UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1999
-----------------
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From____________To____________
Commission file number 333-38673
RB ASSET, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-5041680
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eighth Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
---------------
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No / /
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of February 14, 2000 was 7,100,000. The number of shares of the
Registrant's 15% Non-cumulative Perpetual Preferred Stock, Series A, $.01 par
value, outstanding as of February 14, 2000, was 937,777.
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RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE
----
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition as of December 31,
1999 (unaudited) and June 30, 1999...................................................1
Consolidated Statements of Operations for the three and six months ended
December 31, 1999 and 1998 (unaudited)...............................................2
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended December 31, 1999 and 1998 (unaudited) .................................3
Consolidated Statements of Cash Flows for the six months ended December
31, 1999 and 1998 (unaudited)........................................................4
Notes to the Consolidated Financial Statements ......................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations ..........................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................19
Item 2. Changes in Securities ..................................................................20
Item 3. Defaults Upon Senior Securities ........................................................20
Item 4. Submission of Matters to a Vote of Securities Holders ..................................20
Item 5. Other Information ......................................................................20
Item 6. Exhibits and Reports on Form 8-K .......................................................20
SIGNATURE.....................................................................................................21
</TABLE>
-i-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and June 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Assets
(Unaudited)
December 31, June 30,
1999 1999
------------ --------
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Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $4,388 and $3,264, respectively $ 91,852 $ 92,438
Real estate held for disposal 2,040 2,040
Allowance for fair market value reserve under SFAS-121 (40) (40)
----------------- -----------------
Total real estate held for disposal, net 2,000 2,000
Real estate loans receivable:
Secured by real estate 30,189 53,697
Allowance for possible credit losses (15,617) (15,815)
----------------- -----------------
Total loans receivable, net 14,572 37,882
Investments in joint ventures 1,512 1,536
----------------- -----------------
Total real estate assets 109,936 133,856
Cash, due from banks and cash equivalents 15,207 14,780
Cash, due from banks - restricted 36,852 13,355
Investment securities available for sale 1,125 1,294
Commercial and consumer loans 9,111 10,314
Allowance for possible credit losses (1,215) (2,340)
----------------- -----------------
Commercial and consumer loans, net 7,896 7,974
Other assets 2,076 3,147
----------------- -----------------
Total Assets $ 173,092 $ 174,406
================= =================
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 $ 11,944 $ 11,375
Borrowed funds 50,557 50,557
Other liabilities 14,732 15,957
----------------- -----------------
Total Liabilities 77,233 77,889
----------------- -----------------
Stockholders' equity:
15% non-cumulative perpetual preferred stock, series A par value $1,
liquidation value $25 (1,400,000 shares authorized, 937,777
issued and outstanding at December 31, 1999 and June 30, 1999) 938 938
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at December 31,
1999 and June 30, 1999) 7,100 7,100
Additional paid in capital 100,439 100,439
Accumulated deficit (11,445) (10,956)
Accumulated comprehensive income (loss) (1,173) (1,004)
----------------- -----------------
Total Stockholders' Equity 95,859 96,517
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 173,092 $ 174,406
================= =================
</TABLE>
See notes to Consolidated Financial Statements
1
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RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended December 31,
1999 and 1998
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
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Revenue:
Rental revenue and operations:
Rental income and other property revenue $ 3,763 $ 3,743 $ 7,794 $ 7,513
Property operating and maintenance expense (2,784) (2,625) (5,499) (5,189)
Depreciation - real estate held for investment (569) (608) (1,140) (1,185)
--------------- --------------- --------------- ---------------
Net rental operations 410 510 1,155 1,139
Other property income (expense):
Net gain on sale of real estate 994 1,243 963 1,731
Recovery of investments in real estate -- 106 -- 106
--------------- --------------- --------------- ---------------
Total other property income (expense): 994 1,349 963 1,837
Other income:
Interest income:
Loans receivable 237 733 807 1,373
Money market investments and other 174 126 346 353
--------------- --------------- --------------- ---------------
Total interest income 411 859 1,153 1,726
Gain on satisfaction of loan asset 429 -- 429 --
Realization of contingent participation revenues -- -- -- 1,000
--------------- --------------- --------------- ---------------
Total other income 840 859 1,582 2,726
--------------- --------------- --------------- ---------------
Total revenues 2,244 2,718 3,700 5,702
--------------- --------------- --------------- ---------------
Expenses:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 291 2 579 2
Borrowed funds 531 987 1,204 2,413
Other 2 29 10 34
--------------- --------------- --------------- ---------------
Total interest expense 824 1,018 1,793 2,449
Other expenses:
Salaries and employee benefits 47 58 99 108
Legal and professional fees 340 569 542 771
Management fees 578 613 1,156 1,230
Other 90 73 236 138
--------------- --------------- --------------- ---------------
Total other expenses 1,055 1,313 2,033 2,247
Total expenses 1,879 2,331 3,826 4,696
--------------- --------------- --------------- ---------------
Income (loss) before provision for income taxes 365 387 (126) 1,006
Provision for income taxes 182 145 363 314
--------------- --------------- --------------- ---------------
Net income (loss) 183 242 (489) 692
Dividends declared on preferred stock -- -- -- --
--------------- --------------- --------------- ---------------
Net (loss) income applicable to common stock $ 183 $ 242 $ (489) $ 692
=============== =============== =============== ===============
Basic and diluted (loss) income per common share $ 0.03 $ 0.03 $ (0.07) $ 0.10
=============== =============== =============== ===============
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six months ended December 31, 1999 and 1998
(dollars in thousands)
(Unaudited)
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<CAPTION>
Series A
Non-
cumu-
lative
Perpetual Additional Retained Accumulated Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income (Loss) Equity
--------- ------ ---------- --------- ------------- ------------
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Balances at June 30, 1998 $ 1,400 $7,100 $ 111,170 $(11,561) $ (926) $ 107,183
Net income for the six months
ended December 31, 1998 -- -- -- 692 -- 692
Preferred stock dividends payable -- -- -- -- -- --
Reduction in Stockholders' Equity
resulting from Preferred Stock
Exchange Offer (Note 2) (415) -- (9,751) -- -- (10,166)
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale -- -- -- -- 169 169
------- ------ --------- -------- -------- ---------
