ITEM 1
BUSINESS General
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal business is the management of its real estate assets, mortgage loans and investment securities, under a business plan intended to maximize shareholder value. As a result of the completion of reorganization steps (the "Reorganization") in the year ended June 30, 1998, the Company succeeded to the assets, liabilities and business of River Bank America ("River Bank" or the "Predecessor Bank"). Unless the context otherwise requires, references to the business, assets and liabilities of the Company prior to May 22, 1998 include the business, assets and liabilities of the Predecessor Bank. This report is for the fiscal year ended June 30, 2000.
On May 22, 1998, under a plan that was approved by it's stockholders, River Bank completed its Reorganization into a Delaware corporation named RB Asset, Inc. Prior to the Reorganization, River Bank was a New York State chartered stock savings bank and was regulated by the New York State Banking Department ("the Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance Corporation (the "FDIC").
In connection with the Reorganization, on June 23, 1998, the Predecessor Bank was dissolved and its legal existence terminated. Upon such dissolution, the capital stock of River Bank was canceled and the stock transfer records of River Bank were closed. On that date, common and preferred stockholders of River Bank received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset, Inc. was owned by the same stockholders, in the same proportions, as owned by the Predecessor Bank on the record date. The transfer of assets, liabilities and business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free reorganization under the Internal Revenue Code and, as such, the Company expects that certain tax attributes of the Predecessor Bank have been preserved.
On June 28, 1996, the Predecessor Bank had consummated the transactions (the "Branch Sale") contemplated by the Purchase of Assets and Liability Assumption Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank. Following consummation of the Branch Sale, all retail banking operations of the Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and acquired assets with an aggregate carrying value of $1,066.6 million (the "Transferred Assets"). The Transferred Assets consisted primarily of loans secured by real estate, mortgage-backed and investment securities, and 11 bank branch offices, inclusive of the name East River Savings Bank. Included in the Transferred Assets was approximately $32.4 million of loans in which the Predecessor Bank was granted subordinated participation interests. Also included in the Transferred Assets were the proceeds of dispositions from five individual asset sale transactions with parties other than HSBC, aggregating $60.4 million, composed of real estate assets, loans and other receivables (the "Asset Sale Transactions"). The Asset Sale Transactions were structured to include ongoing recourse to, and participation by, the Predecessor Bank with respect to the assets sold, based upon the net proceeds realized on disposition of assets by the purchasers.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets, including primarily real estate assets and non-performing loans. The balance of the assets retained after the Branch Sale primarily consisted of performing loans (including loans sold with recourse, subordinated participations, junior subordinated participations, loans to facilitate the sale of real estate owned and mortgage and other loans) and a modest amount of cash and investment securities (collectively, the "Retained Assets"). Over the five year period preceding the Branch Sale, the Bank's primary loan origination focus was single-family (one-to-four units) and, to a lesser extent, multi-family (five or more units) residential loans secured by properties in the New York City metropolitan area. Primarily as a result of conditions imposed by the NYSBD and the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor Bank and the Company have not originated a material amount of loans.
Following the Branch Sale, the Company engaged RB Management Company, LLC (the "Management Company") to manage its operations on a day-to-day basis, including developing and recommending strategies to the Company's Board of Directors regarding the ongoing management of assets. The Management Company is a privately-owned entity that was newly formed in June 1996 and is controlled by Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company. See "Management."
At the time of the closing of the Branch Sale, the Predecessor Bank obtained from HSBC a loan facility (the "Facility") consisting of eleven independent mortgage loans with additional collateral, in an aggregate amount of approximately $100.0 million. The Facility has been reduced by repayment activity to $48.3 million at June 30, 2000.
The Predecessor Bank had previously received notice that the approvals necessary to declare or pay dividends on the Predecessor Bank's outstanding shares of 15% noncumulative perpetual Preferred Stock, Series A, par value $1.00 per share ("Predecessor Preferred Stock") would not be provided. In June 1996, the Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock dividend for the quarter ending June 30, 1996, payment of which was subject to the receipt of required approvals from the FDIC and the NYSBD (the Predecessor Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the Company's principal lender). Primarily as a result of the above, neither the Company's or the Predecessor Bank's Board of Directors have taken any action regarding a quarterly dividend on the Predecessor Preferred Stock or the Company's 15% noncumulative perpetual preferred stock, Series A, $1.00 par value ("Company Preferred Stock") for any of the quarterly periods ended from September 30, 1996 through June 30, 2000. Although the Company is no longer subject to the jurisdiction of either the FDIC or the NYSBD, declaration or payment of future dividends on the Company Preferred Stock will continue to be subject to the approval of HSBC for so long as the Facility remains outstanding. The Company has received notice from HSBC that the approval necessary to declare or pay dividends on the Company Preferred Stock will not be provided at this time. There can be no assurance that the Board of Directors of the Company will deem it appropriate to pay dividends on the Company Preferred Stock, even if permitted to do so by HSBC.
On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the HSBC Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The HSBC Facility is secured by a first lien on two properties, certain cooperative shares and a restricted cash collateral account (the "Special Collateral") in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was released from all liens held by HSBC. Accordingly, the balance of the Company's unrestricted cash was increased $29.4 million by an offsetting reduction in the Company's restricted cash of $29.4 million, from $36.9 million at June 30, 1999 to $7.5 million at June 30, 2000.
The Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act") as amended and is presently required to file periodic reports and other information with the Securities Exchange Commission (the "SEC").
During the fiscal year ended June 30, 2000, the Company reported net income applicable to common shares of $449,000 or $0.06 per share. Significant factors contributing to the Company's fiscal 2000 operating results include rental income from real estate operations of $15.3 million, realization of contingent participation interest and gains on the sale of real estate of $2.4 million and $1.8 million, respectively, and a gain on the sale of branch contingencies in the amount of $500,000. Partially offsetting these income items were real estate property and maintenance expenses of $10.7 million, other operating expenses of $4.2 million, depreciation expenses of $2.3 million, a loss on the satisfaction of loan assets of $841,000, a net interest loss (interest expense on borrowed funds in excess of interest income from loan assets), after provision for possible credit losses, of $818,000 and provisions for income taxes of $651,000.
Real Estate Assets
At June 30, 2000, the Company held total real estate assets with a book value (net of applicable reserves) of $102.8 million, which represented approximately 59.1% of the Company's total assets on that date.
Categorization of Real Estate Assets. The Company accounts for its real estate assets in accordance with Statement of Financial Accounting Standards No. 121 (SFAS-121), "Accounting for the Impairment of Long-Lived Assets to be Disposed of," issued by the Financial Accounting Standards Board (the "FASB"). SFAS-121 requires that long-lived assets be reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amount of the asset may not be recoverable. In addition, SFAS-121 requires that long-lived assets to be disposed of be carried at the lower of carrying value or fair value less the cost to sell. Under SFAS-121, the Company is required to categorize its real estate assets as either real estate held for investment or real estate held for disposal.
Real Estate Held for Investment. This category is comprised of the following types of real estate assets:
Assets to Be Held and Used. This category is represented by assets which the Company intends to hold until such time as the Company determines that such assets are held for disposal. No aggressive marketing activities would
be commenced with respect to these assets until such time. When, and if, the asset is marketed, it is expected that the asset would be recategorized as real estate held for disposal.
Assets to Be Developed. This category is represented by assets which the Company intends to develop over an extended period of time. Certain costs (such as interest and overhead) will be capitalized until the project is substantially complete. At the completion of the development phase, the asset would normally will be expected to be recategorized as real estate assets held for disposal, or real estate held and used.
Real Estate Held for Disposal. This category is represented by assets for which marketing activities are underway with a goal of consummating a sale within one year. Real estate held for disposal may include entire real estate properties held for disposal or separately saleable portions of properties, generally described as Assets Held for Inventory. The Assets Held for Inventory category primarily consists of co-operative apartment shares and condominium units. The Company intends to sell such assets on a unit-by-unit basis in as expedient a manner as possible. Marketing and sales activities are underway for this category of assets. The portion of such real estate asset expected to be sold within one year have been categorized as real estate held for disposal at June 30, 2000.
These categories identify the Company's asset management strategy with respect to each individual real estate asset. See "Disposition Strategy." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality." and "Financial Statement Schedules" for more detailed information with respect to the Company's individual investments in real estate.
Under generally accepted accounting principles ("GAAP"), the Company is required to depreciate real estate held for investment over the estimated useful life of the assets. The depreciable portion of assets categorized as real estate held for investment includes the accumulated costs of acquisition and/or development of building structures and leasehold improvements. No depreciation charges are made for the portion of the asset's historical cost attributable to land. Depreciation for real estate held for investment is generally calculated on a straight-line basis over a 30 year period or over the remaining term of the lease for leasehold improvements, whichever period is less.
Real Estate Assets Composition. Tables that set forth information concerning the Company's real estate portfolio at the dates indicated are included in a separate section of this annual report on Form 10-K. See "Financial Statement Schedules" for more detailed information with respect to the Company's portfolio of real estate loans.
Lending Activities and the Real Estate Loan Portfolio. Over the five year period preceding the Branch Sale, the Bank's primary loan origination focus was single-family (one-to-four units) and, to a lesser extent, multi-family (five or more units) residential loans secured by properties in the New York City metropolitan area. Primarily as a result of conditions imposed by the NYSBD and the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor Bank and the Company have not originated a material amount of loans.
Loans Secured by Real Estate. At June 30, 2000, the Company's loans secured by real estate consist of performing and non-performing loans secured by multi-family residential properties. The Company's multi-family residential loans consist primarily of loans secured by rental apartment buildings, unsold condominium units, cooperative apartment buildings and unsold shares secured by cooperative apartments. Multi-family residential loans may involve a substantial risk of loss due to, among other things, the potentially negative effects of changes in either property-specific or general economic conditions, which may result in excessive vacancy rates, inadequate rental income levels and volatility in real estate values.
The terms of the Company's multi-family residential real estate loans are most commonly five to ten years. Certain of these loans have options to extend the term of the loan at interest rates which may be fixed or adjusted upward for one, or in certain instances two, additional five-year periods. These loans include amortizing loans which require the monthly payment of interest and principal. The amortization period for the payment of principal on such loans generally is 20 to 30 years, with balloon payments of the remaining principal amount due upon the maturity of the loan. The Company's commercial real estate loans also were frequently made on an interest-only basis, with the payment of the entire principal amount due at maturity. The multi-family residential loans included in the Retained Assets are nearly all fixed interest rate loans.
Performing Loans Secured by Real Estate. Performing loans secured by real estate at June 30, 2000 consist of loans secured by multi-family and single-family residential loans which are wholly-owned by the Company. Approximately $17.9 million, or approximately 10.3% of the Company's total assets, are categorized as performing loans secured by real estate as of June 30, 2000.
Non-Performing Loans Secured by Real Estate. Non-performing loans consist of multi-family residential, commercial real estate, commercial business loans and student loans. Non-performing loans are those loans which have been placed on non-accrual status. The Company generally places a loan which is delinquent 90 days or more on non-accrual status unless it is well secured and, in the opinion of management, collection appears likely. In addition, the Company may place a loan on non-accrual status even when it is not yet delinquent 90 days or more if the Company makes a determination that such loan is not collectible. When loans are placed on non-accrual status, any accrued but unpaid interest on the loan is reversed and future interest income is recognized only if actually received by the Company and collection of principal is not in doubt. Approximately $14.5 million, or approximately 8.3% of the Company's assets, are comprised of loans categorized as non-performing as of June 30, 2000 and are all currently on non-accrual status.
Real Estate Loan Portfolio Composition. Tables that set forth information concerning the Company's loans secured by real estate portfolio at the dates indicated are included in a separate section of this annual report on Form 10-K. See also "Financial Statement Schedules" for more detailed information with respect to the Company's loans secured by real estate.
Origination and Repayment of Loans. During the fiscal years ended June 30, 2000, 1999 and 1998, the Company advanced funds only to fund continuing construction involving a limited number of loans and investments in real estate. The multi-family residential and commercial real estate loans originated by the Company in recent periods have been primarily in connection with the restructuring/refinancing of existing loans and loans to facilitate the sale of investments in real estate. Originations and loan repurchases from HSBC were $11.1 million, $0 and $471,000 in the years ended June 30, 2000, 1999 and 1998, respectively. Repayments of loans were $32.4 million, $5.5 million and $26.3 million in the years ended June 30, 2000, 1999 and 1998, respectively.
Concentrations of Loans Secured by Real Estate by Loan and by Borrower. At June 30, 2000, the Company's loans secured by real estate portfolio included two loans aggregating $31.3 million with principal amounts greater than $10.0 million.
Real Estate Projects Under Development. At June 30, 2000 and 1999, the Company held three real estate assets currently under development. Two of the projects currently under development are multi-family residential projects and the remaining project is a three-building office complex in Atlanta, Georgia. See also "Consolidated Financial Statements- Note 11."
At June 30, 2000 the multi-family residential real estate projects under development consisted of two adjacent parcels of land located in the Bronx, New York (the "Bronx Projects"). On that date, the Company's remaining investment in the Bronx Projects totaled $15.6, including $11.3 million for one site ("Site One") and $4.3 million for a second site ("Site Two"). The Bronx Projects represent ownership and development rights for each of the parcels of land and the Company's investment in construction in process, which has commenced for both sites. Prior to June 30, 1998, development of the first phase of Site One, involving the construction of 84 condominium units, was completed and all units were sold. The remaining tracts of Site One were vacant on June 30, 1999 and 2000.
During October 1999, the Company, through a newly formed subsidiary, RB Castle Hill Corp. formed a joint venture with an unrelated development company to complete the development of Site Two. The new joint venture company will be owned in equal proportions by RB Castle Hill Corp. and the unrelated joint venture partner. Under the terms of the joint venture partnership, the Company will sell the land in Site Two, which consists of approximately 143 home sites, in not more than six phases. Due to site and existing utility parameters, the land sell phases will range in size from 14 to 40 homesites. Land will be transferred according to a benchmark schedule which provides for each transferred phase to be 80% presold with bona fide contracts before a subsequent phase can be acquired. The release price for each homesite will be $40,000. In addition, the Company may contingently receive a portion of the final sales price for each two-family home at a rate equal to 50% of the amount the home is sold for in excess of an agreed upon base price. Certain expenses related to the development of the site in preparation for the construction of the residential units will be borne equally by the Company and its' joint venture partner. Site Two was vacant on June 30, 1999 and 2000, but significant developmental efforts have commenced at June 30, 2000.
In addition to the two multi-family real estate projects under development, described above, the Company was also actively developing two buildings within a three-building office complex located in Atlanta, Georgia. The fair value of this asset at June 30, 2000 was $19.0 million. It is anticipated that this development project will be fully completed by June 30, 2001 and that the buildings under development will be fully occupied by that date. In order to facilitate the development of this project, the Company has obtained a $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by the two buildings under development within this office complex. At June 30, 2000, approximately $3.7 million had been advanced under the Construction Loan.
The Company also retained an interest in one residential unit within its substantially completed multi-family residential development project located in Wayne, New Jersey. The fair value of this residential unit, which will be offered for sale at a future date, was $185,000 at June 30, 2000.
Other Joint Ventures. At June 30, 2000 and 1999, the Company held one investment in a joint venture project, totaling $1.5 million. This joint venture project is a shopping center located in Escondido, CA. Thirty-five percent of the joint venture is owned by the Company. At June 30, 2000, the Company did not have any material amounts left to be funded pursuant to legally binding commitments relating to the joint venture, except certain ongoing operating expenses and limited amounts of capital investment. Failure by the Company or its joint venture partner to fund operating expenses, in the event that the underlying property does not generate sufficient cash flow to meet its operating costs, could result in the loss of the asset.
Other Assets
Cash, Due from Banks and Cash Equivalents. Included in cash, due from banks and cash equivalents at June 30, 2000, are approximately $2.5 million in funds maintained on deposit by wholly-owned subsidiaries and required to meet ongoing cash flow requirements of those subsidiaries. At June 30, 2000, HSBC had restricted a total of $7.5 million in funds, held on deposit with HSBC, in accordance with the terms of the Branch Sale and the Facility agreements. At June 30, 1999, HSBC had restricted a total of approximately $13.4 million. Restricted funds held by HSBC are not available to the Company for the settlement of any of the Company's current obligations. The restricted cash reserves arose from the sale of assets which were pledged as primary or additional collateral for the HSBC Facility. The restricted cash held by HSBC is intended to serve as substitute collateral for the HSBC Facility until the Company and HSBC negotiate the application or other use of the funds in accordance with the Company's Asset Management Plan and the terms of the HSBC Facility agreements. On October 1, 1998, a modification of the Company's loan agreements with HSBC became effective. This loan modification effectively reduced the rate of interest paid by the Company to HSBC by providing compensating balance credits to the Company for funds it held on deposit with HSBC. See "Sources of Financing."
Investment Securities. The following table sets forth the Company's investment securities portfolio at carrying value at the dates indicated.
(1) At June 30, 2000, 1999 and 1998, all of the Company's investment securities were classified as available for sale and carried at market value in accordance with SFAS-115. See Note 1 to the Consolidated Financial Statements.
At June 30, 2000, the Company's investment in common stock was comprised of investment in the common stock of one corporate issuer. The Company held no debt securities as of June 30, 2000, 1999 and 1998. For additional information relating to the Company's investment securities, see Note 7 to the Consolidated Financial Statements.
Commercial Business and Consumer Loans. The Company has been actively collecting proceeds related to the portfolio of commercial business and consumer loans, which have been reduced to a total of $7.2 million at June 30, 2000. During the year ended June 30, 2000, the Company's portfolio of consumer loans was paid in full. Commercial business and consumer loans totaled $10.3 million at June 30, 1999 and consisted of $8.4 million of commercial business loans, net of provision for possible credit losses, and $1.9 million of consumer loans at that date. Of the $7.2 million in commercial business loans $6.2 million, or 86.1%, was classified as non-performing and maintained on non-accrual status.
The Company's commercial business loans previously consisted primarily of loans which involved the buy out, acquisition or recapitalization of an existing business (including management buy outs and corporate mergers and acquisitions). Such loans involved a high degree of risk in their origination since such transactions frequently resulted in a substantial increase in both the
borrower's liabilities and its liabilities-to-assets leverage ratio, thus increasing the prospects for default. At June 30, 2000, $6.2 million of the Company's commercial business loans had fixed rates of interest and stated maturities greater than five years.
Other assets. The Company held other assets equal to $2.4 million and $3.1 million at June 30, 2000 and 1999, respectively. At June 30, 2000, other assets were primarily composed of accrued interest receivable, net of interest reserves, and other prepaid assets. At June 30, 1999, other assets were primarily composed of deposits securing asset sale recourse claims, accrued interest receivable, net of interest reserves, and other prepaid assets. The decrease in other assets of approximately $700,000 from June 30, 1999 to June 30, 2000 was primarily attributable to the collection of various receivable balances related to subsidiary operations during fiscal 2000. See Note 13 to the Consolidated Financial Statements.
Sources of Financing
Initial Facility with HSBC: The closing of the Branch Sale was conditioned upon the Company's obtaining financing with terms reasonably acceptable to the Company and determined to be adequate to permit consummation of the Branch Sale. At June 28, 1996, the Company obtained from HSBC a loan facility (the "Facility") consisting of eleven independent mortgage loans with additional collateral, in an aggregate amount not to exceed of $100.0 million. As of June 30, 1996, HSBC had extended $89.8 million under the Facility to the Company.
Proceeds of the Facility were utilized by the Company to (i) refinance all or part of the certain indebtedness secured by assets to be transferred to HSBC, including all or a substantial part of the outstanding advances from the Federal Home Loan Bank and (ii) provide additional funds for the development and completion of two individual real estate assets as part of the Company's operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as three-year term loans with options to extend the initial term for two additional one-year periods subject to the Company's achieving pre-agreed minimum repayment amounts which are equal to 60% and 30% of the original aggregate amount of the Facility and remaining fully current on all obligations and in compliance with all covenants. The Company remained current on all obligations and remained in compliance with all covenants related to the Facility. Accordingly, the agreement was extended by mutual agreement between the Company and HSBC in June 1999 through June 30, 2000.
The Facility was secured by first priority mortgage liens on eleven of River Bank's real estate assets approved by HSBC and collateral assignments of first priority mortgages held by the Predecessor Bank (the "Primary Collateral"). Each of the loans was cross defaulted with each other and cross collateralized by all collateral for the Facility. As additional collateral for the Facility, each loan was also secured by first priority mortgages (or, where applicable, a collateral assignment of first priority mortgages held by the Company), stock pledges and assignment of partnership interests and assignment of miscellaneous interests on additional Bank assets (the "Additional Collateral"). The Company collaterally assigned to HSBC all of the cash flow from the Primary Collateral and the Additional Collateral. Substantially all net proceeds from the sale of Primary Collateral assets by the Predecessor Bank and, later, the Company, were applied to the prepayment of the Facility.
The Facility was priced at 175 basis points over LIBOR for the initial six months following June 28, 1996, automatically increasing by 25 basis points at the beginning of each of the subsequent three six month periods and will be priced at 275 basis points over LIBOR for the third year of the Facility. In the event that the Company elects to exercise its option to extend the initial term of the Facility, the Facility will be priced at 300 basis points over LIBOR during the initial one year extension and 325 basis points over LIBOR during the second one year extension. Following maturity or an event of default, the Facility will accrue interest at a specified default rate.
The terms of the Facility agreement required that while any amounts remain outstanding under the Facility, the Company must receive HSBC's prior written consent to, among other things, materially alter its charter or by-laws, incur additional corporate indebtedness and liens, make any distributions to stockholders or repurchases or redemptions of capital stock, acquire additional assets, exchange existing assets with a third party or assume additional liabilities as a result of any proposed merger transaction.
On October 1, 1998, a modification of the loan agreement between HSBC and the Company became effective. This modification effectively reduced the rate of interest paid by the Company to HSBC by providing compensating balance credits to the Company for funds it held on deposit with HSBC. As a result of this modification the average interest paid to HSBC declined from
approximately 8.17% in 1998 to 6.53% in 1999 and declined further to 4.89% in 2000. The decline in the effective interest rate paid to HSBC for the facility in 2000, as compared with 1999, was also partially attributable to a refinancing of the Facility which took place in January 2000 (see below).
Refinanced Facility with HSBC. On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The Facility is secured by a first lien on two properties, certain cooperative shares in a third property and a restricted cash collateral account (the "Special Collateral") in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was released from all liens held by HSBC. Accordingly, the balance of the Company's unrestricted cash was increased $29.4 million by an offsetting reduction in the Company's restricted cash of $29.4 million, from $36.9 million at June 30, 1999 to $7.5 million at June 30, 2000.
Under the terms of the modified agreement, the Facility currently is subject to a an annual interest rate equal to the Prime lending rate, or the three-month London Interbank Offered Rate (LIBOR) plus 2%, at the option of the Company. Notwithstanding the foregoing, interest on the Facility shall accrue at 2% per annum on the portion of the outstanding Facility balance that is equal to the combined balances of the Special Collateral account and the portion of unrestricted funds that remain on deposit with HSBC.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding under the Facility. The Company will make monthly payments to HSBC of interest, as calculated according to the formula outlined above, and scheduled principal reductions based on a hypothetical loan amount of $34.8 million. Minimum scheduled principal reduction payments under this provision of the Facility agreement approximate $800,000 per year.
