As filed with the Securities and Exchange Commission on May 11, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
--------------
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From To
-------------- --------------
Commission file number 333-38673
RB ASSET, INC.
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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 Eight Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
---------------
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No / /
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of May 11, 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 May 11, 2000, was 937,777.
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<PAGE>
RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED MARCH 31, 2000
TABLE OF CONTENTS
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PAGE
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2000
(unaudited) and June 30, 1999............................................ 1
Consolidated Statements of Operations for the three and nine months ended
March 31, 2000 and 1999 (unaudited)...................................... 2
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended March 31, 2000 and 1999 (unaudited) ........................ 3
Consolidated Statements of Cash Flows for the nine months ended March
31, 2000 and 1999 (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...................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 21
Item 2. Changes in Securities ....................................................... 22
Item 3. Defaults Upon Senior Securities ............................................. 22
Item 4. Submission of Matters to a Vote of Securities Holders ....................... 22
Item 5. Other Information ........................................................... 22
Item 6. Exhibits and Reports on Form 8-K ............................................ 22
SIGNATURE.......................................................................................... 23
</TABLE>
-i-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2000 and June 30, 1999
(dollars in thousands)
Assets
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<CAPTION>
(Unaudited)
March 31, June 30,
2000 1999
------ ----
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Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $4,948 and $3,264, respectively $ 96,198 $ 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
Investments in joint ventures 1,454 1,536
----------------- -----------------
Total real estate assets 99,652 95,974
Loans receivable:
Secured by real estate 32,394 53,697
Commercial and consumer 9,111 10,314
Allowance for possible credit losses (13,393) (18,155)
----------------- -----------------
Total loans receivable, net 28,112 45,856
Cash, due from banks and cash equivalents 33,321 14,780
Cash, due from banks - restricted 7,500 13,355
Investment securities available for sale 1,260 1,294
Other assets 1,894 3,147
----------------- -----------------
Total Assets $ 171,739 $ 174,406
================= =================
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 $ 12,485 $ 11,375
Borrowed funds 48,629 50,557
Other liabilities 12,999 15,957
----------------- -----------------
Total Liabilities 74,113 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 March 31, 2000 and June 30, 1999) 938 938
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at March 31, 2000
and June 30, 1999) 7,100 7,100
Additional paid in capital 100,439 100,439
Accumulated deficit (9,813) (10,956)
Accumulated comprehensive loss (1,038) (1,004)
----------------- -----------------
Total Stockholders' Equity 97,626 96,517
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 171,739 $ 174,406
================= =================
</TABLE>
See notes to Consolidated Financial Statements
1
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended March 31, 2000 and 1999
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
---------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue and operations:
Rental income and other property revenue $ 3,698 $ 3,696 $ 11,493 $ 11,210
Property operating and maintenance expense (2,682) (2,497) (8,181) (7,687)
Depreciation - real estate held for investment (568) (582) (1,708) (1,767)
------------- ------------- --------------- ---------------
Net rental operations 448 617 1,604 1,756
Other property income (expense):
Net gain on sale of real estate 725 997 1,688 2,729
Recovery of investments in real estate -- -- -- 106
------------- ------------- --------------- ---------------
Total other property income (expense): 725 997 1,688 2,835
Interest income:
Loans receivable 962 591 1,769 1,964
Money market investments and other 157 123 503 476
------------- ------------- --------------- ---------------
Total interest income 1,119 714 2,272 2,440
Other Income
Gain on settlement of Branch Sale contingencies, net 500 -- 500 --
Loss on satisfaction of loan assets (1,272) -- (841) --
Realization of contingent participation revenues 2,400 -- 2,400 1,000
------------- ------------- --------------- ---------------
Total other income 1,628 -- 2,059 1,000
------------- ------------- --------------- ---------------
Total revenues 3,920 2,328 7,623 8,031
------------- ------------- --------------- ---------------
Expenses:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 299 246 879 248
Borrowed funds 558 928 1,762 3,342
Other (10) 11 -- 44
------------- ------------- --------------- ---------------
Total interest expense 847 1,185 2,641 3,634
Other expenses:
Salaries and employee benefits 61 32 160 140
Legal and professional fees 340 347 883 1,118
Management fees 579 613 1,735 1,844
Other 113 87 350 225
------------- ------------- --------------- ---------------
Total other expenses 1,093 1,079 3,128 3,327
Total expenses 1,940 2,264 5,769 6,961
------------- ------------- --------------- ---------------
Income (loss) before provision for income taxes 1,980 64 1,854 1,070
Provision for income taxes 348 118 711 432