Balances at December 31, 1998 $ 985 $7,100 $ 101,419 $(10,870) $ (757) $ 97,877
======= ====== ========= ======== ======= =========
Balances at June 30, 1999 $ 938 $7,100 $ 100,439 $(10,956) $(1,004) $ 96,517
Net loss for the six months
ended December 31, 1999 -- -- -- (489) -- (489)
Preferred stock dividends payable -- -- -- -- -- --
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale -- -- -- -- (169) (169)
------- ------ --------- -------- -------- ---------
Balances at December 31, 1999 $ 938 $7,100 $ 100,439 $(11,445) $(1,173) $ 95,859
======= ====== ========= ======== ======= =========
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1999
(dollars in thousands)
(Unaudited)
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<CAPTION>
Six months ended
December 31,
---------------------------------
1999 1998
---------------- ---------------
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Operating Activities:
Cash flows (used in) provided by Operating Activities:
Net (loss) income $ (489) $ 692
Adjustments to reconcile net (loss) income to cash (used in) provided
by operating activities:
Recovery of real estate assets -- (106)
Net gain on sale of real estate assets (963) (1,739)
Net gain on satisfaction of loan assets (429) --
Depreciation and amortization 1,140 1,186
Amortization of capitalized issuance costs and accretion of
issuance discount - Increasing Rate Junior Subordinated Notes
due 2006 82 --
Change in operating assets and liabilities:
Net decrease (increase) in accrued interest receivable 186 79
Net (decrease) increase in accrued interest payable, net of
accrued interest payable capitalized as additional principal -
Increasing Rate Junior Subordinated Notes due 2006 408 (100)
Net (decrease) increase in accrued income taxes (281) 407
Net (decrease) increase in accrued expenses
and other liabilities (944) 484
Net (increase) decrease in prepaid expenses and other assets 886 (575)
Cash effect of increases in allowance for possible credit losses 76 331
Other -- 39
================ ===============
Net cash (used in) provided by operating activities (328) 698
---------------- ---------------
Investing Activities:
Cash flows provided by Investing Activities:
Repayment of loans secured by real estate, net 23,310 4,225
Repayment of commercial and consumer loans 509 61
Proceeds from partnership distributions - investments in joint ventures 24 --
Proceeds related to sales of real estate held 1,472 6,105
Additional fundings on real estate held for investment (1,063) (309)
---------------- ---------------
Net cash provided by investing activities 24,252 10,082
---------------- ---------------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1999
(dollars in thousands)
(Unaudited)
(Continued from previous page)
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<CAPTION>
Six months ended
December 31,
--------------------------------
1999 1998
---------------- ---------------
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Financing Activities:
Cash flows used in Financing Activities:
Increase in restricted cash (23,497) (8,962)
---------------- ---------------
Net cash used in financing activities (23,497) (8,962)
---------------- ---------------
Net increase in cash, due from banks and cash equivalents 427 1,818
Cash, due from banks and cash equivalents - June 30, 1999 14,780 12,532
---------------- ---------------
Cash, due from banks and cash equivalents - December 31, 1999 $ 15,207 $ 14,350
================ ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 1,792 $ 2,546
Federal, state and local taxes 670 395
Supplemental Disclosure of Non-cash Transactions
Accrued interest capitalized as additional principal - Increasing Rate
Junior Subordinated Notes due 2006 $ 487 $ --
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
1. Organization and Formation of the Company
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal
business is the management of its real estate assets, mortgage loans and
investment securities, under a business plan intended to maximize shareholder
value. As a result of the completion of reorganization steps (the
"Reorganization") in the fiscal year ended June 30, 1998, the Company succeeded
to the assets, liabilities and business of River Bank America ("River Bank" or
the "Predecessor Bank"). Unless the context otherwise requires, references to
the business, assets and liabilities of the Company prior to May 22, 1998
include the business, assets and liabilities of the Predecessor Bank. This
report is for the three months ended December 31, 1999.
On May 22, 1998, under a plan that was approved by its stockholders, River Bank
completed its Reorganization into a Delaware corporation named RB Asset, Inc.
Prior to the Reorganization, River Bank was a New York State chartered stock
savings bank and was regulated by the New York State Banking Department ("the
Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal
Deposit Insurance Corporation (the "FDIC").
In connection with the Reorganization, on June 23, 1998, the Predecessor Bank
was dissolved and its legal existence terminated. Upon such dissolution, the
capital stock of River Bank was canceled and the stock transfer records of River
Bank were closed. On that date, common and preferred stockholders of River Bank
received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset,
Inc. was owned by the same stockholders, in the same proportions, as owned by
the Predecessor Bank on the record date. The transfer of assets, liabilities and
business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free
reorganization under the Internal Revenue Code and, as such, the Company expects
that certain tax attributes of the Predecessor Bank have been preserved.
On June 28, 1996, the Predecessor Bank had consummated the transactions (the
"Branch Sale") contemplated by the Purchase of Assets and Liability Assumption
Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC
Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank.
Following consummation of the Branch Sale, all retail banking operations of the
Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC
assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and
acquired assets with an aggregate carrying value of $1,066.6 million (the
"Transferred Assets"). The Transferred Assets consisted primarily of loans
secured by real estate, mortgage-backed and investment securities, and 11 bank
branch offices, inclusive of the name East River Savings Bank. Included in the
Transferred Assets was approximately $32.4 million of loans in which the
Predecessor Bank was granted subordinated participation interests. Also included
in the Transferred Assets were the proceeds of dispositions from five individual
asset sale transactions with parties other than HSBC, aggregating $60.4 million,
composed of real estate assets, loans and other receivables (the "Asset Sale
Transactions"). The Asset Sale Transactions were structured to include ongoing
recourse to, and participation by, the Predecessor Bank with respect to the
assets sold, based upon the net proceeds realized on disposition of assets by
the purchasers. See Note 11 to the Consolidated Financial Statements at June 30,
1999.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans. The balance of
the assets retained after the Branch Sale primarily consisted of performing
loans (including loans sold with recourse, subordinated participations, junior
subordinated participations, loans to facilitate the sale of real estate owned
and mortgage and other loans) and a modest amount of cash and investment
securities (collectively, the "Retained Assets"). Over the five year period
preceding the Branch Sale, the Bank's primary loan origination focus was
single-family (one-to-four units) and, to a lesser extent, multi-family (five or
more units) residential loans secured by properties in the New York City
metropolitan area. Primarily as a result of conditions imposed by the NYSBD and
the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor
Bank and the Company have not originated a material amount of loans.