Construction Loan Facility. In order to facilitate the development of the Company's three-building office complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by two buildings under development within this office complex. At June 30, 2000, approximately $3.7 million had been advanced under the Construction Loan. The completion of the development of this project is anticipated prior to June 30, 2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a maturity date in May 2003. The loan allows for the deferral of interest until May 2003 or such time as the collateral buildings are disposed of through sale. The Company has incurred approximately $41,000 in interest during the year ended June 30, 2000, which has been added to the outstanding balance of the Construction Loan and has also been accounted for as an addition to the Company's investment in the office complex project.
Borrowed Funds Summary. The following table sets forth certain information concerning the Company's borrowed funds at the dates indicated (in thousands).
For additional information relating to the Company's borrowed funds, see Note 14 to the Consolidated Financial Statements.
Subsidiaries
A substantial amount of the Company's activities in subsidiaries consists of holding investments in real estate not held directly by the Company. The Company has established a number of subsidiaries for the sole purpose of holding and/or disposing of a single real estate asset. Real estate assets located in New York City are generally held by subsidiaries of Rivercity Realty Corp. ("RRC"), and those located in the eastern United States including New York State are held by subsidiaries of Riverbank Properties, Inc. ("RPI")
and certain other subsidiaries of the Company. RRC and RPI are New York corporations. The Company's investments in real estate located in the western United States are generally held by subsidiaries of Riverbank Financial Group ("RFG"), a California corporation which had an office in San Francisco. RPI, RRC and RFG were originally formed to engage in real estate development and lending activities.
Employees
At June 30, 2000, the Company had two employees who are engaged in administrative duties. See "Directors and Principal Officers of the Registrant."
Taxation
Certain Tax Attributes. As of June 30, 2000, the Company had recorded a gross deferred tax liability of approximately $29.9 million in its consolidated financial statements. Also, as of June 30, 2000, the Company had recorded a gross deferred tax asset of approximately $78.1 million, primarily attributable to net operating loss carry forward attributes ("NOLs") of approximately $105.6 million, reserves for loan losses and real estate valuation allowances of approximately $9.3 million and general business and alternative minimum tax credits of approximately $9.3 million. The Company's ability to realize the excess of the gross deferred tax asset over the gross deferred tax liability is dependent upon its ability to earn taxable income in the future. As a result of losses in recent fiscal years and other evidence, this realization is uncertain and a valuation allowance has been established to reduce the deferred tax asset to the amount that management of the Company believes will more likely than not be realized. Accordingly, neither a net overall liability nor a net overall asset was reflected in the Company's consolidated financial statements. The tax attributes associated with the deferred tax assets have not been reviewed or approved by the IRS. As described further below, the Equity Offering and related transactions may have adversely affected the ability of the Company to realize its deferred tax assets, with the effect that the Company would have an overall net deferred tax liability and concomitant reduction to its stockholders' equity. As a result, the Company could be subject to substantial increased out-of-pocket tax expenditures.
Section 382 of the Code generally provides that if a corporation undergoes an "ownership change," the amount of taxable income that the corporation may offset after the date of the ownership change (the "Change Date") by NOLs (and certain built-in losses, as described below) existing on the Change Date will be subject to an annual limitation. In general, the annual limitation is equal to the product obtained by multiplying (I) the fair market value of the corporation's equity immediately prior to the Change Date (with certain adjustments, including an exclusion of capital contributions made during the two years preceding the Change Date), by (ii) the long-term tax-exempt bond rate determined for the month in which the Change Date occurs, as published by the IRS. For "ownership changes" occurring during June 1994, that rate is 6.01%. If an "ownership change" of the Company took place during June 1994, the Company might be permitted to use no more than approximately $865,000 of its NOLs annually to offset taxable income realized after the Change Date, including income which will be realized in connection with the Branch Sale. Accordingly, the Company's ability to use its deferred tax assets may be reduced materially, resulting in the recognition of additional tax expense and a reduction to its stockholders' equity and the Company's liquidity.
Built-in losses, measured by the excess, if any, of the tax basis of each asset of the corporation over its fair market value, also may be limited under Section 382, if, as is believed to be the case with respect to the Company, the corporation had a net unrealized built-in loss in excess of the lesser of $10.0 million or 15% of the fair market value of its assets, and if the built-in losses are recognized within five years after the Change Date. Certain deductions that have accrued economically on the Change Date and would otherwise have been taken after the Change Date (possibly including suspended passive activity losses) may also be treated as built-in losses.
In general, an "ownership change" occurs with respect to a corporation if any of its stockholders who own, directly or indirectly, five percent or more of the stock of the corporation ("5-percent stockholders") increase their aggregate percentage ownership of such stock by more than 50 percentage points over the lowest percentage of stock owned by those stockholders at any time during a three-year testing period. In applying Section 382, newly-issued stock generally is considered to have been acquired by one or more 5-percent stockholders, even if none of the persons acquiring that stock in fact owns (or owned) at least five percent of the issuer's stock.
Based on current ownership information available to the Company, the Company is of the view that no ownership change of the Company occurred within the three years preceding and three years succeeding the Equity Offering. The Company expects that the Equity Offering, when combined with prior changes in ownership of stock of the Company and other contemplated transactions affecting ownership of the capital stock of the Company occurring in connection with the Equity Offering, did not result in an
ownership change of the Company. However, the application of Section 382 is in many respects uncertain. In assessing the effects of prior transactions and of the Equity Offering under Section 382, the Company has made certain legal judgments and certain factual assumptions. The Company has not requested or received any rulings from the IRS with respect to the application of Section 382 to the Equity Offering and the IRS could challenge the Company's determinations.
Although it may not have caused an ownership change, the Equity Offering caused a significant increase in the percentage ownership of stock of the Predecessor Bank by one or more new 5-percent stockholders. Specifically, the Company believes that the Equity Offering resulted in 5-percent stockholders increasing their ownership for purposes of Section 382 of the Code by approximately 49 percentage points. Therefore, the Equity Offering significantly increased the likelihood that relatively small future issuances of, or transactions in or affecting the direct or indirect ownership of, shares of Common Stock would result in an ownership change.
As part of its efforts to avoid any limitation under Section 382 of the Code on the use of its NOLs and other tax attributes, each of Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B agreed to certain restrictions on the transfer of the Common Stock and any other security of the Company which is deemed to be "stock" for purposes of Section 382 of the Code and regulations promulgated thereunder for a five-year period following consummation of the Equity Offering. These restrictions on transfer are intended to reduce, but do not eliminate, the possibility that there may be a future ownership change affecting the ability of the Company to use its then-existing losses, loss carryovers and built-in losses. Mr. Dworman, as the largest stockholder of the Company following the Equity Offering, may continue to exert substantial influence over decisions made by the Company's Board, including its decisions as to whether to approve a transfer of stock of the Company that could result in an ownership change, with the above-described consequences.
Section 269(a)(1) of the Code generally provides that, if one or more persons acquire control of a corporation and the principal purpose of the acquisition is to evade or avoid federal income tax by securing the benefit of a deduction, credit or other allowance which those persons or the corporation would not otherwise enjoy, then the IRS may disallow the corporation's deductions, credits or other allowances. For this purpose, "control" means ownership of stock possessing either at least 50% of the voting power or at least 50% of the total value of all classes of stock of the corporation. Although the Company's Equity Offering resulted in one or more persons acquiring control of the Company, the Company understands that the principal purpose of the investors for participating in the Equity Offering was not to avail themselves of any tax benefits of the Company. It is possible, however, that the IRS may challenge this view. If any such challenge were successful, the Company could lose its future ability to use its losses, loss carryovers and built-in losses to offset its future income.
Federal Taxation. For federal income tax purposes, the Company reports its income and expenses using the accrual method of accounting. The Company and certain of its subsidiaries file consolidated federal income tax returns on a fiscal year basis and are subject to federal income tax under the rules of the Internal Revenue Code ("Code") in the same manner as other corporations. The currently effective maximum federal corporate income tax rate increased to 35%. In addition to regular income taxes, corporations such as the Company are subject to an alternative minimum tax which is generally equal to 20% of the excess of alternative minimum taxable income (taxable income, increased by tax preference items and adjusted for certain other tax items) over regular income taxes. A portion of alternative minimum taxes paid can be credited against regular taxes due in later years, subject to certain limitations.
As of June 30, 2000, the Company had four existing tax attributes which could be used to reduce federal tax liabilities in the current and future years. These are its passive activity loss carry forwards and credits, net operating loss (NOL) carry forwards, and general business and alternative minimum tax credits, each of which is discussed below and in Note 17 to the Consolidated Financial Statements.
At June 30, 2000, the Company had suspended passive activity losses for federal income tax purposes of approximately $2.3 million and suspended passive activity credits (consisting of rehabilitation tax credits) which it has not been able to utilize in prior periods and are subject to substantially similar limitations, of approximately $5.5 million. In addition, tax credits of $555,000, and $784,000, were generated in 1995 and 1994, respectively, and are considered non passive. This credit is primarily attributable to the Company's investment in the rehabilitation of an historic multi-family residential project located in Philadelphia, Pennsylvania. See Note 17 to the Consolidated Financial Statements for additional information. The primary source of the Company's "passive" losses has been from losses incurred by subsidiaries of the Company in real estate joint ventures, and certain losses incurred by the Company in connection with real estate acquired through foreclosure. "Passive" losses from these sources may be deducted against the Company's "active income" other than its "portfolio income." For tax years in which the Company is considered to be "closely held" within the meaning of the Code, passive activity losses and credits in excess of the amounts currently allowed are suspended and may be carried forward indefinitely to offset taxable income and liabilities from passive activities or from an active trade or business in future years,
or will generally be fully deductible (but not creditable) upon a complete disposition of the underlying passive activity. These tax credits are only utilizable against tax liability which would otherwise be incurred, and, accordingly, can not be used until after the available deductible loss carry forwards have been utilized.
The passive activity loss limitations applied to the Company in prior years because the Company was considered to be "closely held" within the meaning of the passive activity loss limitation rules set forth in the Code. The Company was previously considered to be "closely held" for this purpose because more than 50% of the value of its outstanding stock was owned, directly or indirectly, by or for not more than five individuals. The determination of stock ownership for the purposes of the passive activity loss limitation rules differs from the requirements of Section 382 of the Code with regard to the ownership of certain preferred stock (see Note 17 to the Consolidated Financial Statements). As a result of the Equity Offering, the Company believes that it is not "closely held" for purposes of the passive activity loss rules following consummation of the Offering notwithstanding the absence of the occurrence of an "ownership change" for purposes of Section 382 of the Code. The passive activity loss limitation rules will continue to apply to losses and credits from any preceding period during which the Company was "closely held," but current losses and credits are not subject to treatment as passive activity losses.
At June 30, 2000, the Company had NOL carry forwards for federal income tax purposes of approximately $105.6 million. The Company's NOLs may be carried forward 15 or 20 years and will expire in 2006 through 2020.
The Company is subject to Federal income tax on its operations conducted after the Branch Sale and will recognize gain or loss at the time of the disposition of those of its assets not sold therein. Commencing with the taxable year of the making of any liquidating distribution with regard to the Company Preferred Stock, the Company will become subject to the passive activity loss limitation rules and the "at-risk" rules of the Code and, if at least 60% of the Company's "adjusted ordinary gross income" for any year is "personal holding company income" (each as defined), the Company may be subject to a personal holding company tax on its undistributed personal holding company income for such year. The passive activity loss limitation and "at-risk" rules have not applied to the Company during the period that the Series A Preferred Stock was outstanding (although the Company has passive activity loss carryovers and credits arising before that period) and the personal holding company rules have not applied to the Company during the time that it has been a "Company" or a "domestic building and loan association," each as defined in the relevant provisions of the Code.
At June 30, 2000, the Company had an alternative minimum tax credit carry forward of approximately $2.5 million for federal income tax and financial reporting purposes attributable to alternative minimum taxes paid in prior periods. This tax credit is only utilizable against regular tax liabilities which would otherwise be incurred, and, accordingly, can not be used until after the available deductible loss carry forwards have been utilized.
The Company's federal income tax returns have been audited or closed without audit by the IRS through its 1996 taxable year. For additional information regarding Federal tax matters, see Note 17 to the Consolidated Financial Statements.
State and Local Taxation. Prior to May 22, 1998, the Company was subject to the New York State Franchise Tax on Banking Corporations and to the New York City Banking Corporation Tax (collectively, the "Banking Tax" rules). The reorganization on May 22, 1998, and the dissolution of the Predecessor Bank under New York State Banking Law, resulted in the new organization becoming (on that date) subject to the New York State and New York City Corporate tax rules, as opposed to the Banking Tax rules. The Corporate tax rules impose a tax calculated on the greater of either tax imposed on net income or capital tax base, as defined in the regulations.
In addition to the foregoing, the New York State Tax Law also imposes a Metropolitan Transportation Business Tax surcharge equal to 17% of the portion of the net New York State franchise tax (after deduction of any allowable credits against tax) otherwise payable which is attributable to the Company's gross income within New York City and in several other New York counties in the New York Metropolitan Area.
The Company files a combined New York State franchise tax return with several of its currently active subsidiaries that do business in New York. The Company's New York State tax returns have either been audited or closed without audit by the New York State Department of Taxation and Finance through its 1991 taxable year.
REGULATION
The references to laws and regulations which are applicable to the Company set forth below and elsewhere herein do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.
The Company is a Delaware corporation that succeeded to the assets, liabilities and business of River Bank as a result of a reorganization consummated on May 22, 1998. Prior to the Reorganization, the Predecessor Bank was a stock-form savings bank chartered under the laws of the State of New York, and its remaining non-retail deposit accounts and escrow accounts were insured up to applicable limits by the Bank Insurance Fund administered by the FDIC. The Predecessor Bank was therefore subject to extensive regulation, examination and supervision by the Banking Department and by the FDIC. As a Delaware corporation, no longer engaged in banking activities, the Company is no longer subject to regulation by the Banking Department or the FDIC. The Company remains subject to the information and reporting requirements of the Exchange Act, as amended, administered by the SEC.
ITEM 2
ITEM 2
EXECUTIVE OFFICES AND OTHER PROPERTIES
During the year ended June 30, 1996 the Company terminated all remaining lease obligations involving properties and executive offices. The Company is no longer obligated under any material amounts of non-cancelable operating leases. During 2000, the Company paid rent in an aggregate amount that was not material to its financial statements.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
Litigation. The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, believes that such proceedings will not have a material adverse effect on the financial condition or operations of the Company. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company's interests and have a material adverse effect on the financial condition and operations of the Company.
On November 25, 1998, the Company offered upon the terms and conditions set forth in its Offering Circular and the related Letter of Transmittal (which together constituted the "Exchange Offer"), to exchange $25.94 principal amount of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual Stock, Series A, par value $1.00 (the "Series A Preferred Stock"), of which 1,400,000 shares were outstanding on that date.
By letter, dated May 22, 1998, counsel for certain holders of shares of the Company Preferred Stock advised the Company that such holders objected to the Reorganization. Specifically, such counsel alleged that the Reorganization (I) constituted a "liquidation" of River Bank America in violation of the terms of the certificate of designations of the Predecessor Preferred Stock by failing to provide for the payment to the holders of the Predecessor Preferred Stock of the liquidating distribution required by the certificate of designations of $25.00 per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was illegal under the New York Banking Law (the "NYBL") which provides, in the case of a voluntary liquidation, that the liquidating corporation shall distribute its remaining assets among its shareholders according to their respective rights and interests, (iii) violated a commitment made in River Bank's proxy statement, dated May 13, 1996, to retire the Predecessor Preferred Stock following approval and finalization of the sale of certain of its branches and assets to HSBC and (iv) constituted a breach of duty owed by River Bank's Board of Directors to the holders of the Predecessor Preferred Stock.
The Company believes such allegations are without merit. However, in an effort to resolve these claims on an amicable basis, representatives of the Company and such holders discussed from time to time since the date of such letter, certain proposals under which the Company would offer to exchange a new security for the Company Preferred Stock. In October, 1998, the Company proposed to representatives of such holders to effect an exchange offer upon substantially the terms and conditions of the Exchange Offer. Such proposal was not acceptable to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock who claim to beneficially own, in the aggregate, 849,000 shares (approximately 60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New York, County of New York, Index No. 605226198 (the "Action"), against the Company, certain of its predecessors and certain of its directors (collectively, the "Defendants"). The complaint in the Action alleged (the "Allegations"), among other things, that (i) the Defendants breached the certificate of designations relating to
the Predecessor Preferred Stock by fraudulently transferring assets of River Bank and by illegally amending the certificate of designations, (ii) the Defendants fraudulently conveyed the assets of River Bank, thereby depriving the holders of a liquidating distribution, (iii) the Defendants violated the NYBL by liquidating River Bank without making the liquidating distribution required by the NYBL and by denying holders appraisal rights to which they were entitled by the NYBL, (iv) the Defendants breached their fiduciary duty to holders by depriving them of their liquidating distribution, (v) the Defendants breached their duty of disclosure by omitting from the Proxy Statement dated March 27, 1998 material facts relating to the holders' rights to receive a liquidating distribution, their appraisal rights for their shares and the requirement that holders vote as a class with respect to the amendment of the certificate of designations, (vi) the Defendants' implementation of the liquidation of River Bank and the amendment of the certificate of designations were ultra vires and should be declared void and (vii) the intentionally tortious nature of the Defendants' conduct bars them from seeking indemnification for their actions and, therefore, the Defendants should be enjoined from seeking indemnification for damages or attorney's fees relating to the Action.
The Company believes that the Allegations are without merit and intends to vigorously oppose the Action. Consequently, the Company and the other defendants responded to the Action by filing a motion to dismiss on December 21, 1998 which was argued before the court on March 23, 1999. The court issued its decision on December 2, 1999. The court granted in part the Company's motion and dismissed the causes of action based upon fraudulent conveyance, breach of fiduciary duty, breach of duty of disclosure and ultra vires acts and ordered the remainder of the Action to continue. Both the Plaintiffs and the Defendants have completed discovery and filed motions for summary judgement on June 29, 2000. The motions remain pending before the court.
Environmental Matters. Under various federal, state and local laws, ordinances and regulations, an owner, operator or manager of real property, including under certain circumstances the directors and officers of such entities, may become liable for the costs of removal or remediation of certain hazardous substances and materials released on or in its property or as a result of the disposal of such substances or materials on the owner's or another person's property. Such loans can impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances when released, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. Under certain circumstances secured lenders may become exposed to environmental liabilities if, among other things, they take on an active management role with respect to the real estate property that is the subject of their security interest. While the Comprehensive Environmental Response, Compensation and Liability Act provides certain exemptions from liability for secured lenders, the scope of such exemptions are limited and may not be applicable to all the assets currently or previously owned by the Company and its subsidiaries.
The Company has not been notified by any governmental authority of any material noncompliance, liability or other claim in connection with any of the real estate properties currently owned or classified as in-substance foreclosures by the Company or its subsidiaries, but it is aware of the presence of certain hazardous substances and materials on certain of its properties (foreclosed and in-substance foreclosed), which it has taken into account in connection with the appraisals of such properties. The Company believes that the expected costs of remediation of such conditions are not significant and would not materially impair the Company's ability to sell such properties. It is the Company's general practice to take title to a property only if a Phase I environmental audit (which involves only limited procedures) does not reveal a risk of a material environmental condition and to establish a separate subsidiary to hold each newly-foreclosed property. There can be no assurance, however, that such audits reveal all potential environmental liabilities that might exist with respect to a foreclosed property, that no prior owner created any material unknown environmental condition, that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability on the Company or its subsidiaries, or that the establishment of separate subsidiaries for foreclosed properties will insulate the Company against potential environmental liability relating to such properties.
ITEM 4
ITEM 4
SUBMISSIONS OF MATTERS TO A VOTE OF STOCKHOLDERS
Not Applicable.
PART II
ITEM 5
ITEM 5
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Common Stock - The Common Stock of the Company is traded in limited and sporadic transactions in the inter-dealer over-the-counter market, and bid and ask price quotes are periodically available from the NASD Bulletin Board. Available quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual trading transactions and the availability of quotations should not be considered an indication of the existence of an established active and liquid market. Neither the Company nor the Predecessor Bank have declared dividends on their respective common stock. See "Consolidated Financial Statements - Note 16".
ITEM 6
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in Thousands, Except Per Share Data)
The following table sets forth selected consolidated financial and other data of the Company at the dates and for the periods indicated. The data at June 30, 2000, 1999, 1998, 1997 and 1996 and for the years ended June 30, 2000, 1999, 1998, 1997 and 1996, have been derived from audited consolidated financial statements of the Company, including the audited Consolidated Financial Statements and related Notes included elsewhere herein and other schedules prepared for item 6 of this document. The selected consolidated financial and other data set forth below should be read in conjunction with, and is qualified in its entirety by, the more detailed information included in the Consolidated Financial Statements and related Notes, included elsewhere herein.
(Footnotes on second following page)
(1) Reflects the sale, effective June 28, 1996, of the Company's remaining eleven branch offices. As a result of such transaction, the Company's total assets, loans receivable, net, and deposits decreased by $1,066.6 million, $1,034.9 million and $1,159.6 million, respectively, and the Company recorded a pre-tax net gain of $77.6 million.
(2) At June 30, 1996, the most recent year end period in which the Company held such assets, all of the Company's investment and mortgage backed securities, were classified as available for sale in accordance with the Company's asset management plan and may be sold in response to changes in interest rates, prepayment risk, liquidity needs or similar factors in connection with the Predecessor Bank's asset and liability management strategy.
(3) For years prior to June 30, 1997, investments in real estate consist of in-substance foreclosures, real estate held for disposal and real estate held for investment, net of related reserves.
(4) During the year ended June 30, 1997, the Company and HSBC undertook an overall review of the closing of the Branch Sale. As a result of such review, the Company established a reserve of $3.3 million for potential closing settlement adjustments and claims which it believes may be asserted by HSBC related to certain assets acquired by HSBC in the Branch Sale. The establishment of this reserve is reflected on the 1997 Statement of Operations as provision for HSBC Branch Sale contingencies. The Company believes that the reserve for closing settlement adjustments adequately provides for claims which may be asserted by HSBC.
(5) Per share information is based on the weighted average number of outstanding shares of Common Stock during the period. The Company had no securities outstanding that have a dilutive effect.
(6) Consists of a $77.6 million net pre-tax gain from the sale, in June 1996, of the Company's eleven branch offices, the 96th Street branch office realty and related deposits.
(7) With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods.
(8) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities (which do not include non-interest-bearing demand accounts), and net interest margin represents net interest income as a percent of average interest-earning assets.
(9) Data is as of the end of the indicated periods.
(10) Net income for fiscal 1996 includes a $67.6 million after-tax net gain from the Branch Sale in June 1996. Excluding this gain, return on average assets and return on stockholders' equity for 1996 would have been (0.83%) and (15.09%), respectively.
The following table set forth selected data related to non-performing loans for the periods indicated: (Dollars in thousands)
(1) Non-performing loans consist of loans for which the Company has ceased to accrue interest income and has fully reserved against previously accrued interest income.
(2) The Company's total non-performing loans decreased by $10.1 million or 32.7% to $20.7 million at June 30, 2000, as compared to $30.8 million at June 30, 1999. Such net decreases were due primarily to the sales/satisfactions of an aggregate of $8.9 million of non-performing loans and a writeoff of $1.2 million of such loans.
