurred in connection with the Bank's successful
reorganization from a New York State chartered savings bank to a Delaware
corporation, which occurred in fiscal 1998. The Company accrued and paid
$900,000 and $1.6 million, respectively, in the year ended June 30, 1998, for
legal and professional fees associated with this conversion.
26
<PAGE>
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
ongoing management of Company assets. The Management Company was a newly-formed,
privately-owned entity controlled by Alvin Dworman, who owns 39.0% of the
outstanding Common Stock of the Company. During the year ended June 30, 1999,
the Company accrued $2.6 million in fees payable to the Management Company, of
which $139,000 related to fees incurred upon disposition of assets (which were
accounted for as a reduction in the proceeds from sale of those assets). During
the year ended June 30, 1998, the Company accrued $3.0 million in fees payable
to the Management Company, of which $398,000 related to fees incurred upon
disposition of assets. See "Management."
All other operating expenses declined $290,000, or 82.9%, to $60,000 for the
year ended June 30, 1999 as compared with the year ended June 30, 1998, in which
other operating expenses were $350,000. During the year ended June 30, 1999, the
Company received a settlement in the amount of $240,000, related to property
taxes previously paid on the Predecessor Bank's former headquarters facility.
These property tax expenses had been charged to other operating expenses in
prior periods.
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 carry forwards, 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 carry
forwards may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carry forwards, 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 fiscal 1998 and fiscal 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. For additional
information, see Note 17 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 1999, the Company recorded a net deferred tax asset
of approximately $26.3 million and deferred tax liabilities of $26.3 million.
The net deferred tax asset reflects gross deferred tax assets of $72.5 million
and a valuation allowance of $46.2 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carry
forwards. Generally, the amount of a company's net deferred tax asset may serve
to increase its net worth under generally accepted accounting principles.
However, because of the net losses incurred by the Company in recent years, the
Company established a $46.2 million valuation allowance, resulting in a net
deferred tax asset of $26.3 million. The valuation allowance decreased by
approximately $3.3 million during the fiscal year ended June 30, 1999.
Realization of the net deferred tax asset is expected to occur upon reversal of
existing taxable temporary differences for which deferred tax liabilities of
$26.3 million have been recorded.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 1999, the
Company recorded a net provision for income taxes of $550,000, primarily to
reflect the effects of operations and asset dispositions on its current state
and local income tax liability at June 30, 1999.
Asset Quality
Loan Asset Portfolio Composition The high levels of the Company's non-performing
loan assets in recent years was primarily attributable to the Company's emphasis
during the mid-to-late 1980s on loans to joint ventures for the acquisition,
27
<PAGE>
development and construction of real estate in which the Company or a subsidiary
had an equity interest, commercial business loans, commercial real estate loans
and multi-family residential loans. Primarily as a result of the restrictions
imposed by the NYSBD and HSBC, the Company did not originate any such loans
during the years ended June 30, 2000 and 1999.
Among various types of loans secured by real estate, commercial real estate,
construction and multi-family residential loans are generally considered to
involve more risk than single-family residential loans due to, among other
things, the higher principal amount of such loans and the effects of a downturn
in general economic conditions, which may result in excessive vacancy rates,
inadequate rental income levels and volatility in real estate values. At June
30, 2000, the Company's total loans secured by real estate portfolio of $32.3
million included $31.3 million or 96.8% of multi-family residential loans and
$1.0 million, or 3.2%, of single-family residential real estate loans. Since the
early 1990's, the Company continued to originate such loans, on a limited basis,
in connection with the sale of investments in real estate and other resolutions
of non-performing assets.
The Company discontinued construction lending and loans to joint ventures in
1991. Construction lending is considered to involve even more credit risk than
multi-family residential and commercial real estate lending. Construction loans
generally require only interest payments prior to the ultimate sale or lease of
the completed project, which are funded by the lender and added to the
outstanding principal of the loan. To evaluate a construction loan prior to
completion, leasing and/or sale of the underlying property, the Company must
rely on estimates of anticipated completed cost and subjective assessments of
future demand for the completed project. Accurate assessments of these factors
have been (and continue to be) difficult to perform because of the weakness of
the local economies and the real estate markets in which the Company has engaged
in lending activities. Loans to joint ventures are subject to the same risks as
construction loans and may even be more susceptible to risks of uncertain costs
and changing economic conditions due to the broader scope and longer term of
some ventures and the Company's status in some ventures as an equity
participant.
Non-performing loans are those loans placed on non-accrual status and loans
which are on accrual status but delinquent 90 days or more. The Company
generally places a loan which is delinquent 90 days or more on non-accrual
status unless it is well secured and, in the opinion of management, collection
appears likely. In addition, the Company may place a loan on non-accrual status
even when it is not yet delinquent 90 days or more if the Company makes a
determination that such loan is not collectible. When loans are placed on
non-accrual status, any accrued but unpaid interest on the loan is reversed and
future interest income is recognized only if actually received by the Company
and collection of principal is not in doubt.
The commercial business lending activities emphasized by the Company during the
mid-to-late 1980s also involved a high degree of risk. These activities were
conducted primarily through Quest, a wholly-owned subsidiary of the Company
which was formed in 1986 to implement a program of secured and unsecured
commercial business lending. The loans, and in certain cases equity investments,
made by Quest generally involved the buy out, acquisition or recapitalization of
an existing business and included management buyouts and corporate mergers and
acquisitions. Such transactions frequently resulted in a substantial increase in
both the borrower's liabilities and its liabilities-to-assets leverage ratio,
thus increasing the prospects for default. The Company discontinued its new
commercial business lending activities in 1991 and, as a result of loan
repayments, the Company's gross commercial business loans decreased $1.2 million
at June 30, 2000 to $7.2 million from $8.6 million at June 30, 1999. At June 30,
2000, the remaining investments made through Quest consisted of $1.2 million of
equity securities, net.
28
<PAGE>
The following table summarizes the gross and net carrying values of the
Company's non-performing loan assets at June 30, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Net Book Value
Write-downs/ as a percentage
Gross Specific of
Balance Reserves (1) Net Value Gross Balance
------- ----------- --------- -------------
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------------
Non-performing loans:
--------------------
<S> <C> <C> <C> <C>
Single-family residential $ 1,006 $ 194 $ 812 80.7%
Multi-family residential 13,444 6,485 6,959 51.8
------- -------- --------- ---------
Total non-performing
real estate loans 14,450 6,679 7,771 53.8
Commercial business 6,247 4,707 1,540 24.7
-------- --------- --------- ---------
Total non-performing loans $ 20,697 $ 11,386 $ 9,311 45.0%
======== ========= ======== =========
--------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing Loan Activity. The following tables set forth the activity in the
Company's non-performing loan assets during the periods indicated.
---------------------------------------------------------------------------
Year ended June 30,
-------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
---------------------------------------------------------------------------
Beginning balance $ 30,761 $ 33,072 $ 47,948
Additions 23 144 3,266
Transfers to REO -- -- --
Write-offs (841) (97) (8,917)
Moved to performing loans (1,000) -- (2,165)
Satisfaction/sales (8,246) (2,358) (7,060)
--------- ---------- ----------
Ending balance $ 20,697 $ 30,761 $ 33,072
========= ========== ==========
---------------------------------------------------------------------------
Non-performing loans decreased by $10.1 million, or 32.7%, during the year ended
June 30, 2000 following a decrease of $2.3 million or 7.0% during the fiscal
year ended June 30, 1999. The decrease in non-performing loans in fiscal 2000
and 1999 reflect continued efforts to liquidate assets.
Loans to Finance the Sale of Real Estate. The Company had previously financed
the sale of investments in real estate under appropriate circumstances. Such
financing was provided by the Company on what management of the Company
considered to be market terms, which generally were more flexible than the
Company's standard underwriting guidelines for multi-family residential and
commercial real estate loans. All loans to finance the sale of investments in
real estate were approved in advance by the Board of Directors of the Company
and involve an amount of borrower equity and other terms which result in the
transaction constituting a sale of the property under generally accepted
accounting principles. At June 30, 2000 and 1999, the Company did not retain any
loans which had been made to finance the sale of investments in real estate,
except those reflected in loans sold, with recourse, net. (See "Asset Sales" and
Notes 8, 9 and 11 to the Consolidated Financial Statements).
29
<PAGE>
Restructured Loans. The Company's asset resolution efforts previously included
the restructuring of loans primarily as a result of the financial condition of
the property which secures the loan. The Company encourages restructure
agreements only when it is in the best interest of the Company and it is
practical for the borrower.
The Work-Out Group, and after the Branch Sale RB Management, is responsible for
promptly responding to problem loans to determine if a restructuring is viable
or to commence foreclosure proceedings. Many problem loans are such due to
market conditions (particularly vacancies or market-driven rent reductions,
either of which may result in an impairment of the economic viability of the
underlying property). Therefore, non-performing loans may be restructured by an
agreement which recognizes that the borrower's inability to meet contractual
terms may be remedied through a modification which both protects the financial
interests of the Company and is economically feasible for the borrower.
At June 30, 2000, the Company had restructured loans which aggregated $31.3
million and were performing in accordance with their restructured terms. At the
same date, the Company's restructured loans had been outstanding for periods
which range from 41 months to approximately seven years.
As a result of restructurings which reduced the initial interest rate on certain
loans, the Company's restructured loans had a weighted average rate of 7.0% at
June 30, 2000, as compared to an original weighted average rate of 10.2%. The
Company's restructured loans generally do not call for the payment of foregone
interest at a later date, although many of such loans provide for increases in
the interest rate over the life of the loan.
The Company's restructured loans may have been renegotiated to lower the
interest rate, to defer the payment of principal and/or interest or to effect
other concessions. Because restructured loans may include concessionary terms
related to interest rates, payment terms, loan-to-value ratios and debt service
coverage, such loans have a higher degree of credit risk than the remainder of
the performing loans in the Company's loan portfolio.
The following table sets forth information regarding the Company's restructured
loans at the dates indicated.
--------------------------------------------------------------------------------
June 30,
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
--------------------------------------------------------------------------------
Multi-family residential $ 31,308 $ 20,522 $ 22,499
Commercial real estate -- 360 500
----------- ----------- -----------
Total $ 31,308 $ 20,882 $ 22,999
=========== =========== ===========
--------------------------------------------------------------------------------
Total restructured loans as a
percentage of total loans 79.09% 26.78% 27.47%
Total restructured loans as a
percentage of total assets 18.02% 11.97% 12.05%
Allowance for Credit Losses. Although the process of evaluating the adequacy of
the Company's reserves involves a high degree of management judgment, such
judgment is based, in part, on systematic procedures deemed helpful in assessing
the adequacy of the Company's reserves. The Company's reserve analysis is
prepared quarterly in conjunction with the Company's internal asset
classification system and is used by management in determining if an additional
provision is required to maintain the allowance for credit losses at an
appropriate level or additional write-downs of equity investments and
investments in real estate are needed to reduce the carrying values of such
assets in accordance with the requirements of generally accepted accounting
principles.
The Company's reserve analysis is a computation of reserve requirements based
upon the risks inherent in the various asset portfolios. The various categories
of loans are grouped separately to recognize the various degrees of risk
associated with them. Loan portfolios are further stratified by internal asset
classification categories to assign higher risk weighted reserve percentages or
include targeted reserve definitions. Aggregated computed reserve balances are
compared to recorded reserves to measure the adequacy of reserve levels.
The Company's provisions for credit losses and write-downs of investments in
real estate had been significant in recent years. However, the Company recorded
no provisions for possible credit losses or write-downs during the years ended
June 30, 2000 and 1999. Net recoveries against loan losses previously written
were $1,900 and $107,000 in fiscal 2000
30
<PAGE>
and fiscal 1999, respectively. The Company recorded a provision for possible
credit losses of $1.5 million during the year ended June 30, 1998, which
contributed significantly to the Company's recorded net losses during that year.
At June 30, 2000, the Company's allowance for credit losses amounted to $13.3
million or 33.7% of total loans and 64.4% of non-performing loans, as compared
to $18.2 million or 23.3% of total loans and 59.0% of non-performing loans at
June 30, 1999. The decrease in the Company's allowance for credit losses in 2000
reflects the continued decrease in the size of the Company's loan portfolio and
management's internal analysis of the composition of its non-performing assets.
Of the $13.3 million allowance for credit losses at June 30, 2000, $11.4
million, or 85.3%, were specific reserves relating to particular loans and $1.9
million, or 14.7%, were general reserves. See Note 10 to the Consolidated
Financial Statements.
Management of the Company, based on facts available to it, believes that the
Company's allowance for credit losses at June 30, 2000 was adequate and that the
net carrying value of the Company's investments in real estate equaled the lower
of cost or fair value minus estimated costs to sell. It is anticipated, however,
that the adverse effects of the high level of the Company's non-performing
assets, consisting of provisions for credit losses, net loan charge-offs, loss
of interest income on non-performing loans, write-downs of investments in real
estate and increased operating expenses as a result of the allocation of
resources to the collection and work-out of non-performing assets, will continue
to adversely affect the Company's operations. Because the nature and extent of
these adverse effects will be dependent on many factors outside the control of
the Company, including conditions in the relevant real estate markets and
prevailing interest rates, these adverse effects are not presently determinable
by the Company.
In establishing an appropriate level of loan loss reserves, the Company does not
attempt to predict whether or how much the real estate market and general
economy of its market area may decline in the future. However, the Company
continues to closely monitor the status of its loan portfolio in relation to the
economic and market conditions in the relevant area for any further signs of
weakening. If declining conditions in the relevant area continue, particularly
in the New York City metropolitan area, causing existing non-performing loan
situations to worsen and additional loans to be classified as non-performing,
significant additional provisions for credit losses may be required.
31
<PAGE>
The following table sets forth information concerning the activity in the
Company's allowance for credit losses during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 44,990 $ 65,979 $ 86,139 $ 99,403 $1,018,477
======== ======== ========= ======== ==========
Allowance at the beginning
of the period $ 18,155 $ 20,037 $ 31,570 $ 34,142 $ 33,985
Charge-offs:
Single-family residential
loans -- (149) (2,026) (3,523) (1,089)
Multi-family residential
loans -- (1,498) (1,147) (1,287) (2,665)
Commercial real estate loans (3,599) (500) (3,801) -- (6,795)
Commercial business loans (1,165) -- (3,773) (23) (21)
Consumer loans and other (52) (50) (2,827) -- --
-------- -------- -------- --------- ----------
Total loans charged off (4,816) (2,197) (13,574) (4,833) (10,570)
-------- -------- -------- --------- ----------
Recoveries:
Single-family residential
loans 2 -- 204 98 40
Multi-family residential
loans -- 86 3 704 --
Commercial real estate loans
Consumer loans and other -- 229 146 437 --
Total loans recovered -- -- 188 22 1
-------- -------- -------- --------- ----------
Net charge-offs 2 315 541 1,261 41
Additions charged to operating (4,814) (1,882) (13,033) (3,572) (10,529)
expenses
Additions charged to non- -- -- 1,500 1,000 5,250
operating expenses
Allowance at end of period (1) -- -- -- -- 5,436
-------- -------- -------- -------- ----------
$ 13,341 $ 18,155 $ 20,037 $ 31,570 $ 34,142
Ratio of net charge-offs to
average loans outstanding 10.70% 2.85% 15.13% 3.59% 1.03%
Ratio of allowance to total
loans at end of period (1) 33.70 29.54 28.86 32.96 33.15
Ratio of allowance to non-
performing loans at end of
period (1) 64.38 61.48 60.59 65.84 92.74
</TABLE>
(1) As noted above, the decrease in the Company's allowance for credit
losses in recent periods reflects the transfer of a substantial amount
of non-performing loans to investments in real estate and the Company's
loan restructuring activities, the continued decrease in the size of
the Company's loan portfolio and management's internal analysis of the
composition of its non-performing assets.
(2) Percentages for the six month period are computed on an annualized
basis.