6
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
Following the Branch Sale, the Company engaged RB Management Company, LLC (the
"Management Company") to manage its operations on a day-to-day basis, including
developing and recommending strategies to the Company's Board of Directors
regarding the ongoing management of assets. The Management Company is a
privately-owned entity that was newly formed in June 1996 and is controlled by
Alvin Dworman, who owns 39.0% of the outstanding Common Stock of the Company.
At the time of the closing of the Branch Sale, the Predecessor Bank obtained
from HSBC a loan facility (the "Facility") consisting of eleven independent
mortgage loans with additional collateral, in an aggregate amount of
approximately $100.0 million. The Facility has been reduced by repayment
activity to $50.6 million at December 31, 1999.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending and
real estate transactions. The Company has requested that HSBC provide
availability up to the initial amount of the HSBC Facility of approximately
$100.0 million, or approximately $50.0 million in availability under the HSBC
Facility. Availability under the HSBC Facility would be used, in combination
with the restricted and unrestricted cash of the Company to invest in new
lending, investment and real estate activities, subject to the prior approval of
HSBC pursuant to a business plan intended to improve the future earnings and
cash flow of the Company.
Subsequent to December 31, 1999 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 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 December 2004. The
HSBC Facility will be secured by a first lien on two properties, certain
cooperative shares and a cash collateral account in the amount of $7.5 million.
HSBC retained the right to approve declaration or payment of dividends on the
Company's Preferred Stock as well as other capital transactions. Discussions
with respect to reactivating the HSBC Facility as described above continue.
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 nor 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 December 31, 1999. Although the Company is no longer
subject to the jurisdiction of either the FDIC or the NYSBD, declaration or
payment of future dividends on the Company Preferred Stock will continue to be
subject to the approval of HSBC for so long as the Facility remains outstanding.
The Company has received notice from HSBC that the approval necessary to declare
or pay dividends on the Company Preferred Stock will not be provided at this
time. There can be no assurance that the Board of Directors of the Company will
deem it appropriate to pay dividends on the Company Preferred Stock, even if
permitted to do so by HSBC.
2. Preferred Stock Exchange Offer
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.
The Subordinated Notes carry an interest rate of 8%, compounded semi-annually,
for the first 36 months following December 30, 1998, the date of their issuance.
As a result of the tender of 462,223 shares of the
7
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RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
Company's Series A Preferred Stock in exchange for the Subordinated Notes, the
Company assumed the obligation for the payment of interest on the Subordinated
Notes. During the quarter ended December 31, 1999 and 1998, the Company
recognized accrued interest expense related to the Subordinated Notes in the
amount of approximately $291 thousand and $2 thousand, respectively. During the
six months ended December 31, 1999 and 1998, the Company recognized accrued
interest expense related to the Subordinated Notes in the amount of
approximately $579 thousand and $2 thousand, respectively.
For a further discussion of the Exchange Offer see the Notes to the Consolidated
Financial Statements of the Company on Form 10-Q dated December 31, 1998 and
Form 10-K dated June 30, 1999.
3. Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of the Company
include all adjustments which management believes necessary for a fair
presentation of the Company's financial condition at December 31, 1999, the
results of its operations for the three and six months ended December 31, 1999
and 1998 and the statements of changes in stockholders' equity and cash flows
for the six months ended December 31, 1999 and 1998. Adjustments are of a normal
recurring nature. These unaudited consolidated financial statements have been
prepared in conformity with the accounting principles and practices in effect as
of December 31, 1999, as set forth in the consolidated financial statements of
RB Asset, Inc., at such date. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
of RB Asset, Inc. as of June 30, 1999.
The consolidated financial statements include the accounts of RB Asset, Inc. and
its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Due to the anticipated short-term nature of such
investments, unconsolidated real estate partnerships are generally carried at
cost, subject to periodic assessment of net realizable value. Losses on sales or
dispositions and any adjustments related to redetermination of net realizable
value are charged, as real estate charge-offs to operations of the period in
which such charges occurred.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial position
as of December 31, 1999, the results of operations for the three and six months
ended December 31, 1999 and 1998, and changes in stockholders' equity and cash
flows for the six months ended December 31, 1999 and 1998.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
investments in real estate.
Management believes that the allowance for possible credit losses is adequate
and that loans secured by real estate and real estate held for investment are
properly valued. While management uses available information to establish
reserves, future additions to the allowance or write downs of other real estate
owned or real estate held for investment may be necessary based on changes in
economic conditions, as well as changes in management strategies.
Management determines the appropriate classification of debt and equity
securities (collectively, "marketable" securities) at the time of purchase and
reevaluates such designation as of each balance sheet date. Available-for-sale
securities are stated at estimated fair value, with unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity. The cost
of marketable securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other-than-temporary
8
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RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
are included in net securities gains and losses. The cost of securities sold is
based on the specific identification method. At December 31, 1999, the balance
of stockholders' equity included a cumulative $1,173,000 unrealized loss on
marketable securities classified as available-for-sale.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the income (loss) before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. At
December 31, 1999, the Company reviewed its potential current and deferred
federal and state tax liabilities in light of the results of operations for the
Company since June 30, 1999. As a result of this analysis, the Company
recognized income tax expense in the amount of $182,000, during the quarter
ending December 31, 1999.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
4. Commitments, Contingencies and Other
At December 31, 1999, the Company had deferred tax assets that were primarily
attributable to NOLs, an allowance for loan losses and suspended passive
activity losses and credits which were partially offset by a deferred tax
liability in its consolidated financial statements. However, a valuation
allowance was set up equal to the amount of the difference between the tentative
deferred tax asset and the tentative deferred tax liability due to the
uncertainty of the Company's ability to utilize the deferred tax assets in the
future. Accordingly, neither a net overall asset nor a net overall liability was
reflected in the Company's consolidated financial statements.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Reorganization in Note 1 were to be deemed to be an ownership
change, or if, transactions in the Company's capital stock subsequent to the
Reorganization result in an ownership change, the subsequent utilization of net
operating loss carryforwards, suspended passive activity losses and credits,
alternative minimum tax credit carryforwards and certain other built-in losses
would be subject to an annual limitation as prescribed by current tax
regulations. The application of this limitation could have a material effect on
the Company's ability to realize its deferred tax assets. The Company is of the
view that no ownership change of the Company will be deemed to have occurred as
a result of the Reorganization or otherwise. However, the application of Section
382 is in many respects uncertain. In assessing the effects of prior
transactions and of the Reorganization under Section 382, the Company has made
certain legal judgments and certain factual assumptions. The Company has not
requested or received any rulings from the IRS with respect to the application
of Section 382 to the implementation of the Reorganization and the IRS could
challenge the Company's determinations.