(3) Prior to fiscal 1997, these loans primarily consisted of completed single-family residential developments and lots for the development of single-family residences. After June 30, 1996, such loans represent non-accrual loans on 1-4 family residential properties for which interest income is recognized only as received.
(4) Restructured loans consist of loans which have been restructured primarily as a result of the financial condition of the property which secures the loan and which are performing in accordance with their restructured terms.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
General. Total assets decreased by $625,000, or 0.4% during the year ended June 30, 2000, following a decrease of $16.5 million or 8.6% during the year ended June 30, 1999. Total liabilities decreased by $1.0 million, or 1.2% during the year ended June 30, 2000 following a decrease of $5.8 million or 7.0% during the year ended June 30, 1999. Decreases in assets and liabilities in recent periods have been generally comprised of decreases in most of the principal categories of assets and liabilities.
The following table sets forth the principal categories of the Company's assets and liabilities at the dates indicated.
Investments in Real Estate, Net. Investments in real estate, which are comprised of real estate held for investment and real estate held for disposal, net of applicable fair market value reserves, increased by $6.9 million, or 7.3%, and by $8.0 million, or 9.2%, during the years ended June 30, 2000 and 1999, respectively. The net increase in investments in real estate during the year ended June 30, 2000 was primarily due to investments made in three properties held for development by the Company, totaling $10.2 million, net of dispositions of multi-family residential property units held for sale totaling $1.0 million and the effects of depreciation expense recorded during the year in the amount of $2.3 million. The net increase in the investments in real estate during the year ended June 30, 1999 resulted primarily from the reclassification of two assets previously reported as loans sold with recourse, net of disposals of investments in real estate during fiscal 1999. All disposals in 2000 and 1999 were made in accordance with the Company's asset management strategies.
During the year ended June 30, 1999, the Company disposed of two properties with net book values totaling $2.6 million. In addition, investments in real estate, excluding the reclassification into investments in real estate of $14.0 million in loans sold with recourse, decreased, during the fiscal year ended June 30, 1999, as the result of sales of apartment units within the Company's two multi-family residential developments totaling $1.7 million, and depreciation affecting investments in real estate of $2.3 million. These disposals of investments in real estate, totaling $6.6 million,
were partially offset by additional asset fundings in the amount of $655,000 which were made during the year. For detailed information concerning the Company's investments in real estate, see "Real Estate Assets" and Notes 1, 11 and 12 to the Consolidated Financial Statements.
Loans Secured by Real Estate. Total loans secured by real estate declined $21.4 million, or 39.8%, and $19.2 million, or 33.6%, during the fiscal years ended June 30, 2000 and 1999, respectively. During the year ended June 30, 2000, nine loans totaling $28.8 million were paid in full, for which losses of $841,000 were recorded, and an additional $2.9 million in principal repayments were received. Partially offsetting these reductions in loans secured by real estate was the acquisition from HSBC of a loan participation in the amount of $11.1 million for a loan secured by a multi-family residential apartment building. The Company has held a participation in the portion of the loan not previously held by HSBC. At June 30, 2000 the loan had an outstanding balance of $17.9 million, all of which was due to the Company. During the year ended June 30, 1999, three loans were paid in full, totaling $2.8 million and $14.0 million in loans sold with recourse were reclassified to Investment in Real Estate as described in Investments in Real Estate, Net above. In addition, the Company received principal reduction payments of $2.7 million. See Notes 1, 8, 10 and 11 to the Consolidated Financial Statements.
Commercial and Consumer Loans. Total commercial and consumer loans decreased $3.1 million, or 29.7%, to $7.2 million and $117,000, or 1.1%, to $10.3 million, during the fiscal years ended June 30, 2000 and 1999, respectively. The decline in total commercial and consumer loans during the year ended June 30, 2000 was due to the full satisfaction of $1.9 million in consumer loans and the satisfaction of $1.2 million of commercial business loans. At June 30, 2000, the Company no longer had any loans outstanding classified as consumer loans. The decline in total commercial and consumer loans during the year ended June 30, 1999 was due to normal principal repayments and loan amortization.
Cash and Due from Banks and Money Market Instruments. Cash and due from banks and money market instruments increased by $13.0 million, or 46.3%, to $41.2 million during the year ended June 30, 2000 following a decrease of $4.0 million, or 12.3%, to during the year ended June 30, 1999. For additional information, see Note 5 to the Consolidated Financial Statements.
At June 30, 2000, HSBC had restricted a total of $7.5 million in funds, held on deposit with HSBC, in accordance with the terms of the HSBC Facility agreements, modified in February 2000. At June 30, 1999, HSBC had restricted a total of approximately $13.4 million. Restricted funds held by HSBC are not available to the Company for the settlement of any of the Company's current obligations. The restricted cash reserves at June 30, 2000 was the result of the terms of a renegotiated loan Facility agreement between The Company and HSBC dated February 2000. See "Borrowed Funds," above.
Investment Securities, Available for Sale. Total investment securities, available for sale decreased $124,000, or 9.6%, during the year ended June 30, 2000, following a decrease of $78,000, or 5.8% during the year ended June 30, 1999. The decreases in investment securities, available for sale at June 30, 2000 and 1999 were due to a decline in market value of the securities in each of those fiscal years.
Borrowed Funds. The Company's borrowed funds increased $1.5 million, or 2.9% to $52.0 million in the year ended June 30, 2000, following a decrease of $18.2 million or 26.5% to $50.5 million during the year ended June 30, 1999. Borrowed funds increased during the year ended June 30, 2000, primarily as the result of the use of $3.7 million of the $23.5 million Construction Loan to facilitate the development of the Company's office building development in Atlanta. Georgia. Partially offsetting the $3.7 million increase in borrowed funds related to the Construction Loan were paydowns totaling $2.2 million on the HSBC Facility. Borrowed funds decreased during fiscal 1999 primarily as the result of repayment transactions utilizing funds received from the liquidation of certain assets. See "Borrowed Funds," above.
Stockholders' Equity. Total stockholders' equity increased $325,000, or 0.3%, to $96.8 million in the year ended June 30, 2000, following a decrease of $10.7 million, or 10.0%, during the fiscal years ended June 30, 1999. The increase in stockholder's equity in the year ended June 30, 2000 was the result of the Company's reported net income of $449,000, partially offset by a decline in the securities valuation account of $124,000.
The decline in stockholder's equity during the year ended June 30, 1999 was primarily due to the effects of the Preferred Stock Exchange Offer. As a result of the exchanges of preferred stock made under the Exchange Offer, total stockholder's
equity and other liabilities were reduced by $11.51 million and $432,000, respectively, and its Subordinated Notes liability increased by $11.94 million. See "Preferred Stock Exchange Offer" and Note 24 to the Consolidated Financial Statements.
At June 30, 2000 and 1999, an aggregate of $1.1 million and $1.0 million, respectively, were deducted from the Company's stockholders' equity under Statement of Financial Accounting Standards No. 115 (SFAS-115) "Accounting for Marketable Equity Securities," reflecting net unrealized losses on investment securities classified as available for sale. See the consolidated statements of changes to stockholders' equity in the Consolidated Financial Statements and Note 16 to the Consolidated Financial Statements.
The following table summarizes the calculation of the Company's book value per share at June 30, 2000, 1999 and 1998.
Results of Operations - Fiscal year ended June 30, 2000 compared to fiscal year ended June 30, 1999
General. The Company reported net income attributable to common shares of $449,000, or $0.06 per share, for the year ended June 30, 2000, as compared to net income attributable to common shares of $605,000, or $0.09 per share, for the fiscal year ended June 30, 1999. The primary reasons for the decline in the Company's net income for the fiscal year ended June 30, 2000, as compared to the previous year, was a reduction in total revenues of $1.1 million, or 11.03%, from $10.1 million in fiscal 1999 to $9.0 million in fiscal 2000. This reduction in total revenues was partially offset by a reduction in total pretax expenses of $1.1 million, or 11.84%, in the year ended June 30, 2000 to $7.9 million from $8.9 million during the year ended June 30, 1999. The primary factor causing the reduction in total revenues for the year ended June 30, 2000, as compared with the previous year, was a reduction in net gains on the sale of real estate in the amount of $1.4 million, partially offset by an increase in other income of $559,000. The primary factor causing the reduction in total pretax expenses for the year ended June 30, 2000, as compared with the previous year, was a reduction in interest expense of $1.1 million.
Rental Income. For the year ended June 30, 2000, rental income was $15.3 million, an increase of $318,000, or 2.1%, from $14.9 million for the year ended June 30, 1999. The increase in rental income in the year ended June 30, 2000, as compared with the previous fiscal year, was primarily attributable to increases in rental income per unit at the Company's multi-family residential real estate properties and, additionally, to increases in the overall occupancy rates at those properties.
Property Operating and Maintenance Expenses. For the year ended June 30, 2000, property operating and maintenance expenses ("property expenses") were $10.7 million, an increase of $146,000, or 1.3%, from $10.5 million for the year ended June 30, 1999. The increase in property expenses was primarily attributable to increases in overall operating costs associated with general maintenance and repair expenses for the Company's real estate held for investment.
Depreciation - Real Estate Held for Investment. For the year ended June 30, 2000 and 1999, depreciation charges associated with real estate held for investment were $2.3 million. Under SFAS-121, the Company is required to depreciate real estate held for investment over the estimated useful life of the assets. No depreciation charges are made for the portion of the assets attributable to land values. See Note 1 to the Consolidated Financial Statements.
Net Gain on the Sale of Real Estate. Net gain on the sale of real estate was $1.8 million for the year ended June 30, 2000, a decrease of $1.4 million, or 43.14%, as compared with a net gain of $3.2 million in the year ended June 30, 1999. The $1.8 million net gain was attributable to sales of apartment units, categorized as real estate held for disposal, in the amount of $2.9 million.
During the year ended June 30, 1999, the Company sold a parking garage adjacent to its real estate investment in Atlanta, GA and a portion of the residential units within two multi-family housing properties in New York, NY, realizing a net gain on sale of $3.7 million. During the previous fiscal year, the Company sold two properties realizing a net gain of $2.0 million.
Interest Income. For the year ended June 30, 2000, total interest income, net of provisions for possible credit losses, was $2.8 million, a decrease of $383,000, or 12.0%, from $3.2 million for the previous fiscal year. The decrease in total interest income in fiscal 2000, as compared with the previous year, was primarily due the full satisfaction of loans which reduced the average balance of loans held by the Company by $21.1 million in fiscal 2000, as compared with the previous year. Total performing loans declined due to the full satisfaction of $26.4 million and $4.9 million in performing loans during the years ended June 30, 2000 and 1999, respectively. Partially offsetting the decline in loans in the year ended June 30, 2000 due to the satisfaction of loan assets, was the acquisition of $11.1 million in loans assets from HSBC.
For the years ended June 30, 2000 and 1999, the Company's did not record any provision for possible credit losses. Provisions for possible credit losses result from management's ongoing evaluation of the adequacy of the allowance for credit losses in light of, among other things, the amount of non-performing loans, the risks inherent in the Company's loan portfolio and the markets for real estate and economic conditions in the New York metropolitan area and other areas in which the Company had engaged in lending activities. The provision for credit losses in the fiscal 2000 and 1999 periods reflect management's internal analysis of its loan assets. See Note 10 to the Consolidated Financial Statements.
Other Income. During the year ended June 30, 2000, other income was $2.1 million, an increase of $559,000, or 37.27%, as compared with other income of $1.5 million in fiscal 1999. Other income increased during fiscal 2000, as compared with the previous year, primarily as a result of the realization of contingent participation revenues in the amount of $2.4 million in 2000, as compared with $1.5 million in the previous year and the recognition of $500,000 in gain resulting from the settlement of all remaining Branch Sale contingencies during the year ended June 30, 2000. These increases in other income, totaling $1.4 million, were partially offset by the recognition of net losses from the satisfaction of loan assets in the amount of $841,000 in fiscal 2000, as compared with $0 in the previous year.
Net Gain on Settlement of Branch Sale Contingencies. On January 31, 2000, the Company entered into settlement agreement with HSBC related to the credit indemnities provided to HSBC in the Branch Sale and claims related to the compensating balance arrangement with HSBC. The terms of the settlement resulted in a net cash gain on settlement of Branch Sale contingencies of $500,000 reflected in the results of operations for the year ended June 30, 2000.
Net Loss on the Satisfaction of Loan Assets. The Company recognized a net loss on the satisfaction of loan assets in the amount of $841,000 and $0 for the twelve months ended June 30, 2000 and 1999, respectively. The net loss on the satisfaction of loan assets was the result of a $1.3 million loss taken in the quarter ended March 31, 2000 on the liquidation of a non-performing loan, described below, and a $431,000 gain taken in the quarter ended December 31, 1999 related to the repayment of a single non-performing loan for a combination of cash and an irrevocable letter of credit totaling $1.5 million in the quarter ended December 31, 1999. The irrevocable letter of credit received was in the amount of $1 million, which bears interest at a rate of 8%, and will be redeemed for cash in $500,000 increments in December 2000 and December 2001. Prior to the satisfaction of this non-performing loan, the carrying value of the loan was $1.1 million, net of a specific reserve of $1.1 million. As a result of this $1.5 million satisfaction, the Company reduced its recorded balance in commercial and consumer loans by a net $1.2 million and its allowance for possible credit losses related to commercial and consumer loans by $1.1 million.
During the quarter ended March 31, 2000 the Company received a final liquidating payment for a non-performing loan secured by an office building located in New York State in the amount of $1.9 million. The non-performing loan had been carried on the books of the Company at $2.1 million, net of applicable reserves. At the time the non-performing loan was liquidated, the Company incurred various costs, primarily associated with property taxes that were due on the loan's collateral, totaling approximately $1.0 million. Accordingly, a total loss of $1.3 million was recorded on this liquidation.
Contingent Loan Participation Revenues. The Company recorded contingent participation revenues of $2.4 million and $1.5 million in the twelve months ended June 30, 2000 and 1999, respectively. During the year ended June 30, 2000, received payments totaling $2.4 million in full satisfaction of two loan participations that had been subordinated to HSBC's priority claims on all of the proceeds associated with these loans. The loans had been fully reserved for on the Company's books prior to their repayment. In addition, the Company received approximately $700,000 in unaccrued interest income related to these loans. This additional loan income was included in total interest income for the year ended June 30, 2000. See "Interest Income," above.
During the previous year, contingent loan participation revenues of $1.5 million were recognized on one subordinated participation loan and one junior subordinated participation loan made to the same borrower with a combined principal balance of $1.3 million. These loans were paid in full during the quarter ended September 30, 1998. A portion of the subordinated participation loan and the junior subordinated participation loan had been sold to HSBC on June 28, 1996 in connection with the Branch Sale. A total of $1.0 million, representing a portion of the subordinated participation loan, unaccrued participation revenues and the full amount of the junior participation loan had been reserved for at the time of the Branch Sale. At June 30, 2000, the Company no longer had any interests in any participation loans with either HSBC or any other business entity.
Interest Expense. During the year ended June 30, 2000, the Company recorded interest expenses in the amount of $3.6 million, a decline of $1.1 million, or 24.0%, as compared with interest expenses of $4.8 million in the previous fiscal year. Interest expenses declined in 2000, as compared with 1999, primarily as a result of declines in the average amount borrowed by the Company in fiscal 2000 as compared with fiscal 1999. During 2000, the Company borrowed an average of $50.4 million, a decline of $14.7 million, or 22.6%, as compared with average borrowings of $65.1 million during the year ended June 30, 1999. The decline in the average amount of borrowed funds was attributable to the repayment of outstanding obligations which occurred in fiscal 2000 and 1999. In addition, interest expense declined as a result of increased compensating balances held at HSBC, which effectively reduced the rate of interest paid by the Company to HSBC. As a result of these factors, the annual rate of interest paid to HSBC declined from approximately 6.53% in 1999 to 4.89% in 2000.
Other Expenses. Other expenses consist of the Company's general and administrative expenses. Other expenses do not include direct real estate operations expenses, which are included in "property operating and maintenance expense," discussed above.
During the year ended June 30, 2000, the Company recorded other expenses in the amount of $4.2 million, an increase of $89,000, or 2.2%, as compared with other expenses of $4.1 million in the previous fiscal year. The following table sets forth the components of the Company's other expenses during the periods indicated.
--------------------------------------------------------------- Fiscal Year ended June 30, 2000 1999 ---- ---- (Dollars in Thousands) --------------------------------------------------------------- Salaries and employee benefits $ 219 $ 202
Legal and professional fees 1,307 1,460
Management fees 2,310 2,426
Other operating expenses 401 60 --------- --------- Total $ 4,237 $ 4,148 ========= ========= ----------------------------------------------------------------
The Company engaged RB Management Company, LLC (the "Management Company") to manage the operations of the Company after the Branch Sale, including the ongoing management of Company assets. The Management Company was a newly-formed, privately-owned entity controlled by Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company. During the year ended June 30, 2000, the Company accrued $2.6 million in fees payable to the Management Company, of which $279,000 related to fees incurred upon disposition of assets. During the year ended June 30, 1999, the Company accrued $2.6 million in fees payable to the Management Company, of which $139,000 related to fees incurred upon disposition of assets (which were accounted for as a reduction in the proceeds from sale of those assets).
At June 30, 2000, the Company had accrued fees payable to the Management Company and its affiliate, Fintek, Inc., aggregating $225,000. See "Management."
For the year ended June 30, 2000, all other operating expenses, excluding the management fee expenses discussed above, aggregated $1.9 million, an increase of $205,000 as compared with the year ended June 30, 1999, in which these expense totaled $1.7 million. During the year ended June 30, 1999, the Company received a settlement in the amount of $240,000, related to property taxes previously paid on the Predecessor Bank's former headquarters facility. These property tax expenses had been charged to other operating expenses in prior periods and were deducted from other expenses in that year. The collection of this settlement was primarily responsible for the lower levels of other operating expenses in 1999 as compared with the current year.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109 (SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a deferred tax asset relating to the unrecognized benefit for all temporary differences that will result in future tax deductions and for all unused NOL and tax credit carry forwards, subject to, in certain circumstances, reduction of the asset by a valuation allowance. A valuation allowance is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized based on a review of available evidence. Realization of tax benefits for deductible temporary differences and unused NOL and tax credit carry forwards may be based upon the future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in prior carryback years and, if appropriate, from tax planning strategies.
The high levels of loan charge-offs and other losses, which were largely responsible for losses during the periods, effectively eliminated federal income tax liability for fiscal 1998, fiscal 1997, and fiscal 1996. The Company's income tax provision includes state and local taxes on the greater of combined entire net income, combined alternative entire net income or combined taxable assets. Certain subsidiaries provide for state and local taxes on a separate company basis on income, capital, assets or an alternative minimum tax. For additional information, see Note 17 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 2000, the Company recorded a net deferred tax asset of approximately $29.8 million and deferred tax liabilities of $29.8 million. The net deferred tax asset reflects gross deferred tax assets of $78.1 million and a valuation allowance of $48.2 million. The net deferred tax asset represents primarily the anticipated federal and state and local tax benefits that could be realized in future years upon the utilization of existing tax attributes. The deferred tax asset primarily relates to provisions for anticipated credit losses recognized for financial statement purposes that have not yet been realized for tax purposes, suspended passive activity losses and credits, deferred income on venture investments and available NOL carry forwards. Generally, the amount of a company's net deferred tax asset may serve to increase its net worth under generally accepted accounting principles. However, because of the net losses incurred by the Company in recent years, the Company established a $48.2 million valuation allowance, resulting in a net deferred tax asset of $29.8 million. The valuation allowance increased by approximately $2.0 million during the fiscal year ended June 30, 2000. Realization of the net deferred tax asset is expected to occur upon reversal of existing taxable temporary differences for which deferred tax liabilities of $29.8 million have been recorded.
The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to the reported loss before provision for income taxes primarily due to state and local income and franchise taxes and limitations on the recognition of tax benefits of net operating losses. During the year ended June 30, 2000, the Company recorded a net provision for income taxes of $651,000, primarily to reflect the effects of operations and asset dispositions on its current state and local income tax liability at June 30, 2000.
Results of Operations - Fiscal year ended June 30, 1999 compared to fiscal year ended June 30, 1998
General. The Company reported net income attributable to common shares of $605,000, or $0.09 per share, for the year ended June 30, 1999, as compared with a net loss applicable to Common Shares of $1.5 million, or ($0.21) per share, for the fiscal year ended June 30, 1998. The primary reasons for the increase in the Company's net income for the fiscal year ended June 30, 1999, as compared to the previous year, was a reduction in total pretax expenses of $3.3 million, or 27.15%, in the year ended June 30, 1999, as compared with the previous year. This reduction in total pretax expenses in fiscal 1999, as compared with the previous year, was also accompanied by an increase of total revenues in fiscal 1999, as
compared with fiscal 1998, in the amount of $605,000, or 6.40%. The primary factors causing the reduction in total pretax expenses were a reduction in interest expense of $1.4 million, or 22.10%, and a reduction in other operating expenses of $2.0 million, or 32.19%. The primary factors causing the increase in total revenues during the year ended June 30, 1999, as compared with the previous year, was an increase in net gain on sale of real state gains of $1.2 million, 59.86%, and a reduction in writedowns of real estate charged to operations in the amount of $1.2 million, partially offset by reduced realizations of contingent participation revenues in the amount of $1.8 million, or 55.30%.
Rental Income. For the year ended June 30, 1999, rental income was $14.9 million, an increase of $1.2 million, or 8.4%, from $13.8 million for the year ended June 30, 1998. The increase in rental income in the year ended June 30, 1999, as compared with the previous fiscal year, was primarily attributable to increases in rental income per unit at the Company's multi-family residential real estate properties and, additionally, to slight increases in the overall occupancy rates at those properties.
Property Operating and Maintenance Expenses. For the year ended June 30, 1999, property operating and maintenance expenses ("property expenses") were $10.5 million, a decline of approximately $363,000, or 3.3%, from $10.9 million for the year ended June 30, 1998. The decline in property expenses was primarily attributable to reductions in overall operating costs associated with general maintenance and repair expenses for the Company's real estate held for investment.
Depreciation - Real Estate Held for Investment. For the year ended June 30, 1999, depreciation charges associated with real estate held for investment were $2.3 million, an increase of approximately $1.9 million, or 510.4%, as compared with depreciation charges associated with real estate held for investment in the previous year of $383,000. Under SFAS-121, the Company is required to depreciate real estate held for investment over the estimated useful life of the assets. No depreciation charges are made for the portion of the assets attributable to land values. During the year ended June 30, 1999, the Company recorded a full year's depreciation expense of approximately $2.1 million for five real estate assets, within the Real Estate Held for Investment categorization. Depreciation expenses for the same properties for which depreciation in the amount of $183,000 was recorded during the previous year from the period May 22, 1998 to June 30, 1998. The remaining $208,000 in depreciation charges recorded during the years ended June 30, 1999 and 1998 were for the sixth property, consistent with depreciation charges taken in prior periods for that property. On May 22, 1998, as a consequence of the Reorganization, the Company was no longer subject to the categorization and depreciation regulations for investments in real estate previously imposed by the Predecessor Bank's regulators. Accordingly, on that date, the Company began to record depreciation charges, as required by SFAS-121, for all Real Estate Held For Investment, that had not been subject to depreciation charges in prior periods. See Note 1 to the Consolidated Financial Statements.