------------- ------------- --------------- ---------------
Net income (loss) 1,632 (54) 1,143 638
Dividends declared on preferred stock -- -- -- --
------------- ------------- --------------- ---------------
Net income (loss) applicable to common stock $ 1,632 $ (54) $ 1,143 $ 638
============= ============= =============== ===============
Basic and diluted income (loss) per common share $ 0.23 $ (0.01) $ 0.16 $ 0.09
============= ============= =============== ===============
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months
ended March 31, 2000 and 1999
(dollars in thousands)
(Unaudited)
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Series A
Non-
cumulative
Perpetual Additional Accumulated Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings 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 nine months
ended March 31, 1999 -- -- -- 638 -- 638
Preferred stock dividends payable -- -- -- -- -- --
Reduction in Stockholders' Equity
resulting from Preferred Stock
Exchange Offer (Note 2) (448) -- (10,524) -- -- (10,972)
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale -- -- -- -- (90) (90)
============ ========== ============= ============ ============= ===============
Balances at March 31, 1999 $ 952 $ 7,100 $ 100,646 $ (10,924) $ (1,016) $ 96,758
============ ========== ============= ============ ============= ===============
Balances at June 30, 1999 $ 938 $ 7,100 $ 100,439 $ (10,956) $ (1,004) $ 96,517
Net income for the nine months
ended March 31, 2000 -- -- -- 1,143 -- 1,143
Preferred stock dividends payable -- -- -- -- -- --
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale -- -- -- -- (34) (34)
============ ========== ============= ============ ============= ===============
Balances at March 31, 2000 $ 938 $ 7,100 $ 100,439 $ (9,813) $ (1,038) $ 97,626
============ ========== ============= ============ ============= ===============
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000
(dollars in thousands)
(Unaudited)
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Nine months ended
March 31,
---------------------------------
2000 1999
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Operating Activities:
Cash flows provided by (used in) Operating Activities:
Net income $ 1,143 $ 638
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Recovery of real estate assets -- (106)
Net gain on sale of real estate assets (1,688) (2,736)
Net loss on satisfaction of loan assets 841 --
Depreciation and amortization 1,708 1,768
Amortization of capitalized issuance costs and accretion of
issuance discount - Increasing Rate Junior Subordinated Notes
due 2006 116 --
Change in operating assets and liabilities:
Net (increase) decrease in accrued interest receivable (293) 58
Increase in accrued interest payable, net of additions to
principal - Increasing Rate Junior Subordinated Notes due 2006 683 107
Net (decrease) increase in accrued income taxes (3) 409
Net decrease in accrued expenses and other liabilities (2,643) (97)
Net decrease (increase) in prepaid expenses and other assets 1,546 (1,224)
Cash effect of increases in allowance for possible credit losses 74 330
Other -- 49
---------------- ---------------
Net cash provided by (used in) operating activities 1,484 (804)
---------------- ---------------
Investing Activities:
Cash flows provided by Investing Activities:
Repayment of loans secured by real estate, net 16,397 5,122
Repayment of commercial and consumer loans 508 61
Proceeds from partnership distributions - investments
in joint ventures 82 --
Proceeds related to sales of real estate held 2,478 6,713
Additional net fundings of real estate held for investment (6,335) (524)
---------------- ---------------
Net cash provided by investing activities 13,130 11,372
---------------- ---------------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000
(dollars in thousands)
(Unaudited)
(Continued from previous page)
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<CAPTION>
Nine months ended
March 31,
--------------------------------
2000 1999
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Financing Activities:
Cash flows provided by (used in) Financing Activities:
Decrease in restricted cash 5,855 7,820
Repayment of borrowed funds (1,928) (16,096)
---------------- ---------------
Net cash provided by (used in) financing activities 3,927 (8,276)
---------------- ---------------
Net increase in cash, due from banks and cash equivalents 18,541 2,292
Cash, due from banks and cash equivalents, beginning of period 14,780 12,532
---------------- ---------------
Cash, due from banks and cash equivalents, end of period $ 33,321 $ 14,824
================ ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 2,829 $ 3,577
Federal, state and local taxes 758 523
Supplemental Disclosure of Non-cash Transactions
Accrued interest payable added as additional principal - Increasing
Rate Junior Subordinated Notes due 2006 $ 994 $ --
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(dollars in thousands)
(Unaudited)
1. Organization and Formation of the Company
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal
business is the management of its real estate assets, mortgage loans and
investment securities, under a business plan intended to maximize shareholder
value. As a result of the completion of reorganization steps (the
"Reorganization") in the 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 March 31, 2000.
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
March 31, 2000
(dollars in thousands)
(Unaudited)
Following the Branch Sale, the Company engaged RB Management Company, LLC (the
"Management Company") to manage its operations on a day-to-day basis, including
developing and recommending strategies to the Company's Board of Directors
regarding the ongoing management of assets. The Management Company is a
privately-owned entity that was newly formed in June 1996 and is controlled by
Alvin Dworman, who owns 39.0% 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.