32
<PAGE>
The following table sets forth information concerning the allocation of the
Company's allowance for credit losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1999 June 30, 1998 June 30, 1997 June 30, 1996
---------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Of Total Of Total Of Total Of Total Of Total
Loans by Loans by Loans by Loans by Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
------- -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential $ 256 0.37% $ 325 0.51% $ 328 0.47% $ 1,294 1.86% $ 1,410 2.03%
Multi-family
residential 8,378 12.06 8,784 13.72 9,011 12.98 8,553 12.32 12,359 17.80
Commercial real
estate -- -- 6,706 10.48 7,290 10.50 16,543 23.82 10,822 15.59
Commercial
business 4,707 6.78 2,290 3.58 3,157 4.55 4,357 6.27 6,956 10.02
Consumer -- -- 50 0.08 251 0.36 823 1.19 2,595 3.74
------- ------- ------- ---------- --------
$13,341 $18,155 $20,037 $ 31,570 $ 34,142
======= ======= ======= ========== ========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Asset Carrying Values. Investments in real estate are recorded on the books of
the Company at the lower of the Company's historical cost, less applicable
depreciation for real estate held for investment, or the estimated fair value of
the property minus estimated costs to sell. Adjustments made to the value at
transfer are charged to the allowance for credit losses. See Notes 1, 10, 11 and
12 to the Consolidated Financial Statements.
The Company primarily utilizes two means of valuation in evaluating the carrying
value of its investments in real estate: (1) appraisals and (2) discounted cash
flows. The discounted cash flow ("DCF") is based on assumptions wherein the
forecasted future cash flow attributable to the benefits of ownership are
discounted, at a rate commensurate with the risk involved, to a present value.
The DCF is based on information from various sources, including: actual
operating results, recent appraisals, third party market information and current
investment parameters. The Company believes that the DCF approach generally is
the most accurate predictor of value of a real estate asset over time. This
approach is an accepted means of valuation under GAAP. Under GAAP, among other
things, the DCF method allows for adjustments when local markets are dominated
by forced or liquidation sales, or when properties have unusual characteristics,
so that value estimates can be based on rent levels and occupancy that are
reasonably estimated to be achieved over time. The Company utilizes management
judgement and does not generally make adjustments to appraisal assumptions using
worst case scenarios that are unlikely to occur, direct capitalization of
non-stabilized income flows or simple projections of current levels of operating
income if markets are depressed but can be expected over a reasonable period of
time to return to stabilized conditions. Generally, for purposes of the DCF
analysis, property cash flows will be extended until stabilization, as it is the
Company's intent is to sell investments in real estate as quickly as possible,
assuming a stabilized sales price can be achieved. Assumptions in the DCF model
are made to most accurately reflect the Company's asset management plan.
The Company's real estate loan appraisal policy generally requires that all
appraisals conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and
prepared by an appraiser who is either certified or licensed by the state in
which the property is located. Appraisals may be performed by an outside fee
appraiser or by a staff appraiser, provided that, among other things, such
appraiser is independent of the lending, investment and collection functions of
the Company.
The Company generally reviews the value of its investments in real estate on at
least a quarterly basis. In the event that such reviews indicate a decline in
the value of such investments, write-downs are recorded as appropriate.
Strategy. Following the Branch Sale, the Management Company assumed the duties
of the Predecessor Bank's former "Work-Out Group" which monitored the
Predecessor Bank's problem assets. The Management Company continues to monitor
the Company's assets and develop individual business plans, including cash flow
analysis, for each asset. These plans are then documented for approval of the
Board of Directors of the Company. See "Management."
Loans which become delinquent are analyzed to determine the nature and extent of
the problem and whether a restructuring of the loan or some other method of
resolution is appropriate under the circumstances. Every effort is made by the
Company to work with borrowers who are cooperative with the Company to effect a
restructuring that is economically feasible for both parties. When the Company
concludes that a restructuring is not economically feasible or where the
borrower does not demonstrate a willingness to cooperate, the Company pursues
available legal remedies. In most cases, the Company's strategy in recent years
has been to aggressively pursue the foreclosure process when a restructuring or
other resolution of a non-performing loan does not appear to be feasible or
otherwise in the best interests of the Company. This strategy has been pursued
so that the Company can acquire control of the security property as soon as
possible, and thereby implement a strategy designed by the Company for
management and ultimate resolution of the asset.
Loans that go through the foreclosure process, particularly in New York, are
subject to extensive delays before the Company can gain title to the property.
Non-judicial foreclosure generally is unavailable in New York, and the
procedures mandated by New York law can result in time-consuming litigation in
order to foreclose a mortgage loan. Moreover, the federal and state courts in
New York are overburdened with litigation and, as a result, decisions are often
delayed. Further complications occur when bankruptcy proceedings are involved.
For all these reasons, it can take an extended period of time, often two to six
years, for a lender to obtain title to property that secures a loan which is in
default. Although the foreclosure process can be long and complicated, the
Company aggressively pursues foreclosures or negotiates with borrowers to
acquire properties which secure problem loans by deed-in-lieu of foreclosure.
The Company's general approach once it has acquired an investment in real estate
has been to seek to minimize further losses to the Company through active
management of the properties while they are held by the Company and by
34
<PAGE>
developing management strategies tailored to the individual properties and whose
ultimate objective is to maximize shareholder value through continued
development of the property, management of its' cash flows and/or the sale of
each property.
The Company's general approach once it has acquired an investment in real estate
has been to extract maximum shareholder value through active management of the
properties while they are held by the Company and by developing management
strategies tailored to the individual properties and whose ultimate objective is
to sell each property at, or above, its net book value. Although the Company has
evaluated bulk sales of non-performing assets from time to time, it has not
elected to pursue this strategy to date because it believes that the discounts
which are sought by potential purchasers are excessive, that individual
management strategies have the most potential for maximum recovery and return to
the Company and that the Company did not have sufficient equity capital prior to
and following the Equity Offering to support such a strategy. There can be no
assurance, however, that the Company will be successful in its management
strategies.
The Company's approach with respect to a particular investment in real estate
generally falls into one of the following categories: (i) attempt to sell the
investment as soon as practicable, (ii) actively manage the property until the
cash flow and other relevant factors have been stabilized or (iii) develop the
property to facilitate sale. Each of these strategies generally involves some
investment by the Company to improve the property in order to make it more
saleable, which can range from minor fix-up costs to substantial costs to
develop the property. Each work-out strategy is reviewed and approved by the
Company's Board of Directors.
In many cases the Company seeks to stabilize the cash flow from the property by
investing in necessary improvements and seeking to increase the occupancy of the
property. This approach increases the amount of time that the Company holds the
property, but may enhance the value of the property and be the best means of
disposing of the investment without further loss. In certain cases, the Company
will have made the investment and taken the actions necessary to stabilize the
cash flow from the property, but the real estate markets in the area in which
the property is located will not have stabilized or other factors will be
present which prevent the Company from selling the property at a price which is
reflective of its estimated value. In some cases, the cash flow from the
property has been stabilized such that it is providing a yield above the
Company's cost of funds, thus effectively making it an earning asset. Although
such assets continue to be classified by the Company as investments in real
estate and, thus, non-performing assets, the yield provided by the properties
increases the Company's flexibility to maximize their value in connection with a
sale.
In a number of cases, the Company's strategy to dispose of an investment in real
estate has consisted of development of the property. Although this approach may
involve the best prospects for maximizing the return to the Company, it also may
involve more risk and, as a result, the Company generally does not pursue this
alternative unless other alternatives are clearly not preferable under the
circumstances. In most cases in which this alternative is pursued, development
previously has been initiated by the defaulted borrower prior to the Company's
acquisition of the property upon foreclosure or by deed-in-lieu thereof. On
occasion, however, the Company has commenced development of an investment in
real estate as a management strategy.
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
35
<PAGE>
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 June 30, 1999
to $7.5 million at June 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.
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, terminate its management
agreement with RB Management (see also Item 13 - The Management Company; The
Management Agreement), 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
June 30, 2000, approximately $3.7 million had been advanced under the
Construction Loan. 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 related to the Construction Loan,
which has been accounted for as an additional investment in the office complex.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding
under the Facility provided by HSBC Bank and $3.7 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 June 30, 2000, the Company's liquidity ratio,
as so defined, amounted to 19.4%.
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 will not have a significant effect on the
Company's results of operations or its financial condition.
36
<PAGE>
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 June 30,
2000.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial positions and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and, 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
The Company sustained no significant operational problems, or material financial
effects, associated with the impact of the Year 2000 on the processing of date
sensitive information by its computerized information systems. Due to (i) the
limited number of assets managed by the Company, (ii) the limited scope of the
Company's continuing operations and (iii) that all accounting software used by
the Company is maintained and supported by a third party all of the Company's
costs of assessment, and where necessary, remediation were immaterial to the
reported operating results of the Company.
Risks Associated with Forward-Looking Statements
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risk, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following,
which are discussed in greater detail in the "Risk Factors" section of the
Company's Registration Statement on Form S-4 (File No. 333-386730 and File No.
333-386730-01) filed with the 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 7 (a)
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% change in interest rates (as measured by changes in the LIBOR rate)
would result in an approximate $520,000 change in interest expense based on
37
<PAGE>
approximately $52.0 million outstanding at June 30, 2000. See Note 14, "Borrowed
Funds," contained within the Consolidated Financial Statements.
In addition, The Company has issued $12.53 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.
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.
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item and the reports of the
independent accountants thereon required by Item 14 (a) (2) are included on
pages F-1 to F-38. See accompanying "Index to Consolidated Financial Statements"
on page 48.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
38
<PAGE>
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Subsequent to the closing of the Branch Sale, although the Company has executive
officers under SEC requirements and New York Banking Law, formerly applicable to
the Predecessor Bank, the Company no longer maintains any significant staff of
employees to manage the Company's affairs. Rather, day-to-day management
responsibilities of the Company are vested with the Management Company, a newly
formed management company affiliated with Mr. Dworman. A significant amount of
services, necessary to manage and dispose of the Company's assets, have been and
will be provided by the Management Company or third party subcontractors who
will not have any continuing fiduciary obligations to the Company or the
stockholders. The selection of third party subcontractors to provide various
services to the Company will be made by the Management Company, subject to the
ratification by committees of the Board of Directors but without stockholder
approval. The Company's success in maximizing returns from management of its
assets will depend on the efforts of the Management Company and third party
contractors who provide services to the Company.
Directors of the Company
The Company's Board of Directors is divided into three classes of directors,
serving staggered three-year terms. At the 1998 annual meeting of stockholders
of the Company, the holders of the Company Preferred Stock elected two directors
to serve for a term of one year. The right of holders of Company Preferred Stock
to elect such two directors continues until dividends on the Company Preferred
Stock have been paid for four consecutive quarterly dividend periods at which
time such voting rights will terminate.
The name, age as of August 16, 2000, position with the Company, if any, term of
office and period of service as a director, of each of the Company's directors
are as follows:
<TABLE>
<CAPTION>
Name Age Position Class Term Director
---- --- -------- Expires Since(1)
------- -----
<S> <C> <C> <C> <C>
Francis L. Bryant, Jr. ...... 69 Director (3) (4) (7) 2000 (6) 2000
Robin Chandler Duke.......... 76 Director, Vice President and 2002 1977
Secretary (2) (8)
Alvin Dworman................ 74 Director (3) 2001 1998
James J. Houlihan............ 47 Director (4) 2001 1998
David J. Liptak.............. 42 Director (5) --- 1998
Jerome R. McDougal........... 72 Director and Chairman (3) 2000(6) 1991
Edward V. Regan.............. 70 Director (2) 2001 1995
David A. Shapiro............. 49 Director (2)(4) 2002 1998
Jeffrey E. Susskind.......... 47 Director (5) --- 1998
</TABLE>
(1) Includes tenure with the Predecessor Bank.
(2) Member of the audit committee.
(3) Member of the executive committee.
(4) Member of the asset management committee.
(5) Elected by holders of Preferred Stock for a term of one year.
(6) The Company intends to nominate this Director for re-election at its next
annual meeting of stockholders.
(7) Mr. Bryant was elected a Director in May, 2000 to fill the Directorship
previously held by Mr. William Hassett who passed away in March, 2000.
(8) On August 16, 2000, Ms. Duke resigned from the Board of Directors and
positions as Vice President and Secretary as a result of her being
confirmed United States Ambassador to Norway.
39
<PAGE>
The principal occupation for the last five years and selected biographical
information of each of the directors is set forth below.
Francis L. Bryant, Jr. Mr. Bryant is Chairman of Peregrine Mortgage Company,
Inc., a commercial mortgage banking company. He is also a director of Mondev
Senior Living, Inc., located in Montreal, Quebec and of Real French Corporation,
a subsidiary of Banque Nationale de Paris. Mr. Bryant has been a member of the
Real Estate Advisory Committee to the New York State Common Retirement Fund for
over twenty years and is a past Chairman of the New York Community Preservation
Corporation and Co-Chairman of Industry Real Estate Financing Advisory Council
of the American Hotel and Motel Association. He was a founding member of the
Real Estate Center of the Wharton School of the University of Pennsylvania and
has served on board of directors of various other organizations, including the
Real Estate Board of New York, Urban Land Institute, Prudential Realty Trust,
New York University Real Estate Institute and the Realty Foundation of New York.
Mr. Bryant was previously Executive Vice President of Manufacturers Hanover
Trust Company and officer in-charge of its Real Estate Division and senior real
estate lending officer for Manufacturers Hanover Corporation until his
retirement in June, 1987.
Robin Chandler Duke. Ms. Duke was previously National Chairman of Population
Action International, and she served as a director of International Flavors and
Fragrances and American Home Products Corporation. Ms. Duke served in an
unsalaried capacity as Vice President and Secretary of the Company and the
Predecessor Bank from July 1996 until August 16, 2000. On that date, Ms. Duke
resigned from the Board of Directors and positions as Vice President and
Secretary as a result of her being confirmed United States Ambassador to Norway.
Alvin Dworman. Mr. Dworman is the founder and chairman of The ADCO Group, a
financial services, merchant banking and real estate company established in
1981. Mr. Dworman also has been a director of the Sequa Corporation since 1987
and has been serving as a member of the Real Estate Advisory Committee to the
New York State Common Retirement Fund since 1985.
James J. Houlihan, Jr. Mr. Houlihan has been a partner of Houlihan-Parnes
Realtors, LLC, since 1984. Houlihan-Parnes Realtors, LLC is one of the leading
commercial real estate firms throughout the New York City metropolitan area. In
addition, Mr. Houlihan is the President of JHP Realty Advisors, Inc. which
specializes in arranging debt and equity financing for real estate transactions
on behalf of private and institutional clients. Mr. Houlihan, together with
several other real estate professionals formed GHP Office Realty, a company
dedicated to the acquisition, renovation and management of office buildings
throughout Westchester, Bergen, Rockland and Fairfield Counties in New Jersey.
Other entities in which Mr. Houlihan is a partner include HP Capital, Inc., a
mortgage servicing company, and Metro Properties, LLC, a property management
company that manages properties owned by the principals of Houlihan-Parnes as
well as clients of the firm.
David J. Liptak. Mr. Liptak has been the President of West Broadway Partners,
Inc., which is the General Partner of West Broadway Partners, L.P. and the
investment manager of AIG International West Broadway Fund, Ltd for more than
the past five years. Mr. Liptak was previously a Senior Vice President at
Oppenheimer & Co., Inc.
Jerome R. McDougal. Mr. McDougal served as Chief Executive Officer of the
Company and the Predecessor Bank from April 1995 and as President from July 1997
until he retired from such positions in June 1998. Mr. McDougal served as
President and Chief Executive Officer of the Predecessor Bank from March 1991 to
April 1995, at which time he became Chairman of the Board and Chief Executive
Officer. Prior to joining the Company, Mr. McDougal was Chairman and Chief
Executive Officer of the Apple Bank for Savings for four years. Prior to joining
Apple Bank, Mr. McDougal held various positions, including management positions
in a manufacturing concern, operating a consulting company, and running one of
the largest automotive retail chains in the New York metropolitan area.
Edward V. Regan. Mr. Regan is President of Baruch College of the City University
of New York. Mr. Regan is the former Chairman of the Municipal Assistance
Corporation and former Policy Advisor for the Jerome Levy Economics Institute.
Mr. Regan previously served as the New York State Comptroller from 1979 to 1993.
David A. Shapiro. Mr. Shapiro has been a portfolio manager for Seneca Capital
Management LLC, an investment management firm since May 1995. Mr. Shapiro
founded Asset Holdings Group, a privately held originator of senior and
mezzanine commercial real estate loans formed in 1993. From 1991 to 1993, Mr.
Shapiro also served as an advisor to the Predecessor Bank in connection with the
restructuring and management of a portion of its commercial real state
portfolio.