Net Gain on the Sale of Real Estate. Net gain on the sale of real estate was $3.2 million for the year ended June 30, 1999, an increase of $1.2 million, or 59.86%, as compared with a net gain of $2.0 million in the year ended June 30, 1998. During the year ended June 30, 1999, the Company sold a parking garage adjacent to its real estate investment in Atlanta, GA and a portion of the residential units within two multi-family housing properties in New York, NY, realizing a net gain on sale of $3.7 million. During the previous fiscal year, the Company sold two properties realizing a net gain of $2.0 million.
Recovery (Writedown) of Investments in Real Estate. During the year ended June 30, 1999, the Company recovered amounts related to real estate that had been written down in prior periods in the amount of $107,000. During the year ended June 30, 1998, the Company wrote down investments in real estate in the amount of $1.1 million. This amount represents a decrease in writedowns for investments in real estate of $18.6 million, or 94.4%, as compared with writedowns taken in fiscal 1997, totaling $19.7 million. During 1998, the Company wrote down two investments in joint ventures, totaling $1.1 million.
Interest Income. For the year ended June 30, 1999, total interest income, net of provisions for possible credit losses, was $3.2 million, an increase of $483,000, or 17.9%, from $2.7 million for the previous fiscal year. The increase in total interest income in fiscal 1999, as compared with the previous year, was primarily due to a decrease in the provision for possible credit losses of $1.5 million in fiscal 1999, as compared with the previous year.
Without regard to the effects of the provision for possible credit losses on total interest income, total interest income declined $1.0 million, or 24.2%, from $4.2 million during the year ended June 30, 1998, to $3.2 million during the current fiscal year. The decline in total interest income was due to the full satisfaction of $4.9 million and $16.4 million in performing loans during the years ended June 30, 1999 and 1998, respectively.
For the year ended June 30, 1999, the Company's provision for possible credit losses was $0, a decrease of $1.5 million from the $1.5 million provision taken in the previous fiscal year. These provisions resulted from management's ongoing evaluation of the adequacy of the allowance for credit losses in light of, among other things, the amount of non-performing loans, the risks inherent in the Company's loan portfolio and the markets for real estate and economic conditions in the New York metropolitan area and other areas in which the Company had engaged in lending activities. The provision for credit losses in the fiscal 1999 and 1998 periods reflect management's internal analysis of its loan assets. See Note 10 to the Consolidated Financial Statements.
Realization of Contingent Participation Revenues. During the year ended June 30, 1999, contingent participation revenues were $1.5 million, a decrease of $1.9 million, or 55.30%, as compared with income of $3.4 million in fiscal 1998. Contingent participation revenues were realized on one junior participation loan and two junior participation loans, which were paid in full during fiscal 1999 and 1998, respectively. Each of the loans had been sold to HSBC on June 28, 1996 and were fully reserved for on the Company's books following the Branch Sale. The Company retained a contingent interest in these two loans approximating $3.3 million in principal amount following the Branch Sale.
Interest Expense. During the year ended June 30, 1999, the Company recorded interest expenses in the amount of $4.8 million, a decline of $1.4 million, or 22.1%, as compared with interest expenses of $6.1 million in the previous fiscal year. Interest expenses declined in 1999, as compared with 1998, primarily as a result of declines in the average amount borrowed by the Company in fiscal 1999 as compared with fiscal 1998. During 1999, the Company borrowed an average of $65.1 million, a decline of $8.2 million, or 11.2%, as compared with average borrowings of $73.3 million during the year ended June 30, 1998. The decline in the average amount of borrowed funds was attributable to the repayment of outstanding obligations which occurred in fiscal 1999 and 1998. In addition, interest expense declined as a result of a decline in general interest rates and as a result of the modification of the terms of the loan agreements between HSBC and the Company which effectively reduced the rate of interest paid by the Company to HSBC. This modification, which became effective on October 1, 1998, provided compensating balance credits to the Company for funds it held on deposit with HSBC. As a result of these factors, the average annual rate of interest paid to HSBC declined from approximately 8.20% in 1998 to 6.49% in 1999.
Other Expenses. Other expenses consist of the Company's general and administrative expenses. Other expenses do not include direct real estate operations expenses, which are included in "property operating and maintenance expense," discussed above.
During the year ended June 30, 1999, the Company recorded other expenses in the amount of $4.1 million, a decline of approximately $2.0 million, or 32.2%, as compared with other expenses of $6.1 million in the previous fiscal year. Other expenses declined in the year ended June 30, 1999, as compared with the previous year, primarily as a result of declines in salaries and employee benefit expenses, legal and professional fees, and other operating expenses in fiscal 1999 as compared with fiscal 1998. The following table sets forth the components of the Company's other expenses during the periods indicated.
------------------------------------------------------------------------ Fiscal Year ended June 30, 1999 1998 ---- ---- (Dollars in Thousands) ------------------------------------------------------------------------
Salaries and employee benefits $ 202 $ 900
Legal and professional fees 1,460 2,305
Management fees 2,426 2,562
Other operating expenses 60 350 ------ -------- Total $ 4,148 $ 6,117 ======= ======== ------------------------------------------------------------------------
Legal and professional fees expense decreased from $2.3 million during the year ended June 30, 1998 to $1.5 million in fiscal 1999 primarily as a result of a reduction in expenses incurred in connection with the Bank's successful reorganization from a New York State chartered savings bank to a Delaware corporation, which occurred in fiscal 1998. The Company accrued and paid $900,000 and $1.6 million, respectively, in the year ended June 30, 1998, for legal and professional fees associated with this conversion.
The Company engaged RB Management Company, LLC (the "Management Company") to manage the operations of the Company after the Branch Sale, including the ongoing management of Company assets. The Management Company was a newly-formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0% of the outstanding Common Stock of the Company. During the year ended June 30, 1999, the Company accrued $2.6 million in fees payable to the Management Company, of which $139,000 related to fees incurred upon disposition of assets (which were accounted for as a reduction in the proceeds from sale of those assets). During the year ended June 30, 1998, the Company accrued $3.0 million in fees payable to the Management Company, of which $398,000 related to fees incurred upon disposition of assets. See "Management."
All other operating expenses declined $290,000, or 82.9%, to $60,000 for the year ended June 30, 1999 as compared with the year ended June 30, 1998, in which other operating expenses were $350,000. During the year ended June 30, 1999, the Company received a settlement in the amount of $240,000, related to property taxes previously paid on the Predecessor Bank's former headquarters facility. These property tax expenses had been charged to other operating expenses in prior periods.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109 (SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a deferred tax asset relating to the unrecognized benefit for all temporary differences that will result in future tax deductions and for all unused NOL and tax credit carry forwards, subject to, in certain circumstances, reduction of the asset by a valuation allowance. A valuation allowance is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized based on a review of available evidence. Realization of tax benefits for deductible temporary differences and unused NOL and tax credit carry forwards may be based upon the future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in prior carryback years and, if appropriate, from tax planning strategies.
The high levels of loan charge-offs and other losses, which were largely responsible for losses during the periods, effectively eliminated federal income tax liability for fiscal 1998 and fiscal 1997. The Company's income tax provision includes state and local taxes on the greater of combined entire net income, combined alternative entire net income or combined taxable assets. Certain subsidiaries provide for state and local taxes on a separate company basis on income, capital, assets or an alternative minimum tax. For additional information, see Note 17 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 1999, the Company recorded a net deferred tax asset of approximately $26.3 million and deferred tax liabilities of $26.3 million. The net deferred tax asset reflects gross deferred tax assets of $72.5 million and a valuation allowance of $46.2 million. The net deferred tax asset represents primarily the anticipated federal and state and local tax benefits that could be realized in future years upon the utilization of existing tax attributes. The deferred tax asset primarily relates to provisions for anticipated credit losses recognized for financial statement purposes that have not yet been realized for tax purposes, suspended passive activity losses and credits, deferred income on venture investments and available NOL carry forwards. Generally, the amount of a company's net deferred tax asset may serve to increase its net worth under generally accepted accounting principles. However, because of the net losses incurred by the Company in recent years, the Company established a $46.2 million valuation allowance, resulting in a net deferred tax asset of $26.3 million. The valuation allowance decreased by approximately $3.3 million during the fiscal year ended June 30, 1999. Realization of the net deferred tax asset is expected to occur upon reversal of existing taxable temporary differences for which deferred tax liabilities of $26.3 million have been recorded.
The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to the reported loss before provision for income taxes primarily due to state and local income and franchise taxes and limitations on the recognition of tax benefits of net operating losses. During the year ended June 30, 1999, the
Company recorded a net provision for income taxes of $550,000, primarily to reflect the effects of operations and asset dispositions on its current state and local income tax liability at June 30, 1999.
Asset Quality
Loan Asset Portfolio Composition The high levels of the Company's non-performing loan assets in recent years was primarily attributable to the Company's emphasis during the mid-to-late 1980s on loans to joint ventures for the acquisition,
development and construction of real estate in which the Company or a subsidiary had an equity interest, commercial business loans, commercial real estate loans and multi-family residential loans. Primarily as a result of the restrictions imposed by the NYSBD and HSBC, the Company did not originate any such loans during the years ended June 30, 2000 and 1999.
Among various types of loans secured by real estate, commercial real estate, construction and multi-family residential loans are generally considered to involve more risk than single-family residential loans due to, among other things, the higher principal amount of such loans and the effects of a downturn in general economic conditions, which may result in excessive vacancy rates, inadequate rental income levels and volatility in real estate values. At June 30, 2000, the Company's total loans secured by real estate portfolio of $32.3 million included $31.3 million or 96.8% of multi-family residential loans and $1.0 million, or 3.2%, of single-family residential real estate loans. Since the early 1990's, the Company continued to originate such loans, on a limited basis, in connection with the sale of investments in real estate and other resolutions of non-performing assets.
The Company discontinued construction lending and loans to joint ventures in 1991. Construction lending is considered to involve even more credit risk than multi-family residential and commercial real estate lending. Construction loans generally require only interest payments prior to the ultimate sale or lease of the completed project, which are funded by the lender and added to the outstanding principal of the loan. To evaluate a construction loan prior to completion, leasing and/or sale of the underlying property, the Company must rely on estimates of anticipated completed cost and subjective assessments of future demand for the completed project. Accurate assessments of these factors have been (and continue to be) difficult to perform because of the weakness of the local economies and the real estate markets in which the Company has engaged in lending activities. Loans to joint ventures are subject to the same risks as construction loans and may even be more susceptible to risks of uncertain costs and changing economic conditions due to the broader scope and longer term of some ventures and the Company's status in some ventures as an equity participant.
Non-performing loans are those loans placed on non-accrual status and loans which are on accrual status but delinquent 90 days or more. The Company generally places a loan which is delinquent 90 days or more on non-accrual status unless it is well secured and, in the opinion of management, collection appears likely. In addition, the Company may place a loan on non-accrual status even when it is not yet delinquent 90 days or more if the Company makes a determination that such loan is not collectible. When loans are placed on non-accrual status, any accrued but unpaid interest on the loan is reversed and future interest income is recognized only if actually received by the Company and collection of principal is not in doubt.
The commercial business lending activities emphasized by the Company during the mid-to-late 1980s also involved a high degree of risk. These activities were conducted primarily through Quest, a wholly-owned subsidiary of the Company which was formed in 1986 to implement a program of secured and unsecured commercial business lending. The loans, and in certain cases equity investments, made by Quest generally involved the buy out, acquisition or recapitalization of an existing business and included management buyouts and corporate mergers and acquisitions. Such transactions frequently resulted in a substantial increase in both the borrower's liabilities and its liabilities-to-assets leverage ratio, thus increasing the prospects for default. The Company discontinued its new commercial business lending activities in 1991 and, as a result of loan repayments, the Company's gross commercial business loans decreased $1.2 million at June 30, 2000 to $7.2 million from $8.6 million at June 30, 1999. At June 30, 2000, the remaining investments made through Quest consisted of $1.2 million of equity securities, net.
The following table summarizes the gross and net carrying values of the Company's non-performing loan assets at June 30, 2000.
Non-performing Loan Activity. The following tables set forth the activity in the Company's non-performing loan assets during the periods indicated.
---------------------------------------------------------------------------
Year ended June 30, ------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) ---------------------------------------------------------------------------
Beginning balance $ 30,761 $ 33,072 $ 47,948
Additions 23 144 3,266
Transfers to REO -- -- --
Write-offs (841) (97) (8,917)
Moved to performing loans (1,000) -- (2,165)
Satisfaction/sales (8,246) (2,358) (7,060) --------- ---------- ---------- Ending balance $ 20,697 $ 30,761 $ 33,072 ========= ========== ========== ---------------------------------------------------------------------------
Non-performing loans decreased by $10.1 million, or 32.7%, during the year ended June 30, 2000 following a decrease of $2.3 million or 7.0% during the fiscal year ended June 30, 1999. The decrease in non-performing loans in fiscal 2000 and 1999 reflect continued efforts to liquidate assets.
Loans to Finance the Sale of Real Estate. The Company had previously financed the sale of investments in real estate under appropriate circumstances. Such financing was provided by the Company on what management of the Company considered to be market terms, which generally were more flexible than the Company's standard underwriting guidelines for multi-family residential and commercial real estate loans. All loans to finance the sale of investments in real estate were approved in advance by the Board of Directors of the Company and involve an amount of borrower equity and other terms which result in the transaction constituting a sale of the property under generally accepted accounting principles. At June 30, 2000 and 1999, the Company did not retain any loans which had been made to finance the sale of investments in real estate, except those reflected in loans sold, with recourse, net. (See "Asset Sales" and Notes 8, 9 and 11 to the Consolidated Financial Statements).
Restructured Loans. The Company's asset resolution efforts previously included the restructuring of loans primarily as a result of the financial condition of the property which secures the loan. The Company encourages restructure agreements only when it is in the best interest of the Company and it is practical for the borrower.
The Work-Out Group, and after the Branch Sale RB Management, is responsible for promptly responding to problem loans to determine if a restructuring is viable or to commence foreclosure proceedings. Many problem loans are such due to market conditions (particularly vacancies or market-driven rent reductions, either of which may result in an impairment of the economic viability of the underlying property). Therefore, non-performing loans may be restructured by an agreement which recognizes that the borrower's inability to meet contractual terms may be remedied through a modification which both protects the financial interests of the Company and is economically feasible for the borrower.
At June 30, 2000, the Company had restructured loans which aggregated $31.3 million and were performing in accordance with their restructured terms. At the same date, the Company's restructured loans had been outstanding for periods which range from 41 months to approximately seven years.
As a result of restructurings which reduced the initial interest rate on certain loans, the Company's restructured loans had a weighted average rate of 7.0% at June 30, 2000, as compared to an original weighted average rate of 10.2%. The Company's restructured loans generally do not call for the payment of foregone interest at a later date, although many of such loans provide for increases in the interest rate over the life of the loan.
The Company's restructured loans may have been renegotiated to lower the interest rate, to defer the payment of principal and/or interest or to effect other concessions. Because restructured loans may include concessionary terms related to interest rates, payment terms, loan-to-value ratios and debt service coverage, such loans have a higher degree of credit risk than the remainder of the performing loans in the Company's loan portfolio.
The following table sets forth information regarding the Company's restructured loans at the dates indicated.
- -------------------------------------------------------------------------------- June 30, 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) - --------------------------------------------------------------------------------
Multi-family residential $ 31,308 $ 20,522 $ 22,499 Commercial real estate -- 360 500 ----------- ----------- ----------- Total $ 31,308 $ 20,882 $ 22,999 =========== =========== =========== - --------------------------------------------------------------------------------
Total restructured loans as a percentage of total loans 79.09% 26.78% 27.47% Total restructured loans as a percentage of total assets 18.02% 11.97% 12.05%
Allowance for Credit Losses. Although the process of evaluating the adequacy of the Company's reserves involves a high degree of management judgment, such judgment is based, in part, on systematic procedures deemed helpful in assessing the adequacy of the Company's reserves. The Company's reserve analysis is prepared quarterly in conjunction with the Company's internal asset classification system and is used by management in determining if an additional provision is required to maintain the allowance for credit losses at an appropriate level or additional write-downs of equity investments and investments in real estate are needed to reduce the carrying values of such assets in accordance with the requirements of generally accepted accounting principles.
The Company's reserve analysis is a computation of reserve requirements based upon the risks inherent in the various asset portfolios. The various categories of loans are grouped separately to recognize the various degrees of risk associated with them. Loan portfolios are further stratified by internal asset classification categories to assign higher risk weighted reserve percentages or include targeted reserve definitions. Aggregated computed reserve balances are compared to recorded reserves to measure the adequacy of reserve levels.
The Company's provisions for credit losses and write-downs of investments in real estate had been significant in recent years. However, the Company recorded no provisions for possible credit losses or write-downs during the years ended June 30, 2000 and 1999. Net recoveries against loan losses previously written were $1,900 and $107,000 in fiscal 2000
and fiscal 1999, respectively. The Company recorded a provision for possible credit losses of $1.5 million during the year ended June 30, 1998, which contributed significantly to the Company's recorded net losses during that year.
At June 30, 2000, the Company's allowance for credit losses amounted to $13.3 million or 33.7% of total loans and 64.4% of non-performing loans, as compared to $18.2 million or 23.3% of total loans and 59.0% of non-performing loans at June 30, 1999. The decrease in the Company's allowance for credit losses in 2000 reflects the continued decrease in the size of the Company's loan portfolio and management's internal analysis of the composition of its non-performing assets. Of the $13.3 million allowance for credit losses at June 30, 2000, $11.4 million, or 85.3%, were specific reserves relating to particular loans and $1.9 million, or 14.7%, were general reserves. See Note 10 to the Consolidated Financial Statements.
Management of the Company, based on facts available to it, believes that the Company's allowance for credit losses at June 30, 2000 was adequate and that the net carrying value of the Company's investments in real estate equaled the lower of cost or fair value minus estimated costs to sell. It is anticipated, however, that the adverse effects of the high level of the Company's non-performing assets, consisting of provisions for credit losses, net loan charge-offs, loss of interest income on non-performing loans, write-downs of investments in real estate and increased operating expenses as a result of the allocation of resources to the collection and work-out of non-performing assets, will continue to adversely affect the Company's operations. Because the nature and extent of these adverse effects will be dependent on many factors outside the control of the Company, including conditions in the relevant real estate markets and prevailing interest rates, these adverse effects are not presently determinable by the Company.
In establishing an appropriate level of loan loss reserves, the Company does not attempt to predict whether or how much the real estate market and general economy of its market area may decline in the future. However, the Company continues to closely monitor the status of its loan portfolio in relation to the economic and market conditions in the relevant area for any further signs of weakening. If declining conditions in the relevant area continue, particularly in the New York City metropolitan area, causing existing non-performing loan situations to worsen and additional loans to be classified as non-performing, significant additional provisions for credit losses may be required.
The following table sets forth information concerning the activity in the Company's allowance for credit losses during the periods indicated.
(1) As noted above, the decrease in the Company's allowance for credit losses in recent periods reflects the transfer of a substantial amount of non-performing loans to investments in real estate and the Company's loan restructuring activities, the continued decrease in the size of the Company's loan portfolio and management's internal analysis of the composition of its non-performing assets.
(2) Percentages for the six month period are computed on an annualized basis.
The following table sets forth information concerning the allocation of the Company's allowance for credit losses by loan categories at the dates indicated.
Asset Carrying Values. Investments in real estate are recorded on the books of the Company at the lower of the Company's historical cost, less applicable depreciation for real estate held for investment, or the estimated fair value of the property minus estimated costs to sell. Adjustments made to the value at transfer are charged to the allowance for credit losses. See Notes 1, 10, 11 and 12 to the Consolidated Financial Statements.
The Company primarily utilizes two means of valuation in evaluating the carrying value of its investments in real estate: (1) appraisals and (2) discounted cash flows. The discounted cash flow ("DCF") is based on assumptions wherein the forecasted future cash flow attributable to the benefits of ownership are discounted, at a rate commensurate with the risk involved, to a present value. The DCF is based on information from various sources, including: actual operating results, recent appraisals, third party market information and current investment parameters. The Company believes that the DCF approach generally is the most accurate predictor of value of a real estate asset over time. This approach is an accepted means of valuation under GAAP. Under GAAP, among other things, the DCF method allows for adjustments when local markets are dominated by forced or liquidation sales, or when properties have unusual characteristics, so that value estimates can be based on rent levels and occupancy that are reasonably estimated to be achieved over time. The Company utilizes management judgement and does not generally make adjustments to appraisal assumptions using worst case scenarios that are unlikely to occur, direct capitalization of non-stabilized income flows or simple projections of current levels of operating income if markets are depressed but can be expected over a reasonable period of time to return to stabilized conditions. Generally, for purposes of the DCF analysis, property cash flows will be extended until stabilization, as it is the Company's intent is to sell investments in real estate as quickly as possible, assuming a stabilized sales price can be achieved. Assumptions in the DCF model are made to most accurately reflect the Company's asset management plan.
The Company's real estate loan appraisal policy generally requires that all appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and prepared by an appraiser who is either certified or licensed by the state in which the property is located. Appraisals may be performed by an outside fee appraiser or by a staff appraiser, provided that, among other things, such appraiser is independent of the lending, investment and collection functions of the Company.
The Company generally reviews the value of its investments in real estate on at least a quarterly basis. In the event that such reviews indicate a decline in the value of such investments, write-downs are recorded as appropriate.
Strategy. Following the Branch Sale, the Management Company assumed the duties of the Predecessor Bank's former "Work-Out Group" which monitored the Predecessor Bank's problem assets. The Management Company continues to monitor the Company's assets and develop individual business plans, including cash flow analysis, for each asset. These plans are then documented for approval of the Board of Directors of the Company. See "Management."
Loans which become delinquent are analyzed to determine the nature and extent of the problem and whether a restructuring of the loan or some other method of resolution is appropriate under the circumstances. Every effort is made by the Company to work with borrowers who are cooperative with the Company to effect a restructuring that is economically feasible for both parties. When the Company concludes that a restructuring is not economically feasible or where the borrower does not demonstrate a willingness to cooperate, the Company pursues available legal remedies. In most cases, the Company's strategy in recent years has been to aggressively pursue the foreclosure process when a restructuring or other resolution of a non-performing loan does not appear to be feasible or otherwise in the best interests of the Company. This strategy has been pursued so that the Company can acquire control of the security property as soon as possible, and thereby implement a strategy designed by the Company for management and ultimate resolution of the asset.
Loans that go through the foreclosure process, particularly in New York, are subject to extensive delays before the Company can gain title to the property. Non-judicial foreclosure generally is unavailable in New York, and the procedures mandated by New York law can result in time-consuming litigation in order to foreclose a mortgage loan. Moreover, the federal and state courts in New York are overburdened with litigation and, as a result, decisions are often delayed. Further complications occur when bankruptcy proceedings are involved. For all these reasons, it can take an extended period of time, often two to six years, for a lender to obtain title to property that secures a loan which is in default. Although the foreclosure process can be long and complicated, the Company aggressively pursues foreclosures or negotiates with borrowers to acquire properties which secure problem loans by deed-in-lieu of foreclosure.
The Company's general approach once it has acquired an investment in real estate has been to seek to minimize further losses to the Company through active management of the properties while they are held by the Company and by
developing management strategies tailored to the individual properties and whose ultimate objective is to maximize shareholder value through continued development of the property, management of its' cash flows and/or the sale of each property.