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. The
Facility has been reduced by repayment activity to $48.6 million at March 31,
2000.
Also 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 thousand, reflected in the results of operations for the
three and nine months ended March 31, 2000.
During the quarter ended March 31, 2000, the Company and HSBC entered into an
asset swap and purchase agreement, whereby the Company exchanged its interests
in four subordinated participation and two junior subordinated participation
loans with a total net book value of $3.2 million and cash in the amount of $4.8
million for a loan held by HSBC in the amount of $11.1 million. As a result of
this transaction during the quarter ended March 31, 2000, the Company recognized
contingent participation revenues of $2.4 million and, in addition, the Company
received $700,000 in previously unaccrued loan interest related to the junior
subordinated participation loans.
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 March 31, 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, until otherwise notified, the
approval necessary to declare or pay dividends on the Company Preferred Stock
will not be provided. 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.
7
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(dollars in thousands)
(Unaudited)
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 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
March 31, 2000 and 1999, the Company recognized accrued interest expense related
to the Subordinated Notes in the amount of approximately $299 thousand and $246
thousand, respectively. During the nine months ended March 31, 2000 and 1999,
the Company recognized accrued interest expense related to the Subordinated
Notes in the amount of approximately $879 thousand and $248 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 March 31, 2000, the results
of its operations for the three and nine months ended March 31, 2000 and 1999
and the statements of changes in stockholders'equity and cash flows for the nine
months ended March 31, 2000 and 1999. Adjustments are of a normal recurring
nature. These unaudited consolidated financial statements have been prepared in
conformity with the accounting principles and practices in effect as of March
31, 2000, as set forth in the consolidated financial statements of RB Asset,
Inc., at such date. These unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of RB
Asset, Inc. as of June 30, 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 fair 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 March 31, 2000, the results of operations for the three and nine months
ended March 31, 2000 and 1999, and changes in stockholders' equity and cash
flows for the nine months ended March 31, 2000 and 1999.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
investments in real estate.
Management believes that the allowance for possible credit losses is adequate
and that loans secured by real estate and real estate held for investment are
properly valued. While management uses available information to establish
reserves, future additions to the allowance or write downs of other real estate
owned or real estate
8
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(dollars in thousands)
(Unaudited)
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, where applicable, reported in a separate component of stockholders'
equity. The cost of marketable securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other-than-temporary are included in
net securities gains and losses. The cost of securities sold is based on the
specific identification method. At March 31, 2000, the balance of stockholders'
equity included a cumulative $1.038 million 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 March
31, 2000, the Company reviewed its potential current and deferred federal and
state tax liabilities in light of the results of operations for the Company
since June 30, 1999. As a result of this analysis, the Company recognized income
tax expense in the amount of $348,000, during the quarter ending March 31, 2000.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments
when purchased with maturities of 90 days or less.
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 March 31, 2000, the Company had deferred tax assets that were primarily
attributable to NOLs, an allowance for loan losses and suspended passive
activity losses and credits which were partially offset by a deferred tax
liability in its consolidated financial statements. However, a valuation
allowance was set up equal to the amount of the difference between the tentative
deferred tax asset and the tentative deferred tax liability due to the
uncertainty of the Company's ability to utilize the deferred tax assets in the
future. Accordingly, neither a net overall asset nor a net overall liability was
reflected in the Company's consolidated financial statements.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Reorganization in Note 1 were to be deemed to be an ownership
change, or if, transactions in the Company's capital stock subsequent to the
Reorganization result in an ownership change, the subsequent utilization of net
operating loss carryforwards, suspended passive activity losses and credits,
alternative minimum tax credit carryforwards and certain other built-in losses
would be subject to an annual limitation as prescribed by current tax
regulations. The application of this limitation could have a material effect on
the Company's ability to realize its deferred tax assets. The Company is of the
view that no ownership change of the Company will be deemed to have occurred as
a result of the Reorganization or otherwise. However, the application of Section
382 is in many respects uncertain. In assessing the effects of prior
transactions and of the Reorganization under Section 382, the Company has made
certain legal judgments and certain factual assumptions. The Company has not
requested or received any rulings from the IRS with respect to the application
of Section 382 to the implementation of the Reorganization and the IRS could
challenge the Company's determinations.
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
9
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(dollars in thousands)
(Unaudited)
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.
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three and nine months ended March 31, 2000 and
1999, respectively. The Company had no securities outstanding that were
convertible to common stock at March 31, 2000 or 1999.