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of any outstanding legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company. See Note 7.
9
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three and six months ended December 31, 1999 and
1998, respectively. The Company had no securities outstanding that were
convertible to common stock at December 31, 1999 or 1998.
6. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS-130"). SFAS-130 establishes new
rules for the reporting and display of comprehensive income and its components.
However, the adoption of this Statement has had no effect on the Company's net
income or stockholders' equity. SFAS-130 requires unrealized gains or losses on
the Company's available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS-130.
During the three months ended December 31, 1999 and 1998, total comprehensive
(loss) income was $161 and $523, respectively. During the six months ended
December 31, 1999 and 1998, total comprehensive (loss) income was $(658) and
$861, respectively. The following table describes the components of
comprehensive income and accumulated comprehensive income for the dates
indicated:
<TABLE>
<CAPTION>
Components of Comprehensive Income (Loss)
(Unaudited):
Three months ended December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Net (loss) income $ 183 $ 242
Unrealized losses on securities (22) 281
----------------- ----------------
Comprehensive (loss) income $ 161 $ 523
================= ================
Six months ended December 31,
1999 1998
----------------- ----------------
Net (loss) income $ (489) $ 692
Unrealized losses on securities (169) 169
----------------- ----------------
Comprehensive (loss) income $ (658) $ 861
================= ================
Components of Accumulated Comprehensive
Income (Unaudited):
December 31, December 31,
1999 1998
----------------- ----------------
Unrealized losses on securities $ (1,173) $ (757)
----------------- ----------------
Accumulated comprehensive income (loss) $ (1,173) $ (757)
================= ================
</TABLE>
10
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(dollars in thousands)
(Unaudited)
7. Legal Proceedings
On November 25, 1998, the Company offered upon the terms and conditions set
forth in its Offering Circular and the related Letter of Transmittal (which
together constituted the "Exchange Offer"), to exchange $25.94 principal amount
of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated
Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual
Stock, Series A, par value $1.00 (the "Series A Preferred Stock"), of which
1,400,000 shares were outstanding on that date.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company Preferred Stock advised the Company that such holders objected to the
Reorganization. Specifically, such counsel alleged that the Reorganization (i)
constituted a "liquidation" of River Bank America in violation of the terms of
the certificate of designations of the Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor Preferred Stock of the
liquidating distribution required by the certificate of designations of $25.00
per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was
illegal under the New York Banking Law (the "NYBL") which provides, in the case
of a voluntary liquidation, that the liquidating corporation shall distribute
its remaining assets among its shareholders according to their respective rights
and interests, (iii) violated a commitment made in River Bank's proxy statement,
dated May 13, 1996, to retire the Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor Preferred Stock.
The Company believes such allegations are without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders discussed from time to time since the date of such letter, certain
proposals under which the Company would offer to exchange a new security for the
Company Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. Such proposal was not acceptable
to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock
who claim to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized
Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River
Bank America et. al. (the "Complaint") in Supreme Court of the State of New
York, County of New York, Index No. 605226198 (the "Action"), against the
Company, certain of its predecessors and certain of its directors (collectively,
the "Defendants"). The complaint in the Action alleged (the "Allegations"),
among other things, that (i) the Defendants breached the certificate of
designations relating to the Predecessor Preferred Stock by fraudulently
transferring assets of River Bank and by illegally amending the certificate of
designations, (ii) the Defendants fraudulently conveyed the assets of River
Bank, thereby depriving the holders of a liquidating distribution, (iii) the
Defendants violated the NYBL by liquidating River Bank without making the
liquidating distribution required by the NYBL and by denying holders appraisal
rights to which they were entitled by the NYBL, (iv) the Defendants breached
their fiduciary duty to holders by depriving them of their liquidating
distribution, (v) the Defendants breached their duty of disclosure by omitting
from the Proxy Statement dated March 27, 1998 material facts relating to the
holders' rights to receive a liquidating distribution, their appraisal rights
for their shares and the requirement that holders vote as a class with respect
to the amendment of the certificate of designations, (vi) the Defendants'
implementation of the liquidation of River Bank and the amendment of the
certificate of designations were ultra vires and should be declared void and
(vii) the intentionally tortious nature of the Defendants' conduct bars them
from seeking indemnification for their actions and, therefore, the Defendants
should be enjoined from seeking indemnification for damages or attorney's fees
relating to the Action.
The Company believes that the Allegations are without merit and intends to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998 which
was argued before the court on March 23, 1999. The court issued its decision on
December 2, 1999. The court granted in part the Company's motion and dismissed
the causes of action based upon fraudulent conveyance, breach of fiduciary duty,
breach of duty of disclosure and ultra vires acts and ordered the remainder of
the Action to continue. The parties are proceeding with discovery.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition:
At December 31, 1999, the consolidated assets of the Company totaled $173.1
million, a decrease of $1.3 million, or 0.75%, as compared with total assets at
June 30, 1999.
Real estate held for investment, net of accumulated depreciation, declined
$586,000, or 0.63%, from $92.4 million at June 30, 1999 to $91.9 million at
December 31, 1999. The decline in real estate held for investment, net of
accumulated depreciation at December 31, 1999 as compared with the balance at
June 30, 1999, was primarily attributable to depreciation charges of $569,000.
Real estate held for disposal, net of allowance for fair market value reserve
under Statement of Accounting Standards No. 121 (SFAS-121), remained unchanged
at December 31, 1999 from the balance of $2.0 million at June 30, 1999. The
balance categorized as real estate held for disposal at December 31, 1999 are
apartment units which are expected to be sold within the next twelve months.
Total loans secured by real estate, net of the related allowance for possible
credit losses, declined $23.5 million, or 61.53%, from $37.9 million at June 30,
1999 to $14.6 million at December 31, 1999. The $23.5 million decline in real
estate loans, net, during the six months ended December 31, 1999, was primarily
attributable to the full satisfaction of three loans secured by real estate,
totaling $23.2 million and the effects of normal scheduled principal repayments,
partially offset by a decline in the related allowance for possible credit
losses of $198,000.