The Company's general approach once it has acquired an investment in real estate has been to extract maximum shareholder value through active management of the properties while they are held by the Company and by developing management strategies tailored to the individual properties and whose ultimate objective is to sell each property at, or above, its net book value. Although the Company has evaluated bulk sales of non-performing assets from time to time, it has not elected to pursue this strategy to date because it believes that the discounts which are sought by potential purchasers are excessive, that individual management strategies have the most potential for maximum recovery and return to the Company and that the Company did not have sufficient equity capital prior to and following the Equity Offering to support such a strategy. There can be no assurance, however, that the Company will be successful in its management strategies.
The Company's approach with respect to a particular investment in real estate generally falls into one of the following categories: (i) attempt to sell the investment as soon as practicable, (ii) actively manage the property until the cash flow and other relevant factors have been stabilized or (iii) develop the property to facilitate sale. Each of these strategies generally involves some investment by the Company to improve the property in order to make it more saleable, which can range from minor fix-up costs to substantial costs to develop the property. Each work-out strategy is reviewed and approved by the Company's Board of Directors.
In many cases the Company seeks to stabilize the cash flow from the property by investing in necessary improvements and seeking to increase the occupancy of the property. This approach increases the amount of time that the Company holds the property, but may enhance the value of the property and be the best means of disposing of the investment without further loss. In certain cases, the Company will have made the investment and taken the actions necessary to stabilize the cash flow from the property, but the real estate markets in the area in which the property is located will not have stabilized or other factors will be present which prevent the Company from selling the property at a price which is reflective of its estimated value. In some cases, the cash flow from the property has been stabilized such that it is providing a yield above the Company's cost of funds, thus effectively making it an earning asset. Although such assets continue to be classified by the Company as investments in real estate and, thus, non-performing assets, the yield provided by the properties increases the Company's flexibility to maximize their value in connection with a sale.
In a number of cases, the Company's strategy to dispose of an investment in real estate has consisted of development of the property. Although this approach may involve the best prospects for maximizing the return to the Company, it also may involve more risk and, as a result, the Company generally does not pursue this alternative unless other alternatives are clearly not preferable under the circumstances. In most cases in which this alternative is pursued, development previously has been initiated by the defaulted borrower prior to the Company's acquisition of the property upon foreclosure or by deed-in-lieu thereof. On occasion, however, the Company has commenced development of an investment in real estate as a management strategy.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements for debt repayments related to asset sales, operating expenses, development costs related to certain real estate projects, and to satisfy the regulatory requirements described below.
On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the HSBC Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The HSBC Facility is secured by a first lien on two properties, certain cooperative shares and a restricted cash collateral account (the Special Collateral) in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was
released from all liens held by HSBC. Accordingly, the balance of the Company's unrestricted cash was increased $29.4 million by an offsetting reduction in the Company's restricted cash of $29.4 million, from $36.9 million at June 30, 1999 to $7.5 million at June 30, 2000.
The HSBC Facility has an annual interest rate equal to the Prime lending rate, or the three-month London Interbank Offered Rate (LIBOR) plus 2%, at the option of the Company. Notwithstanding the foregoing, interest on the Facility shall accrue at 2% per annum on the portion of the outstanding Facility balance that is equal to the combined balances of the Special Collateral account and unrestricted funds that remain on deposit with HSBC.
The Company will make monthly payments to HSBC of interest, as calculated according to the formula outlined above, and scheduled principal reductions based on a hypothetical loan amount of $34.8 million. Minimum scheduled principal reduction payments under this provision of the Facility agreement approximate $800,000 per year.
The Loan Agreement requires that while any amounts remain outstanding under the Facility, the Company must receive HSBC's prior written consent to, among other things, materially alter its charter or by-laws, terminate its management agreement with RB Management (see also Item 13 - The Management Company; The Management Agreement), incur additional corporate indebtedness and liens, make any distributions to stockholders or repurchases or redemptions of capital stock, acquire additional assets, exchange existing assets with a third party or assume additional liabilities as a result of any proposed merger transaction.
In order to facilitate the development of the Company's three-building office complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by two buildings under development within this office complex. At June 30, 2000, approximately $3.7 million had been advanced under the Construction Loan. The completion of the development of this project is anticipated prior to June 30, 2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a maturity date in May 2003. The loan allows for the deferral of interest until May 2003 or such time as the collateral buildings are disposed of through sale. The Company has incurred approximately $41,000 in interest during the year ended June 30, 2000 related to the Construction Loan, which has been accounted for as an additional investment in the office complex.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding under the Facility provided by HSBC Bank and $3.7 million under the Construction Loan provided by Bank of America. The Company actively monitors and manages its cash inflows and outflows in the management of the Facility with HSBC and invests, to the extent possible, all available cash balances.
The Company seeks to maintain liquidity within a range of 5% to 10% of total assets, above that considered necessary to meet the projected cash requirements of endeavors such as real estate development. Liquidity for this purpose is defined as unrestricted cash. At June 30, 2000, the Company's liquidity ratio, as so defined, amounted to 19.4%.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts accounting standards (generally referred to as Statements of Financial Accounting Standards, or "SFASs") which set forth required generally accepted accounting principles. In addition, other regulatory agencies, such as the Securities Exchange Commission (the "SEC" ), may also, from time to time, promulgate required generally accepted accounting principles. Set forth below is a description of certain of the accounting standards recently adopted by the FASB and the SEC which are relevant to financial institutions such as the Company.
SFAS No. 133 and No. 137. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, which was deferred until June 30, 2000 as a result of the promulgation of SFAS-137, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to the Company's limited use of derivative instruments, the adoption of SFAS-133 will not have a significant effect on the Company's results of operations or its financial condition.
Other Pronouncements. In December, 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition ("SAB No. 101"), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. Specifically, SAB No. 101 provides guidance on lessors' accounting for contingent rent. SAB No. 101 explains the SEC staff's general framework for revenue recognition. SAB No. 101 does not change existing literature on revenue recognition, but rather clarifies the SEC's position on preexisting literature. SAB No. 101 did not require the Company to change existing revenue recognition policies and therefore had no impact on the Company's financial position or results of operations at June 30, 2000.
Impact of Inflation
The consolidated financial statements and related consolidated data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial positions and operating results in terms of historical dollars without considering the changes in the relative purchasing power of dollars over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs and, generally, increases in interest rates paid on borrowed funds. Over any given term, however, interest rates do not necessarily move in the same direction or in the same magnitude as changes in prices for goods and services.
Impact of Year 2000
The Company sustained no significant operational problems, or material financial effects, associated with the impact of the Year 2000 on the processing of date sensitive information by its computerized information systems. Due to (i) the limited number of assets managed by the Company, (ii) the limited scope of the Company's continuing operations and (iii) that all accounting software used by the Company is maintained and supported by a third party all of the Company's costs of assessment, and where necessary, remediation were immaterial to the reported operating results of the Company.
Risks Associated with Forward-Looking Statements
This Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following, which are discussed in greater detail in the "Risk Factors" section of the Company's Registration Statement on Form S-4 (File No. 333-386730 and File No. 333-386730-01) filed with the Securities and Exchange Commission ("SEC"), general economic conditions, which will among other things, affect demand for commercial and residential properties, availability and credit worthiness of prospective tenants, lease rents and the availability of financing: difficulty of locating suitable investments; competition; risks of real estate acquisition, development, construction and renovation; vacancies at existing commercial properties; dependence on rental income from real property; adverse consequences of debt financing; risks of investments in debt instruments, including possible payment defaults and reductions in the value of collateral; illiquidity of real estate investments; lack of prior operating history; and other risks listed from time to time in the Company's reports filed with the SEC. Therefore, actual results could differ materially from those projected in such statements.
ITEM 7 (a)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the company is interest rate risk on its borrowed funds, mortgage notes and notes receivable. The Company does not hedge interest rate risk using financial instruments nor is the Company subject to foreign currency risk.
The company has assessed the market risk for its variable rate debt and believes that a 1% change in interest rates (as measured by changes in the LIBOR rate) would result in an approximate $520,000 change in interest expense based on
approximately $52.0 million outstanding at June 30, 2000. See Note 14, "Borrowed Funds," contained within the Consolidated Financial Statements.
In addition, The Company has issued $12.53 million in Increasing Rate Junior Subordinated Notes due 2006. The Subordinated Notes provide for a steadily increasing interest cost after December 15, 2001. A substantial increase in general interest rates would potentially prevent the Company from refinancing the Subordinated Notes at a rate favorable to the Company. See Note 24, "Preferred Stock Exchange Offer," contained within the Consolidated Financial Statements.
The fair value of the Company's long term debt, mortgage notes, notes receivable and other financial assets is estimated based on discounting future cash flows at interest rates that management believes reflect the risks associated with long term debt, mortgage notes, notes receivable and other financial assets of similar risk and duration. See Note 22, "Fair Value of Financial Instruments," within the Consolidated Financial Statements.
ITEM 8
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item and the reports of the independent accountants thereon required by Item 14 (a) (2) are included on pages to. See accompanying "Index to Consolidated Financial Statements" on page 48.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Subsequent to the closing of the Branch Sale, although the Company has executive officers under SEC requirements and New York Banking Law, formerly applicable to the Predecessor Bank, the Company no longer maintains any significant staff of employees to manage the Company's affairs. Rather, day-to-day management responsibilities of the Company are vested with the Management Company, a newly formed management company affiliated with Mr. Dworman. A significant amount of services, necessary to manage and dispose of the Company's assets, have been and will be provided by the Management Company or third party subcontractors who will not have any continuing fiduciary obligations to the Company or the stockholders. The selection of third party subcontractors to provide various services to the Company will be made by the Management Company, subject to the ratification by committees of the Board of Directors but without stockholder approval. The Company's success in maximizing returns from management of its assets will depend on the efforts of the Management Company and third party contractors who provide services to the Company.
Directors of the Company
The Company's Board of Directors is divided into three classes of directors, serving staggered three-year terms. At the 1998 annual meeting of stockholders of the Company, the holders of the Company Preferred Stock elected two directors to serve for a term of one year. The right of holders of Company Preferred Stock to elect such two directors continues until dividends on the Company Preferred Stock have been paid for four consecutive quarterly dividend periods at which time such voting rights will terminate.
The name, age as of August 16, 2000, position with the Company, if any, term of office and period of service as a director, of each of the Company's directors are as follows:
(1) Includes tenure with the Predecessor Bank. (2) Member of the audit committee. (3) Member of the executive committee. (4) Member of the asset management committee. (5) Elected by holders of Preferred Stock for a term of one year. (6) The Company intends to nominate this Director for re-election at its next annual meeting of stockholders. (7) Mr. Bryant was elected a Director in May, 2000 to fill the Directorship previously held by Mr. William Hassett who passed away in March, 2000. (8) On August 16, 2000, Ms. Duke resigned from the Board of Directors and positions as Vice President and Secretary as a result of her being confirmed United States Ambassador to Norway.
The principal occupation for the last five years and selected biographical information of each of the directors is set forth below.
Francis L. Bryant, Jr. Mr. Bryant is Chairman of Peregrine Mortgage Company, Inc., a commercial mortgage banking company. He is also a director of Mondev Senior Living, Inc., located in Montreal, Quebec and of Real French Corporation, a subsidiary of Banque Nationale de Paris. Mr. Bryant has been a member of the Real Estate Advisory Committee to the New York State Common Retirement Fund for over twenty years and is a past Chairman of the New York Community Preservation Corporation and Co-Chairman of Industry Real Estate Financing Advisory Council of the American Hotel and Motel Association. He was a founding member of the Real Estate Center of the Wharton School of the University of Pennsylvania and has served on board of directors of various other organizations, including the Real Estate Board of New York, Urban Land Institute, Prudential Realty Trust, New York University Real Estate Institute and the Realty Foundation of New York. Mr. Bryant was previously Executive Vice President of Manufacturers Hanover Trust Company and officer in-charge of its Real Estate Division and senior real estate lending officer for Manufacturers Hanover Corporation until his retirement in June, 1987.
Robin Chandler Duke. Ms. Duke was previously National Chairman of Population Action International, and she served as a director of International Flavors and Fragrances and American Home Products Corporation. Ms. Duke served in an unsalaried capacity as Vice President and Secretary of the Company and the Predecessor Bank from July 1996 until August 16, 2000. On that date, Ms. Duke resigned from the Board of Directors and positions as Vice President and Secretary as a result of her being confirmed United States Ambassador to Norway.
Alvin Dworman. Mr. Dworman is the founder and chairman of The ADCO Group, a financial services, merchant banking and real estate company established in 1981. Mr. Dworman also has been a director of the Sequa Corporation since 1987 and has been serving as a member of the Real Estate Advisory Committee to the New York State Common Retirement Fund since 1985.
James J. Houlihan, Jr. Mr. Houlihan has been a partner of Houlihan-Parnes Realtors, LLC, since 1984. Houlihan-Parnes Realtors, LLC is one of the leading commercial real estate firms throughout the New York City metropolitan area. In addition, Mr. Houlihan is the President of JHP Realty Advisors, Inc. which specializes in arranging debt and equity financing for real estate transactions on behalf of private and institutional clients. Mr. Houlihan, together with several other real estate professionals formed GHP Office Realty, a company dedicated to the acquisition, renovation and management of office buildings throughout Westchester, Bergen, Rockland and Fairfield Counties in New Jersey. Other entities in which Mr. Houlihan is a partner include HP Capital, Inc., a mortgage servicing company, and Metro Properties, LLC, a property management company that manages properties owned by the principals of Houlihan-Parnes as well as clients of the firm.
David J. Liptak. Mr. Liptak has been the President of West Broadway Partners, Inc., which is the General Partner of West Broadway Partners, L.P. and the investment manager of AIG International West Broadway Fund, Ltd for more than the past five years. Mr. Liptak was previously a Senior Vice President at Oppenheimer & Co., Inc.
Jerome R. McDougal. Mr. McDougal served as Chief Executive Officer of the Company and the Predecessor Bank from April 1995 and as President from July 1997 until he retired from such positions in June 1998. Mr. McDougal served as President and Chief Executive Officer of the Predecessor Bank from March 1991 to April 1995, at which time he became Chairman of the Board and Chief Executive Officer. Prior to joining the Company, Mr. McDougal was Chairman and Chief Executive Officer of the Apple Bank for Savings for four years. Prior to joining Apple Bank, Mr. McDougal held various positions, including management positions in a manufacturing concern, operating a consulting company, and running one of the largest automotive retail chains in the New York metropolitan area.
Edward V. Regan. Mr. Regan is President of Baruch College of the City University of New York. Mr. Regan is the former Chairman of the Municipal Assistance Corporation and former Policy Advisor for the Jerome Levy Economics Institute. Mr. Regan previously served as the New York State Comptroller from 1979 to 1993.
David A. Shapiro. Mr. Shapiro has been a portfolio manager for Seneca Capital Management LLC, an investment management firm since May 1995. Mr. Shapiro founded Asset Holdings Group, a privately held originator of senior and mezzanine commercial real estate loans formed in 1993. From 1991 to 1993, Mr. Shapiro also served as an advisor to the Predecessor Bank in connection with the restructuring and management of a portion of its commercial real state portfolio.
Jeffrey E. Susskind. Mr. Susskind has served since 1999 as a consultant to Strome Investment, L.P., an investment management company and from 1992 through 1998 as a principal in its predecessor company, Strome, Susskind Investment Management, L.P. Mr. Susskind was also a director of Sheridan Energy, Inc., a publicly traded domestic independent energy company engaged in the production of oil and gas, and served, from 1998 to 1999, as its Chairman of the Board.
Board of Directors and Committees
The Company is managed by a eight-member Board of Directors. The Board of Directors has three standing committees, an executive committee, an asset management committee and an audit committee.
Executive Committee. The executive committee is comprised of Messrs. Bryant, Dworman and McDougal. The executive committee oversees the management of the day-to-day business and affairs of the Company and the implementation of the management of the Company's assets and reports with respect to its activities at each meeting of the Board of Directors.
Audit Committee. The audit committee is comprised of Messrs. Regan and Shapiro and Ms. Duke. The audit committee reviews and provides recommendations to the Board of Directors with respect to the engagement of the Company's independent auditors, financial reporting practices and internal accounting and financial controls and procedures of the Company and monitors the Company's compliance with its policies and procedures. In addition, the audit committee also administers and reviews all compensation policies and provides recommendations to the Board of Directors with respect thereto. The Audit Committee reports its activities to the Board of Directors at each meeting of the Board of Directors.
Asset Management Committee. The asset management committee is comprised of Messrs. Bryant, Houlihan and Shapiro. The asset management committee oversees the performance of the asset portfolio of the Company and reports with respect to its activities at each meeting of the Board of Directors.
During fiscal year 2000, the Board of Directors held four meetings, including telephonic meetings. The audit committee held two meetings during the fiscal year. The asset management committee held four meetings during the fiscal year. The executive committee meets informally throughout the year, reporting its activities to the Board of Directors at each meeting of the Board of Directors. During fiscal year 2000, each director (other than Ms. Duke who was absent for one meeting) attended 100% of the total number of meetings of the Board of Directors and each director attended 100% percent of the total number of meetings of committees on which he or she served.
The Company's Board of Directors may, from time to time, establish certain other committees of the Board to facilitate the management of the Company. Directors will be elected in a manner consistent with, and shall serve for a term, as provided in the Company's Charter and Bylaws.
Executive Officers: In as much as the Predecessor Bank had disposed of its depository banking operations in connection with the sale of its branches and transfer of its deposits to HSBC Midland Bank in June 1996 (the "Branch Sale"), the Company as successor does not require a large staff of officers or employees to manage the business and affairs of the Company. Certain day-to-day management functions are performed by RB Management Company LLC pursuant to the terms of a management agreement. See "--Certain Relationships and Related Transactions".
The Company's officers are Nelson L. Stephenson, who serves as president and chief executive officer of the Company and Robin Chandler Duke, who serves without compensation as the vice president and secretary of the Company. Set forth below is certain biographical information for Mr. Stephenson.
Nelson L. Stephenson. Mr. Stephenson was elected to the offices of president and chief executive officer of the Company in July 1998. For more than the past five years, Mr. Stephenson has been President of Fintek Inc., a privately held financial advisory firm that provides services to the Company and the Predecessor Bank. Mr. Stephenson is also President and a Director of Coast-To-Coast Financial Corporation, a unitary savings and loan holding company which owns Fintek, Inc. and Superior Bank FSB as well as other subsidiaries engaged in consumer finance.
ITEM 11
ITEM 11
EXECUTIVE COMPENSATION
Remuneration of Executive Officers - Summary Compensation Table: The following table discloses compensation received by the Company's chief executive officer for the years indicated. The cash compensation amounts below reflect compensation received from the Company and its subsidiaries. There were no other executive officers who received compensation in 1999 from the Company (other than director fees).
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(1) - Consists of severance pay following Mr. McDougal's retirement from the offices of President and Chief Executive Officer in June 1998, in the amount of $150,000 and a housing allowance, club dues, automobile, driver expenses and health insurance premiums aggregating $26,269. Mr. McDougal received severance payments in equal biweekly installments through June 30, 2000. The Company has no remaining liability to Mr. McDougal for severance payments at June 30, 2000.
(2) - Consists of a housing allowance, club dues, automobile and driver expenses (aggregating $21,548 for the year ended June 30, 1998), certain tax expense reimbursements and health insurance premiums.
(3) - Consists of contributions of $9,000, $9,000 and $9,000 made by the Company to its 401(k) Tax Deferred Savings Plan, accruals of and earnings on deferred compensation in the amounts of $0, $0 and $110,053 and payments of $5,313, $5,853 and $4,057 for life and personal liability insurance premiums for the 2000, 1999 and 1998 periods presented, respectively.
Employment Arrangements:
Mr. Stephenson is compensated pursuant to an informal arrangement with the Company that provides for compensation of $2,000 per month.
Jerome R. McDougal, was compensated pursuant to an arrangement with the Predecessor Bank reached in 1991. The terms of Mr. McDougal's employment were memorialized in the minutes of the Predecessor Bank's January 22, 1991 Board of Directors meeting, which provided for an annual salary of $375,000 and customary employee benefits commensurate with Mr. McDougal's position at the Company. $75,000 of Mr. McDougal's annual salary was in the form of deferred compensation. Mr. McDougal's annual deferred compensation accrues quarterly in equal amounts and earns a variable rate of interest on the cumulative balance. Prior to the Branch Sale, interest was compounded quarterly at the highest rate offered on the predecessor's customer deposits each quarter and was thereafter compounded at the prime rate. Mr. McDougal received additional compensation in the form of a housing allowance, an automobile and payment of club membership dues. The Company also reimbursed Mr. McDougal for the amount of personal income taxes incurred as a result of the additional benefits.
Mr. McDougal retired from his offices of president and chief executive officer, effective July 1, 1998, at which time he was granted severance equal to two years of his $375,000 annual salary. As part of his severance package, the Company funds his health insurance premiums for a two year severance period and funded his automobile allowance until the lease term of his current vehicle expired in November 1998. Mr. McDougal also elected to withdraw his deferred compensation in the amount of $689,728 during the quarter ended June 30, 1998. A payment in this amount was made to Mr. McDougal on July 10, 1998.
Board of Directors Compensation: Effective July 1, 1998, directors of the Company will receive directors fees of $2,500 for each regular Board meeting attended, $750 for each telephonic Board meeting attended and $1500 for each committee meeting attended.
Compensation Committee Interlocks and Insider Participation: Determinations regarding compensation of the Company's employees were previously made by the Compensation and Benefits Committee of the Board of Directors prior to the Branch Sale. Mr. McDougal was a member of the Compensation and Benefits Committee. Subsequent to the Branch Sale such determinations have been made by the Audit Committee.
Retirement Plan: Effective April 30, 1992, the Company determined to suspend the Company's Retirement Plan. As of the date of suspension, there have been no new enrollments in the Retirement Plan and no further benefit accruals. As of June 30, 1998, Mr. McDougal was entitled to an accrued benefit of less than $5,000 pursuant to the terms of the Retirement Plan.
Indebtedness of Management: The Company's current policy is not to make loans to its directors, executive officers or members of their immediate families, although it did so from time to time in the past. All loans to directors and executive officers and all other loans to the Company's employees were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collection or present other unfavorable features. All such loans were transferred to HSBC as Transferred Assets in connection with the Branch Sale.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information with respect to beneficial ownership of Common Stock and Preferred Stock by (i) each person known by the Company to own beneficially or of record more than 5% of Common Stock or Preferred Stock, (ii) each director, nominee for director and executive officer of the Company, and (iii) all directors and executive officers as a group. The Company's Common Stock is not registered under Section 12 of The Securities Exchange Act of 1934, as amended, and therefore stockholders holding 5% or more of the Company's Common Stock are not required to file identifying and beneficial ownership information with the SEC. Other than with respect to the stockholders listed in the table below, the Company does not have access to information deemed reliable as to the beneficial ownership of its Common Stock. Unless otherwise indicated, each stockholder listed in the table has sole voting and investment powers as of August 16, 2000 with respect to the shares owned beneficially or of record by such person.
- ---------------- * Less than .1%.