6. Comprehensive Income
During the three months ended March 31, 2000, total comprehensive income was
$1.7 million, as compared to total comprehensive loss of $313, during the same
three month period in 1999. During the nine months ended March 31, 2000 and
1999, total comprehensive income was $1.1 million and $548, respectively. The
following table describes the components of comprehensive income and accumulated
comprehensive income for the dates indicated:
Components of Comprehensive Income (Loss)
(Unaudited):
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
----------------- ----------------
<S> <C> <C>
Net income (loss) $ 1,632 $ (54)
Unrealized gain (loss) on securities 135 (259)
================= ================
Comprehensive (loss) income $ 1,767 $ (313)
================= ================
Nine months ended March 31,
2000 1999
----------------- ----------------
Net income $ 1,143 $ 638
Unrealized losses on securities (34) (90)
================= ================
Comprehensive (loss) income $ 1,109 $ 548
================= ================
Components of Accumulated Comprehensive
Income (Unaudited):
March 31, March 31,
2000 1999
----------------- ----------------
Unrealized loss on securities $ (1,038) $ (1,016)
================= ================
Accumulated comprehensive loss $ (1,038) $ (1,016)
================ ================
</TABLE>
7. Legal Proceedings
On November 25, 1998, the Company offered upon the terms and conditions set
forth in its Offering Circular
10
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(dollars in thousands)
(Unaudited)
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 March 31, 2000, the consolidated assets of the Company totaled $171.7
million, a decrease of $2.7 million, or 1.53%, as compared with the Company's
total assets at June 30, 1999.
Real estate held for investment, net of accumulated depreciation, increased $3.8
million, or 4.07%, from $92.4 million at June 30, 1999 to $96.2 million at March
31, 2000. The increase in real estate held for investment, net of accumulated
depreciation at March 31, 2000, as compared with the balance at June 30, 1999,
is primarily due to asset fundings for capital improvements and/or developmental
activities of $6.3 million, partially offset by reductions in carrying value
attributable to unit sales of $800,000 and depreciation charges of $1.7 million.
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 March 31, 2000, from the balance of $2.0 million at June 30, 1999. The
balance categorized as real estate held for disposal at March 31, 2000 are
apartment units and 1-4 family housing units which are expected to be sold
within the next twelve months.
During the quarter ended March 31, 2000, the Company and HSBC entered into an
asset swap and purchase agreement, whereby the Company exchanged its interests
in four subordinated participation and two junior subordinated participation
loans with a total net book value of $3.2 million and cash in the amount of $4.8
million for a loan held by HSBC in the amount of $11.1 million. As a result of
this transaction during the quarter ended March 31, 2000, the Company recognized
contingent participation revenues of $2.4 million and, in addition, the Company
received $700,000 in previously unaccrued loan interest related to the junior
subordinated participation loans.
Total loans secured by real estate declined $21.3 million, or 39.67%, from $53.7
million at June 30, 1999 to $32.4 million at March 31, 2000. The $21.3 million
decline in loans secured by real estate, during the nine months ended March 31,
2000, was primarily attributable to the full satisfaction of ten loans, totaling
$31.9 million, for which losses on the satisfaction of loan assets in the amount
of $841,000 and gains related to realization of contingent participation
revenues in the amount of $2.4 million were recognized in the nine months ended
March 31, 2000. In addition to the $31.9 million reduction in loans secured by
real estate attributable to the satisfaction of loans, the balances in these
loans were reduced by an additional $500,000 due to the effects of normal
scheduled principal repayments. These reductions in loans secured by real estate
were partially offset by the acquisition of a $11.1 million loan from HSBC,
which took place in the quarter ended March 31, 2000 as part of the HSBC asset
swap transaction. The loan acquired from HSBC is secured by a New York City
apartment complex.
Commercial and consumer loans totaled $9.1 million at March 31, 2000, a decrease
of $1.2 million, or 11.66%, from the June 30, 1999. 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 $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 during the
quarter ended December 31, 1999.
The Company's allowance for possible credit losses decreased by $4.8 million, or
26.23%, from $18.2 million at June 30, 1999 to $13.4 million at March 31, 2000.
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 March 31, 2000, the allowance for possible credit losses was 32.27% of loans
outstanding, as compared to 28.36% at June 30, 1999.
12
<PAGE>
Cash, due from banks and cash equivalents increased by $18.5 million, or
125.45%, from $14.8 million at June 30, 1999 to $33.3 million at March 31, 2000.
Total operating revenues and available asset sales proceeds exceeded asset
fundings and the amounts paid out for operating expenses, resulting in the
increase in unrestricted cash during the nine months ended March 31, 2000 of
approximately $12.2 million. In addition, restricted cash totaling approximately
$5.8 million was released to unrestricted cash by HSBC during the nine months
ended March 31, 2000.