40
<PAGE>
Jeffrey E. Susskind. Mr. Susskind has served since 1999 as a consultant to
Strome Investment, L.P., an investment management company and from 1992 through
1998 as a principal in its predecessor company, Strome, Susskind Investment
Management, L.P. Mr. Susskind was also a director of Sheridan Energy, Inc., a
publicly traded domestic independent energy company engaged in the production of
oil and gas, and served, from 1998 to 1999, as its Chairman of the Board.
Board of Directors and Committees
The Company is managed by a eight-member Board of Directors. The Board of
Directors has three standing committees, an executive committee, an asset
management committee and an audit committee.
Executive Committee. The executive committee is comprised of Messrs. Bryant,
Dworman and McDougal. The executive committee oversees the management of the
day-to-day business and affairs of the Company and the implementation of the
management of the Company's assets and reports with respect to its activities at
each meeting of the Board of Directors.
Audit Committee. The audit committee is comprised of Messrs. Regan and Shapiro
and Ms. Duke. The audit committee reviews and provides recommendations to the
Board of Directors with respect to the engagement of the Company's independent
auditors, financial reporting practices and internal accounting and financial
controls and procedures of the Company and monitors the Company's compliance
with its policies and procedures. In addition, the audit committee also
administers and reviews all compensation policies and provides recommendations
to the Board of Directors with respect thereto. The Audit Committee reports its
activities to the Board of Directors at each meeting of the Board of Directors.
Asset Management Committee. The asset management committee is comprised of
Messrs. Bryant, Houlihan and Shapiro. The asset management committee oversees
the performance of the asset portfolio of the Company and reports with respect
to its activities at each meeting of the Board of Directors.
During fiscal year 2000, the Board of Directors held four meetings, including
telephonic meetings. The audit committee held two meetings during the fiscal
year. The asset management committee held four meetings during the fiscal year.
The executive committee meets informally throughout the year, reporting its
activities to the Board of Directors at each meeting of the Board of Directors.
During fiscal year 2000, each director (other than Ms. Duke who was absent for
one meeting) attended 100% of the total number of meetings of the Board of
Directors and each director attended 100% percent of the total number of
meetings of committees on which he or she served.
The Company's Board of Directors may, from time to time, establish certain other
committees of the Board to facilitate the management of the Company. Directors
will be elected in a manner consistent with, and shall serve for a term, as
provided in the Company's Charter and Bylaws.
Executive Officers: In as much as the Predecessor Bank had disposed of its
depository banking operations in connection with the sale of its branches and
transfer of its deposits to HSBC Midland Bank in June 1996 (the "Branch Sale"),
the Company as successor does not require a large staff of officers or employees
to manage the business and affairs of the Company. Certain day-to-day management
functions are performed by RB Management Company LLC pursuant to the terms of a
management agreement. See "--Certain Relationships and Related Transactions".
The Company's officers are Nelson L. Stephenson, who serves as president and
chief executive officer of the Company and Robin Chandler Duke, who serves
without compensation as the vice president and secretary of the Company. Set
forth below is certain biographical information for Mr. Stephenson.
Nelson L. Stephenson. Mr. Stephenson was elected to the offices of president and
chief executive officer of the Company in July 1998. For more than the past five
years, Mr. Stephenson has been President of Fintek Inc., a privately held
financial advisory firm that provides services to the Company and the
Predecessor Bank. Mr. Stephenson is also President and a Director of
Coast-To-Coast Financial Corporation, a unitary savings and loan holding company
which owns Fintek, Inc. and Superior Bank FSB as well as other subsidiaries
engaged in consumer finance.
41
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
Remuneration of Executive Officers - Summary Compensation Table: The following
table discloses compensation received by the Company's chief executive officer
for the years indicated. The cash compensation amounts below reflect
compensation received from the Company and its subsidiaries. There were no other
executive officers who received compensation in 1999 from the Company (other
than director fees).
<TABLE>
<CAPTION>
---------------------------------------------------------
Annual Compensation
----------------------------------------------------------------------------------------------------------------
Name and Principal Other All Other
Position Year Salary Bonus Compensation Compensation
-------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nelson L. 2000 $ 24,000 $ -- $ -- $ --
Stephenson 1999 12,000 -- --
President and
Chief
Executive 2000 $ 150,000 $ -- $ -- $ 14,313 (3)
Officer 1998 300,000 -- 176,269 (1) 14,853 (3)
1999 150,000 -- 63,214 (2) 123,110 (3)
Jerome R. McDougal
Chairman of the Board,
Chief Executive Officer
and President
----------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------
(1) - Consists of severance pay following Mr. McDougal's retirement from
the offices of President and Chief Executive Officer in June 1998, in the
amount of $150,000 and a housing allowance, club dues, automobile, driver
expenses and health insurance premiums aggregating $26,269. Mr. McDougal
received severance payments in equal biweekly installments through June 30,
2000. The Company has no remaining liability to Mr. McDougal for severance
payments at June 30, 2000.
(2) - Consists of a housing allowance, club dues, automobile and driver
expenses (aggregating $21,548 for the year ended June 30, 1998), certain
tax expense reimbursements and health insurance premiums.
(3) - Consists of contributions of $9,000, $9,000 and $9,000 made by the
Company to its 401(k) Tax Deferred Savings Plan, accruals of and earnings
on deferred compensation in the amounts of $0, $0 and $110,053 and payments
of $5,313, $5,853 and $4,057 for life and personal liability insurance
premiums for the 2000, 1999 and 1998 periods presented, respectively.
Employment Arrangements:
Mr. Stephenson is compensated pursuant to an informal arrangement with the
Company that provides for compensation of $2,000 per month.
Jerome R. McDougal, was compensated pursuant to an arrangement with the
Predecessor Bank reached in 1991. The terms of Mr. McDougal's employment were
memorialized in the minutes of the Predecessor Bank's January 22, 1991 Board of
Directors meeting, which provided for an annual salary of $375,000 and customary
employee benefits commensurate with Mr. McDougal's position at the Company.
$75,000 of Mr. McDougal's annual salary was in the form of deferred
compensation. Mr. McDougal's annual deferred compensation accrues quarterly in
equal amounts and earns a variable rate of interest on the cumulative balance.
Prior to the Branch Sale, interest was compounded quarterly at the highest rate
offered on the predecessor's customer deposits each quarter and was thereafter
compounded at the prime rate. Mr. McDougal received additional compensation in
the form of a housing allowance, an automobile and payment of club membership
dues. The Company also reimbursed Mr. McDougal for the amount of personal income
taxes incurred as a result of the additional benefits.
42
<PAGE>
Mr. McDougal retired from his offices of president and chief executive officer,
effective July 1, 1998, at which time he was granted severance equal to two
years of his $375,000 annual salary. As part of his severance package, the
Company funds his health insurance premiums for a two year severance period and
funded his automobile allowance until the lease term of his current vehicle
expired in November 1998. Mr. McDougal also elected to withdraw his deferred
compensation in the amount of $689,728 during the quarter ended June 30, 1998. A
payment in this amount was made to Mr. McDougal on July 10, 1998.
Board of Directors Compensation: Effective July 1, 1998, directors of the
Company will receive directors fees of $2,500 for each regular Board meeting
attended, $750 for each telephonic Board meeting attended and $1500 for each
committee meeting attended.
Compensation Committee Interlocks and Insider Participation: Determinations
regarding compensation of the Company's employees were previously made by the
Compensation and Benefits Committee of the Board of Directors prior to the
Branch Sale. Mr. McDougal was a member of the Compensation and Benefits
Committee. Subsequent to the Branch Sale such determinations have been made by
the Audit Committee.
Retirement Plan: Effective April 30, 1992, the Company determined to suspend the
Company's Retirement Plan. As of the date of suspension, there have been no new
enrollments in the Retirement Plan and no further benefit accruals. As of June
30, 1998, Mr. McDougal was entitled to an accrued benefit of less than $5,000
pursuant to the terms of the Retirement Plan.
Indebtedness of Management: The Company's current policy is not to make loans to
its directors, executive officers or members of their immediate families,
although it did so from time to time in the past. All loans to directors and
executive officers and all other loans to the Company's employees were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and do
not involve more than the normal risk of collection or present other unfavorable
features. All such loans were transferred to HSBC as Transferred Assets in
connection with the Branch Sale.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information with respect to beneficial
ownership of Common Stock and Preferred Stock by (i) each person known by the
Company to own beneficially or of record more than 5% of Common Stock or
Preferred Stock, (ii) each director, nominee for director and executive officer
of the Company, and (iii) all directors and executive officers as a group. The
Company's Common Stock is not registered under Section 12 of The Securities
Exchange Act of 1934, as amended, and therefore stockholders holding 5% or more
of the Company's Common Stock are not required to file identifying and
beneficial ownership information with the SEC. Other than with respect to the
stockholders listed in the table below, the Company does not have access to
information deemed reliable as to the beneficial ownership of its Common Stock.
Unless otherwise indicated, each stockholder listed in the table has sole voting
and investment powers as of August 16, 2000 with respect to the shares owned
beneficially or of record by such person.
43
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Common Stock
------------------- -------------------- -----------------------
<S> <C> <C>
Mr. Alvin Dworman 2,822,693 39.8%
645 Fifth Avenue
New York, New York 10022
East River Partnership B(1) 415,800 5.9%
Madison Plaza
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Odyssey Partners, L.P.(2) 415,800 5.9%
31 West 52nd Street
New York, New York 10019
Francis L. Bryant -- --
Robin Chandler Duke --
James J. Houlihan -- --
David J. Liptak -- --
Jerome R. McDougal 4,000
Edward V. Regan -- --
David A. Shapiro -- --
Nelson L. Stephenson -- --
Jeffrey E. Susskind -- --
All directors and executive officers as a group 2,826,693 39.9%
(10 persons)
</TABLE>
----------------
* Less than .1%.
(1) - East River Partnership B is an Illinois general partnership, the
general partners of which are: (1) JAP Grandchildren Trust # 1, the
co-trustees of which are Marshall E. Eisenberg and Jay A. Pritzker; (2) Don
Trust #25, the co-trustees of which are Marshall E. Eisenberg and Thomas J.
Pritzker; and (3) R.A. Trust #25, the co-trustees of which are Marshall E.
Eisenberg and Thomas J. Pritzker.
(2) - Odyssey Partners, L.P. is a Delaware limited partnership having six
general partners: Stephen Berger, Leon Levy, Jack Nash, Joshua Nash, Brian
Wruble and Nash Family Partnership, L.P. The general partners of Odyssey
Partners, excluding Nash Family Partnership, L.P., share voting and
dispositive power over all owned shares.
---------------------
44
<PAGE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Management Company; The Management Agreement: The Company has engaged the
Management Company under a management agreement (the "Management Agreement") to
provide Company Management Services and Asset Management Services (each as
defined below). The responsibilities of the Management Company include, but are
not limited to, development and recommendation to the Company's Board of
Directors of strategies intended to maximize stockholder value. The Management
Company is responsible for developing, recommending and maintaining business
plans and operating budgets, individual asset and liability strategies and
decisions relating to sales and retentions of assets. The Management Company
reports to the Company's Board of Directors or its Asset Management Committee.
The Management Company was newly formed in 1996 and is controlled by Alvin
Dworman, who serves as its Managing Member. Mr. Dworman also owns 39.8% of the
outstanding Common Stock of the Company.
The Management Company has access to the expertise, resources and business
relationships accumulated by Mr. Dworman over 35 years in a wide variety of
general business activities. Mr. Dworman currently serves as a member of the
Real Estate Advisory Committee of the New York State Employee Retirement System
and is a member of the Board of Trustees of the New York Law School. As an
individual and as Chairman and Chief Executive Officer of the ADCO Financial
Group, Mr. Dworman maintains investments in a number of financial services,
banking and real estate entities. During his career, Mr. Dworman has founded,
developed, owned and managed a wide variety of entities throughout the United
States. Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B hold in
the aggregate 51.5% of the Common Stock. In connection with the equity
recapitalization offering in June 1994, Mr. Dworman, Odyssey Partners, L.P. and
East River Partnership B agreed not to sell their Common Stock for a period of
three years. In addition, such agreement provided that, for an additional two
years, they would not sell their Common Stock without the approval of the Board
of Directors of the Company under certain circumstances.
The terms of the Loan Agreement with HSBC include a requirement that, while any
amount remains outstanding under the Facility, Mr. Dworman retain his 39.8%
common stock interest in the Company and remain actively involved in the
day-to-day management of the affairs of the Company and its assets.
The Management Company also employs certain individuals previously employed by
the Predecessor Bank who were directly involved in managing the Company's real
estate portfolio.
Transactions With Affiliates: The Company previously obtained certain services
from Fintek. Effective October 31, 1991, substantially all of the employees of
the Company's then-existing capital markets group became employees of Fintek, a
newly-formed corporation. At the same time, Nelson L. Stephenson, a Senior
Executive Vice President of the Company at the time, resigned as an officer of
the Company and became the President and Chief Executive Officer of Fintek, as
well as a director of Fintek. Fintek may be deemed to be under common control
with the Company as a result of interests of Mr. Dworman, and, in addition, an
adult child of Mr. Dworman's is a director of Fintek. Fintek, pursuant to a
written agreement approved by the Company's Board of Directors, provided certain
financial consulting, strategic planning and advisory services to the Company,
including providing advice and consulting services with regard to the Company's
treasury functions. The Company had the right to terminate the agreement (which
was for a term of one year with automatic annual renewals) by giving Fintek 180
days' notice of such termination. In addition, the Company had the right to
terminate the agreement by giving Fintek thirty days' notice prior to any
renewal.
At June 30, 1996, the Company had an accrued aggregate liability to Fintek in
the amount of $1,516,000 for services performed prior to that date. The services
performed by Fintek on behalf of the Company prior to June 30, 1996 were
primarily in connection with the Branch Sale. During fiscal years 2000 and 1999
the Company made aggregate cash payments to Fintek in the amount of $112,000 and
$132,000. At June 30, 2000, the Company had no remaining aggregate liability to
Fintek.
The Fintek Agreement was terminated by mutual consent of the Company and Fintek
on June 28, 1996. Fintek has been engaged by the Management Company (at the
Management Company's expense) to provide similar services to RB Management and
the Company subsequent to the Branch Sale. See "Management."
45
<PAGE>
"Company Management Services" includes the management of the general business
affairs of the Company, including:
1. Developing and recommending policies and procedures appropriate for
continuing the orderly management of the Company's assets and
implementation of all policies and procedures approved by the
Company's Board of Directors or the Asset Management Committee of the
Board.
2. Providing quarterly and annual financial and operating reports and
such other information to the Company's Board of Directors and the
Asset Management Committee and Audit Committee as may be necessary
and reasonably requested by the Company's Board of Directors or such
committee.
3. Analyzing the Company's performance, including progress in continuing
the orderly management of the Company's assets and preparation of
financial forecasts and periodic variance analyses of actual
performance relative to plan.
4. Overseeing provision of all accounting and financial reporting
services, including maintenance and control of a general ledger,
controlling accounts payable and processing services and payroll
processing services, preparation of financial reports and regulatory
compliance reports and preparation and filing of tax returns, and
establishing and maintaining management information systems.
5. Providing treasury services and control functions, including:
- implementing cost and disbursement controls.
- cash management and investment of short-term funds.
- debt management, corporate finance and development and
implementation of alternative financing arrangement.
6. Overseeing legal and accounting services required by the Company.
7. Using best efforts to ensure compliance with any conditions imposed
by the Banking Department on the Company as a predicate to its
approval of the Branch Sale, including but not limited to, the
preparation and submission to the Banking Department of required
reports.
"Asset Management Services" entails management of all of the Company's assets on
a day-to-day basis and include the following:
1. Maintaining and implementing individual business plans for each asset
of the Company, as modified from time to time to reflect changes in
conditions and circumstances.
2. Development, marketing, negotiation and execution of transactions
necessary to continue to effect the Company's asset management plans,
subject to the ongoing approval of the Banking Department.
3. Obtaining and overseeing marketing and brokerage activities relating
to real estate managements and property leasing.
4. Managing real estate activities, including retention and oversight of
third-party property managers.
5. Obtaining and overseeing third-party loan servicing, including
ordinary course monthly payment collections and pay-offs.