(1) - East River Partnership B is an Illinois general partnership, the general partners of which are: (1) JAP Grandchildren Trust # 1, the co-trustees of which are Marshall E. Eisenberg and Jay A. Pritzker; (2) Don Trust #25, the co-trustees of which are Marshall E. Eisenberg and Thomas J. Pritzker; and (3) R.A. Trust #25, the co-trustees of which are Marshall E. Eisenberg and Thomas J. Pritzker.
(2) - Odyssey Partners, L.P. is a Delaware limited partnership having six general partners: Stephen Berger, Leon Levy, Jack Nash, Joshua Nash, Brian Wruble and Nash Family Partnership, L.P. The general partners of Odyssey Partners, excluding Nash Family Partnership, L.P., share voting and dispositive power over all owned shares.
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ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Management Company; The Management Agreement: The Company has engaged the Management Company under a management agreement (the "Management Agreement") to provide Company Management Services and Asset Management Services (each as defined below). The responsibilities of the Management Company include, but are not limited to, development and recommendation to the Company's Board of Directors of strategies intended to maximize stockholder value. The Management Company is responsible for developing, recommending and maintaining business plans and operating budgets, individual asset and liability strategies and decisions relating to sales and retentions of assets. The Management Company reports to the Company's Board of Directors or its Asset Management Committee.
The Management Company was newly formed in 1996 and is controlled by Alvin Dworman, who serves as its Managing Member. Mr. Dworman also owns 39.8% of the outstanding Common Stock of the Company.
The Management Company has access to the expertise, resources and business relationships accumulated by Mr. Dworman over 35 years in a wide variety of general business activities. Mr. Dworman currently serves as a member of the Real Estate Advisory Committee of the New York State Employee Retirement System and is a member of the Board of Trustees of the New York Law School. As an individual and as Chairman and Chief Executive Officer of the ADCO Financial Group, Mr. Dworman maintains investments in a number of financial services, banking and real estate entities. During his career, Mr. Dworman has founded, developed, owned and managed a wide variety of entities throughout the United States. Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B hold in the aggregate 51.5% of the Common Stock. In connection with the equity recapitalization offering in June 1994, Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B agreed not to sell their Common Stock for a period of three years. In addition, such agreement provided that, for an additional two years, they would not sell their Common Stock without the approval of the Board of Directors of the Company under certain circumstances.
The terms of the Loan Agreement with HSBC include a requirement that, while any amount remains outstanding under the Facility, Mr. Dworman retain his 39.8% common stock interest in the Company and remain actively involved in the day-to-day management of the affairs of the Company and its assets.
The Management Company also employs certain individuals previously employed by the Predecessor Bank who were directly involved in managing the Company's real estate portfolio.
Transactions With Affiliates: The Company previously obtained certain services from Fintek. Effective October 31, 1991, substantially all of the employees of the Company's then-existing capital markets group became employees of Fintek, a newly-formed corporation. At the same time, Nelson L. Stephenson, a Senior Executive Vice President of the Company at the time, resigned as an officer of the Company and became the President and Chief Executive Officer of Fintek, as well as a director of Fintek. Fintek may be deemed to be under common control with the Company as a result of interests of Mr. Dworman, and, in addition, an adult child of Mr. Dworman's is a director of Fintek. Fintek, pursuant to a written agreement approved by the Company's Board of Directors, provided certain financial consulting, strategic planning and advisory services to the Company, including providing advice and consulting services with regard to the Company's treasury functions. The Company had the right to terminate the agreement (which was for a term of one year with automatic annual renewals) by giving Fintek 180 days' notice of such termination. In addition, the Company had the right to terminate the agreement by giving Fintek thirty days' notice prior to any renewal.
At June 30, 1996, the Company had an accrued aggregate liability to Fintek in the amount of $1,516,000 for services performed prior to that date. The services performed by Fintek on behalf of the Company prior to June 30, 1996 were primarily in connection with the Branch Sale. During fiscal years 2000 and 1999 the Company made aggregate cash payments to Fintek in the amount of $112,000 and $132,000. At June 30, 2000, the Company had no remaining aggregate liability to Fintek.
The Fintek Agreement was terminated by mutual consent of the Company and Fintek on June 28, 1996. Fintek has been engaged by the Management Company (at the Management Company's expense) to provide similar services to RB Management and the Company subsequent to the Branch Sale. See "Management."
"Company Management Services" includes the management of the general business affairs of the Company, including:
1. Developing and recommending policies and procedures appropriate for continuing the orderly management of the Company's assets and implementation of all policies and procedures approved by the Company's Board of Directors or the Asset Management Committee of the Board. 2. Providing quarterly and annual financial and operating reports and such other information to the Company's Board of Directors and the Asset Management Committee and Audit Committee as may be necessary and reasonably requested by the Company's Board of Directors or such committee. 3. Analyzing the Company's performance, including progress in continuing the orderly management of the Company's assets and preparation of financial forecasts and periodic variance analyses of actual performance relative to plan. 4. Overseeing provision of all accounting and financial reporting services, including maintenance and control of a general ledger, controlling accounts payable and processing services and payroll processing services, preparation of financial reports and regulatory compliance reports and preparation and filing of tax returns, and establishing and maintaining management information systems. 5. Providing treasury services and control functions, including: - implementing cost and disbursement controls. - cash management and investment of short-term funds. - debt management, corporate finance and development and implementation of alternative financing arrangement. 6. Overseeing legal and accounting services required by the Company. 7. Using best efforts to ensure compliance with any conditions imposed by the Banking Department on the Company as a predicate to its approval of the Branch Sale, including but not limited to, the preparation and submission to the Banking Department of required reports.
"Asset Management Services" entails management of all of the Company's assets on a day-to-day basis and include the following:
1. Maintaining and implementing individual business plans for each asset of the Company, as modified from time to time to reflect changes in conditions and circumstances. 2. Development, marketing, negotiation and execution of transactions necessary to continue to effect the Company's asset management plans, subject to the ongoing approval of the Banking Department. 3. Obtaining and overseeing marketing and brokerage activities relating to real estate managements and property leasing. 4. Managing real estate activities, including retention and oversight of third-party property managers. 5. Obtaining and overseeing third-party loan servicing, including ordinary course monthly payment collections and pay-offs. 6. Providing loan administration services, including delinquency monitoring and response and enforcement of rights under loan agreements. 7. Overseeing loan servicing activities for subordinated participations in loans acquired by HSBC in connection with the Branch Sale. 8. Administration of joint ventures and oversight of the business activities of the joint ventures.
The Management Company obtains and oversees the provision, on an outsourced basis, of those services not provided directly by the Management Company. All outsourcing arrangements is subject to prior review and recommendation as to compensation terms by the Audit Committee and as to the other terms of the engagement subject to prior approval by the Asset Management Committee of the Company's Board of Directors. The cost of approved outsourced arrangements is borne by the Company. The Management Company offers similar services to entities not affiliated with Mr. Dworman, and also renders services to affiliates of Mr. Dworman.
The Management Company is paid an annual base fee for Company Management Services in an amount not to exceed $1.25 million. The annual base fee is reviewed no less frequently than annually by the Audit Committee of the Company and adjusted based upon the costs expected to be incurred by the Management Company to provide the Company Management Services. In addition, the Management Company also receives an annual fee for Asset Management Services of 0.75% of the average month-end book value of the Company's assets and a Success Fee of 0.75% of the proceeds from the sale or collection of any asset sold by the Company.
During the year ended June 30, 2000, the Company accrued expenses for services provided by the Management Company in the amount of $1,250,000 for the Base Fee payable to the Management Company, $1,060,000 for the Asset Service Fee, and $279,000 for Asset Disposition Fees in accordance with the fee schedule outlined above. During 2000, the Company paid RB Management, LLC an aggregate amount of $2,033,000. At June 30, 2000, the Company had a remaining aggregate amount payable to the Management Company of $225,000.
The Kenneth Leventhal Real Estate Group of Ernst & Young LLP, which was engaged for this purpose by the Special Transactions Committee of the Predecessor Bank's Board of Directors, reviewed the form and amount of the fees payable to the Management Company and advised upon the comparability of the fees and terms to similar arrangements negotiated on an arm's-length basis.
The Management Agreement has an initial term of three years, which will be extended for up to two additional one-year terms if the HSBC senior debt is so extended. The Management Agreement is terminable by either party at any time on 180 days' notice with the consent of HSBC or other senior lenders, as applicable. In addition, the Company's Board of Directors, subject to the consent of HSBC, may terminate the Management Agreement without notice for "Cause." "Cause" is defined as a material breach of the Management Agreement and/or willful act or omission by the Management Company that is materially detrimental to the best interests of the Company. In addition, the Management Agreement may be terminated by the Company's Board of Directors during the last year of any term 60 days after the sale of the last asset of the Company.
Upon any termination of the Management Agreement, the fees payable to the Management Company will be pro rated for such year to the date of termination. If the Management Agreement is terminated prior to the expiration of any term, the Company also reimburses the Management Company for the reasonable costs incurred by the Management Company in terminating its services to the Company including, but not limited to, reasonable termination or severance payments made to service providers or employees terminated by the Management Company as a result of such termination.
Other Service Providers: In addition to retaining the Management Company to provide the Company with the services described above, the Company, subject to regulatory approval, terminated most of its employees and retained third parties (including Fintek, Inc. and other entities controlled by Mr. Dworman) to provide much of the administrative and non-real estate operating functions of the Company's operations.
The Management Company has engaged Fintek, Inc. ("Fintek"), a firm 50% beneficially owned by Mr. Dworman which has previously provided certain advisory services to the Company, to continue to provide such services to the Company. All fees paid to Fintek for such advisory services were the obligation of the Management Company and were paid out of the fees received by the Management Company from the Company. On June 28, 1996, Fintek and the Company mutually agreed to the termination of the previous contract between Fintek and the Company.
Persons or entities engaged by the Board of Directors, the Asset Management Committee or by the Management Company on behalf of the Company entered into a service contract with the Company and are compensated in accordance with market rates for similar services. The terms of these contracts, including compensation, were reviewed prior to execution by the Audit Committee of the Board of Directors, and the Board of Directors engaged the Kenneth Leventhal Real Estate Group of Ernst & Young LLP to review each service contract and to advise the Audit Committee on the terms of the contracts and the comparability to similar arrangements for similar services.
PART IV ITEM 14
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included elsewhere in this Form 10-K at the pages indicated and are incorporated by reference:
Page ----
Report of Independent Auditor
Consolidated Statements of Financial Condition June 30, 2000 and 1999
Consolidated Statements of Operations Years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Changes in Stockholders' Equity Years ended June 30, 2000, 1999, and 1998 Consolidated Statements of Cash Flows Years ended June 30, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
[a](2) Certain financial statement schedules are omitted due to inapplicability or because the required financial information is shown in the Consolidated Financial Statements or Notes thereto.
[b] Reports on Form 8-K filed during the last quarter of the period covered by this report:
None
[c] Exhibits:
2.1* Agreement and Plan of Merger, dated as of October 9, 1997, by and between River Asset Sub, Inc. and River Distribution Sub, Inc.
2.1b ** AmendmentNo. 1, dated as of May 15, 1998, to Agreement and Plan of Merger, October 9, 1997, by and between River Asset Sub, Inc. and River Distribution Sub, Inc.
2.2 * Petition for a Closing Order, made by River Bank America to the New York State Supreme Court, dated October 15, 1997.
2.2b * Notice of Settlement of Closing Order, made by River Bank America to the New York State Supreme Court, dated December 8, 1997.
2.2c * Closing Order, signed by the New York State Supreme Court on January 9, 1998 and entered on January 14, 1998.
2.3 * Assignment and Assumption Agreement, dated as of May 11, 1998, by and between River Bank America and River Asset Sub, Inc.
3.1 *** Certificate of Merger, dated May 18, 1998, of River Asset Sub, Inc. and River Distribution Sub, Inc.
3.2 *** Certificate of Incorporation of the Company.
3.3 *** Certificate of Designation of the 15% Noncumulative Perpetual Preferred Stock, Series A, $1.00 par value, of the Company.
3.4 *** By-Laws of the Company.
4.0 + Indenture, dated as of December 30, 1998, by and between the Company and LaSalle National Bank, as Trustee (the "Indenture").
4.2 ++ First Supplemental Indenture, dated as of February 1, 1999 to the indenture.
10.1 Amended and Restated Credit Agreement dated as of January [ ], 2000 among the Company and other borrowers and HSBC USA.
10.2.* Management Agreement dated as of June 28, 1996, by and between River Bank America and RB Management Company LLC.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
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* Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 26, 1998. ** Incorporated by reference to the Company's Registration Statement on Form S-4 filed on February 28, 1998 *** Incorporated by reference to the Company's Annual Report on Form 10-K/A filed on September 28, 1998 + Incorporated by reference to the Company's Schedule 13-E4/A Issuer Tender Offer Statement filed on December 31, 1998 ++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on February 12, 1999
Supplemental Information to Be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
The Company has not mailed any proxy materials to its stockholders in connection with the Company's 2000 annual meeting of stockholders for its 2000 annual report to stockholders. The Company intends to prepare and mail such documents as soon as practicable following the setting of the record date for the annual meeting.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RB ASSET, INC. (Registrant)
Date: September 8, 2000 By: /s/Nelson L. Stephenson --------------------------- Nelson L. Stephenson President and Chief Executive Officer (principal executive and principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Frank L. Bryant, Jr. --------------------------- Date: September 8, 2000 Frank L. Bryant, Jr. Director
/s/ Alvin Dworman --------------------------- Date: September 8, 2000 Alvin Dworman Director
/s/ David J. Liptak --------------------------- Date: September 8, 2000 David J. Liptak Director
/s/ James J. Houlihan, Jr. --------------------------- Date: September 8, 2000 James J. Houlihan, Jr. Director
/s/ Jerome R. McDougal --------------------------- Date: September 8, 2000 Jerome R. McDougal Director
/s/ Edward V. Regan --------------------------- Date: September 8, 2000 Edward V. Regan Director
/s/ David A. Shapiro --------------------------- Date: September 8, 2000 David A. Shapiro Director
/s/ Jeffrey E. Susskind --------------------------- Date: September 8, 2000 Jeffrey E. Susskind Director
FINANCIAL STATEMENTS
RB ASSET, INC. Index to Consolidated Financial Statements
Report of Independent Auditors
The Board of Directors RB Asset, Inc.
We have audited the consolidated statements of financial condition of RB Asset, Inc. (the "Company"), successor to River Bank America (see Note 1), as of June 30, 2000 and 1999 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. We have also audited the financial statement schedules listed in the Index to Financial Statements included in the Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at June 30, 2000 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therin.
/s/ Ernst & Young LLP
New York, New York July 28, 2000
RB ASSET, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2000 and 1999 (Dollars in Thousands)
Assets
See Notes to Consolidated Financial Statements.
RB ASSET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, 2000, 1999, and 1998 (Dollars in Thousands, except per share data)
See Notes to Consolidated Financial Statements.
RB ASSET, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended June 30, 2000, 1999, and 1998 (Dollars in Thousands)
See Notes to Consolidated Financial Statements.
RB ASSET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2000, 1999, and 1998 (Dollars in Thousands)
(Continued on following page)
See Notes to Consolidated Financial Statements.
RB ASSET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2000, 1999, and 1998 (Dollars in Thousands)
(Continued from previous page)
See Notes to Consolidated Financial Statements.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
1. Organization, summary of significant accounting policies and accounting changes
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal business is the management of its real estate assets, mortgage loans and investment securities, under a business plan intended to maximize shareholder value. As a result of the completion of reorganization steps (the "Reorganization"), which were finalized on May 22, 1998, the Company succeeded to the assets, liabilities and business of River Bank America ("River Bank" or the "Predecessor Bank"). Prior to the Reorganization, River Bank was a New York State chartered stock savings bank and was regulated by the New York State Banking Department ("the Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance Corporation (the "FDIC").
In connection with the Reorganization, on June 23, 1998 the Predecessor Bank was dissolved and its legal existence terminated. Upon such dissolution, the capital stock of River Bank was canceled and the stock transfer records of River Bank were closed. On that date, common and preferred shareholders of River Bank received shares of the Company on a share-for-share basis so that the Company was owned by the same stockholders, in the same proportions, as owned by the Predecessor Bank on the record date.
On June 28, 1996, the Predecessor Bank sold its remaining eleven branches ("the Branch Sale") to HSBC Bank USA ("HSBC"), formerly known as Marine Midland Bank. See Note 3 to the Consolidated Financial Statements. Following consummation of the Branch Sale, all retail banking operations of the Predecessor Bank ceased.
Basis of presentation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Due to the anticipated short- term nature of such investments, investments in unconsolidated real estate partnerships are generally carried at cost, which results do not differ materially from generally accepted accounting principles, subject to periodic assessment of net realizable value. Gains on sales or dispositions of such investments are recognized dependent upon the terms of the transaction. Losses on sales or dispositions and any adjustments related to redetermination of net realizable value are charged to operations of the current period.
For the purpose of the statements of cash flows, cash equivalents are defined as those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation.
Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Money market investments: Money market investments are carried at cost, which approximates market value.
Investment and mortgage-backed securities: In accordance with Statement of Financial Accounting Standards No. 115 (SFAS-115), "Accounting for Certain Investments in Debt and Equity Securities," at June 30, 2000, the balance of stockholders' equity included a $1.1 million unrealized loss on securities classified as available for sale.
Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available for sale securities are stated at estimated fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The cost of debt and equity securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security using a method approximating the level yield method. Such amortization is included in interest income from these investments. Interest and dividends are included
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
in interest income from the respective investments. Realized gains and losses, and declines in value judged to be other-than-temporary, are included in net securities gains and losses. The cost of securities sold is based on the specific identification method.
Loans receivable, interest, and loan origination fees and costs: Loans receivable are stated at principal balances, net of deferred fees and costs. Interest on loans is accrued based on principal amounts outstanding. Loans are placed on non- accrual status when they become 90 days past due or at any time collection of principal or interest is doubtful unless, in the opinion of management, collection appears likely. Accrued but unpaid interest on such loans is reversed and interest income is subsequently recognized only to the extent that payments are received and when no doubt exists as to the collectibility of the remaining book balance of the asset. Interest is subsequently accrued when such loans return to full current status and have had a period of performance in accordance with a loan's terms.
Loan origination fees and certain loan origination direct costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the approximate lives of the related loans, adjusted for estimated prepayments as appropriate to provide a level interest yield.
Allowance for possible credit losses: The allowance for possible credit losses is provided by charges to operations. Credit losses, net of recoveries, are charged directly to the allowance for possible credit losses. Additions to the allowance are based on management's periodic review and evaluation of the Company's assets, the potential for loss in light of the current composition of the Company's assets, and economic conditions.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and operations for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for possible credit losses and the valuation of real estate held for investment. A substantial portion of the Company's loans are collateralized by real estate and, accordingly, the performance of such loans may be affected by market conditions for real estate. As of June 30, 2000, most of the Company's real estate held for investment is located in New York. The Company has 70% of its total assets in five real estate properties and loans. Accordingly, the ultimate collectibility of these assets collateralized by real estate is particularly susceptible to changes in local market conditions. Management believes that the allowance for possible credit losses is adequate and that real estate held for investment is properly recorded.
Real estate: The Company accounts for its real estate assets in accordance with Statement of Accounting Standard No. 121 (SFAS-121), "Accounting for the Impairment of Long Lived Assets to be Disposed Of," issued by the Financial Accounting Standards Board (the "FASB"). SFAS-121 requires that a loss is recorded for assets held for investment when events and circumstances indicate impairment and the undiscounted future cash flow generated by the investment in real estate is less than the related carrying amount. When the carrying amount of the asset may not be recoverable, the asset balance must be directly written down as part of the recorded loss. In addition, SFAS-121 requires long-lived assets held for sale to be carried at the lower of carrying value or fair value less the costs to sell. Fair value is defined in SFAS-121 as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Depreciation: Under generally accepted accounting principals ("GAAP"), SFAS-121, the Company is required to depreciate real estate held for investment over the estimated useful life of the assets. The depreciable portion of assets categorized as real estate held for investment includes the accumulated costs of acquisition and/or development of building structures and leasehold improvements. No depreciation charges are made for the portion of the asset's historical cost attributable to land. Depreciation for real estate held for investment is generally calculated on a straight-line basis over a 30 year period or over the remaining term of the lease for leasehold improvements, whichever period is less. On May 22, 1998, as a consequence of the Reorganization, the Company was no longer subject to the categorization and depreciation regulations for investments in real estate previously imposed by the Predecessor Bank's regulators. Accordingly, as of that
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
date, the Company began to record depreciation charges, as required by GAAP, for all real estate held for investment, that had not been subject to depreciation charges in prior periods.
Retirement plan: The Company has a contributory 401(k) plan and a non-contributory pension plan (the "Plan") covering substantially all of its employees. During 1992, the Company adopted an amendment to the Plan which ceased the accrual of benefits under the Plan ("Plan suspension") effective April 30, 1992. The Plan was further amended to exclude employees hired on or after April 30, 1992 from participating in the Plan.
Income taxes: For federal income tax purposes, the Company files a consolidated tax return with its subsidiaries on a calendar year basis. The Company files combined New York State and New York City income tax returns with various subsidiaries. In addition, certain subsidiaries file on a separate basis in New York and the Company and certain subsidiaries file income and franchise tax returns in various other states.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. To the extent that current available evidence about the future raises doubt about the realization of deferred tax assets, a valuation allowance must be established. Deferred tax assets and liabilities are measured using enacted tax rates which are expected to be applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Recent Accounting Pronouncements:
SFAS No. 133 and No. 137. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, which was deferred until June 30, 2000 as a result of the promulgation of SFAS-137, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to the Company's limited use of derivative instruments, the adoption of SFAS-133 will not have a significant effect on the Company's results of operations or its financial condition.
Other Pronouncements. In December, 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition ("SAB No. 101"), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. Specifically, SAB No. 101 provides guidance on lessors' accounting for contingent rent. SAB No. 101 explains the SEC staff's general framework for revenue recognition. SAB No. 101 does not change existing literature on revenue recognition, but rather clarifies the SEC's position on preexisting literature. SAB No. 101 did not require the Company to change existing revenue recognition policies and therefore had no impact on the Company's financial position or results of operations at June 30, 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
2. Reorganization
On May 22, 1998, River Bank completed its Reorganization into a Delaware corporation named RB Asset, Inc., under a plan that was approved by the stockholders of River Bank. Prior to the Reorganization, River Bank was a New York State chartered stock savings bank and was regulated by the New York State Banking Department ("the Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance Corporation (the "FDIC"). Prior to the
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
Reorganization, the Predecessor Bank was therefore subject to extensive regulation, examination and supervision by the Banking Department and by the FDIC. As a Delaware corporation, no longer engaged in banking activities, the Company is no longer subject to regulation by the Banking Department or the FDIC.
In connection with the Reorganization, on June 23, 1998 the Predecessor Bank was dissolved and its legal existence terminated. Upon such dissolution, the capital stock of River Bank was canceled and the stock transfer records of River Bank were closed. On that date, common and preferred shareholders of River Bank received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset, Inc. was owned by the same stockholders, in the same proportions, as owned the Predecessor Bank on the record date. The transfer of assets, liabilities and business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free reorganization under the Internal Revenue Code and, as such, the Company expects that certain of the Predecessor Bank's tax attributes have been preserved.