At March 31, 2000, HSBC had restricted a total of approximately $7.5 million in
funds, held on deposit at HSBC, in accordance with the terms of the modified
Facility agreements, which became effective in January 2000. HSBC had restricted
approximately $13.4 million at June 30, 1999 under the terms of the Branch Sale
and Facility agreements dated June 28, 1996. 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 was intended to serve as substitute collateral for
the HSBC Facility, until such time as the HSBC Facility was reduced in
accordance with the Company's Asset Management Plan and the HSBC Facility
Agreements. See "Liquidity and Capital Resources," below.
The carrying amount of the Company's Increasing Rate Junior Subordinated Notes
due 2006 increased $1.1 million, or 9.76%, to $12.5 million at March 31, 2000
from $11.4 million at June 30, 1999. This increase was primarily due to the
addition of $994,000 in accrued interest payable to the principal balance of the
Subordinated Notes during the nine months ended March 31, 2000.
Other liabilities totaled $13.0 million at March 31, 2000, a decrease of $3.0
million, or 18.53%, from the June 30, 1999 balance of $16.0 million. The decline
in other liabilities during the nine months ended March 31, 2000 was primarily
the result of payments made to HSBC, various service providers and to
governmental authorities for state income and franchise taxes in excess of
required expense and liability accruals for the nine month period. The decline
in other liabilities over this nine month period is consistent with a general
reduction in other operating expenses incurred by the Company. See "Results of
Operations," below.
During the nine months ended March 31, 2000, total stockholders' equity
increased by $1.1 million, or 1.15%, to $97.6 million, as compared with $96.5
million at June 30, 1999. This increase was due to the net income for the nine
months ended March 31, 2000 in the amount of $1.1 million and a decrease in the
securities valuation account (allowance for unrealized losses on marketable
securities) of $34,000.
The following table summarizes the calculation of the Company's book value per
share at March 31, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
----------------- ----------------
<S> <C> <C>
Total stockholders' equity $ 97,625,000 $ 96,517,000
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 23,444,000 23,444,000
----------------- ----------------
Net stockholders' equity $ 74,181,000 $ 73,073,000
================= ================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
================= ================
Book value per share $ 10.45 $ 10.30
================= ================
</TABLE>
13
<PAGE>
Results of Operations:
General. The Company reported net income attributable to common shares of $1.6
million, or $0.23 per basic and diluted share, for the three months ended March
31, 2000, an increase of $1.7 million, compared with net a net loss attributable
to common shares of $54,000, or $(0.01) per share, for the three month period
ended March 31, 1999. The Company reported net income attributable to common
shares of $1.1 million, or $0.16 per basic and diluted share, for the nine
months ended March 31, 2000, an increase of $505,000, or 75.15% compared with
net income attributable to common shares of $638,000, or $0.09 per share, for
the nine month period ended March 31, 1999.
The primary reasons for the increase in the Company's net operating results for
the quarter ended March 31, 2000, as compared to the same quarter in the
previous year, were (1) the realization of $2.4 million in contingent loan
participation revenues, (2) the collection of an additional $700,000 in
previously unaccrued interest related to the junior subordinated participation
loans that were paid in full during the quarter ended March 31, 2000 as part of
the asset swap completed with HSBC, (3) the recognition of a $500,000 net gain
on settlement of Branch Sale contingencies and the Company's compensating
balance interest claims with HSBC, and (4) a reduction of interest expense of
$338,000.
Partially offsetting these increases in income and reductions in expense
recorded in the quarter ended March 31, 2000, as compared to the same quarterly
period in the previous year, were (1) the recognition of a $1.3 million loss on
the satisfaction of loan assets in the quarter ended March 31, 2000, as compared
with $0 in the quarter ended March 31, 1999, (2) an increase in the provision
for state and local income taxes in the amount of $230,000, (3) reductions in
interest income (excluding the non-recurring collection of $700,000 in loan
interest, sited above) of $295,000, and (4) a reduction of net revenues from
rental operations of $169,000.
The primary reasons for the increase in the Company's net operating results for
the nine months ended March 31, 2000, as compared to the same nine month period
of the previous year, were (1) the realization of $1.4 million in additional
contingent loan participation revenues in the nine months ended March 31, 2000,
as compared with the nine months ended March 31, 1999, and (3) a reduction of
interest expense of $993,000, (3) the collection of an additional $700,000 in
previously unaccrued interest related to the junior subordinated participation
loans that were paid in full during the quarter ended March 31, 2000 as part of
the asset swap completed with HSBC, and (4) the recognition of a $500,000 gain
on settlement of Branch Sale contingencies and the Company's compensating
balance interest claims with HSBC.