The Company's allowance for possible credit losses related to loans secured by
real estate decreased by $198,000, or 1.25%, from $15.8 million, at June 30,
1999 to $15.6 million at December 31, 1999. The decrease resulted from
chargeoffs for asset disposition transactions previously provided for at June
30, 1999. The Company's allowance for possible credit losses is maintained at a
level which management considers adequate based on its periodic review of the
Company's loans secured by real estate portfolios and certain individual loans,
taking into consideration, among other things, the likelihood of repayment, the
diversity of the borrowers, the type of loan, the quality of the collateral,
current market conditions and the associated risks. At December 31, 1999, the
allowance for possible credit losses was 51.7% of real estate loans as compared
to 29.5% at June 30, 1999.
Cash, due from banks and cash equivalents increased by $427,000, or 2.89%, from
$14.8 million at June 30, 1999 to $15.2 million at December 31, 1999. Total
operating revenues and available asset sales proceeds exceeded additions to
restricted cash, scheduled asset fundings and the payment of operating expenses,
resulting in the increase in unrestricted cash during the six months ended
December 31, 1999.
At December 31, 1999, HSBC had restricted a total of approximately $36.9 million
in funds, held on deposit at HSBC, in accordance with the terms of the Branch
Sale and the Facility agreements. HSBC had restricted approximately $13.4
million at June 30, 1999. Restricted funds held by HSBC are not available to the
Company for settlements of any of the Company's current obligations. The
restricted cash reserves arose from the sale of assets which had served as
primary or supplemental collateral for the HSBC Facility. The restricted cash
held by HSBC is intended to serve as substitute collateral for the HSBC
Facility, until such time as the HSBC Facility is reduced in accordance with the
Company's Asset Management Plan and the HSBC Facility Agreements. See "Liquidity
and Capital Resources," below.
Commercial and consumer loans, net of the related allowance for loan losses,
totaled $7.9 million at December 31, 1999, a decrease of $80,000, or 1.00%, from
the June 30, 1999 amount. This decrease was primarily the result of the
satisfaction 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 and the effects of normal amortization and repayment of individual
loans in the portfolio. 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.
In addition, as a result of this transaction, the Company recorded a gain on the
satisfaction of loan assets in the amount of $429,000.
12
<PAGE>
Other liabilities totaled $14.7 million at December 31, 1999, a decrease of $1.2
million, or 7.68%, from the June 30, 1999 balance of $16.0 million. The net
decrease in other liabilities during the six months ended December 31, 1999 was
primarily the result of payments made to service providers and to governmental
authorities, for state income and franchise taxes, in excess of required expense
and liability accruals for the six month period. The decline in other
liabilities over this six month period is consistent with a general reduction in
other operating expenses incurred by the Company. See "Results of Operations,"
below.
During the six months ended December 31, 1999, total stockholders' equity
decreased by $658,000, or 0.68%, to $95.9 million, as compared with $96.5
million at June 30, 1999. This decrease was due to the net loss recorded for the
six months ended December 31, 1999 in the amount of $489,000 and a decrease in
the securities valuation account (allowance for unrealized losses on marketable
securities) of $169,000.
The following table summarizes the calculation of the Company's book value per
share at December 31, 1999 and June 30, 1999.
<TABLE>
December 31, June 30,
1999 1999
----------------- ----------------
<S> <C> <C>
Total stockholders' equity $ 95,859,000 $ 96,517,000
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 23,444,000 23,444,000
----------------- ----------------
Net stockholders' equity $ 72,415,000 $ 73,073,000
================= ================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
================= ================
Book value per share $ 10.20 $ 10.30
================= ================
</TABLE>
Results of Operations:
General. The Company reported net income attributable to common shares of
$183,000, or $0.03 per basic and diluted share, for the three months ended
December 31, 1999, a decrease of $59,000, or 24.38%, compared with net income
attributable to common shares of $242,000, or $0.03 per share, for the three
month period ended December 31, 1998. The Company reported a net loss
attributable to common shares of $489,000, or $(0.07) per basic and diluted
share, for the six months ended December 31, 1999, a decrease of $1.2 million as
compared with net income attributable to common shares of $692,000, or $0.10 per
share, for the six month period ended December 31, 1998.
The primary reason for the decrease in the Company's net operating results for
the quarter ended December 31, 1999, as compared to the same quarter in the
previous year, were a decline of total interest income of $448,000, or 52.15%,
the effects of reduced sales gains on dispositions of real estate held for sale
which declined $355,000, or 26.32%, and a reduction of $100,000, or 19.61%, in
net revenues from rental operations. Partially offsetting these reductions in
recorded income during the quarter ended December 31, 1999, as compared to the
same period in the previous year, were reductions in interest expense of
$194,000, or 19.06%, a reduction in other expenses of $258,000, or 19.65%.
The primary reason for the decrease in the Company's net operating results for
the six months ended December 31, 1999, as compared to the same six months in
the previous year, was due to the positive income effects of nonrecurring
transactions in the six months ended September 30, 1998, which resulted in the
recording of gains on asset sales and loan participations totaling $1.0 million.
During the six months ended December 31, 1998, the Company recognized $1.0
million in contingent loan participation revenues. During the six months ended
December 31, 1999, the Company recognized no contingent loan participation
revenues.
13
<PAGE>
In addition to the $1.0 million in positive effects of the nonrecurring
transactions on income in the six months ended December 31, 1998, as compared
with the same six month period in 1999, other property income (expense) declined
$874,000, or 47.58%, from $1.8 million in the six months ended December 31, 1998
to $963,000 in the six months ended December 31, 1999, and interest income
declined $573,000, or 33.20%, from $1.7 million in the six months ended December
31, 1998 to $1.2 million in the six months ended December 31, 1999.
Partially offsetting the decreases in income cited above, for the six months
ended December 31, 1999, as compared to the same six month period of the
previous year, was a reduction in interest expense of $656,000, or 26.79%, and
other operating expenses of $214,000, or 9.52%. Interest expense declined from
$2.5 million in the six months ended December 31, 1999 to $1.8 million during
the same six month period of the current year. Other expenses declined from $2.2
million in the six months ended December 31, 1999 to $2.0 million during the
same six month period of the current year.