3. Purchase of Assets and Liability Assumption Agreement
On June 28, 1996, the Predecessor Bank had consummated the transactions (the "Branch Sale") contemplated by the Purchase of Assets and Liability Assumption Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank. Following consummation of the Branch Sale, all retail banking operations of the Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and acquired assets with an aggregate carrying value of $1,066.6 million (the "Transferred Assets"). The Transferred Assets consisted primarily of loans secured by real estate, mortgage-backed and investment securities, and 11 bank branch offices, inclusive of the name East River Savings Bank. Included in the Transferred Assets was approximately $32.4 million of loans in which the Predecessor Bank was granted subordinated participation interests. Also included in the Transferred Assets were the proceeds of dispositions from five individual asset sale transactions with parties other than HSBC, aggregating $60.4 million, composed of real estate assets, loans and other receivables (the "Asset Sale Transactions"). The Asset Sale Transactions were structured to include ongoing recourse to, and participation by, the Predecessor Bank with respect to the assets sold, based upon the net proceeds realized on disposition of assets by the purchasers.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets, including primarily real estate assets and non- performing loans. The balance of the assets retained after the Branch Sale primarily consisted of performing loans (including loans sold with recourse, subordinated participations, junior subordinated participations, loans to facilitate the sale of real estate owned and mortgage and other loans) and a modest amount of cash and investment securities (collectively, the "Retained Assets"). Over the five year period preceding the Branch Sale, the Bank's primary loan origination focus was single-family (one-to-four units) and, to a lesser extent, multi-family (five or more units) residential loans secured by properties in the New York City metropolitan area. Primarily as a result of conditions imposed by the NYSBD and the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor Bank and the Company have not originated a material amount of loans.
Subsequent to the closing of the Branch Sale, the Company no longer retained a significant number of employees to manage the Company's affairs. Rather, day-to-day management responsibilities of the Company have been obtained from RB Management Company, LLC ("RB Management"), a management company affiliated with Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company.
4. Regulatory capital requirements
Subsequent to the termination of the Predecessor Bank's status as an insured nonmember bank by the FDIC and the reorganization of the Predecessor Bank into a Delaware corporation, the Company is no longer subject to the regulatory capital requirements of either the FDIC or the Banking Department.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common Stock outstanding during the years ended June 30, 2000, 1999, and 1998, respectively. The Company had no securities outstanding that were convertible to common stock at June 30, 2000, 1999 and 1998.
6. Cash due from banks and cash equivalents
Included in Cash, due from banks and cash equivalents at June 30, 2000, are approximately $2.5 million in Funds maintained on deposit by wholly-owned subsidiaries and required to meet ongoing cash flow requirements of those subsidiaries. At June 30, 2000, HSBC had restricted a total of $7.5 million in funds, held on deposit with HSBC, in accordance with the terms of the HSBC Facility agreement. At June 30, 1999, HSBC had restricted a total of approximately $13.4 million. Restricted funds held by HSBC are not available to the Company for the settlement of any of the Company's current obligations. The restricted cash reserves arose from the sale of assets which had served as primary collateral for the HSBC Facility. The restricted cash held by HSBC is intended to serve as substitute collateral for the HSBC Facility, until such time as the HSBC Facility is reduced in accordance with the Company's Asset Management Plan and the HSBC Facility agreements.
7. Investment securities available for sale, net
The amortized cost of investment securities available for sale and their estimated fair values at June 30, 2000 are as follows:
The amortized cost of investment securities available for sale and their estimated fair values at June 30, 1999 are as follows:
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
8. Loans receivable, secured by real estate
Loans secured by real estate at June 30, 2000 and 1999 consist of the following:
June 30, June 30, 2000 1999 ------ ----- One-to-four family residential $ 1,031 $ 1,229 Multi-family residential 31,308 21,519 Commercial -- 30,949 ---------- --------- $ 32,339 $ 53,697 ========== ========
In accordance with SFAS No. 114 (SFAS-114), "Accounting by Creditors for Impairment of a Loan," the Company considers a loan impaired if, based on current information and events, it is probable that all amounts due under the loan agreement are not collectable. Impairment is measured based upon the fair value of the underlying collateral.
At June 30, 2000 and 1999, the recorded investment in loans that are considered to be impaired under SFAS-114 were $14,450 and $18,047, respectively (of which $14,450 and $16,191 were on a non-accrual basis). The related allowance for credit losses is $6,679 and $7,679. The average investment in impaired loans during the years ended June 30, 2000 and June 30, 1999, were $16,523 and $18,589, respectively. For the years ended June 30, 2000 and June 30, 1999 the Company recognized interest income on those impaired loans of $81 and $84, respectively, using the cash basis of income recognition.
At June 30, 2000 and 1999, the Company had restructured 2 and 3 loans, respectively, secured by real estate which aggregated $31,308 and $20,882, respectively. The amount of interest on these loans that was included in interest income for the year ended June 30, 2000, and 1999 is $793 and $501.
9. Commercial and consumer loans
Commercial and consumer loans at June 30, 2000 and 1999 consist of the following:
June 30, June 30, 2000 1999 ------ ----- Commercial loans: Secured $ 1,000 $ 2,520 Unsecured 6,247 5,939 ------------- ------------- 7,247 8,459 Consumer loans: Student education loans -- 1,855 ------------- -------------
Total commercial and consumer loans $ 7,247 $ 10,314 ============= =============
During the year ended June 30, 2000, the Company's portfolio of consumer loans, which consisted of receivables secured by student education loans was repaid in full.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
10. Allowance for possible credit losses
The following is an analysis of the allowance for possible credit losses for the years ended June 30, 2000 and 1999:
2000 1999 ------------ ------------ Balance at July 1, 1999 and 1998 $ 18,155 $ 20,037 Provision charged to operations -- -- Charge-offs, net of recoveries (4,814) (1,882) ------------ ------------ Balance at June 30, 2000 and 1999 $ 13,341 $ 18,155 ============ ============
Charge-offs, net of recoveries, relate to losses incurred and recoveries realized in the sale or liquidation of assets.
At June 30, 2000, the total provisions for possible credit losses were allocated to real estate loans in the amount of $8,634 and to commercial and consumer loans in the amount of $4,707. At June 30, 1999, the total provisions for possible credit losses were allocated to real estate loans in the amount of $15,815 and to commercial loans in the amount of $2,340.
11. Real estate held for investment
Real estate held for investment at June 30, 2000 and 1999, respectively, consists of the following:
June 30, 2000 June 30, 1999 ------------- ------------- Number of Number of Properties Amount Properties Amount ---------- ------ ---------- ------ Land Held for Development 2 $ 15,625 2 $ 13,774 Multi-family 3 58,962 3 60,327 Commercial real estate: Office buildings 2 23,749 2 17,577 Other 1 985 1 760 --- --------- --- ---------- 8 $ 99,321 8 $ 92,438 === ========= === ==========
At June 30, 2000, the Company's principal real estate held for investment properties consists of a multi-family apartment complex located in Philadelphia, PA, an office building complex in Atlanta, GA, co-operative apartment shares in New York, NY and two parcels of land held for development located in the Borough of The Bronx, New York, New York. The book values of the three real estate investment properties held for investment are $53.7 million, $19.0 million and $7.1 million, respectively and the book value of the land held for development is $15.6 million .
The Company has used currently-available information to establish valuations for real estate held for investment at June 30, 2000. Although the best available information was used to determine real estate valuations and corresponding reserves for possible loan losses, future writedowns of real estate held for investment may be necessary based on changes in economic conditions, the receipt of newly-available information involving specific properties, or changes in management strategies.
In order to facilitate the development of the Company's three-building office complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by two buildings under development within this office complex. At June 30, 2000, approximately $3.7 million had
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
been advanced under the Construction Loan. The completion of the development of this project is anticipated prior to June 30, 2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a maturity date in May 2003. The loan allows for the deferral of interest until May 2003 or such time as the collateral buildings are disposed of through sale. The Company has incurred approximately $41,000 in interest during the year ended June 30, 2000, which has been added to the outstanding balance of the Construction Loan and has also been accounted for as an addition to the Company's investment in the office complex project.
12. Real estate held for disposal
Real estate held for disposal, net of a valuation allowance of $40 at both June 30, 2000 and 1999, respectively, consists of $2.0 million in units within multi-family residential expected to be sold within one year. There was no activity in the valuation allowance for real estate held for disposal for the years ended June 30, 2000 and 1999.
At June 30, 2000 and 1999, the Company's principal real estate held for disposal properties consisted of co-operative apartment shares in New York, NY, from which only minimal rental income was derived. Net rental income from investments in real estate held for sale were $31 and $66 for the years ended June 30, 2000 and 1999, respectively.
Management believes that the allowance for possible losses is adequate and that real estate held for disposal is properly valued. The Company has used currently available information to establish reserves and resultant net valuations for real estate held for disposal at June 30, 2000 and 1999.
13. Other assets
Other assets at June 30, 2000 and 1999 consist of the following:
June 30, June 30, 2000 1999 ---- ---- Accrued interest receivable $ 546 $ 348 Prepaid pension expenses and other assets 1,879 2,799 -------- --------- $ 2,425 $ 3,147 ======== =========
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
14. Borrowed funds
Borrowed funds and weighted average year-end interest rates at June 30, 2000 and 1999 consist of the following:
Initial Facility with HSBC: The closing of the Branch Sale was conditioned upon the Company's obtaining financing with terms reasonably acceptable to the Company and determined to be adequate to permit consummation of the Branch Sale. At June 28, 1996, the Company obtained from HSBC a loan facility (the "Facility") consisting of eleven independent mortgage loans with additional collateral, in an aggregate amount not to exceed of $100.0 million. As of June 30, 1996, HSBC had extended $89.8 million under the Facility to the Company.
Proceeds of the Facility were utilized by the Company to (i) refinance all or part of the certain indebtedness secured by assets to be transferred to HSBC, including all or a substantial part of the outstanding advances from the Federal Home Loan Bank and (ii) provide additional funds for the development and completion of two individual real estate assets as part of the Company's operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as three-year term loans with options to extend the initial term for two additional one-year periods subject to the Company's achieving pre-agreed minimum repayment amounts which are equal to 60% and 30% of the original aggregate amount of the Facility and remaining fully current on all obligations and in compliance with all covenants. The Company remained current on all obligations and remained in compliance with all covenants related to the Facility. Accordingly, the agreement was extended by mutual agreement between the Company and HSBC in June 1999 through June 30, 2000.
The Facility was secured by first priority mortgage liens on eleven of River Bank's real estate assets approved by HSBC and collateral assignments of first priority mortgages held by the Predecessor Bank (the "Primary Collateral"). Each of the loans was cross defaulted with each other and cross collateralized by all collateral for the Facility. As additional collateral for the Facility, each loan was also secured by first priority mortgages (or, where applicable, a collateral assignment of first priority mortgages held by the Company), stock pledges and assignment of partnership interests and assignment of miscellaneous interests on additional Bank assets (the "Additional Collateral"). The Company collaterally assigned to HSBC all of the cash flow from the Primary Collateral and the Additional Collateral. Substantially all net proceeds from the sale of Primary Collateral assets by the Predecessor Bank and, later, the Company, were applied to the prepayment of the Facility.
The Facility was priced at 175 basis points over LIBOR for the initial six months following June 28, 1996, automatically increasing by 25 basis points at the beginning of each of the subsequent three six month periods and will be priced at 275 basis points over LIBOR for the third year of the Facility. In the event that the Company elects to exercise its option to
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
extend the initial term of the Facility, the Facility will be priced at 300 basis points over LIBOR during the initial one year extension and 325 basis points over LIBOR during the second one year extension. Following maturity or an event of default, the Facility will accrue interest at a specified default rate.
The terms of the Facility agreement required that while any amounts remain outstanding under the Facility, the Company must receive HSBC's prior written consent to, among other things, materially alter its charter or by-laws, incur additional corporate indebtedness and liens, make any distributions to stockholders or repurchases or redemptions of capital stock, acquire additional assets, exchange existing assets with a third party or assume additional liabilities as a result of any proposed merger transaction.
On October 1, 1998, a modification of the loan agreement between HSBC and the Company became effective. This modification effectively reduced the rate of interest paid by the Company to HSBC by providing compensating balance credits to the Company for funds it held on deposit with HSBC. As a result of this modification the average interest paid to HSBC declined from approximately 8.17% in 1998 to 6.53% in 1999 and declined further to 4.89% in 2000. The decline in the effective interest rate paid to HSBC for the facility in 2000, as compared with 1999, was also partially attributable to a refinancing of the Facility which took place in January 2000 (see below).
Refinanced Facility with HSBC. On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The Facility is secured by a first lien on two properties, certain cooperative shares in a third property and a restricted cash collateral account (the Special Collateral) in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions.
As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was released from all liens held by HSBC. Accordingly, the balance of the Company's unrestricted cash was increased $29.4 million by an offsetting reduction in the Company's restricted cash of $29.4 million, from $36.9 million at June 30, 1999 to $7.5 million at June 30, 2000.
Under the terms of the modified agreement, the Facility currently is subject to a an annual interest rate equal to the Prime lending rate, or the three-month London Interbank Offered Rate (LIBOR) plus 2%, at the option of the Company. Notwithstanding the foregoing, interest on the Facility shall accrue at 2% per annum on the portion of the outstanding Facility balance that is equal to the combined balances of the Special Collateral account and the portion of unrestricted funds that remain on deposit with HSBC.
At June 30, 2000, the Company had $48.3 million in borrowed funds outstanding under the Facility. The Company will make monthly payments to HSBC of interest, as calculated according to the formula outlined above, and scheduled principal reductions based on a hypothetical loan amount of $34.8 million. Minimum scheduled principal reduction payments under this provision of the Facility agreement approximate $800,000 per year.
Construction Loan Facility. In order to facilitate the development of the Company's three-building office complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by two buildings under development within this office complex. At June 30, 2000, approximately $3.7 million had been advanced under the Construction Loan. The completion of the development of this project is anticipated prior to June 30, 2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a maturity date in May 2003. The loan allows for the deferral of interest until May 2003 or such time as the collateral buildings are disposed of through sale. The Company has incurred approximately $41,000 in interest during
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
the year ended June 30, 2000, which has been added to the outstanding balance of the Construction Loan and has also been accounted for as an addition to the Company's investment in the office complex project.
15. Other liabilities
Other liabilities at June 30, 2000 and 1999 consist of the following:
June 30, June 30, 2000 1999 ------ ----- Accrued interest payable $ 725 $ 754 Accrued income taxes 6,066 6,290 Accounts payable and accrued expenses 1,286 4,120 Postretirement benefits obligation 3,423 3,914 Preferred Stock dividend, declared and unpaid 879 879 ---------- ---------- $ 12,379 $ 15,957 ========== ==========
16. Stockholders' equity
On June 30, 1994, the Predecessor Bank consummated the placement ("Offering") of 5,500,000 shares of its common stock, par value $1.00 per share ("Predecessor Common Stock"), and 1,400,000 shares of 15% noncumulative perpetual preferred stock, series A, par value $1.00 per share ("Predecessor Preferred Stock") which resulted in net proceeds to the Predecessor Bank of $78,200. The issuance price of the offered stock was $9 per share for the Predecessor Common Stock and $25 per share for the Predecessor Preferred Stock. The Predecessor Bank's Restated Organization Certificate was amended prior to consummation of the Offering in order to authorize the issuance of up to 30,000,000 shares of Predecessor Common Stock and 10,000,000 shares of Predecessor Preferred Stock. Prior to the offering, the Predecessor Bank had 1,000,000 shares of Predecessor Common Stock issued and outstanding, plus warrants to purchase an additional 690,000 shares of Predecessor Common Stock. The Predecessor Bank also had 200,000 shares of 3% Noncumulative Senior Preferred Stock and 130,000 shares of 4% Noncumulative Preferred Stock issued and outstanding (each of which series of preferred stock had a liquidation value of $100 per share). Substantially concurrently with the Offering these shares were exchanged for 600,000 shares of Predecessor Common Stock and outstanding warrants to purchase Predecessor Common Stock were canceled. The Predecessor Bank had 7,100,000 shares of its Predecessor Common Stock and 1,400,000 shares of its Predecessor Preferred Stock outstanding at June 30, 1997.
In connection with the Reorganization (See Note 2), the stockholders of the Predecessor Bank received substantially identical capital stock of the Company (with substantially identical rights and privileges) on a share for share basis and as a result the Company had 7,100,000 shares of its common stock, $1.00 par value Company Common Stock, and 1,400,000 shares of its 15% non-cumulative perpetual preferred stock, series A, $1.00 par value ("Company Preferred Stock"), outstanding at June 30, 1998. Mr. Alvin Dworman, continues to be the largest stockholder of the Company with 2,768,400 shares or 39% of the Company Common Stock outstanding.
The Company's certificate of incorporation authorizes the issuance of up to 30,000,000 shares of Company Common Stock and 10,000,000 shares of preferred stock, of which 1,400,000 have been designated and issued as the Company Preferred Stock pursuant to the certificate of designation with respect thereto. The Company Preferred Stock is perpetual and is not subject to any sinking fund or other obligation of the Company to redeem or retire it.
The board of directors of the Company has the power from time to time to issue additional shares of Company Common Stock or perpetual preferred stock authorized by its certification of incorporation without obtaining approval of the Company's stockholders. The board of directors has the power to fix various terms with respect to additional shares of preferred stock, including voting powers, designations, preferences, price, dividend rate, conversion and exchange provisions, redemption provisions and the amounts that holders are entitled to receive upon any dissolution, liquidation or winding up of the Company.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
The Company may pay dividends on common stock as declared from time to time by the Board of Directors out of funds legally available therefor. Except as provided with respect to any series of Preferred Stock, the holders of Common Stock possess exclusive voting rights in the Company. Each holder of Common Stock is entitled to one vote for each share held on all matters voted upon by stockholders. Stockholders are not permitted to cumulate votes in elections of directors. Subject to the prior rights of the holders of any shares of Preferred Stock that may be outstanding, in the event of any liquidation, dissolution or winding up of the Company, the holders of the Common Stock would be entitled to receive, after payment of all debts and liabilities of the Company (including all deposit accounts and accrued interest thereon) and, after distribution of the balance, if any, in the liquidation account maintained for certain depositors of the Company at the time of the Conversion, all assets of the Company available for distribution.
The Company had 937,777, 937,777, and 1,400,000 shares of its Preferred Stock, which were issued in connection with the Offering, outstanding at June 30, 2000, 1999, and 1998. During the year ended June 30, 1999, 462,223 shares of the Company's Preferred Stock were exchanged for Increasing Rate Junior Subordinated Notes due 2006 under the terms of the Company's Preferred Stock Exchange Offer. See Note 24, below.
The Company's Preferred Stock is perpetual and is not subject to any sinking fund or other obligation of the Company to redeem or retire it. The par value of the Preferred Stock is $1.00 per share. This stock ranks prior to the Common Stock with respect to dividend rights and rights upon the voluntary or involuntary dissolution, liquidation or winding up of the Company, and to all other classes and series of equity securities of the Company hereafter issued, other than any class or series of equity securities of the Company expressly designated as being on a parity with or senior to the Preferred Stock with respect to dividend rights or rights upon any such dissolution, liquidation or winding up. The Common Stock and any other classes or series of equity securities of the Company not expressly designated as being on a parity with or senior to the Preferred Stock are referred to hereafter as "Junior Stock." The rights of holders of shares of Preferred Stock are subordinate to the rights of the Company's creditors, including its depositors. The Company may not issue any capital stock that ranks senior to the Preferred Stock without the approval of holders of at least 66% of the outstanding shares of Preferred Stock, voting as a class.
Holders of Company's Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, noncumulative cash dividends at the rate of 15% per annum. The right of holders of Preferred Stock to receive dividends is noncumulative. Accordingly, if the Board does not declare a dividend payable in respect of any quarterly dividend period (a "Dividend Period"), then holders of Preferred Stock will have no right to receive, and the Company will have no obligation to pay, a dividend in respect of such Dividend Period, whether or not dividends are declared payable in respect of any future Dividend Period. No full dividends may be declared or paid or set aside for payment as dividends on any class or series of equity securities ranking, as to dividends, on a parity with the Preferred Stock for any Dividend Period unless full dividends on the Preferred Stock for such Dividend Period shall have been paid or declared and set aside for payment.
Dividends on the Preferred Stock will not be declared and paid if payment of such dividends is then restricted by (i) laws, rules, regulations or regulatory conditions applicable to the Company or (ii) orders, judgments, injunctions or decrees issued by, or agreements with, federal or state authorities with respect to the Company. The Company is not permitted to declare or pay dividends (whether in cash, stock or otherwise) on its common or preferred stock without the prior written consent of HSBC.
The Predecessor Bank had previously received notice that the approvals necessary to declare or pay dividends on the Predecessor Bank's outstanding shares of River Bank Predecessor Preferred Stock would not be provided. In June 1996, the Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock dividend for the quarter ending June 30, 1996, payment of which was subject to the receipt of required approvals from the FDIC and the NYSBD (the Predecessor Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the Company's principal lender). Primarily as a result of the above, neither the Company's nor the Predecessor Bank's Board of Directors have taken any action
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
regarding a quarterly dividend on the Company's Predecessor or Company Preferred for any of the quarterly periods ended from September 30, 1996 through June 30, 1999. Although the Company is no longer subject to the jurisdiction of either the FDIC or the NYSBD, declaration or payment of future dividends on the Company's Preferred Stock will continue to be subject to the approval of HSBC for as long as the Facility remains outstanding. The Company has received notice from HSBC that the approval necessary to declare or pay dividends on the Company's Preferred Stock will not be provided at this time. There can be no assurance that the Board of Directors of the Company will deem it appropriate to pay dividends on the Company preferred Stock, even if permitted to do so by HSBC.
Holders of the Preferred Stock will not be entitled to vote upon the election of members of the Board or other matters in general. Holders of the Preferred Stock, however, will be entitled to elect two members of the Company's Board to fill two newly-created directorships upon the occurrence of a "Voting Event." A Voting Event occurs if the Company fails to pay full dividends on the Preferred Stock (or to declare such full dividends and set apart a sum sufficient for payment thereof) with respect to each of any six Dividend Periods, whether consecutive or not. Two members of the Company's Board of Directors were elected to represent the holders of the Company's preferred stock on September 16, 1998 at the Company's annual meeting.
The Preferred Stock is perpetual and is not redeemable prior to July 1, 2004. The Preferred Stock is redeemable by the Company at its option at any time on or after July 1, 2004, in whole or in part, at the per share redemption prices set forth below in cash, plus in each case an amount in cash equal to accrued but unpaid dividends for the then-current Dividend Period up to, but excluding, the date fixed for redemption (the "Redemption Date") without the accumulation of unpaid dividends for prior Dividend Periods:
July 1, 2004 to June 30, 2005 $27.50 July 1, 2005 to June 30, 2006 27.25 July 1, 2006 to June 30, 2007 27.00 July 1, 2007 to June 30, 2008 26.75 July 1, 2008 to June 30, 2009 26.50 July 1, 2009 to June 30, 2010 26.25 July 1, 2010 to June 30, 2011 26.00 July 1, 2011 to June 30, 2012 25.75 July 1, 2012 to June 30, 2013 25.50 July 1, 2013 to June 30, 2014 25.25 July 1, 2014 and thereafter 25.00
If fewer than all the outstanding shares of Preferred Stock are to be redeemed, the shares to be redeemed shall be selected pro rata or by lot or by such other method as the Board of Directors of the Company, in its sole discretion, determines to be equitable.