Partially offsetting these increases in income and reductions in expense
recorded during the nine months ended March 31, 2000, as compared to the same
nine month period in the previous year, were (1) a reduction in the recorded net
gain on the sale of real estate of $1.1 million, (2) reductions in interest
income (excluding the non-recurring collection of $700,000 in loan interest,
sited above) of $868,000, (3) the recognition of an additional $841,000 loss on
the satisfaction of loan assets in the nine months ended March 31, 2000, as
compared with the nine months ended March 31, 1999, (4) an increase in the
provision for income taxes in the amount of $430,000, and (5) a reduction of net
revenues from rental operations of $152,000.
Net Rental Operations. For the three months ended March 31, 2000, net rental
operations resulted in income of $448,000, a decrease of $169,000, or 27.39%,
from $617,000 for the same three month period in the previous year. For the nine
months ended March 31, 2000, net rental operations resulted in income of $1.6
million, a decrease of $152,000 from the $1.75 million recorded for the same
nine month period in the previous year. The decrease in net rental operating
revenue for the three and nine month periods ended March 31, 2000, 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.
Net Gain on the Sale of Real Estate. Net gain on sale of real estate of $725,000
was realized for the quarter ended March 31, 2000, a decrease of $272,000, or
27.28%, as compared with net income of $997,000 in the quarter ended March 31,
2000. For the quarter ended March 31, 2000, the $725,000 net gain was
attributable to sales of apartment units, categorized as real estate held for
disposal, in the amount of $1.2 million, for which the gain of $725,000 was
recognized.
For the quarter ended March 31, 1999, the $1.0 million in other property income
was attributable to the sale of $2.3 million of real estate held, of which $2.1
million related to units in a multi-family apartment
14
<PAGE>
complex in New York City for which a net gain in the amount of $1.2 million was
recognized and the sale of a condominium unit at another of the Company's
multi-family housing projects in New York City for $276,000, for which a gain in
the amount of $251,000 was recognized. These realized gains were partially
offset by $525,000 in non-recurring expenses resulting from the full
satisfaction of certain liabilities related to operations of a New York City
property that had been disposed of in prior periods.
Net gain on the sale of real estate was $1.7 million for the nine months ended
March 31, 2000, a decrease of $1.0 million, or 38.15%, as compared with a net
gain of $2.7 million in the nine months ended March 31, 1999. The $1.7 million
net gain was attributable to sales of apartment units, categorized as real
estate held for disposal, in the amount of $2.6 million, for which the gain of
$1.7 million was recognized.
The $2.7 million in net gain on the sale of real estate recorded in the nine
month period ended March 31, 1999 was due to the $1.0 million in gains from
sales of real estate recorded during the quarter ended March 31, 1999 (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, $1.2 million of the gain related to
sales of a New York City shopping center complex during the first six months of
the year.
Interest Income. For the three months ended March 31, 2000, total interest
income was $1.1 million, an increase of $405,000, or 56.72%, from $714,000
recorded for the same quarter in the previous year. Loan interest increased
$371,000, or 62.77%, from $591,000 in the quarter ended March 31, 2000 to
$962,000 for the same quarter in the current year. This increase was due to the
collection of $700,000 in previously unaccrued interest related to two
contingent loan participations. Without this collection of $700,000 in interest
related to contingent loan participations, loan interest income would have been
$262,000, a decline of $329,000, or 55.67%, from the $591,000 reported in the
same quarter of 1999. This decline in loan interest income is due to reduced
average balances for loan assets resulting from satisfactions and the effects of
normal amortization and repayment activity.
Partially offsetting the decline in loan interest income in the three months
ended March 31, 2000 (excluding the $700,000 in interest collected related to
contingent loan participations), as compared with the same three month period in
the previous year, was an increase in other interest income to $157,000, an
increase of $34,000, or 27.64%, in the quarter ended March 31, 2000, as compared
with other interest income of $123,000 recorded in the quarter ended March 31,
1999. The increase in other interest income was primarily due to an increase in
the average balance of funds held in interest-bearing money market accounts
during the quarter ended March 31, 2000, as compared with the same quarter in
the previous year.
For the nine months ended March 31, 2000, total interest income was $2.3
million, a decrease of $168,000, or 5.08%, from the $2.4 million recorded for
the same nine months in the previous year. Loan interest decreased $195,000, or
9.93%, from $2.0 million in the nine months ended March 31, 1999 to $1.8 million
for the same quarter in the current year. This decline in loan interest income
is due to reduced average balances for loan assets resulting from satisfactions
and the effects of normal amortization and repayment activity, partially offset
by the collection of $700,000 of previously unaccrued interest related to two
contingent loan participations. Without the collection of $700,000 in interest
related to contingent loan participations, which occurred in the quarter ended
March 31, 2000, loan interest income would have been $1.1 million, a decline of
$895,000, or 45.57%, from the $2.0 million reported in the same nine month
period of 1999.