Net Rental Operations. For the three months ended December 31, 1999, net rental
operations resulted in income of $410,000, a decrease of $100,000, or 19.61%,
from $510,000 for the same three month period in the previous year. For the six
months ended December 31, 1999, net rental operations resulted in income of
$1.16 million, an increase of $16,000 from the $1.14 million recorded for the
same six month period in the previous year. The decrease in net rental operating
revenue for the three month period ended December 31, 1999 and the increase in
the income recorded from net rental operations for the six month period ended
December 31, 1999, as compared with the same periods in the previous year, were
due to various, individually immaterial operating factors affecting aggregate
rental income and expenses within the Company's rental properties.
Other Property Income/Expense. Net gain on sale of real estate of $994,000 was
recorded for the quarter ended December 31, 1999, a decrease of $355,000, or
26.32%, as compared with net income of $1.3 million in the quarter ended
December 31, 1998. For the quarter ended December 31, 1999, the $994,000 net
gain was attributable to sales of apartment units in the amount of $1.5 million,
for which a gain was recognized.
For the quarter ended December 31, 1998, the $1.2 million of net gain on sale of
real estate was primarily attributable to the sale of $2.7 million of real
estate held for investment, of which $2.3 million related to a shopping center
complex in New York City for which a net gain in the amount of $304,000 was
recognized, $496,000 related to the sale of a condominium unit at one of the
Company's multi-family housing projects for which a gain in the amount of
$354,000 was recognized, and the sale of a multi-car parking garage adjacent to
the Company's office complex real estate investment in Atlanta, GA for
approximately $1.7 million for which a gain of $523,000 was recognized. In
addition, during the three months ended December 31, 1998, the Company recorded
a gain in the amount of $106,000 related to the recovery of certain sales
proceeds related to a real estate joint venture that had been fully written off
in prior years.
Total other property income (expense) was $963,000 for the six months ended
December 31, 1999, a decrease of $874,000, or 47.58%, as compared with a net
gain of $1.8 million in the six months ended December 31, 1998. The $963,000
other property income (expense) recorded during the six months ended December
31, 1999 was primarily due to the apartment unit sales completed in the quarter
ended December 31, 1999, described above.
The $1.8 million in other property income (expense) recorded in the six month
period ended December 31, 1998 was due to the $1.2 million in gains from sales
of real estate recorded during the quarter ended December 31, 1998 (described
above) and to the recognition of a gain of $500,000, in the quarter ended
September 30, 1998, resulting from the full satisfaction of a junior
subordinated participation loan secured by real estate which had been fully
reserved for in prior periods. In addition, during the three months ended
December 31, 1998, the Company recorded a gain in the amount of $106,000 related
to the recovery of certain sales proceeds related to a real estate joint venture
that had been fully written off in prior years.
Interest Income. For the three months ended December 31, 1999, total interest
income was $411,000, a decline of $448,000, or 52.15%, from $859,000 recorded
for the same quarter in the previous year. Loan interest declined $496,000, or
67.67%, from $733,000 in the quarter ended December 31, 1998 to $237,000 for the
same quarter in the current year. This decline in loan interest expense was due
to reduced average balances for loan assets resulting from satisfactions and the
effects of normal amortization and repayment activity.
14
<PAGE>
Partially offsetting the decline in loan interest income in the three months
ended December 31, 1999, as compared with the same three month period in the
previous year, was an increase in other interest income to $174,000, an increase
of $48,000, or 38.10%, in the quarter ended December 31, 1999 as compared with
other interest income of $126,000 recorded in the quarter ended December 31,
1998. The increase in other interest income was due to an increase in the
average balance of funds held in interest-bearing money market accounts during
the quarter ended December 31, 1999 as compared with the same quarter in the
previous year. Partially offsetting this increase in the average balance in
interest bearing accounts during the quarter ended December 31, 1999 as compared
with the same quarter in the previous year, was a decrease in the interest rate
on these assets primarily due to the effects of a renegotiation of the HSBC
Facility agreement which occurred in the quarter ended December 31, 1998. Under
the renegotiated agreement, funds held on deposit at HSBC no longer earn
interest income, but are, instead, now used to reduce the interest expense for
funds borrowed from HSBC under the Facility. See "Interest Expense," below.
For the six months ended December 31, 1999, loan interest income was $807,000, a
decline of $566,000, or 41.22%, to $1.4 million for the same quarter in the
previous year. The $566,000 decline in loan interest in the quarter ended
December 31, 1999, as compared with the same quarter in the previous year, was
primarily due to reduced average balances for performing loan assets resulting
from satisfactions and the effects of normal amortization and repayment
activity.
Contingent Loan Participation Revenues. The Company realized contingent
participation revenues of $0 and $1.0 million in the six months ended December
31, 1999 and 1998, respectively. During the quarter ended September 30, 1998,
contingent loan participation revenues of $1.0 million were recognized on one
subordinated participation loan and one junior subordinated participation loan
made to the same borrower with a combined principal balance of $1.3 million.
These loans were paid in full during the quarter ended September 30, 1998. A
portion of the subordinated participation loan and the junior participation loan
had been sold to HSBC on June 28, 1996 and the junior subordinated participation
loan was fully reserved for on the Company's books following the Branch Sale.
The full repayment of the junior subordinated participation loan resulted in the
recognition of an additional gain in the amount of $500,000 during the quarter
ended September 30, 1998.
At December 31, 1999, the Company had a remaining contingent interest in two
junior subordinated participation loans in which the Company retains an interest
of approximately $2.4 million in principal amount, which are fully reserved for
(100%) by the Company. All of such loans have been modified since origination
and are currently performing in accordance with their terms.
Net Gain on the Satisfaction of Loan Assets. The Company recognized a gain on
the satisfaction of loan assets in the amount of $429,000 for the three and six
months ended December 31, 1999. The Company did not recognize any gains on the
satisfaction of loan assets for the same three and six month periods of the
previous year. The net gain on the satisfaction of loan assets was the result 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.
Interest Expense. During the three months ended December 31, 1999, the Company
recorded interest expenses in the amount of $824,000, a decline of $194,000, or
19.06%, as compared with interest expenses of $1.0 million in the same quarter
of the previous year. Interest expense for borrowed funds declined $456,000, or
46.20%, from $987,000 in the quarter ended December 31, 1998 to $531,000 for the
same quarter in the current year. This decline in interest expense on borrowed
funds was partially offset by the recognition of $291,000 in interest expense in
the quarter ended December 31, 1999 related to the Company's Increasing Rate
Junior Subordinated Notes due 2006, which were initially issued on December 30,
1998.