6. Providing loan administration services, including delinquency
monitoring and response and enforcement of rights under loan
agreements.
7. Overseeing loan servicing activities for subordinated participations
in loans acquired by HSBC in connection with the Branch Sale.
8. Administration of joint ventures and oversight of the business
activities of the joint ventures.
The Management Company obtains and oversees the provision, on an outsourced
basis, of those services not provided directly by the Management Company. All
outsourcing arrangements is subject to prior review and recommendation as to
compensation terms by the Audit Committee and as to the other terms of the
engagement subject to prior approval by the Asset Management Committee of the
Company's Board of Directors. The cost of approved outsourced arrangements is
borne by the Company. The Management Company offers similar services to entities
not affiliated with Mr. Dworman, and also renders services to affiliates of Mr.
Dworman.
The Management Company is paid an annual base fee for Company Management
Services in an amount not to exceed $1.25 million. The annual base fee is
reviewed no less frequently than annually by the Audit Committee of the Company
and adjusted based upon the costs expected to be incurred by the Management
Company to provide the Company Management Services. In addition, the Management
Company also receives an annual fee for Asset Management Services of 0.75% of
the average month-end book value of the Company's assets and a Success Fee of
0.75% of the proceeds from the sale or collection of any asset sold by the
Company.
46
<PAGE>
During the year ended June 30, 2000, the Company accrued expenses for services
provided by the Management Company in the amount of $1,250,000 for the Base Fee
payable to the Management Company, $1,060,000 for the Asset Service Fee, and
$279,000 for Asset Disposition Fees in accordance with the fee schedule outlined
above. During 2000, the Company paid RB Management, LLC an aggregate amount of
$2,033,000. At June 30, 2000, the Company had a remaining aggregate amount
payable to the Management Company of $225,000.
The Kenneth Leventhal Real Estate Group of Ernst & Young LLP, which was engaged
for this purpose by the Special Transactions Committee of the Predecessor Bank's
Board of Directors, reviewed the form and amount of the fees payable to the
Management Company and advised upon the comparability of the fees and terms to
similar arrangements negotiated on an arm's-length basis.
The Management Agreement has an initial term of three years, which will be
extended for up to two additional one-year terms if the HSBC senior debt is so
extended. The Management Agreement is terminable by either party at any time on
180 days' notice with the consent of HSBC or other senior lenders, as
applicable. In addition, the Company's Board of Directors, subject to the
consent of HSBC, may terminate the Management Agreement without notice for
"Cause." "Cause" is defined as a material breach of the Management Agreement
and/or willful act or omission by the Management Company that is materially
detrimental to the best interests of the Company. In addition, the Management
Agreement may be terminated by the Company's Board of Directors during the last
year of any term 60 days after the sale of the last asset of the Company.
Upon any termination of the Management Agreement, the fees payable to the
Management Company will be pro rated for such year to the date of termination.
If the Management Agreement is terminated prior to the expiration of any term,
the Company also reimburses the Management Company for the reasonable costs
incurred by the Management Company in terminating its services to the Company
including, but not limited to, reasonable termination or severance payments made
to service providers or employees terminated by the Management Company as a
result of such termination.
Other Service Providers: In addition to retaining the Management Company to
provide the Company with the services described above, the Company, subject to
regulatory approval, terminated most of its employees and retained third parties
(including Fintek, Inc. and other entities controlled by Mr. Dworman) to provide
much of the administrative and non-real estate operating functions of the
Company's operations.
The Management Company has engaged Fintek, Inc. ("Fintek"), a firm 50%
beneficially owned by Mr. Dworman which has previously provided certain advisory
services to the Company, to continue to provide such services to the Company.
All fees paid to Fintek for such advisory services were the obligation of the
Management Company and were paid out of the fees received by the Management
Company from the Company. On June 28, 1996, Fintek and the Company mutually
agreed to the termination of the previous contract between Fintek and the
Company.
Persons or entities engaged by the Board of Directors, the Asset Management
Committee or by the Management Company on behalf of the Company entered into a
service contract with the Company and are compensated in accordance with market
rates for similar services. The terms of these contracts, including
compensation, were reviewed prior to execution by the Audit Committee of the
Board of Directors, and the Board of Directors engaged the Kenneth Leventhal
Real Estate Group of Ernst & Young LLP to review each service contract and to
advise the Audit Committee on the terms of the contracts and the comparability
to similar arrangements for similar services.
47
<PAGE>
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included
elsewhere in this Form 10-K at the pages indicated and are incorporated
by reference:
Page
----
Report of Independent Auditor F-2
Consolidated Statements of Financial Condition
June 30, 2000 and 1999 F-3
Consolidated Statements of Operations
Years ended June 30, 2000, 1999, and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 2000, 1999, and 1998 F-5
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999, and 1998 F-6
Notes to Consolidated Financial Statements F-8
[a](2) Certain financial statement schedules are omitted due to inapplicability
or because the required financial information is shown in the Consolidated
Financial Statements or Notes thereto.
[b] Reports on Form 8-K filed during the last quarter of the period covered
by this report:
None
[c] Exhibits:
2.1* Agreement and Plan of Merger, dated as of October 9, 1997, by and
between River Asset Sub, Inc. and River Distribution Sub, Inc.
2.1b ** AmendmentNo. 1, dated as of May 15, 1998, to Agreement and Plan of
Merger, October 9, 1997, by and between River Asset Sub, Inc. and River
Distribution Sub, Inc.
2.2 * Petition for a Closing Order, made by River Bank America to the New
York State Supreme Court, dated October 15, 1997.
2.2b * Notice of Settlement of Closing Order, made by River Bank America to
the New York State Supreme Court, dated December 8, 1997.
2.2c * Closing Order, signed by the New York State Supreme Court on January 9,
1998 and entered on January 14, 1998.
2.3 * Assignment and Assumption Agreement, dated as of May 11, 1998, by and
between River Bank America and River Asset Sub, Inc.
3.1 *** Certificate of Merger, dated May 18, 1998, of River Asset Sub, Inc. and
River Distribution Sub, Inc.
3.2 *** Certificate of Incorporation of the Company.
48
<PAGE>
3.3 *** Certificate of Designation of the 15% Noncumulative Perpetual Preferred
Stock, Series A, $1.00 par value, of the Company.
3.4 *** By-Laws of the Company.
4.0 + Indenture, dated as of December 30, 1998, by and between the Company
and LaSalle National Bank, as Trustee (the "Indenture").
4.2 ++ First Supplemental Indenture, dated as of February 1, 1999 to the
indenture.
10.1 Amended and Restated Credit Agreement dated as of January [ ], 2000
among the Company and other borrowers and HSBC USA.
10.2.* Management Agreement dated as of June 28, 1996, by and between River
Bank America and RB Management Company LLC.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
-------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-4 filed on March 26, 1998.
** Incorporated by reference to the Company's Registration Statement on Form
S-4 filed on February 28, 1998
*** Incorporated by reference to the Company's Annual Report on Form 10-K/A
filed on September 28, 1998
+ Incorporated by reference to the Company's Schedule 13-E4/A Issuer Tender
Offer Statement filed on December 31, 1998
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on February 12, 1999
Supplemental Information to Be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
The Company has not mailed any proxy materials to its stockholders in connection
with the Company's 2000 annual meeting of stockholders for its 2000 annual
report to stockholders. The Company intends to prepare and mail such documents
as soon as practicable following the setting of the record date for the annual
meeting.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RB ASSET, INC.
(Registrant)
Date: September 8, 2000 By: /s/Nelson L. Stephenson
---------------------------
Nelson L. Stephenson
President and Chief Executive Officer
(principal executive and principal
financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Frank L. Bryant, Jr.
---------------------------
Date: September 8, 2000 Frank L. Bryant, Jr.
Director
/s/ Alvin Dworman
---------------------------
Date: September 8, 2000 Alvin Dworman
Director
/s/ David J. Liptak
---------------------------
Date: September 8, 2000 David J. Liptak
Director
/s/ James J. Houlihan, Jr.
---------------------------
Date: September 8, 2000 James J. Houlihan, Jr.
Director
/s/ Jerome R. McDougal
---------------------------
Date: September 8, 2000 Jerome R. McDougal
Director
/s/ Edward V. Regan
---------------------------
Date: September 8, 2000 Edward V. Regan
Director
/s/ David A. Shapiro
---------------------------
Date: September 8, 2000 David A. Shapiro
Director
/s/ Jeffrey E. Susskind
---------------------------
Date: September 8, 2000 Jeffrey E. Susskind
Director
50
<PAGE>
FINANCIAL STATEMENTS
RB ASSET, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Auditors F-2
Consolidated Statements of Financial Condition
June 30, 2000 and 1999 F-3
Consolidated Statements of Operations
Years ended June 30, 2000, 1999, and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 2000, 1999, and 1998 F-5
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999, and 1998 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts F-34
Schedule III - Real Estate and Accumulated Depreciation F-35
Schedule IV - Investments in Real Estate F-37
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
RB Asset, Inc.
We have audited the consolidated statements of financial condition of RB Asset,
Inc. (the "Company"), successor to River Bank America (see Note 1), as of June
30, 2000 and 1999 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 2000. We have also audited the financial statement
schedules listed in the Index to Financial Statements included in the Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
June 30, 2000 and 1999 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therin.
/s/ Ernst & Young LLP
New York, New York
July 28, 2000
F-2
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
(Dollars in Thousands)
Assets
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $5,550 and $3,264, respectively (note 11) $ 99,321 $ 92,438
Real estate held for disposal (note 12) 2,040 2,040
Allowance for fair market value reserve
Under SFAS-121 (note 12) (40) (40)
-------------- --------------
Total real estate held for disposal, net 2,000 2,000
Investments in joint ventures 1,454 1,536
------------- -------------
Total real estate assets 102,775 95,974
Loans receivable:
Secured by real estate (note 8) 32,339 53,697
Commercial and consumer (note 9) 7,247 10,314
Allowance for possible credit losses (note 10) (13,341) (18,155)
------------ ------------
Total loans receivable, net 26,245 45,856
Cash, due from banks and cash equivalents (note 6) 33,666 14,780
Cash, due from banks - restricted cash (note 6) 7,500 13,355
Investment securities available for sale (note 7) 1,170 1,294
Other assets (note 13) 2,425 3,147
------------- -------------
Total Assets $ 173,781 $ 174,406
=========== ============
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 (note 24) $ 12,527 $ 11,375
Borrowed funds (note 14) 52,033 50,557
Other liabilities (note 15) 12,379 15,957
------------ ------------
Total Liabilities 76,939 77,889
------------ ------------
Commitments and contingencies (note 23)
Stockholders' equity:
15% non-cumulative perpetual preferred stock, Series A, par value 938 938
$1, liquidation value $25 (1,400,000 shares authorized, 937,777 shares issued
and outstanding at June 30, 2000 and 1999)
Common stock, par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at June 30, 2000 and 1999) 7,100 7,100
Additional paid-in capital 100,439 100,439
Accumulated deficit (note 16) (10,507) (10,956)
Securities valuation account (notes 1 and 7) (1,128) (1,004)
-------------- -------------
Total stockholders' equity 96,842 96,517
------------- ------------
Total liabilities and stockholders' equity $ 173,781 $ 174,406
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2000, 1999, and 1998
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rental revenue and operations:
Rental income and other property revenue $ 15,258 $ 14,940 $ 13,779
Property operating and maintenance expenses (10,667) (10,521) (10,884)
Depreciation - real estate held for investment ( 2,311) (2,338) (383)
--------------- --------------- -------------
Net rental operations 2,280 2,081 2,512
Other property income (expense):
Net gain on sale of real estate 1,816 3,194 1,998
(Recovery)/writedown of investments in real estate -- 107 (1,106)
-------------- -------------- -------------
Total other property income/(expense) 1,816 3,301 892
Interest income:
Loans receivable 2,123 2,551 3,680
Investment securities -- -- 55
Money market investments and other 674 629 462
Provision for possible credit losses -- -- (1,500)
-------------- -------------- -------------
Total interest income 2,797 3,180 2,697
Other income:
Gain on settlement of Branch sale contingencies, net 500 -- --
Loss on satisfaction of loan assets (841) -- --
Realization of contingent participation revenues 2,400 1,500 3,356
-------------- -------------- ------------
Total other income 2,059 1,500 3,356
Total revenues 8,952 10,062 9,457
-------------- -------------- ------------
EXPENSES:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 1,181 524 --
Borrowed funds 2,430 4,173 6,026
Other 4 62 83
-------------- -------------- ------------
Total interest expense 3,615 4,759 6,109
Other expenses:
Salaries and employee benefits 219 202 900
Legal and professional fees 1,307 1,460 2,305
Management fees 2,310 2,426 2,562
Other 401 60 350
-------------- -------------- ------------
Total other expenses 4,237 4,148 6,117
Total expenses 7,852 8,907 12,226
Income (loss) before net gain on sale of investment securities and
-------------- -------------- ------------
before provision for (benefit from) income taxes 1,100 1,155 (2,769)
Net gain on sales of investment securities -- -- 1,697
-------------- -------------- ------------
Income/(loss) before provision for income taxes 1,100 1,155 (1,072)
-------------- -------------- -------------
Provision for (benefit from) income taxes 651 550 434
-------------- -------------- ------------
Net income/(loss) 449 605 (1,506)
Dividends declared on preferred stock -- -- --
--------------- -------------- ------------
Net income/(loss) applicable to common stock $ 449 $ 605 $ (1,506)
=============== ============== =============
Basic and diluted income (loss) per common share $ 0.06 $ 0.09 $ (0.21)
=============== ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY Years
ended June 30, 2000, 1999, and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Series A
Non-
cumulative
Perpetual Additional Retained Total
Preferred Common Paid-in Earnings Securities Stockholders'
Stock Stock Capital (deficit) Valuation Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 $ 1,400 $ 7,100 $111,170 $(10,055) $ (1,105) $108,510
Net loss for the year ended
June 30, 1998 -- -- -- (1,506) -- (1,506)
Preferred Stock dividends -- -- -- -- -- --
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- 179 179
-------- -------- -------- -------- -------- --------
Balances at June 30, 1998 1,400 7,100 111,170 (11,561) (926) 107,183
Net income for the year ended
June 30, 1999 -- -- -- 605 -- 605
Preferred stock dividends -- -- -- -- -- --
Reduction in Stockholders' Equity
resulting from the Preferred Stock
Exchange Offer (Note 24) (462) -- (10,731) -- -- (11,193)
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- (78) (78)
-------- --------- --------- -------- ------- -------
Balances at June 30, 1999 938 7,100 100,439 (10,956) (1,004) 96,517
Net income for the year ended
June 30, 2000 -- -- -- 449 -- 449
Preferred stock dividends -- -- -- -- -- --
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- (124) (124)
-------- --------- --------- ------------ -------- --------
Balances at June 30, 2000 $ 938 $ 7,100 $ 100,439 $ (10,507) $(1,128) $ 96,842
======== ========= ========= ============ ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999, and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Cash Flows Provided by (Used in) Operating Activities:
Net income/(loss) $ 449 $ 605 $ (1,506)
Adjustments to reconcile net (loss)/income to cash
used in operating activities:
Provision for possible credit losses -- -- 1,500
(Recovery)/write downs of real estate assets -- (106) 1,106
Depreciation and amortization 2,311 2,338 383
Amortization of capitalized issuance costs - Increasing Rate Junior
Subordinated Notes due 2006 165 68 --
Net (gain)/loss on sale of investments in real estate (1,816) (3,694) (2,542)
Net loss/(gain) on sales/satisfaction of loans, other investments
and investment securities 841 -- (5,241)
Change in operating assets and liabilities:
Net (increase)/decrease in accrued interest and
preferred stock dividend receivable (51) 40 405
Net increase/(decrease) in accrued interest payable, net of additions to
principal - Increasing Rate Junior Subordinated Notes due 2006 987 275 (486)
Net (decrease)/increase in accrued income taxes (224) 503 16
Net (decrease)/increase in accrued expenses
and other liabilities (3,354) 674 (3,439)
Net decrease/(increase) in prepaid expenses and other assets 773 (1,082) (1,672)
Cash effect of increases/(decreases) in allowance for
possible credit losses 74 352 372
Other -- -- 172
--------- ---------- ----------
Net cash provided by/(used in) operating activities 155 (27) (10,932)
--------- ---------- ----------
Investing Activities:
Cash Flows Provided by Investing Activities
Proceeds from sales and maturities of investment
securities, available for sale -- -- 6,871
Net repayment/(origination) of loans secured by real estate, net 16,846 -- 18,812
Net repayment/(reacquisition) of commercial and consumer loans 1,850 69 (1,579)
Net decrease in loans sold with recourse -- -- 8,667
Proceeds from distributions from joint venture partnerships 82 -- --
Proceeds from sales of real estate held 2,839 13,077 16,583
Additional fundings on real estate held (10,217) (655) (5,069)
--------- --------- ----------
Net cash provided by investing activities $ 11,400 $ 12,491 $ 44,285
--------- --------- ----------
</TABLE>
(Continued on following page)
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999, and 1998
(Dollars in Thousands)
(Continued from previous page)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Financing Activities:
Cash Flows Provided by (Used in) Financing Activities:
Decrease/(increase) in restricted cash $ 5,855 $ 6,200 $ (14,459)
Capitalization of issuance costs - Increasing Rate Junior Subordinated
Notes due 2006 -- (319) --
Proceeds from borrowed funds 3,706 -- --
Repayment of borrowed funds (2,230) (10,000) (5,509)
Decrease in borrowed funds secured by loans
sold with recourse, net of construction advances -- (6,097) (9,793)
Net cash provided by (used in) financing activities 7,331 (10,216) (29,761)
--------------- ------------- -------------
Net increase in cash and money market investments 18,886 2,248 3,592
Beginning cash 14,780 12,532 8,940
-------------- -------------- -------------
Ending cash $ 33,666 $ 14,780 $ 12,532
============= ============= =============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 3,457 $ 4,449 $ 6,594
Federal, state and local income and franchise taxes 903 548 433
Non-cash transactions:
Transfer of loans sold with recourse to real estate held
for investment -- 13,959 --
Accrued interest payable added as additional principal - Increasing Rate
Junior Subordinated Notes due 2006 (See Note 24) 994 -- --
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
1. Organization, summary of significant accounting policies and accounting
changes
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"), which were finalized on May 22, 1998, the Company succeeded
to the assets, liabilities and business of River Bank America ("River Bank" or
the "Predecessor Bank"). Prior to the Reorganization, River Bank was a New York
State chartered stock savings bank and was regulated by the New York State
Banking Department ("the Banking Department" or the "NYSBD") and, until December
31, 1997, the Federal Deposit Insurance Corporation (the "FDIC").