Partially offsetting the decline in loan interest income in the nine months
ended March 31, 2000, as compared with the same nine month period in the
previous year, was an increase in other interest income to $503,000, an increase
of $27,000, or 5.67%, in the quarter ended March 31, 2000, as compared with
other interest income of $476,000 recorded in the quarter ended March 31, 1999.
The increase in other interest income was primarily due to an increase in the
average balance of funds held in interest-bearing money market accounts during
the nine months ended March 31, 2000, as compared with the nine month period 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 thousand,
reflected in the results of operations for the three and nine months ended March
31, 2000.
15
<PAGE>
Net Loss on the Satisfaction of Loan Assets. The Company recognized a net loss
on the satisfaction of loan assets in the amount of $1.3 million and $0 for the
three months ended March 31, 2000 and 1999, respectively. 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.
The Company recognized a net loss on the satisfaction of loan assets in the
amount of $841,000 and $0 for the nine months ended March 31, 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 above, 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.
Contingent Loan Participation Revenues. The Company recorded contingent
participation revenues of $2.4 million and $0 in the three months ended March
31, 2000 and 1999, respectively. During the quarter ended March 31, 2000, the
Company 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
quarter ended March 31, 2000 (see "Interest Income," above).
The Company recorded contingent participation revenues of $2.4 million and $1
million in the nine months ended March 31, 2000 and 1999, respectively. During
the nine months ended March 31, 2000, the Company received payments totaling
$2.4 million in full satisfaction of two loan participations, described above.
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 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 and the
full amount of the junior participation loan had been reserved for at the time
of the Branch Sale.
At March 31, 2000, the Company no longer had any interests in any participation
loans with either HSBC or any other business entity.
Interest Expense. During the three months ended March 31, 2000, the Company
recorded interest expense in the amount of $847,000, a decline of $338,000, or
28.52%, as compared with interest expense of $1.2 million in the same quarter of
the previous year. Interest expense for borrowed funds declined $370,000, or
47.28%, from $928,000 in the quarter ended March 31, 1999 to $558,000 for the
same quarter in the current year.
During the nine months ended March 31, 2000, the Company recorded interest
expense in the amount of $2.6 million, a decline of $993,000, or 27.33%, as
compared with interest expense of $3.6 million in the same nine month period of
the previous year. Interest expense for borrowed funds declined $1.6 million, or
47.28%, from $3.3 million recorded in the nine months ended March 31, 1999 to
$1.7 million recorded in the same nine month period of the current year. This
decline in interest expense on borrowed funds was partially offset by the
recognition of $879,000 in interest expense in the nine months ended March 31,
2000 related to the Company's Increasing Rate Junior Subordinated Notes due
2006, which were initially issued
16
<PAGE>
on December 30, 1998. Accordingly, nine months of interest on the Subordinated
Notes was recognized during the nine months ended March 31, 2000, as compared
with three months of interest during the nine month period ended March 31, 1999.
Interest expense paid on borrowed funds declined in the three and nine months
ended March 31, 2000, as compared with the same three and nine month periods
ended March 31, 1999 as 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 months ended March 31, 2000, the Company borrowed an average of
$49.6 million, a decline of $19.2 million, or 27.8%, as compared with average
borrowings of $68.8 million during the three month period ended March 31, 1999.
During the nine months ended March 31, 2000, the Company borrowed an average of
$50.1 million, a decline of $18.7 million, or 27.2%, as compared with average
borrowings of $68.6 million during the nine month period ended March 31, 2000.
The decline in the average amount of borrowed funds was attributable to the
repayment of outstanding obligations which occurred in fiscal 2000, primarily
funded by asset sales and loan repayments.
The average interest rate paid to HSBC on borrowed funds was 4.50% and 4.69% for
the three and nine months ended March 31, 2000, respectively, as compared to
5.40% and 6.48%, respectively, for the same three and nine month periods of the
previous year. The decline in rates paid to HSBC in the three and nine month
periods ended March 31, 2000, 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.
Other Expenses. During the quarter ended March 31, 2000, the Company recorded
total other expenses in the amount of $1.1 million, an increase of $14,000, or
1.30%, as compared with the same quarter of the previous year. During the nine
months ended March 31, 2000, the Company recorded total other expenses in the
amount of $3.1 million, a decrease of $199,000, or 5.98%, as compared with other
expenses of $3.3 million in the same nine month period of the previous year.