During the six months ended December 31, 1999, the Company recorded interest
expense in the amount of $1.8 million, a decline of $656,000, or 26.79%, as
compared with interest expense of $2.4 million in the same six month period of
the previous year. Interest expense for borrowed funds declined $1.2 million, or
50.10%, from $2.4 million recorded in the six months ended December 31, 1998 to
$1.2 million recorded in the same
15
<PAGE>
six month period of the current year. This decline in interest expense on
borrowed funds was partially offset by the recognition of $579,000 in interest
expense in the six months ended December 31, 1999 related to the Company's
Increasing Rate Junior Subordinated Notes due 2006, which were initially issued
on December 30, 1998.
The decline in interest expense paid on borrowed funds declined in the three and
six months ended December 31, 1999, as compared with the same three and six
month periods ended December 31, 1998 was the result of declines in the average
amount borrowed by the Company from HSBC and reductions in the interest rate
paid by the Company on borrowed funds, under the renegotiated terms of the
Facility.
During the three and six months ended December 31, 1999, the Company borrowed an
average of $50.6 million, a decline of $18.2 million, or 26.45%, as compared
with average borrowings of $68.8 million during the same three and six month
periods ended December 31, 1998. The decline in the average amount of borrowed
funds was attributable to the repayment of outstanding obligations which
occurred in fiscal 1999, primarily funded by asset sales and loan repayments.
The average interest rate paid to HSBC on borrowed funds was 4.20% and 4.76% for
the three and six months ended December 31, 1999, respectively, as compared to
6.57% and 7.02%, respectively, for the same three month period of the previous
year. The decline in rates paid to HSBC in the three month period ended December
31, 1999, as compared with the same periods in the previous year, was primarily
due to a renegotiation of the Company's interest rate with HSBC. Under the terms
of the renegotiated interest rate agreements with HSBC, which became effective
October 1, 1998, the Company receives interest rate reductions for borrowed
funds, calculated using a formula that considers certain compensating balances
held in bank accounts with HSBC. The interest expense rate reductions received
under the new rate schedule agreement with HSBC are in lieu of interest income
that had been earned on those deposited funds. See "Interest Income," above.
Other Expenses. During the quarter ended December 31, 1999, the Company recorded
total other expenses in the amount of $1.1 million, a decrease of $258,000, or
19.65%, as compared with other expenses of $1.3 million in the same quarter of
the previous year. Other expenses decreased in the quarter ended December 31,
1999, as compared with the quarter ended December 31, 1998, primarily as a
result of differences in the timing of certain non-recurring expense payments.
During the six months ended December 31, 1999, the Company recorded total other
expenses in the amount of $2.0 million, a decrease of $214,000, or 9.52%, as
compared with other expenses of $2.2 million in the same six months of the
previous year. Other expenses decreased in the six months ended December 31,
1999, as compared with the six months ended December 31, 1998, primarily as a
result of differences in the timing of certain non-recurring expense payments.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a newly
formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0% of
the outstanding Common Stock of the Company. During the three and six months
ended December 31, 1999, the Company accrued $748,000 and $1.4 million,
respectively in fees payable to the Management Company, of which $170,000 and
$289,000, respectively, related to fees incurred for the successful disposition
of assets. During the three and six months ended December 30, 1998, the Company
accrued $670,000 and $1.3 million, respectively in fees payable to the
Management Company, of which $57,000 and $102,000, respectively, related to fees
incurred for the successful disposition of assets.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109
(SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a
deferred tax asset relating to the unrecognized benefit for all temporary
differences that will result in future tax deductions and for all unused NOL and
tax credit carryforwards, subject to, in certain circumstances, reduction of the
asset by a valuation allowance. A valuation allowance is recorded if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized based on a review of available evidence. Realization of tax benefits
for deductible temporary differences and unused NOL and tax credit carryforwards
may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carryforwards, taxable income in prior carryback years and, if appropriate,
from tax planning strategies.
16
<PAGE>
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated federal income
tax liability for the quarters ended September 30, 1998 and 1997. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the three and six months ended December 31, 1999, the Company recorded a net
provision for income taxes of $182,000 and $363,000, respectively. During the
three and six months ended December 31, 1998, the Company recorded a net
provision for income taxes of $145,000 and $314,000, respectively. Income taxes
recorded by the Company primarily reflect the effects of operations on its
current state and local income tax liability at December 31, 1999 and 1998,
respectively.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for debt repayments related to asset sales, operating expenses and development
costs related to certain real estate projects.
At December 31, 1999 the Company had $50.6 million in borrowed funds outstanding
under the Facility provided by HSBC Bank. The Company actively monitors and
manages its cash inflows and outflows in the management of the Facility with
HSBC and invests, to the extent possible, all available cash balances.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending,
investment and real estate transactions. The Company has requested that HSBC
provide availability up to the initial amount of the HSBC Facility of
approximately $100.0 million, or approximately $50.0 million in availability
under the HSBC Facility. Availability under the HSBC Facility would be used, in
combination with the restricted and unrestricted cash of the Company to invest
in new lending, investment and real estate activities, subject to the prior
approval of HSBC.
Subsequent to December 31, 1999 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 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 December 2004. The
HSBC Facility will be secured by a first lien on two properties, certain
cooperative shares and a cash collateral account in the amount of $7.5 million.
HSBC retained the right to approve declaration or payment of dividends on the
Company's Preferred Stock as well as other capital transactions. Discussions
with respect to reactivating the HSBC Facility as described above continue.
The Company seeks to maintain liquidity, in the form of unrestricted cash,
within a range of 5% to 10% of total assets. At December 31, 1999, the Company's
liquidity ratio, as so defined, amounted to 7.9%, which was within the
maintenance range.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts
accounting standards (generally referred to as Statements of Financial
Accounting Standards, or "SFASs") which set forth required generally accepted
accounting principles. Set forth below is a description of certain of the
accounting standards recently adopted by the FASB which are relevant to
financial institutions such as the Company.
17
<PAGE>
FASB Interpretation No. 43. FASB Interpretation No. 43, "Real Estate Sales,"
interprets and amends Statement of Financial Accounting Standards No. 66
(SFAS-66), "Accounting for Sales of Real Estate." FASB Interpretation No. 43
states that the sales recognition criteria of SFAS-66 should apply to land and
physical structures attached to the land (for instance, property improvements or
integral equipment such as manufacturing facilities) that cannot be removed and
used separately without incurring significant cost. FASB Interpretation No. 43
is effective for all sales of real estate with property improvements or integral
equipment entered into after June 30, 1999. Management has evaluated the
provisions of this Interpretation and has concluded that the adoption of this
Interpretation will have no effect on the Company's results of operations and
financial condition.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and, generally, increases in interest rates paid on borrowed
funds. Over any given term, however, interest rates do not necessarily move in
the same direction or in the same magnitude as changes in prices for goods and
services.