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 shareholders of River Bank
received shares of the Company on a share-for-share basis so that the Company
was owned by the same stockholders, in the same proportions, as owned by the
Predecessor Bank on the record date.
On June 28, 1996, the Predecessor Bank sold its remaining eleven branches ("the
Branch Sale") to HSBC Bank USA ("HSBC"), formerly known as Marine Midland Bank.
See Note 3 to the Consolidated Financial Statements. Following consummation of
the Branch Sale, all retail banking operations of the Predecessor Bank ceased.
Basis of presentation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation. Due to the anticipated
short- term nature of such investments, investments in unconsolidated real
estate partnerships are generally carried at cost, which results do not differ
materially from generally accepted accounting principles, subject to periodic
assessment of net realizable value. Gains on sales or dispositions of such
investments are recognized dependent upon the terms of the transaction. Losses
on sales or dispositions and any adjustments related to redetermination of net
realizable value are charged to operations of the current period.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Money market investments: Money market investments are carried at cost, which
approximates market value.
Investment and mortgage-backed securities: In accordance with Statement of
Financial Accounting Standards No. 115 (SFAS-115), "Accounting for Certain
Investments in Debt and Equity Securities," at June 30, 2000, the balance of
stockholders' equity included a $1.1 million unrealized loss on securities
classified as available for sale.
Management determines the appropriate classification of debt and equity
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 debt and equity securities
classified as available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security using a method approximating
the level yield method. Such amortization is included in interest income from
these investments. Interest and dividends are included
F-8
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
in interest income from the respective investments. Realized gains and losses,
and declines in value judged to be other-than-temporary, are included in net
securities gains and losses. The cost of securities sold is based on the
specific identification method.
Loans receivable, interest, and loan origination fees and costs: Loans
receivable are stated at principal balances, net of deferred fees and costs.
Interest on loans is accrued based on principal amounts outstanding. Loans are
placed on non- accrual status when they become 90 days past due or at any time
collection of principal or interest is doubtful unless, in the opinion of
management, collection appears likely. Accrued but unpaid interest on such loans
is reversed and interest income is subsequently recognized only to the extent
that payments are received and when no doubt exists as to the collectibility of
the remaining book balance of the asset. Interest is subsequently accrued when
such loans return to full current status and have had a period of performance in
accordance with a loan's terms.
Loan origination fees and certain loan origination direct costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income over
the approximate lives of the related loans, adjusted for estimated prepayments
as appropriate to provide a level interest yield.
Allowance for possible credit losses: The allowance for possible credit losses
is provided by charges to operations. Credit losses, net of recoveries, are
charged directly to the allowance for possible credit losses. Additions to the
allowance are based on management's periodic review and evaluation of the
Company's assets, the potential for loss in light of the current composition of
the Company's assets, and economic conditions.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
real estate held for investment. A substantial portion of the Company's loans
are collateralized by real estate and, accordingly, the performance of such
loans may be affected by market conditions for real estate. As of June 30, 2000,
most of the Company's real estate held for investment is located in New York.
The Company has 70% of its total assets in five real estate properties and
loans. Accordingly, the ultimate collectibility of these assets collateralized
by real estate is particularly susceptible to changes in local market
conditions. Management believes that the allowance for possible credit losses is
adequate and that real estate held for investment is properly recorded.
Real estate: The Company accounts for its real estate assets in accordance with
Statement of Accounting Standard No. 121 (SFAS-121), "Accounting for the
Impairment of Long Lived Assets to be Disposed Of," issued by the Financial
Accounting Standards Board (the "FASB"). SFAS-121 requires that a loss is
recorded for assets held for investment when events and circumstances indicate
impairment and the undiscounted future cash flow generated by the investment in
real estate is less than the related carrying amount. When the carrying amount
of the asset may not be recoverable, the asset balance must be directly written
down as part of the recorded loss. In addition, SFAS-121 requires long-lived
assets held for sale to be carried at the lower of carrying value or fair value
less the costs to sell. Fair value is defined in SFAS-121 as the amount at which
an asset could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
Depreciation: Under generally accepted accounting principals ("GAAP"), SFAS-121,
the Company is required to depreciate real estate held for investment over the
estimated useful life of the assets. The depreciable portion of assets
categorized as real estate held for investment includes the accumulated costs of
acquisition and/or development of building structures and leasehold
improvements. No depreciation charges are made for the portion of the asset's
historical cost attributable to land. Depreciation for real estate held for
investment is generally calculated on a straight-line basis over a 30 year
period or over the remaining term of the lease for leasehold improvements,
whichever period is less. On May 22, 1998, as a consequence of the
Reorganization, the Company was no longer subject to the categorization and
depreciation regulations for investments in real estate previously imposed by
the Predecessor Bank's regulators. Accordingly, as of that
F-9
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
date, the Company began to record depreciation charges, as required by GAAP, for
all real estate held for investment, that had not been subject to depreciation
charges in prior periods.
Retirement plan: The Company has a contributory 401(k) plan and a
non-contributory pension plan (the "Plan") covering substantially all of its
employees. During 1992, the Company adopted an amendment to the Plan which
ceased the accrual of benefits under the Plan ("Plan suspension") effective
April 30, 1992. The Plan was further amended to exclude employees hired on or
after April 30, 1992 from participating in the Plan.
Income taxes: For federal income tax purposes, the Company files a consolidated
tax return with its subsidiaries on a calendar year basis. The Company files
combined New York State and New York City income tax returns with various
subsidiaries. In addition, certain subsidiaries file on a separate basis in New
York and the Company and certain subsidiaries file income and franchise tax
returns in various other states.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of deferred tax assets, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates which are expected to be applicable to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Recent Accounting Pronouncements:
SFAS No. 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 will 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 June 30,
2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
2. Reorganization
On May 22, 1998, River Bank completed its Reorganization into a Delaware
corporation named RB Asset, Inc., under a plan that was approved by the
stockholders of River Bank. Prior to the Reorganization, River Bank was a New
York State chartered stock savings bank and was regulated by the New York State
Banking Department ("the Banking Department" or the "NYSBD") and, until December
31, 1997, the Federal Deposit Insurance Corporation (the "FDIC"). Prior to the
F-10
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
Reorganization, the Predecessor Bank was therefore subject to extensive
regulation, examination and supervision by the Banking Department and by the
FDIC. As a Delaware corporation, no longer engaged in banking activities, the
Company is no longer subject to regulation by the Banking Department or 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 shareholders 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 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 of the Predecessor Bank's tax attributes have been preserved.
3. Purchase of Assets and Liability Assumption Agreement
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.
Subsequent to the closing of the Branch Sale, the Company no longer retained a
significant number of employees to manage the Company's affairs. Rather,
day-to-day management responsibilities of the Company have been obtained from RB
Management Company, LLC ("RB Management"), a management company affiliated with
Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company.
4. Regulatory capital requirements
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmember bank by the FDIC and the reorganization of the Predecessor Bank into a
Delaware corporation, the Company is no longer subject to the regulatory capital
requirements of either the FDIC or the Banking Department.
F-11
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the years ended June 30, 2000, 1999, and 1998,
respectively. The Company had no securities outstanding that were convertible to
common stock at June 30, 2000, 1999 and 1998.
6. Cash due from banks and cash equivalents
Included in Cash, due from banks and cash equivalents at June 30, 2000, are
approximately $2.5 million in Funds maintained on deposit by wholly-owned
subsidiaries and required to meet ongoing cash flow requirements of those
subsidiaries. At June 30, 2000, HSBC had restricted a total of $7.5 million in
funds, held on deposit with HSBC, in accordance with the terms of the HSBC
Facility agreement. At June 30, 1999, HSBC had restricted a total of
approximately $13.4 million. Restricted funds held by HSBC are not available to
the Company for the settlement of any of the Company's current obligations. The
restricted cash reserves arose from the sale of assets which had served as
primary 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.
7. Investment securities available for sale, net
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Equity securities $ 2,298 $ -- $ (1,128) $ 1,170
================ ============= =========== ===========
</TABLE>
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Equity securities $ 2,298 $ -- $ (1,004) $ 1,294
============ =============== ================ =================
</TABLE>
F-12
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
8. Loans receivable, secured by real estate
Loans secured by real estate at June 30, 2000 and 1999 consist of the following:
June 30, June 30,
2000 1999
------ -----
One-to-four family residential $ 1,031 $ 1,229
Multi-family residential 31,308 21,519
Commercial -- 30,949
---------- ---------
$ 32,339 $ 53,697
========== ========
In accordance with SFAS No. 114 (SFAS-114), "Accounting by Creditors for
Impairment of a Loan," the Company considers a loan impaired if, based on
current information and events, it is probable that all amounts due under the
loan agreement are not collectable. Impairment is measured based upon the fair
value of the underlying collateral.
At June 30, 2000 and 1999, the recorded investment in loans that are considered
to be impaired under SFAS-114 were $14,450 and $18,047, respectively (of which
$14,450 and $16,191 were on a non-accrual basis). The related allowance for
credit losses is $6,679 and $7,679. The average investment in impaired loans
during the years ended June 30, 2000 and June 30, 1999, were $16,523 and
$18,589, respectively. For the years ended June 30, 2000 and June 30, 1999 the
Company recognized interest income on those impaired loans of $81 and $84,
respectively, using the cash basis of income recognition.
At June 30, 2000 and 1999, the Company had restructured 2 and 3 loans,
respectively, secured by real estate which aggregated $31,308 and $20,882,
respectively. The amount of interest on these loans that was included in
interest income for the year ended June 30, 2000, and 1999 is $793 and $501.
9. Commercial and consumer loans
Commercial and consumer loans at June 30, 2000 and 1999 consist of the
following:
June 30, June 30,
2000 1999
------ -----
Commercial loans:
Secured $ 1,000 $ 2,520
Unsecured 6,247 5,939
------------- -------------
7,247 8,459
Consumer loans:
Student education loans -- 1,855
------------- -------------
Total commercial and consumer loans $ 7,247 $ 10,314
============= =============
During the year ended June 30, 2000, the Company's portfolio of consumer loans,
which consisted of receivables secured by student education loans was repaid in
full.
F-13
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
10. Allowance for possible credit losses
The following is an analysis of the allowance for possible credit losses for the
years ended June 30, 2000 and 1999:
2000 1999
------------ ------------
Balance at July 1, 1999 and 1998 $ 18,155 $ 20,037
Provision charged to operations -- --
Charge-offs, net of recoveries (4,814) (1,882)
------------ ------------
Balance at June 30, 2000 and 1999 $ 13,341 $ 18,155
============ ============
Charge-offs, net of recoveries, relate to losses incurred and recoveries
realized in the sale or liquidation of assets.
At June 30, 2000, the total provisions for possible credit losses were allocated
to real estate loans in the amount of $8,634 and to commercial and consumer
loans in the amount of $4,707. At June 30, 1999, the total provisions for
possible credit losses were allocated to real estate loans in the amount of
$15,815 and to commercial loans in the amount of $2,340.
11. Real estate held for investment
Real estate held for investment at June 30, 2000 and 1999, respectively,
consists of the following:
June 30, 2000 June 30, 1999
------------- -------------
Number of Number of
Properties Amount Properties Amount
---------- ------ ---------- ------
Land Held for Development 2 $ 15,625 2 $ 13,774
Multi-family 3 58,962 3 60,327
Commercial real estate:
Office buildings 2 23,749 2 17,577
Other 1 985 1 760
--- --------- --- ----------
8 $ 99,321 8 $ 92,438
=== ========= === ==========
At June 30, 2000, the Company's principal real estate held for investment
properties consists of a multi-family apartment complex located in Philadelphia,
PA, an office building complex in Atlanta, GA, co-operative apartment shares in
New York, NY and two parcels of land held for development located in the Borough
of The Bronx, New York, New York. The book values of the three real estate
investment properties held for investment are $53.7 million, $19.0 million and
$7.1 million, respectively and the book value of the land held for development
is $15.6 million .
The Company has used currently-available information to establish valuations for
real estate held for investment at June 30, 2000. Although the best available
information was used to determine real estate valuations and corresponding
reserves for possible loan losses, future writedowns of real estate held for
investment may be necessary based on changes in economic conditions, the receipt
of newly-available information involving specific properties, or changes in
management strategies.
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
June 30, 2000, approximately $3.7 million had
F-14
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
been advanced under the Construction Loan. 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, which has
been added to the outstanding balance of the Construction Loan and has also been
accounted for as an addition to the Company's investment in the office complex
project.
12. Real estate held for disposal
Real estate held for disposal, net of a valuation allowance of $40 at both June
30, 2000 and 1999, respectively, consists of $2.0 million in units within
multi-family residential expected to be sold within one year. There was no
activity in the valuation allowance for real estate held for disposal for the
years ended June 30, 2000 and 1999.
At June 30, 2000 and 1999, the Company's principal real estate held for disposal
properties consisted of co-operative apartment shares in New York, NY, from
which only minimal rental income was derived. Net rental income from investments
in real estate held for sale were $31 and $66 for the years ended June 30, 2000
and 1999, respectively.
Management believes that the allowance for possible losses is adequate and that
real estate held for disposal is properly valued. The Company has used currently
available information to establish reserves and resultant net valuations for
real estate held for disposal at June 30, 2000 and 1999.
13. Other assets
Other assets at June 30, 2000 and 1999 consist of the following:
June 30, June 30,
2000 1999
---- ----
Accrued interest receivable $ 546 $ 348
Prepaid pension expenses and other assets 1,879 2,799
-------- ---------
$ 2,425 $ 3,147
======== =========
F-15
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
14. Borrowed funds
Borrowed funds and weighted average year-end interest rates at June 30, 2000 and
1999 consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Weighted Weighted
Year-end Average Year-end Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Loan facilities (HSBC) $ 48,327 4.89% $ 50,557 6.53%
Construction financing (Bank of
America) 3,706 8.63 -- --
---------- -----------
$ 52,033 $ 50,557
=========== ===========
Average cost of funds during
the year ended 5.85% 6.62%
===== =====
</TABLE>
Initial Facility with HSBC: The closing of the Branch Sale was conditioned upon
the Company's obtaining financing with terms reasonably acceptable to the
Company and determined to be adequate to permit consummation of the Branch Sale.