Other expenses decreased in the nine months ended March 31, 2000, as compared
with the nine months ended March 31, 1999, primarily as a result of differences
in the timing of certain non-recurring expense payments.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a newly
formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0% of
the outstanding Common Stock of the Company. During the three and nine months
ended March 31, 2000, the Company accrued $657,000 and $2.0 million,
respectively in fees payable to the Management Company, of which $78,000 and
$269,000, respectively, related to fees incurred for the successful disposition
of assets. During the three and nine months ended March 31, 1999, the Company
accrued $626,000 and $2.0 million, respectively in fees payable to the
Management Company, of which $13,000 and $120,000, 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.
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated currently
payable federal income tax liabilities through March 31, 2000. The
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<PAGE>
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 nine months ended March 31, 2000, the Company recorded a net
provision for income taxes of $348,000 and $711,000, respectively. During the
three and nine months ended March 31, 1999, the Company recorded a net provision
for income taxes of $118,000 and $432,000, respectively. Income taxes recorded
by the Company primarily reflect the effects of operations on its current state
and local income tax liability at March 31, 2000 and 1999, respectively.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for debt repayments related to asset sales, operating expenses and development
costs related to certain real estate projects.
At March 31, 2000 the Company had $48.6 million in borrowed funds outstanding
under the Credit Facility (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.
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 unrestricted cash of $29.4 million, from $36.9 million at December 31,
1999 to $7.5 million at March 31, 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 Company seeks to maintain liquidity, in the form of unrestricted cash,
within a range of 5% to 10% of total assets. At March 31, 2000, the Company's
liquidity ratio, as so defined, amounted to 19.4%, which exceeded the minimum
requirements of the targeted 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
18
<PAGE>
generally accepted accounting principles. Set forth below is a description of
certain of the accounting standards recently adopted by the FASB which are
relevant to financial institutions such as the Company.FASB Interpretation No.
43, "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 material effect on the
Company's results of operations and financial condition.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon existing accounting rules and explains those
rules, by analogy, to other transactions that the existing rules did not
address. SAB No. 101 is effective for all fiscal years beginning after December
15, 1999. Management has evaluated the provisions of the SAB and has concluded
that the adoption of this Statement will have no material effect on the
Company's results of operations and financial condition.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and, generally, increases in interest rates paid on borrowed
funds. Over any given term, however, interest rates do not necessarily move in
the same direction or in the same magnitude as changes in prices for goods and
services.
Impact of Year 2000
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-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.
19
<PAGE>
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 $486,000 increase in interest expense based on
approximately $48.6 million outstanding at March 31, 2000. See Note 16,
"Borrowed Funds," contained within the Consolidated Financial Statements dated
June 30, 1999.
In addition, the Company has issued $12.49 million in Increasing Rate Junior
Subordinated Notes due 2006. The Subordinated Notes provide for a steadily
increasing interest cost after December 15, 2001. A substantial increase in
general interest rates would potentially prevent the Company from refinancing
the Subordinated Notes at a rate favorable to the Company. See Note 27,
"Preferred Stock Exchange Offer" and Note 28, "Increasing Rate Junior
Subordinated Notes," contained within the Consolidated Financial Statements at
June 30, 1999.
The fair value of the Company's long term debt, mortgage notes, notes receivable
and other financial assets is estimated based on discounting future cash flows
at interest rates that management believes reflect the risks associated with
long term debt, mortgage notes, notes receivable and other financial assets of
similar risk and duration. See Note 25, "Fair Value of Financial Instruments,"
within the Consolidated Financial Statements at June 30, 1999.
20
<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.
21
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- ------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 2000, the Company filed the
following Current Reports on Form 8-K:
None.
22
<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: May 12, 2000 By: /s/ Nelson L. Stephenson
------------ -------------------------
Nelson L. Stephenson
President and Chief Executive Officer (principal
executive and principal financial officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial extracted from the financial statements
of RB Asset, Inc. for the 9 months ended March 31, 2000 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 40,821
<SECURITIES> 1,260
<RECEIVABLES> 41,505
<ALLOWANCES> 13,393
<INVENTORY> 0
<CURRENT-ASSETS> 44,081
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 171,739
<CURRENT-LIABILITIES> 0
<BONDS> 12,485
0
938
<COMMON> 7,100
<OTHER-SE> 89,588
<TOTAL-LIABILITY-AND-EQUITY> 171,739
<SALES> 0
<TOTAL-REVENUES> 17,512
<CGS> 0
<TOTAL-COSTS> 9,889
<OTHER-EXPENSES> 3,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,641
<INCOME-PRETAX> 1,854
<INCOME-TAX> 711
<INCOME-CONTINUING> 1,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,143
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