Risks Associated with Forward-Looking Statements
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-
looking statements involve known and unknown risk, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following, which are
discussed in greater detail in the "Risk Factors" section of the Company's
Registration Statement on Form S-4 (File No. 333-386730 and File No.
333-386730-01) filed with the Securities and Exchange Commission ("SEC"),
general economic conditions, which will among other things, affect demand for
commercial and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability of financing: difficulty
of locating suitable investments; competition; risks of real estate acquisition,
development, construction and renovation; vacancies at existing commercial
properties; dependence on rental income from real property; adverse consequences
of debt financing; risks of investments in debt instruments, including possible
payment defaults and reductions in the value of collateral; illiquidity of real
estate investments; lack of prior operating history; and other risks listed from
time to time in the Company's reports filed with the SEC. Therefore, actual
results could differ materially from those projected in such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk facing the Company is interest rate risk on its borrowed
funds, mortgage notes and notes receivable. The Company does not hedge interest
rate risk using financial instruments nor is the Company subject to foreign
currency risk.
The Company has assessed the market risk for its variable rate debt and believes
that a 1% increase in interest rates (as measured by changes in the LIBOR rate)
would result in an approximate $506,000 increase in interest expense based on
approximately $50.6 million outstanding at December 31, 1999. See Note 16,
"Borrowed Funds," contained within the Consolidated Financial Statements dated
June 30, 1999.
In addition, the Company has issued $12.48 million in Increasing Rate Junior
Subordinated Notes due 2006. The Subordinated Notes provide for a steadily
increasing interest cost after December 15, 2001. A substantial increase in
general interest rates would potentially prevent the Company from refinancing
the Subordinated Notes at a rate favorable to the Company. See Note 27,
"Preferred Stock Exchange Offer" and Note 28, "Increasing Rate Junior
Subordinated Notes," contained within the Consolidated Financial Statements at
June 30, 1999.
18
<PAGE>
The fair value of the Company's long term debt, mortgage notes, notes receivable
and other financial assets is estimated based on discounting future cash flows
at interest rates that management believes reflect the risks associated with
long term debt, mortgage notes, notes receivable and other financial assets of
similar risk and duration. See Note 25, "Fair Value of Financial Instruments,"
within the Consolidated Financial Statements at June 30, 1999.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 25, 1998, the Company offered upon the terms and conditions set
forth in its Offering Circular and the related Letter of Transmittal (which
together constituted the "Exchange Offer"), to exchange $25.94 principal amount
of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated
Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual
Stock, Series A, par value $1.00 (the "Series A Preferred Stock"), of which
1,400,000 shares were outstanding on that date.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company Preferred Stock advised the Company that such holders objected to the
Reorganization. Specifically, such counsel alleged that the Reorganization (i)
constituted a "liquidation" of River Bank America in violation of the terms of
the certificate of designations of the Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor Preferred Stock of the
liquidating distribution required by the certificate of designations of $25.00
per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was
illegal under the New York Banking Law (the "NYBL") which provides, in the case
of a voluntary liquidation, that the liquidating corporation shall distribute
its remaining assets among its shareholders according to their respective rights
and interests, (iii) violated a commitment made in River Bank's proxy statement,
dated May 13, 1996, to retire the Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor Preferred Stock.
The Company believes such allegations are without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders discussed from time to time since the date of such letter, certain
proposals under which the Company would offer to exchange a new security for the
Company Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. Such proposal was not acceptable
to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock
who claim to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized
Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River
Bank America et. al. (the "Complaint") in Supreme Court of the State of New
York, County of New York, Index No. 605226198 (the "Action"), against the
Company, certain of its predecessors and certain of its directors (collectively,
the "Defendants"). The complaint in the Action alleged (the "Allegations"),
among other things, that (i) the Defendants breached the certificate of
designations relating to the Predecessor Preferred Stock by fraudulently
transferring assets of River Bank and by illegally amending the certificate of
designations, (ii) the Defendants fraudulently conveyed the assets of River
Bank, thereby depriving the holders of a liquidating distribution, (iii) the
Defendants violated the NYBL by liquidating River Bank without making the
liquidating distribution required by the NYBL and by denying holders appraisal
rights to which they were entitled by the NYBL, (iv) the Defendants breached
their fiduciary duty to holders by depriving them of their liquidating
distribution, (v) the Defendants breached their duty of disclosure by omitting
from the Proxy Statement dated March 27, 1998 material facts relating to the
holders' rights to receive a liquidating distribution, their appraisal rights
for their shares and the requirement that holders vote as a class with respect
to the amendment of the certificate of designations, (vi) the Defendants'
implementation of the liquidation of River Bank and the amendment of the
certificate of designations were ultra vires and should be declared void and
(vii) the intentionally tortious nature of the Defendants' conduct bars them
from seeking indemnification for their actions and, therefore, the Defendants
should be enjoined from seeking indemnification for damages or attorney's fees
relating to the Action.
The Company believes that the Allegations are without merit and intends to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998 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. The parties are proceeding with discovery.
Item 2. Changes in Securities
None.
20
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1999, the Company filed
the following Current Reports on Form 8-K:
None
21
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RB ASSET, INC.
(Registrant)
Date: February 14, 2000 By: /s/ Nelson L. Stephenson
----------------- -------------------------
Nelson L. Stephenson
President and Chief Executive Officer
(principal executive and principal financial
officer)
22
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial extracted from the financial statements
of RB Asset, Inc. for the 6 months ended December 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 52,060
<SECURITIES> 1,125
<RECEIVABLES> 39,300
<ALLOWANCES> 16,832
<INVENTORY> 0
<CURRENT-ASSETS> 55,185
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 173,092
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<BONDS> 11,944
0
938
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<OTHER-SE> 87,821
<TOTAL-LIABILITY-AND-EQUITY> 173,092
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<INTEREST-EXPENSE> 1,793
<INCOME-PRETAX> (126)
<INCOME-TAX> 363
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<EPS-BASIC> (0.09)
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