At June 28, 1996, the Company obtained from HSBC a loan facility (the
"Facility") consisting of eleven independent mortgage loans with additional
collateral, in an aggregate amount not to exceed of $100.0 million. As of June
30, 1996, HSBC had extended $89.8 million under the Facility to the Company.
Proceeds of the Facility were utilized by the Company to (i) refinance all or
part of the certain indebtedness secured by assets to be transferred to HSBC,
including all or a substantial part of the outstanding advances from the Federal
Home Loan Bank and (ii) provide additional funds for the development and
completion of two individual real estate assets as part of the Company's
operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts which are equal to 60% and 30% of the original aggregate amount of the
Facility and remaining fully current on all obligations and in compliance with
all covenants. The Company remained current on all obligations and remained in
compliance with all covenants related to the Facility. Accordingly, the
agreement was extended by mutual agreement between the Company and HSBC in June
1999 through June 30, 2000.
The Facility was secured by first priority mortgage liens on eleven of River
Bank's real estate assets approved by HSBC and collateral assignments of first
priority mortgages held by the Predecessor Bank (the "Primary Collateral"). Each
of the loans was cross defaulted with each other and cross collateralized by all
collateral for the Facility. As additional collateral for the Facility, each
loan was also secured by first priority mortgages (or, where applicable, a
collateral assignment of first priority mortgages held by the Company), stock
pledges and assignment of partnership interests and assignment of miscellaneous
interests on additional Bank assets (the "Additional Collateral"). The Company
collaterally assigned to HSBC all of the cash flow from the Primary Collateral
and the Additional Collateral. Substantially all net proceeds from the sale of
Primary Collateral assets by the Predecessor Bank and, later, the Company, were
applied to the prepayment of the Facility.
The Facility was priced at 175 basis points over LIBOR for the initial six
months following June 28, 1996, automatically increasing by 25 basis points at
the beginning of each of the subsequent three six month periods and will be
priced at 275 basis points over LIBOR for the third year of the Facility. In the
event that the Company elects to exercise its option to
F-16
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
extend the initial term of the Facility, the Facility will be priced at 300
basis points over LIBOR during the initial one year extension and 325 basis
points over LIBOR during the second one year extension. Following maturity or an
event of default, the Facility will accrue interest at a specified default rate.
The terms of the Facility agreement required 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.
On October 1, 1998, a modification of the loan agreement between HSBC and the
Company became effective. This modification effectively reduced the rate of
interest paid by the Company to HSBC by providing compensating balance credits
to the Company for funds it held on deposit with HSBC. As a result of this
modification the average interest paid to HSBC declined from approximately 8.17%
in 1998 to 6.53% in 1999 and declined further to 4.89% in 2000. The decline in
the effective interest rate paid to HSBC for the facility in 2000, as compared
with 1999, was also partially attributable to a refinancing of the Facility
which took place in January 2000 (see below).
Refinanced Facility with HSBC. 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
Facility over a term of 20 years and extended the maturity of the HSBC Facility
through January 31, 2005. The Facility is secured by a first lien on two
properties, certain cooperative shares in a third property 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 June 30, 1999
to $7.5 million at June 30, 2000.
Under the terms of the modified agreement, the Facility currently is subject to
a 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 the portion of
unrestricted funds that remain on deposit with HSBC.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding
under the Facility. 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.
Construction Loan Facility. 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 June 30, 2000, approximately $3.7
million had been advanced under the Construction Loan. 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
F-17
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
the year ended June 30, 2000, which has been added to the outstanding balance of
the Construction Loan and has also been accounted for as an addition to the
Company's investment in the office complex project.
15. Other liabilities
Other liabilities at June 30, 2000 and 1999 consist of the following:
June 30, June 30,
2000 1999
------ -----
Accrued interest payable $ 725 $ 754
Accrued income taxes 6,066 6,290
Accounts payable and accrued expenses 1,286 4,120
Postretirement benefits obligation 3,423 3,914
Preferred Stock dividend, declared and unpaid 879 879
---------- ----------
$ 12,379 $ 15,957
========== ==========
16. Stockholders' equity
On June 30, 1994, the Predecessor Bank consummated the placement ("Offering") of
5,500,000 shares of its common stock, par value $1.00 per share ("Predecessor
Common Stock"), and 1,400,000 shares of 15% noncumulative perpetual preferred
stock, series A, par value $1.00 per share ("Predecessor Preferred Stock") which
resulted in net proceeds to the Predecessor Bank of $78,200. The issuance price
of the offered stock was $9 per share for the Predecessor Common Stock and $25
per share for the Predecessor Preferred Stock. The Predecessor Bank's Restated
Organization Certificate was amended prior to consummation of the Offering in
order to authorize the issuance of up to 30,000,000 shares of Predecessor Common
Stock and 10,000,000 shares of Predecessor Preferred Stock. Prior to the
offering, the Predecessor Bank had 1,000,000 shares of Predecessor Common Stock
issued and outstanding, plus warrants to purchase an additional 690,000 shares
of Predecessor Common Stock. The Predecessor Bank also had 200,000 shares of 3%
Noncumulative Senior Preferred Stock and 130,000 shares of 4% Noncumulative
Preferred Stock issued and outstanding (each of which series of preferred stock
had a liquidation value of $100 per share). Substantially concurrently with the
Offering these shares were exchanged for 600,000 shares of Predecessor Common
Stock and outstanding warrants to purchase Predecessor Common Stock were
canceled. The Predecessor Bank had 7,100,000 shares of its Predecessor Common
Stock and 1,400,000 shares of its Predecessor Preferred Stock outstanding at
June 30, 1997.
In connection with the Reorganization (See Note 2), the stockholders of the
Predecessor Bank received substantially identical capital stock of the Company
(with substantially identical rights and privileges) on a share for share basis
and as a result the Company had 7,100,000 shares of its common stock, $1.00 par
value Company Common Stock, and 1,400,000 shares of its 15% non-cumulative
perpetual preferred stock, series A, $1.00 par value ("Company Preferred
Stock"), outstanding at June 30, 1998. Mr. Alvin Dworman, continues to be the
largest stockholder of the Company with 2,768,400 shares or 39% of the Company
Common Stock outstanding.
The Company's certificate of incorporation authorizes the issuance of up to
30,000,000 shares of Company Common Stock and 10,000,000 shares of preferred
stock, of which 1,400,000 have been designated and issued as the Company
Preferred Stock pursuant to the certificate of designation with respect thereto.
The Company Preferred Stock is perpetual and is not subject to any sinking fund
or other obligation of the Company to redeem or retire it.
The board of directors of the Company has the power from time to time to issue
additional shares of Company Common Stock or perpetual preferred stock
authorized by its certification of incorporation without obtaining approval of
the Company's stockholders. The board of directors has the power to fix various
terms with respect to additional shares of preferred stock, including voting
powers, designations, preferences, price, dividend rate, conversion and exchange
provisions, redemption provisions and the amounts that holders are entitled to
receive upon any dissolution, liquidation or winding up of the Company.
F-18
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
The Company may pay dividends on common stock as declared from time to time by
the Board of Directors out of funds legally available therefor. Except as
provided with respect to any series of Preferred Stock, the holders of Common
Stock possess exclusive voting rights in the Company. Each holder of Common
Stock is entitled to one vote for each share held on all matters voted upon by
stockholders. Stockholders are not permitted to cumulate votes in elections of
directors. Subject to the prior rights of the holders of any shares of Preferred
Stock that may be outstanding, in the event of any liquidation, dissolution or
winding up of the Company, the holders of the Common Stock would be entitled to
receive, after payment of all debts and liabilities of the Company (including
all deposit accounts and accrued interest thereon) and, after distribution of
the balance, if any, in the liquidation account maintained for certain
depositors of the Company at the time of the Conversion, all assets of the
Company available for distribution.
The Company had 937,777, 937,777, and 1,400,000 shares of its Preferred Stock,
which were issued in connection with the Offering, outstanding at June 30, 2000,
1999, and 1998. During the year ended June 30, 1999, 462,223 shares of the
Company's Preferred Stock were exchanged for Increasing Rate Junior Subordinated
Notes due 2006 under the terms of the Company's Preferred Stock Exchange Offer.
See Note 24, below.
The Company's Preferred Stock is perpetual and is not subject to any sinking
fund or other obligation of the Company to redeem or retire it. The par value of
the Preferred Stock is $1.00 per share. This stock ranks prior to the Common
Stock with respect to dividend rights and rights upon the voluntary or
involuntary dissolution, liquidation or winding up of the Company, and to all
other classes and series of equity securities of the Company hereafter issued,
other than any class or series of equity securities of the Company expressly
designated as being on a parity with or senior to the Preferred Stock with
respect to dividend rights or rights upon any such dissolution, liquidation or
winding up. The Common Stock and any other classes or series of equity
securities of the Company not expressly designated as being on a parity with or
senior to the Preferred Stock are referred to hereafter as "Junior Stock." The
rights of holders of shares of Preferred Stock are subordinate to the rights of
the Company's creditors, including its depositors. The Company may not issue any
capital stock that ranks senior to the Preferred Stock without the approval of
holders of at least 66% of the outstanding shares of Preferred Stock, voting as
a class.
Holders of Company's Preferred Stock will be entitled to receive, when, as and
if declared by the Board of Directors of the Company, out of funds legally
available therefor, noncumulative cash dividends at the rate of 15% per annum.
The right of holders of Preferred Stock to receive dividends is noncumulative.
Accordingly, if the Board does not declare a dividend payable in respect of any
quarterly dividend period (a "Dividend Period"), then holders of Preferred Stock
will have no right to receive, and the Company will have no obligation to pay, a
dividend in respect of such Dividend Period, whether or not dividends are
declared payable in respect of any future Dividend Period. No full dividends may
be declared or paid or set aside for payment as dividends on any class or series
of equity securities ranking, as to dividends, on a parity with the Preferred
Stock for any Dividend Period unless full dividends on the Preferred Stock for
such Dividend Period shall have been paid or declared and set aside for payment.
Dividends on the Preferred Stock will not be declared and paid if payment of
such dividends is then restricted by (i) laws, rules, regulations or regulatory
conditions applicable to the Company or (ii) orders, judgments, injunctions or
decrees issued by, or agreements with, federal or state authorities with respect
to the Company. The Company is not permitted to declare or pay dividends
(whether in cash, stock or otherwise) on its common or preferred stock without
the prior written consent of 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
River Bank 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 nor the Predecessor Bank's Board of Directors have taken any action
F-19
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
regarding a quarterly dividend on the Company's Predecessor or Company Preferred
for any of the quarterly periods ended from September 30, 1996 through June 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's Preferred Stock will continue to be subject to the approval of HSBC
for as 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's 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.
Holders of the Preferred Stock will not be entitled to vote upon the election of
members of the Board or other matters in general. Holders of the Preferred
Stock, however, will be entitled to elect two members of the Company's Board to
fill two newly-created directorships upon the occurrence of a "Voting Event." A
Voting Event occurs if the Company fails to pay full dividends on the Preferred
Stock (or to declare such full dividends and set apart a sum sufficient for
payment thereof) with respect to each of any six Dividend Periods, whether
consecutive or not. Two members of the Company's Board of Directors were elected
to represent the holders of the Company's preferred stock on September 16, 1998
at the Company's annual meeting.
The Preferred Stock is perpetual and is not redeemable prior to July 1, 2004.
The Preferred Stock is redeemable by the Company at its option at any time on or
after July 1, 2004, in whole or in part, at the per share redemption prices set
forth below in cash, plus in each case an amount in cash equal to accrued but
unpaid dividends for the then-current Dividend Period up to, but excluding, the
date fixed for redemption (the "Redemption Date") without the accumulation of
unpaid dividends for prior Dividend Periods:
July 1, 2004 to June 30, 2005 $27.50
July 1, 2005 to June 30, 2006 27.25
July 1, 2006 to June 30, 2007 27.00
July 1, 2007 to June 30, 2008 26.75
July 1, 2008 to June 30, 2009 26.50
July 1, 2009 to June 30, 2010 26.25
July 1, 2010 to June 30, 2011 26.00
July 1, 2011 to June 30, 2012 25.75
July 1, 2012 to June 30, 2013 25.50
July 1, 2013 to June 30, 2014 25.25
July 1, 2014 and thereafter 25.00
If fewer than all the outstanding shares of Preferred Stock are to be redeemed,
the shares to be redeemed shall be selected pro rata or by lot or by such other
method as the Board of Directors of the Company, in its sole discretion,
determines to be equitable.
In the event of a change of control, the acquirer ("Note Issuer") may, at its
option, exchange (the "Note Exchange") all or part of the outstanding Preferred
Stock for subordinated notes (the "Notes") of the Note Issuer, provided that any
such Note Issuer is an insured depository institution within the meaning of the
FDIC. Pursuant to a Note Exchange, each $1,000 in liquidation value of the
shares of Preferred Stock covered thereby will be exchangeable for $1,000
principal amount of Notes. Such Notes shall have the terms, covenants and
conditions set forth under "Description of Notes" below. The rate of interest on
the Notes shall be 15%, the maximum principal amount of the Notes shall be 100%
of the aggregate liquidation preference of the Preferred Stock to be exchanged
and the principal of such Notes shall not be payable prior to July 1, 2004.
Subject to the FDIC approval of the Notes as Tier 2 capital of the Note Issuer,
the Note Issuer may elect to consummate the Note Exchange at any time following
a change of control and prior to July 1, 2014.
As a result of the capital stock distribution steps described in Note 2 to the
Consolidated Financial Statements, all of the capital stock of an interim
predecessor of the Company was distributed to stockholders of the Predecessor
Bank on a share-
F-20
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
for-share basis such that following consummation of the Reorganization each
holder of the capital stock of the Predecessor Bank is now the holder of
corresponding capital stock of the Company. The capital stock of the Company has
rights and privileges substantially identical to those of the capital stock of
the Predecessor Bank.
17. Income taxes
At June 30, 2000, the Company had a net operating loss ("NOL") carryforward for
federal income tax purposes of approximately $105.6 million attributable to
tax-basis operating losses incurred in 1991 through 2000. The Company's NOL's
may be carried forward 15 or 20 years and will expire in years 2006 through
2020.
For income tax purposes, certain deductions of "closely held" corporations from
"passive activities" are generally deductible only against either income from
passive activities or net income from an active trade or business. Passive
activity losses in excess of the amounts currently allowed are suspended and may
be carried forward indefinitely to offset taxable income from passive activities
or from an active trade or business in future years, or will generally be fully
deductible upon a complete disposition of the underlying passive activity. At
June 30, 2000, the Company had suspended passive activity losses for federal
income tax purposes of approximately $2,306, suspended passive activity credits,
which are subject to similar limitations, of approximately $5.5 million and
additional non-passive credits of $555 and $784 which were generated in 1995 and
1994, respectively, and will expire in the years 2009 to 2010 if not used.
Alternative minimum tax payments of $2.5 million may be carried forward as a
credit to offset regular federal tax liabilities in future years, subject to
certain limitations.
The Reorganization was structured and implemented in a manner intended to
constitute a tax-free "reorganization" for Federal income tax purposes, within
the meaning of section 368 of the Code. Consequently, the Reorganization was
reasonably characterized as a tax-free "reorganization." However, the ability of
the Reorganization to qualify as a tax-free reorganization turns on certain
unresolved and complex issues of tax law as to which there are no clearly
established legal precedents and for which the Company has not requested a
ruling from the IRS. As a result, the IRS or a court could determine that the
Reorganization did not constitute a tax-free reorganization. If such a
determination were made and sustained, certain of the tax consequences described
above would not apply. In particular, the Predecessor Bank's stockholders would
be required to recognize gain upon the deemed exchanges of River Bank capital
stock for RB Asset Common Stock and RB Asset Preferred Stock to the extent that
the fair market value of any RB Asset capital stock received exceeded the basis
of the River Bank capital stock deemed exchanged therefor, and their holding
period would begin on the date of the exchange. Recognition of loss on such
deemed exchanges might not be allowed until the stockholders dispose of some or
all of their RB Asset, Inc. Capital Stock. Moreover, the Predecessor Bank would
be required to recognize gain on its disposition and distribution of property in
connection with the Reorganization and any loss on such disposition and
distribution may be required to be deferred until RB Asset, Inc. were to sell
the assets to an unrelated third party; and, to the extent its tax attributes
were not used to offset any gain, RB Asset, Inc. would not succeed to them.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Offering discussed in Note 17 is deemed to result in an ownership
change, the subsequent utilization of net operating loss carryforwards,
suspended passive activity losses and credits, alternative minimum tax credit
carryforwards and certain other built-in losses would be subject to an annual
limitation as prescribed by current regulations. The application of this
limitation could have a material effect on the Company's ability to realize its
deferred tax assets. The Company is of the view that no ownership change of the
Company has occurred as a result of the Offering. The Company believes that the
Offering, when combined with prior changes in ownership of stock of the Company
and other transactions affecting ownership of the capital stock of the Company
which occurred in connection with the Offering, also did not result in an
ownership change of the Company. However, the application of Section 382 is in
many respects uncertain. In assessing the effects of prior transactions and of
the Offering under Section 382, the Company made certain legal judgments and
certain factual assumptions. The Company has not requested nor received any
rulings from the IRS with respect to
F-21
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
the application of Section 382 to the Offering and the IRS could challenge the
Company's determinations. The significant components of the net tax effects of
temporary differences and carryforwards that give rise to the deferred tax
assets and liabilities at June 30, 2000, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 36,977 $ 35,604 $ 31,136
Allowance for credit losses and valuation allowances 9,272 10,703 12,213
Suspended passive activity losses 949 277 277
Suspended passive activity credit carryforward 6,791 6,791 8,236
Interest accrued on non-performing loans 17,930 12,817 9,854
Alternative minimum tax credit carryforward 2,500 2,500 2,500
Non-deductible reserves and contingencies 3,324 3,485 4,129
Other 310 310 341
----------- ----------- -----------
Total gross deferred tax assets 78,053 72,487 68,686
Less: Valuation allowance 48,183 46,179 49,456
----------- ----------- -----------
Net deferred tax assets $ 29,870 $ 26,308 $ 19,230
=========== =========== ===========
Deferred tax liabilities:
Tax losses on partnership ventures $ 29,575 $ 26,013 $ 18,863
Tax over book depreciation 295 295 367
----------- ----------- -----------
Total deferred tax liabilities $ 29,870 $ 26,308 $ 19,230
=========== =========== ===========
</TABLE>
The Company's ability to realize the excess of the gross deferred tax asset over
the gross deferred tax liability is dependent upon its ability to earn taxable
income in the future. As a result of recent losses and other evidence, this
realization is uncertain and a valuation allowance has been established to
reduce the deferred tax asset to the amount that management of the Company
believes will more likely than not be realized. The valuation allowance
increased during the fiscal year ended June 30, 2000 by $2.0 million. This
increase relates to the increase in the excess of the gross deferred tax assets
over the gross deferred tax liability.
F-22
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
The components of the provision for income taxes for the fiscal years ended June
30, 2000, 1999 and 1998 are as follows:
June 30, June 30, June 30,
2000 1999 1998
---- ---- ----
Current:
Federal $ -- $ -- $ --
State and local(benefit) 651 550 434
Deferred -- -- --
---------- ---------- ----------
$ 651 $ 550 $ 434
========== ========== ==========
The table below presents a reconciliation between the expected tax expense
(benefit) and the recorded tax provision for the fiscal years ended June 30,
2000, 1999 and 1998 which have been computed by applying the statutory federal
income tax rate (35%) to income/(loss) before provision for income taxes.
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense at statutory rates $ 385 $ 211 $ (528)
Increase in tax resulting from:
State and local income taxes, net of federal
income tax effect 423 358 283
Effect of net operating loss not currently
recognized (808) (569) 245
----------- ------------ -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
18. Leases
The Company is not obligated for any material amounts under the terms of any
non-cancelable operating leases.
19. Other operating expenses
During the year ended June 30, 2000, the Company accrued expenses for services
provided by RB Management in the amount of $1,250 for corporate management
services, $1,060 for asset management services, and $280 for Asset Disposition
Fees in accordance with a fee schedule agreement between the two entities.
During 2000, the Company paid RB Management an aggregate $2,033. At June 30,
2000, the Company had a remaining payable balance due to RB Management of $225.
20. Retirement and other employee benefits
The Company maintains a noncontributory defined benefit retirement plan (the
"Plan") in which substantially all employees participated. The Plan provides
benefits based on the participant's years of service and compensation.
The tables on the following page provide a reconciliation of the changes in the
Plan's benefit obligations and fair value of assets for the years ended June 30,
2000, 1999 and 1998 and a statement of the funded status of the Plans as of June
30, 2000, 1999 and 1998.
F-23
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Reconciliation of the benefit obligation
Obligation at July 1 $ 5,605 $ 5,691 $ 5,481
Service cost -- -- --
Interest cost 429 417 397
Plan amendments -- -- --
Actuarial (gain) loss 126 (128) 165
Benefit payments (383) (375) (352)
-------------- ------------- -------------
Obligation at June 30 $ 5,777 $ 5,605 $ 5,691
============== ============= =============
Reconciliation of fair value of plan assets
Fair value of plan assets at July 1 $ 5,710 $ 5,800 $ 5,872
Actual return on plan assets (net of expenses) 400 285 280
Employer contributions -- -- --
Benefit payments (383) (375) (352)
-------------- ------------- --------------
Fair value of plan assets at June 30 $ 5,727 $ 5,710 $ 5,800
============== ============= ==============
Funded status
Funded status at June 30 $ (49) $ (90) $ 109
Unrecognized transition (asset) obligation -- -- --
Unrecognized prior service cost -- -- --
-- -- --
Unrecognized (gain) loss 1,261 1,347 1,180
--------------- ------------- --------------
Net amount recognized $ 1,212 $ 1,257 $ 1,289
=============== ============= ==============
</TABLE>
The following table provides the amounts recognized in the statement of
financial condition as a component of other assets at June 30, 2000, 1999 and
1998:
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
Prepaid benefit cost $ 1,212 $ 1,257 $ 1,289
Accrued benefit liability -- -- --
Intangible asset -- -- --
------------ ------------ ------------
Net periodic pension benefit $ 1,212 $ 1,257 $ 1,289
============ ============ ============
F-24
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
The following table provides the components of the net periodic benefit cost for
the Plan for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost on projected benefit obligation 429 413 397
Expected return on plan assets (400) (407) (413)
Amortization of transition (asset) obligation -- -- --
Amortization of prior service cost -- -- --
Amortization of net (gain) loss 23 25 27
---------- ----------- ----------
Net periodic pension cost/(credit) $ 52 $ 31 $ 11
========== =========== ==========
</TABLE>
The weighted average assumptions used in the measurement of the Company's
benefit obligations at June 30, 2000, 1999 and 1998 are provided in the
following table:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Weighted average discount rates 7.75% 7.25% 7.25%
----- ----- -----
Expected weighted average long-term rate of return on assets 7.25% 7.25% 7.25%
----- ----- -----
</TABLE>
In connection with contractual termination agreements, certain former officers
of the Company have been granted additional retirement benefits, net of amounts
provided by the Plan, based in part on additional years of service and early
retirement subsidies. These retirement benefits are accounted for as deferred
compensation arrangements. The liability for these retirement benefits at June
30, 2000, 1999 and 1998 aggregated $702, $722 and $746, respectively. The
related expense for the years ended June 30, 2000, 1999, and 1998 was $403, $192
and $192, respectively.
Retirement benefits are also provided through a 401(k) plan which, through
December 1993, allowed participants to contribute up to 6% of their compensation
to the plan. The Company matched 100% of employee contributions. In January
1994, the 401(k) plan was amended to allow "non-highly compensated" participants
to contribute up to 15% of their compensation to the Plan with the Company
matching 100% of the contributions up to 6% of their compensation. In addition,
the Company provides for the cost of administering the 401(k) plan. The costs of
providing such benefits are not material to the results of operations.
In addition to providing retirement benefits, the Company provides various
health care and life insurance benefits for retired employees. These benefits
are provided through insurance companies and health care organizations and are
primarily funded by contributions from the Company and its employees. Subsequent
to December 31, 1993, the Company amended its retiree health care which became
effective April 1, 1994 to require contributions from retirees including
deductibles, co- insurance and reimbursement limitations.
F-25
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
21. Postretirement benefits other than pensions
The Company sponsors a voluntary, unfunded defined benefit postretirement
medical and a funded postretirement life insurance plan to all full time
employees who retired from the Company prior to July 1, 1991. In addition, full
time active employees with ten years of service as of July 1, 1991 and who
retire early with at least twenty years of service, or retire on or after age 65
are eligible to participate.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" as of July 1, 1994.
The funded status of the Company's Plan at June 30, 2000, 1999, and 1998 is as
follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $ (2,551) $ (3,170) $ (3,784)
Fully eligible plan participants -- -- --
Other active plan participants -- -- --
----------- ----------- -----------
Unfunded postretirement benefit obligation (2,551) (3,170) (3,784)
Unrecognized net (gains) / losses (872) (744) (568)
Unrecognized transition obligation -- -- --
----------- ----------- -----------
Accrued postretirement benefit liability $ (3,423) $ (3,914) $ (4,352)
=========== =========== ===========
</TABLE>
The net periodic postretirement benefit cost of the Company's Plan for the years
ended June 30, 2000, 1999, and 1998 include the following components:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 207 210 207
Recognized gains (57) -- --
Amortization of transition obligation -- -- (13)
---------- ---------- ----------
Net periodic postretirement benefit cost $ 150 $ 210 $ 194
========== ========== ==========
</TABLE>
For measurement purposes, an 8.0% annual increase in the per capita cost of
covered health care benefits was assumed for fiscal 2000 and 1999. The health
care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of June 30, 2000 by $286 and the aggregate of the service
and interest cost components of the net periodic postretirement benefit cost for
fiscal 2000 by $19.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for the years ended June 30, 2000
and 1999. As the plan is unfunded, no assumption was needed as to the long term
rate of return of assets.
F-26
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
22. Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose estimated fair values for its financial instruments.
SFAS No. 107 defines fair value of financial instruments as the amount at which
the instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 uses the same
definition for a financial instrument as SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk". SFAS No. 105 defines
a financial instrument as cash, evidence of ownership interest in an entity, or
a contract that imposes on an entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other financial
instruments on potentially favorable terms with the second entity and conveys to
that second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax amounts and
office premises and equipment. In addition, there are intangible assets that
SFAS No. 107 does not recognize, such as the value of "core deposits", the
Company's branch network and other items generally referred to as "goodwill."
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 41,166 $ 41,166 $ 28,135 $ 28,135 $ 32,087 $ 32,087
Investment securities available for sale, net 1,170 1,170 1,294 1,294 1,373 1,373
Accrued interest receivable 546 546 348 348 388 388
Gross loans receivable:
Secured by real estate 32,339 32,339 53,697 53,697 59,006 59,006
Consumer -- -- 1,855 1,855 1,972 1,972
Loans sold with recourse, net -- -- -- -- 15,781 15,781
Borrowed funds 52,033 52,033 50,557 50,557 68,760 68,760
Accrued interest payable 725 725 754 754 479 479
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Short term instruments: For short term financial instruments, defined as
those with remaining maturities of 90 days or less, the carrying amount was
considered to be a reasonable estimate of fair value. The following
instruments were
F-27
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
predominately short term: cash and due from banks, money market
investments, U.S. Treasury obligations, demand deposits, accrued interest
receivable and payable, mortgage escrow deposits and other financial
liabilities.
Debt and equity securities: Estimated fair values for securities are based
on quoted market prices, if available. If quoted market prices are not
available, fair values are estimated using discounted cash flow analyses,
using interest rates currently being offered for investments with similar
terms and credit quality.
Loans receivable: Fair values of performing loans receivable, secured by
real estate, is calculated by discounting the contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources adjusted to reflect the credit risk inherent in the loans.
Fair values of non-performing loans, secured by real estate, are based on
recent appraisals of the underlying real estate or discounted cash flow
analyses. The fair value of consumer loans is based on a third party offer.
Approximately $7,247, $8,459 and $8,459, of the Company's $39,586, $64,011
and $65,181 total loans receivable relate to commercial loans at June 30,
2000, 1999 and 1998, respectively. The Company believes that dollar amounts
relating to commercial loans are relatively small in comparison to total
loans receivable at June 30, 2000, 1999 and 1998, and that an estimate of
fair value of commercial loans cannot be made without incurring excessive
costs. Therefore, the Company concludes that it is not practicable to
estimate the fair value of its commercial loan portfolio.
The Company's estimates of impairment due to collectibility concerns
related to these loans are included in the allowance for possible credit
losses. The weighted average of the effective interest rates and the
weighted average maturity dates of commercial loans are 7.88% and 0.09
years, 8.22% and 1.09 years and 8.22% and 2.09 years at June 30, 2000, 1999
and 1998, respectively.
Borrowed funds: Fair values of borrowed funds are based on the discounted
values of contractual cash flows. The discount rate is estimated using the
rates currently offered for borrowed funds of similar remaining maturities.
23. Commitments and contingencies
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of such legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company.
24. Preferred Stock Exchange Offer
Summary. On November 25, 1998, the Company offered upon the terms and conditions
set forth in its Offering Circular and the related Letter of Transmittal (which
together constituted the "Exchange Offer"), to exchange $25.94 principal amount
of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated
Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual
Stock, Series A, par value $1.00 (the "Company Preferred Stock"), of which
1,400,000 shares were outstanding on that date.
Description of the Subordinated Notes. The following narrative describes the
Subordinated Notes, issued by the Company on December 30, 1998:
F-28
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
Issue - Increasing Rate Junior Subordinated Notes due 2006 issued under an
indenture (the "Indenture"), as amended on February 1, 1999, between the Company
and La Salle National Bank, as trustee.
Principal Amount - $11,988,000, plus such additional principal amount of
Subordinated Notes as may be issued in payment of interest on the Subordinated
Notes from the date of their initial issuance until the semi-annual interest
period beginning January 16, 2002.
Interest Payment Dates - January 15 and July 15 of each year, commencing July
15, 1999.
Maturity - January 15, 2006.
Interest Rate - Interest will accrue from the issuance date (December 30, 1998)
at the initial rate of 8% per annum (the "Initial Rate") until the interest
period beginning January 16, 2002 (the "Interest Increase Date") and will be
payable, at the option of the Company, either in cash or by issuance of
additional Subordinated Notes. Thereafter, interest will be payable
semi-annually in cash at an annual rate increasing from the Initial rate by
0.50% per annum each semi-annual interest payment period commencing with the
interest payment period beginning on the Interest Increase Date up to a maximum
of 12% per annum. The Company's ability to pay in cash any installment of
interest on, or principal or premium (if any) of, the Subordinated Notes is
currently subject to the approval of HSBC under the terms of the Facility and
its Credit Agreement, dated June 28, 1996 (the "Credit Agreement"). However,
borrowings under the Credit Agreement mature on June 30, 1999, subject to the
right of the Company to extend for two successive one-year periods to June 30,
2001, which date is prior to the dates on which cash payments of interest and
principal are required to be made on the Subordinated Notes. There can be no
assurance that HSBC will provide any such approval that may be requested by the
Company in the future for payment of cash for any installment of interest or any
prepayment of principal and premium, if any, prior to the dates such cash
payments are required to be made under the terms of the Subordinated Notes.
Ranking - The Subordinated Notes constitute unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. At June 30, 1999, the Company had
approximately $50.6 million of Senior Indebtedness outstanding. The Indenture
will not limit the amount of additional indebtedness which the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create incur, assume or
guarantee.
Mandatory Redemption - The Company will be required to redeem 1/14th (7.14285%)
of the aggregate principal amount of the Subordinated Notes issued by the
Company (including any issued in payment of interest) semi-annually commencing
on July 15, 2002 and on each January 15, and July 15 thereafter to and including
July 15, 2005 at a price of 100% of the principal amount plus accrued and unpaid
interest plus, for redemptions effected after January 15, 2003, a premium as
noted below. The balance of the outstanding Subordinated Notes will mature on
January 15, 2006. All mandatory redemptions will be made on a pro rata basis.
Optional Redemption - The Subordinated Notes will be redeemable at the option of
the Company at any time in whole or in part, by lot or pro rata as determined by
the Company's Board of Directors (the "Board"), at the redemption price of 100%
of the principal amount plus accrued and unpaid interest plus, for redemptions
effected after January 15, 2003, a premium as noted below.
Premium - The redemption price for each redemption (mandatory or optional)
effected after January 15, 2003 and the payment at maturity will include a
premium based on the amount redeemed or paid. Such premium will consist of (i)
0.5% of the principal amount redeemed during the period from January 16, 2003
through and including July 15, 2003, (ii) 0.75% of the principal amount redeemed
during the period from July 16, 2003 through and including January 15, 2004 and
(iii) 1% of the principal amount redeemed during the period from January 16,
2004 through and including July 15, 2004, which premium will increase by 1% for
redemptions during each subsequent six month period beginning each July 16 and
F-29
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
January 16 thereafter until it reaches 4% of the principal amount for the period
from July 16, 2005 to January 15, 2006. Payments of a premium at maturity will
also be at the rate of 4% of the principal amount paid.
The following chart illustrates the amount of premium payable on each $1,000
principal amount of Subordinated Notes during the periods indicated:
If redeemed during the six month period beginning Premium
January 16, 2003 .................................... $ 5.00
July 16, 2003 ....................................... $ 7.50
January 16, 2004 .................................... $ 10.00
July 16, 2004 ....................................... $ 20.00
January 16, 2005 .................................... $ 30.00
July 16, 2005 ....................................... $ 40.00
Purposes of the Exchange Offer. In view of the changes in the nature of the
Company and its business as a result of the Reorganization described in Note 1,
the Board of Directors effected the Exchange Offer for the purpose of affording
all holders of the Company Preferred Stock an opportunity to exchange their
shares of Company Preferred Stock for the Subordinated Notes which may have been
determined by them to be a more attractive investment. As more fully described
in the Offering Circular dated November 25, 1998, the Exchange Offer provided
holders of the Company Preferred Stock with the opportunity to exchange
perpetual preferred stock having a $25.00 per share liquidation value with
non-cumulative dividend rights and no mandatory redemption provisions for $25.94
principal amount of a debt instrument maturing in seven years which requires (i)
semi-annual payments of interest, payable in kind or in cash, at the Company's
option, for the first three years and thereafter in cash, at rates increasing
from an initial 8% per annum rate and (ii) the repayment of principal in
mandatory semi-annual installments commencing after three years with increasing
premiums on installments paid after four years.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company 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 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 claimed 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
F-30
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
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 February 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.
Release of Claims. Holders of Company Preferred Stock, including any of the
plaintiffs in the Action, whose shares were tendered and accepted by the Company
for exchange pursuant to the Exchange Offer have released the Company, its
predecessors and successors, and their respective parents, subsidiaries,
affiliates and assigns, and each of their respective officers, directors,
employees, partners, advisors, agents and representatives from all actions,
causes of action, claims, judgements, contracts, agreements or understandings
whether individual or derivative in nature, which such holders had with respect
to the shares of Company Preferred Stock exchanged pursuant to the Offering
Circular or any disclosures, rights or agreements relating thereto, including,
but not limited to, any claims made in the Action and any claims with respect to
the Reorganization and the transfer of assets from River Bank.
Waiver of Dividend. Each Holder (as defined in the Offering Circular) who
accepted the Exchange Offer was deemed to have waived all rights, with respect
to each share of Company Preferred Stock exchanged, to receive the $0.94 per
share quarterly dividend that was declared on shares of Series A Preferred Stock
for the quarter ended June 30, 1996 but which remains unpaid.
Proposed Equity Rights Offering. If within one year after expiration of the
Exchange Offer, the Company effects an equity enhancement plan through either a
rights offering to the holders of its Common Stock or the distribution to such
holders of Warrants to purchase additional shares of Common Stock, each holder
of Series A Preferred Stock whose shares were accepted by the Company for
exchange pursuant to the Exchange Offer will be entitled to participate in such
rights offering or distribution of Warrants on the basis of one subscription
right or Warrant for each share of Series A Preferred Stock so exchanged for
Subordinated Notes. The Company's Board of Directors has authorized management
to develop a proposal for such a rights offering or distribution of Warrants,
provided that, under the terms thereof, Alvin Dworman, Odyssey Partners, L.P.
and East River Partnership B., who currently own an aggregate of 50.8% of the
outstanding shares of Common Stock, will have the ability to avoid dilution of
their aggregate percentage ownership of the Common Stock outstanding upon
consummation thereof. While the Company presently intends to effect such a plan,
there can be no assurance that such rights offering or distribution of Warrants
plan will be effected or as to the terms and conditions thereof.
F-31
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
Conditions of the Exchange Offer. The Company obtained the consent of HSBC to
effect the Exchange Offer and issue the Subordinated Notes. However, there can
be no assurance that HSBC will provide any approval that may be requested by the
Company in the future for the payment in cash of any installments of interest or
any prepayment of principal and premium, if any, prior to the dates such cash
payments are required to be made under the terms of the Subordinated Notes.
Acceptance Results of the Exchange Offer. On December 28, 1998, the Company
announced that it had completed its offer to exchange $25.94 principal amount of
its newly-authorized Subordinated Notes for each outstanding share of its
Series A Preferred Stock properly tendered to, and accepted by, the Company in
accordance with the provisions of the Exchange Offer. At the expiration of the
Exchange Offer on December 24, 1998, 415,273 shares of the Series A Preferred
Stock had been properly tendered and accepted by the Company for exchange.
Subsequent to the expiration of the Exchange Offer, the Company accepted private
requests for the exchange of its Series A Preferred Stock from individuals under
terms identical to those of the Exchange Offer. As a result, 32,950 shares of
the Company's Series A Preferred Stock were exchanged during the quarter ended
March 31, 1999 and an additional 14,000 were exchanged during the quarter ended
June 30, 1999.
As a result of these exchanges, the Company's total Stockholder's Equity and
other liabilities were reduced by $11.19 million and $432,000, respectively, and
its Subordinated Notes liability increased by $11.38 million. Following the
acceptance of the exchanges of the Preferred Stock, described above, 462,223
shares of the Series A Preferred Stock (representing approximately 33.0% of the
1,400,000 shares of Series A Preferred Stock outstanding before the commencement
of the Exchange Offer) had been properly tendered and accepted by the Company.
No members of the Organized Group tendered any shares of the Series A Preferred
Stock in the Exchange Offer. The Company does not believe that there will be any
additional exchanges of Preferred Stock for Subordinated Notes subsequent to
June 30, 1999.
Interest Expense. The Subordinated Notes carry an interest rate of 8%, which
will rise to 8.5% for the 37th to 42nd month following the issuance date and to
9.0% in the 43rd to 48th months following the issuance date. All interest will
be compounded semi-annually, following December 30, 1998, the date of
Subordinated Notes issuance. The Subordinated Notes were discounted at issuance,
on the Financial Statements of the Company, by $363 in order to provide a level
cost of funds for the Subordinated Notes of 9.0%. This rate is consistent with
debt instruments of similar credit quality and maturity structure at the time
the Subordinated Notes were issued. During the year ended June 30, 2000, accrued
interest expense, in the amount of $1,181 (including accretion expense for the
effective yield discount and debt issuance costs of $191) was recognized for the
year ended June 30, 2000.
F-32
<PAGE>
FINANCIAL SCHEDULES
RB ASSET, INC.
June 30, 2000
Index to Consolidated Financial Schedules
Page
Valuation and Qualifying Accounts (Schedule II)
Year ended June 30, 2000 F-34
Real Estate and Accumulated Depreciation (Schedule III) F-35
Year ended June 30, 2000
Investments in Real Estate Assets (Schedule IV) F-37
Year ended June 30, 2000
F-33
<PAGE>
RB ASSET, INC.
FORM 10-K
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
JUNE 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Additions - Additions - Charged
Balance at Charged to Costs to Other Balance at
Description Beginning of and Expenses Accounts Deductions End of Period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 2000
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate $ 15,815 $ -- $ (3,584) $ 3,597 [3] $ 8,634
Allowance for possible credit losses -
commercial and consumer loans 2,340 -- 3,584 1,217 4,707
Securities valuation account 1,004 -- 124 [1] -- 1,128
---------- --------- ------------ ----------- -----------
$19,159 $ -- $ 124 $ 4,814 $ 14,469
========== ========= ============ =========== ===========
Year Ended June 30, 1999
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate $ 17,697 $ -- $ -- $ 1,882 [3] $ 15,815
Allowance for possible credit losses -
commercial and consumer loans 2,340 -- -- -- 2,340
Securities valuation account 926 -- 78 -- 1,004
---------- --------- ----------- ----------- -----------
$ 20,963 $ -- $ 78 $ 1,882 $ 19,159
========== ========= ============ =========== ===========
Year Ended June 30, 1998
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate 25,787 $ 1,500 $ -- $ 9,590 [3] $ 17,697
Allowance for possible credit losses -
commercial and consumer loans 5,783 -- -- 3,443 [3] 2,340
Securities valuation account 1,105 -- -- 179 [2] 926
--------- --------- ------------ ---------- -----------
$32,675 $ 1,500 $ -- $ 13,212 $ 20,963
======= ========= ============ ========== ===========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Valuation and Qualifying Accounts Schedule:
Note 1 - Addition to valuation reserve for marketable equity securities charged
to Stockholder's Equity in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Note 2 - Reduction in valuation reserve for marketable equity securities added
to Stockholder's Equity in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Note 3 - Uncollectible loan assets written off, net of recoveries.
F-34
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Cost capitalized subsequent
Initial cost to complete to acquisition
--------------------------------------------------------------------------
Building and
Description Encumberances Land improvements Improvements Deductions Description
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alden Park $ 39,266 $ 11,221 $ 39,769 $ 5,829 $ -- (3)
Multi-family apartment bldg.
Philadelphia, PA
Royal York 6,306 1,479 20,099 4,322 18,414 Unit sales (2)
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 2,755 370 5,616 -- -- Unit sales
Office complex
North Woodmere, NY
86 West -- 165 1,100 423 661 Sales (3)
Condominium
New York, NY
Kingston Atlanta 3,706 2,488 22,901 6,756 12,402
Mixed use commercial
Atlanta, GA
Shorehaven -- 9,524 -- 1,792 --
Land held for development
New York, NY
Castle Hill -- 4,027 -- 282 --
Land under development (joint
venture partnership)
New York, NY
Wayne -- 37 148 -- --
Single attached residential unit
Wayne, NJ
--------------------------------------------------------------------------------------------------------------------------
Totals $ 52,033 $ 29,311 $ 89,633 $ 19,404 $ 31,477
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Gross amount at which carried
at close of period, June 30, 2000
------------------------------------------
Life on which
Buildings Date of depreciation in latest
and Accumulated Construction income statement is
Description Land improvements Total Depreciation Acquisition compound (years)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alden Park $ 11,221 $ 45,598 $56,819 $ 3,120 (1) 30
Multi-family apartment bldg.
Philadelphia, PA
Royal York 1,479 6,007 7,486 408 (1) 30
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 370 5,616 5,986 1,197 (1) 25
Office complex
North Woodmere, NY
86 West 165 862 1,027 42 (1) 30
Condominium
New York, NY
Kingston Atlanta 2,488 17,255 19,743 783 (1) 30
Mixed use commercial
Atlanta, GA
Shorehaven 9,524 1,792 11,316 -- (1) n/a
Land held for development
New York, NY
Castle Hill 4,027 282 4,309 -- (1) n/a
Land under development (joint
venture partnership)
New York, NY
Wayne 37 148 185 -- (1) 30
Single attached residential unit
Wayne, NJ
--------------------------------------------------------------------------------------------------------------------------
Totals $ 29,311 $ 77,560 $106,871 $ 5,550
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate cost for Federal income tax purposes was approximately $121.3
million at June 30, 2000.
See notes to this schedule on the following page.
F-35
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The changes in real estate for each of the
three years ended June 30, 2000 are as July 1, 1999 to June July 1, 1998 to June 30 July 1, 1997 to June
follows: 30, 2000 1999 30, 1998
Balance at beginning of period $ 94,438 $ 86,485 $ 97,349
Improvements 10,217 655 3,666
Re-acquired assets -- -- 2,095
Sales/Write downs (3,334) (6,661) (16,325)
Transferred from Loans Sold with
Recourse (see Note 4, below) -- 13,959 --
--------- --------- ---------
Balance at end of period $ 101,321 $ 94,438 $ 86,485
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The changes in accumulated real estate
depreciation for the three years ended June July 1, 1999 to July 1, 1998 to July 1, 1997 to
30, 2000 are as follows: June 30, 2000 June 30, 1999 June 1, 1998
Balance at beginning of period $ 3,264 $ 956 $ 573
Depreciation for the period 2,311 2,338 383
Disposals, including write-off
of fully depreciated building
improvements (25) (30) --
--------- --------- ---------
Balance at end of period $ 5,550 $ 3,264 $ 956
========= ========= =========
</TABLE>
Notes to Real Estate and Accumulated Depreciation Schedule (previous page)
Note 1 - Property acquired, in substantially completed form, through foreclosure
or transfer and satisfaction of obligations of borrowers prior to 1996.
Note 2 - Improvements totaling $4,322 were made to refurbish individual units in
preparation for sale during the four year period ended June 30, 2000. Proceeds
of unit sales during the same four year period, after selling costs other than
refurbishment costs, were $18,414. Accordingly, net proceeds of unit sales,
after selling and refurbishment costs, were $14,092 during the four year period
ended June 30, 2000.
Note 3 - For additional information related to this write down of the asset's
carrying value, see "Management Discussion and Analysis - Results of Operations"
contained within the RB Asset, Inc. annual report on Form 10-K, dated June 30,
2000.
Note 4 - During the year ended June 30, 1999 the Company transferred $13,959 of
loans sold with recourse to real estate held for investment as a result of the
funding of the remaining recourse amounts on these loans.
F-36
<PAGE>
RB ASSET, INC.
FORM 10-K
INVESTMENTS IN REAL ESTATE ASSETS (SCHEDULE IV)
JUNE 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Final Periodic Face amount Carrying
Interest Maturity payment Prior of amount of
Description rate Date terms liens Mortgages mortgages
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family and other real
estate loans Amortizing over 15-30
New York, NY 7%-10% 5/1/09 years $ 1,030 $ 837
Anita Terrace
Co-op Interest only, balloon
Rego Park, NY 7.00% 5/1/09 payment at maturity 13,444 6,959
Anita Terrace
Co-op Interest only, balloon
Rego Park, NY 7.00% 5/1/09 payment at maturity 17,864 17,864
Totals $ 32,338
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Principal amount of loans subject
Description to delinquent principal or interest
--------------------------------------------------------------------------------
Residential 1-4 family and other real
estate loans
New York, NY
$ 242 (1)
Anita Terrace
Co-op
Rego Park, NY
13,444 (2)
Anita Terrace
Co-op
Rego Park, NY
Totals $ 13,686
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Reconciliation of mortgages July 1,1999 to July 1, 1998 to July 1, 1997 to
receivable at their carrying values: June 30, 2000 June 30, 1999 June 30, 1998
Balance at beginning of period $ 43,618 $ 48,427 $ 65,499
Purchases and advances made 11,087 162 649
Capitalization of interest/expense -- -- --
Collections of principal (29,045) (4,922) (16,413)
Transfers of foreclosed properties -- -- --
Charged to provision for credit losses -- (49) (1,308)
-------------- ------------- -------------
Balance at end of period $ 25,660 $ 43,618 $ 48,427
============== ============= =============
</TABLE>
See notes to this schedule on the following page.
F-37
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE IV)
JUNE 30, 2000
(dollars in thousands)
Notes to Investments in Real Estate Assets Schedule (previous page)
Note 1 - The Company's 1-4 family residential loans are carried as non-accrual
assets, whereby interest income is recognized only when received. At June 30,
2000 there were loans aggregating $206 in outstanding principal balance that
were delinquent 60 days or longer.
Note 2 - This loan asset has been categorized as a non-accrual loan. Accrued
interest related to this loan has been fully reserved for at June 30, 2000. Loan
principal continues to be repaid from the proceeds of apartment unit sales of
the property serving as collateral for this loan.
F-38
<PAGE>
EXHIBIT INDEX
10.1 Amended and Restated Credit Agreement
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
E-1