In the event of a change of control, the acquirer ("Note Issuer") may, at its option, exchange (the "Note Exchange") all or part of the outstanding Preferred Stock for subordinated notes (the "Notes") of the Note Issuer, provided that any such Note Issuer is an insured depository institution within the meaning of the FDIC. Pursuant to a Note Exchange, each $1,000 in liquidation value of the shares of Preferred Stock covered thereby will be exchangeable for $1,000 principal amount of Notes. Such Notes shall have the terms, covenants and conditions set forth under "Description of Notes" below. The rate of interest on the Notes shall be 15%, the maximum principal amount of the Notes shall be 100% of the aggregate liquidation preference of the Preferred Stock to be exchanged and the principal of such Notes shall not be payable prior to July 1, 2004. Subject to the FDIC approval of the Notes as Tier 2 capital of the Note Issuer, the Note Issuer may elect to consummate the Note Exchange at any time following a change of control and prior to July 1, 2014.
As a result of the capital stock distribution steps described in Note 2 to the Consolidated Financial Statements, all of the capital stock of an interim predecessor of the Company was distributed to stockholders of the Predecessor Bank on a share-
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
for-share basis such that following consummation of the Reorganization each holder of the capital stock of the Predecessor Bank is now the holder of corresponding capital stock of the Company. The capital stock of the Company has rights and privileges substantially identical to those of the capital stock of the Predecessor Bank.
17. Income taxes
At June 30, 2000, the Company had a net operating loss ("NOL") carryforward for federal income tax purposes of approximately $105.6 million attributable to tax-basis operating losses incurred in 1991 through 2000. The Company's NOL's may be carried forward 15 or 20 years and will expire in years 2006 through 2020.
For income tax purposes, certain deductions of "closely held" corporations from "passive activities" are generally deductible only against either income from passive activities or net income from an active trade or business. Passive activity losses in excess of the amounts currently allowed are suspended and may be carried forward indefinitely to offset taxable income from passive activities or from an active trade or business in future years, or will generally be fully deductible upon a complete disposition of the underlying passive activity. At June 30, 2000, the Company had suspended passive activity losses for federal income tax purposes of approximately $2,306, suspended passive activity credits, which are subject to similar limitations, of approximately $5.5 million and additional non-passive credits of $555 and $784 which were generated in 1995 and 1994, respectively, and will expire in the years 2009 to 2010 if not used. Alternative minimum tax payments of $2.5 million may be carried forward as a credit to offset regular federal tax liabilities in future years, subject to certain limitations.
The Reorganization was structured and implemented in a manner intended to constitute a tax-free "reorganization" for Federal income tax purposes, within the meaning of section 368 of the Code. Consequently, the Reorganization was reasonably characterized as a tax-free "reorganization." However, the ability of the Reorganization to qualify as a tax-free reorganization turns on certain unresolved and complex issues of tax law as to which there are no clearly established legal precedents and for which the Company has not requested a ruling from the IRS. As a result, the IRS or a court could determine that the Reorganization did not constitute a tax-free reorganization. If such a determination were made and sustained, certain of the tax consequences described above would not apply. In particular, the Predecessor Bank's stockholders would be required to recognize gain upon the deemed exchanges of River Bank capital stock for RB Asset Common Stock and RB Asset Preferred Stock to the extent that the fair market value of any RB Asset capital stock received exceeded the basis of the River Bank capital stock deemed exchanged therefor, and their holding period would begin on the date of the exchange. Recognition of loss on such deemed exchanges might not be allowed until the stockholders dispose of some or all of their RB Asset, Inc. Capital Stock. Moreover, the Predecessor Bank would be required to recognize gain on its disposition and distribution of property in connection with the Reorganization and any loss on such disposition and distribution may be required to be deferred until RB Asset, Inc. were to sell the assets to an unrelated third party; and, to the extent its tax attributes were not used to offset any gain, RB Asset, Inc. would not succeed to them.
Under current tax law, the Company's ability to utilize certain tax benefits in the future may be limited in the event of an "ownership change," as defined by the Internal Revenue Code Section 382 and the regulations thereunder. In the event that the Offering discussed in Note 17 is deemed to result in an ownership change, the subsequent utilization of net operating loss carryforwards, suspended passive activity losses and credits, alternative minimum tax credit carryforwards and certain other built-in losses would be subject to an annual limitation as prescribed by current regulations. The application of this limitation could have a material effect on the Company's ability to realize its deferred tax assets. The Company is of the view that no ownership change of the Company has occurred as a result of the Offering. The Company believes that the Offering, when combined with prior changes in ownership of stock of the Company and other transactions affecting ownership of the capital stock of the Company which occurred in connection with the Offering, also did not result in an ownership change of the Company. However, the application of Section 382 is in many respects uncertain. In assessing the effects of prior transactions and of the Offering under Section 382, the Company made certain legal judgments and certain factual assumptions. The Company has not requested nor received any rulings from the IRS with respect to
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
the application of Section 382 to the Offering and the IRS could challenge the Company's determinations. The significant components of the net tax effects of temporary differences and carryforwards that give rise to the deferred tax assets and liabilities at June 30, 2000, 1999 and 1998 are presented below:
The Company's ability to realize the excess of the gross deferred tax asset over the gross deferred tax liability is dependent upon its ability to earn taxable income in the future. As a result of recent losses and other evidence, this realization is uncertain and a valuation allowance has been established to reduce the deferred tax asset to the amount that management of the Company believes will more likely than not be realized. The valuation allowance increased during the fiscal year ended June 30, 2000 by $2.0 million. This increase relates to the increase in the excess of the gross deferred tax assets over the gross deferred tax liability.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
The components of the provision for income taxes for the fiscal years ended June 30, 2000, 1999 and 1998 are as follows:
June 30, June 30, June 30, 2000 1999 1998 ---- ---- ---- Current: Federal $ -- $ -- $ -- State and local(benefit) 651 550 434 Deferred -- -- -- ---------- ---------- ---------- $ 651 $ 550 $ 434 ========== ========== ==========
The table below presents a reconciliation between the expected tax expense (benefit) and the recorded tax provision for the fiscal years ended June 30, 2000, 1999 and 1998 which have been computed by applying the statutory federal income tax rate (35%) to income/(loss) before provision for income taxes.
18. Leases
The Company is not obligated for any material amounts under the terms of any non-cancelable operating leases.
19. Other operating expenses
During the year ended June 30, 2000, the Company accrued expenses for services provided by RB Management in the amount of $1,250 for corporate management services, $1,060 for asset management services, and $280 for Asset Disposition Fees in accordance with a fee schedule agreement between the two entities. During 2000, the Company paid RB Management an aggregate $2,033. At June 30, 2000, the Company had a remaining payable balance due to RB Management of $225.
20. Retirement and other employee benefits
The Company maintains a noncontributory defined benefit retirement plan (the "Plan") in which substantially all employees participated. The Plan provides benefits based on the participant's years of service and compensation.
The tables on the following page provide a reconciliation of the changes in the Plan's benefit obligations and fair value of assets for the years ended June 30, 2000, 1999 and 1998 and a statement of the funded status of the Plans as of June 30, 2000, 1999 and 1998.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
The following table provides the amounts recognized in the statement of financial condition as a component of other assets at June 30, 2000, 1999 and 1998:
June 30, June 30, June 30, 2000 1999 1998 ------ ------ ----- Prepaid benefit cost $ 1,212 $ 1,257 $ 1,289 Accrued benefit liability -- -- -- Intangible asset -- -- -- ------------ ------------ ------------ Net periodic pension benefit $ 1,212 $ 1,257 $ 1,289 ============ ============ ============
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
The following table provides the components of the net periodic benefit cost for the Plan for the years ended June 30, 2000, 1999 and 1998:
The weighted average assumptions used in the measurement of the Company's benefit obligations at June 30, 2000, 1999 and 1998 are provided in the following table:
In connection with contractual termination agreements, certain former officers of the Company have been granted additional retirement benefits, net of amounts provided by the Plan, based in part on additional years of service and early retirement subsidies. These retirement benefits are accounted for as deferred compensation arrangements. The liability for these retirement benefits at June 30, 2000, 1999 and 1998 aggregated $702, $722 and $746, respectively. The related expense for the years ended June 30, 2000, 1999, and 1998 was $403, $192 and $192, respectively.
Retirement benefits are also provided through a 401(k) plan which, through December 1993, allowed participants to contribute up to 6% of their compensation to the plan. The Company matched 100% of employee contributions. In January 1994, the 401(k) plan was amended to allow "non-highly compensated" participants to contribute up to 15% of their compensation to the Plan with the Company matching 100% of the contributions up to 6% of their compensation. In addition, the Company provides for the cost of administering the 401(k) plan. The costs of providing such benefits are not material to the results of operations.
In addition to providing retirement benefits, the Company provides various health care and life insurance benefits for retired employees. These benefits are provided through insurance companies and health care organizations and are primarily funded by contributions from the Company and its employees. Subsequent to December 31, 1993, the Company amended its retiree health care which became effective April 1, 1994 to require contributions from retirees including deductibles, co- insurance and reimbursement limitations.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
21. Postretirement benefits other than pensions
The Company sponsors a voluntary, unfunded defined benefit postretirement medical and a funded postretirement life insurance plan to all full time employees who retired from the Company prior to July 1, 1991. In addition, full time active employees with ten years of service as of July 1, 1991 and who retire early with at least twenty years of service, or retire on or after age 65 are eligible to participate.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" as of July 1, 1994.
The funded status of the Company's Plan at June 30, 2000, 1999, and 1998 is as follows:
The net periodic postretirement benefit cost of the Company's Plan for the years ended June 30, 2000, 1999, and 1998 include the following components:
For measurement purposes, an 8.0% annual increase in the per capita cost of covered health care benefits was assumed for fiscal 2000 and 1999. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 2000 by $286 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for fiscal 2000 by $19.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for the years ended June 30, 2000 and 1999. As the plan is unfunded, no assumption was needed as to the long term rate of return of assets.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
22. Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. SFAS No. 107 defines fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. SFAS No. 107 uses the same definition for a financial instrument as SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk". SFAS No. 105 defines a financial instrument as cash, evidence of ownership interest in an entity, or a contract that imposes on an entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially favorable terms with the second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no ready market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected net cash flows, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax amounts and office premises and equipment. In addition, there are intangible assets that SFAS No. 107 does not recognize, such as the value of "core deposits", the Company's branch network and other items generally referred to as "goodwill."
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at June 30, 2000, 1999 and 1998:
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Short term instruments: For short term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments were
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
predominately short term: cash and due from banks, money market investments, U.S. Treasury obligations, demand deposits, accrued interest receivable and payable, mortgage escrow deposits and other financial liabilities.
Debt and equity securities: Estimated fair values for securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for investments with similar terms and credit quality.
Loans receivable: Fair values of performing loans receivable, secured by real estate, is calculated by discounting the contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect the credit risk inherent in the loans. Fair values of non-performing loans, secured by real estate, are based on recent appraisals of the underlying real estate or discounted cash flow analyses. The fair value of consumer loans is based on a third party offer.
Approximately $7,247, $8,459 and $8,459, of the Company's $39,586, $64,011 and $65,181 total loans receivable relate to commercial loans at June 30, 2000, 1999 and 1998, respectively. The Company believes that dollar amounts relating to commercial loans are relatively small in comparison to total loans receivable at June 30, 2000, 1999 and 1998, and that an estimate of fair value of commercial loans cannot be made without incurring excessive costs. Therefore, the Company concludes that it is not practicable to estimate the fair value of its commercial loan portfolio.
The Company's estimates of impairment due to collectibility concerns related to these loans are included in the allowance for possible credit losses. The weighted average of the effective interest rates and the weighted average maturity dates of commercial loans are 7.88% and 0.09 years, 8.22% and 1.09 years and 8.22% and 2.09 years at June 30, 2000, 1999 and 1998, respectively.
Borrowed funds: Fair values of borrowed funds are based on the discounted values of contractual cash flows. The discount rate is estimated using the rates currently offered for borrowed funds of similar remaining maturities.
23. Commitments and contingencies
In the normal course of the Company's business, there are outstanding various claims, commitments and contingent liabilities. The Company also is involved in various other legal proceedings which have occurred in the ordinary course of business. Management, based on discussions with legal counsel, believes that the Company will not be materially affected by the actions of such legal proceedings. However, there can be no assurance that any outstanding legal proceedings will not be decided adversely to the Company and have a material adverse effect on the financial condition and the results of operations of the Company.
24. Preferred Stock Exchange Offer
Summary. On November 25, 1998, the Company offered upon the terms and conditions set forth in its Offering Circular and the related Letter of Transmittal (which together constituted the "Exchange Offer"), to exchange $25.94 principal amount of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual Stock, Series A, par value $1.00 (the "Company Preferred Stock"), of which 1,400,000 shares were outstanding on that date.
Description of the Subordinated Notes. The following narrative describes the Subordinated Notes, issued by the Company on December 30, 1998:
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
Issue - Increasing Rate Junior Subordinated Notes due 2006 issued under an indenture (the "Indenture"), as amended on February 1, 1999, between the Company and La Salle National Bank, as trustee.
Principal Amount - $11,988,000, plus such additional principal amount of Subordinated Notes as may be issued in payment of interest on the Subordinated Notes from the date of their initial issuance until the semi-annual interest period beginning January 16, 2002.
Interest Payment Dates - January 15 and July 15 of each year, commencing July 15, 1999.
Maturity - January 15, 2006.
Interest Rate - Interest will accrue from the issuance date (December 30, 1998) at the initial rate of 8% per annum (the "Initial Rate") until the interest period beginning January 16, 2002 (the "Interest Increase Date") and will be payable, at the option of the Company, either in cash or by issuance of additional Subordinated Notes. Thereafter, interest will be payable semi-annually in cash at an annual rate increasing from the Initial rate by 0.50% per annum each semi-annual interest payment period commencing with the interest payment period beginning on the Interest Increase Date up to a maximum of 12% per annum. The Company's ability to pay in cash any installment of interest on, or principal or premium (if any) of, the Subordinated Notes is currently subject to the approval of HSBC under the terms of the Facility and its Credit Agreement, dated June 28, 1996 (the "Credit Agreement"). However, borrowings under the Credit Agreement mature on June 30, 1999, subject to the right of the Company to extend for two successive one-year periods to June 30, 2001, which date is prior to the dates on which cash payments of interest and principal are required to be made on the Subordinated Notes. There can be no assurance that HSBC will provide any such approval that may be requested by the Company in the future for payment of cash for any installment of interest or any prepayment of principal and premium, if any, prior to the dates such cash payments are required to be made under the terms of the Subordinated Notes.
Ranking - The Subordinated Notes constitute unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. At June 30, 1999, the Company had approximately $50.6 million of Senior Indebtedness outstanding. The Indenture will not limit the amount of additional indebtedness which the Company can create, incur, assume or guarantee, nor will the Indenture limit the amount of indebtedness which any subsidiary of the Company can create incur, assume or guarantee.
Mandatory Redemption - The Company will be required to redeem 1/14th (7.14285%) of the aggregate principal amount of the Subordinated Notes issued by the Company (including any issued in payment of interest) semi-annually commencing on July 15, 2002 and on each January 15, and July 15 thereafter to and including July 15, 2005 at a price of 100% of the principal amount plus accrued and unpaid interest plus, for redemptions effected after January 15, 2003, a premium as noted below. The balance of the outstanding Subordinated Notes will mature on January 15, 2006. All mandatory redemptions will be made on a pro rata basis.
Optional Redemption - The Subordinated Notes will be redeemable at the option of the Company at any time in whole or in part, by lot or pro rata as determined by the Company's Board of Directors (the "Board"), at the redemption price of 100% of the principal amount plus accrued and unpaid interest plus, for redemptions effected after January 15, 2003, a premium as noted below.
Premium - The redemption price for each redemption (mandatory or optional) effected after January 15, 2003 and the payment at maturity will include a premium based on the amount redeemed or paid. Such premium will consist of (i) 0.5% of the principal amount redeemed during the period from January 16, 2003 through and including July 15, 2003, (ii) 0.75% of the principal amount redeemed during the period from July 16, 2003 through and including January 15, 2004 and (iii) 1% of the principal amount redeemed during the period from January 16, 2004 through and including July 15, 2004, which premium will increase by 1% for redemptions during each subsequent six month period beginning each July 16 and
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
January 16 thereafter until it reaches 4% of the principal amount for the period from July 16, 2005 to January 15, 2006. Payments of a premium at maturity will also be at the rate of 4% of the principal amount paid.
The following chart illustrates the amount of premium payable on each $1,000 principal amount of Subordinated Notes during the periods indicated:
If redeemed during the six month period beginning Premium
January 16, 2003 .................................... $ 5.00 July 16, 2003 ....................................... $ 7.50 January 16, 2004 .................................... $ 10.00 July 16, 2004 ....................................... $ 20.00 January 16, 2005 .................................... $ 30.00 July 16, 2005 ....................................... $ 40.00
Purposes of the Exchange Offer. In view of the changes in the nature of the Company and its business as a result of the Reorganization described in Note 1, the Board of Directors effected the Exchange Offer for the purpose of affording all holders of the Company Preferred Stock an opportunity to exchange their shares of Company Preferred Stock for the Subordinated Notes which may have been determined by them to be a more attractive investment. As more fully described in the Offering Circular dated November 25, 1998, the Exchange Offer provided holders of the Company Preferred Stock with the opportunity to exchange perpetual preferred stock having a $25.00 per share liquidation value with non-cumulative dividend rights and no mandatory redemption provisions for $25.94 principal amount of a debt instrument maturing in seven years which requires (i) semi-annual payments of interest, payable in kind or in cash, at the Company's option, for the first three years and thereafter in cash, at rates increasing from an initial 8% per annum rate and (ii) the repayment of principal in mandatory semi-annual installments commencing after three years with increasing premiums on installments paid after four years.
By letter, dated May 22, 1998, counsel for certain holders of shares of the Company Preferred Stock advised the Company that such holders objected to the Reorganization. Specifically, such counsel alleged that the Reorganization (i) constituted a "liquidation" of River Bank America in violation of the terms of the certificate of designations of the Predecessor Preferred Stock by failing to provide for the payment to the holders of the Predecessor Preferred Stock of the liquidating distribution required by the certificate of designations of $25.00 per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was illegal under the New York Banking Law (the "NYBL") which provides, in the case of a voluntary liquidation, that the liquidating corporation shall distribute its remaining assets among its shareholders according to their respective rights and interests, (iii) violated a commitment made in River Bank's proxy statement, dated May 13, 1996, to retire the Predecessor Preferred Stock following approval and finalization of the sale of certain of its branches and assets to HSBC and (iv) constituted a breach of duty owed by River Bank's Board of Directors to the holders of the Predecessor Preferred Stock.
The Company believed such allegations were without merit. However, in an effort to resolve these claims on an amicable basis, representatives of the Company and such holders discussed from time to time since the date of such letter, certain proposals under which the Company would offer to exchange a new security for the Company Preferred Stock. In October, 1998, the Company proposed to representatives of such holders to effect an exchange offer upon substantially the terms and conditions of the Exchange Offer. Such proposal was not acceptable to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock who claimed to beneficially own, in the aggregate, 849,000 shares (approximately 60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New York, County of New York, Index No. 605226198 (the "Action" ), against the Company, certain of its predecessors and
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
certain of its directors (collectively, the "Defendants"). The complaint in the Action alleged (the "Allegations"), among other things, that (i) the Defendants breached the certificate of designations relating to the Predecessor Preferred Stock by fraudulently transferring assets of River Bank and by illegally amending the certificate of designations, (ii) the Defendants fraudulently conveyed the assets of River Bank, thereby depriving the holders of a liquidating distribution, (iii) the Defendants violated the NYBL by liquidating River Bank without making the liquidating distribution required by the NYBL and by denying holders appraisal rights to which they were entitled by the NYBL, (iv) the Defendants breached their fiduciary duty to holders by depriving them of their liquidating distribution, (v) the Defendants breached their duty of disclosure by omitting from the Proxy Statement dated March 27, 1998 material facts relating to the holders' rights to receive a liquidating distribution, their appraisal rights for their shares and the requirement that holders vote as a class with respect to the amendment of the certificate of designations, (vi) the Defendants' implementation of the liquidation of River Bank and the amendment of the certificate of designations were ultra vires and should be declared void and (vii) the intentionally tortious nature of the Defendants' conduct bars them from seeking indemnification for their actions and, therefore, the Defendants should be enjoined from seeking indemnification for damages or attorney's fees relating to the Action.
The Company believes that the Allegations are without merit and intends to vigorously oppose the Action. Consequently, the Company and the other defendants responded to the Action by filing a motion to dismiss on December 21, 1998. The motion was argued before the court on February 23, 1999. The court issued its decision on December 2, 1999. The court granted in part the Company's motion and dismissed the causes of action based upon fraudulent conveyance, breach of fiduciary duty, breach of duty of disclosure and ultra vires acts and ordered the remainder of the Action to continue. Both the Plaintiffs and the Defendants have completed discovery and filed motions for summary judgement on June 29, 2000. The motions remain pending before the court.
Release of Claims. Holders of Company Preferred Stock, including any of the plaintiffs in the Action, whose shares were tendered and accepted by the Company for exchange pursuant to the Exchange Offer have released the Company, its predecessors and successors, and their respective parents, subsidiaries, affiliates and assigns, and each of their respective officers, directors, employees, partners, advisors, agents and representatives from all actions, causes of action, claims, judgements, contracts, agreements or understandings whether individual or derivative in nature, which such holders had with respect to the shares of Company Preferred Stock exchanged pursuant to the Offering Circular or any disclosures, rights or agreements relating thereto, including, but not limited to, any claims made in the Action and any claims with respect to the Reorganization and the transfer of assets from River Bank.
Waiver of Dividend. Each Holder (as defined in the Offering Circular) who accepted the Exchange Offer was deemed to have waived all rights, with respect to each share of Company Preferred Stock exchanged, to receive the $0.94 per share quarterly dividend that was declared on shares of Series A Preferred Stock for the quarter ended June 30, 1996 but which remains unpaid.
Proposed Equity Rights Offering. If within one year after expiration of the Exchange Offer, the Company effects an equity enhancement plan through either a rights offering to the holders of its Common Stock or the distribution to such holders of Warrants to purchase additional shares of Common Stock, each holder of Series A Preferred Stock whose shares were accepted by the Company for exchange pursuant to the Exchange Offer will be entitled to participate in such rights offering or distribution of Warrants on the basis of one subscription right or Warrant for each share of Series A Preferred Stock so exchanged for Subordinated Notes. The Company's Board of Directors has authorized management to develop a proposal for such a rights offering or distribution of Warrants, provided that, under the terms thereof, Alvin Dworman, Odyssey Partners, L.P. and East River Partnership B., who currently own an aggregate of 50.8% of the outstanding shares of Common Stock, will have the ability to avoid dilution of their aggregate percentage ownership of the Common Stock outstanding upon consummation thereof. While the Company presently intends to effect such a plan, there can be no assurance that such rights offering or distribution of Warrants plan will be effected or as to the terms and conditions thereof.
RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 2000, 1999, and 1998 (Dollars in thousands, except per share data)
Conditions of the Exchange Offer. The Company obtained the consent of HSBC to effect the Exchange Offer and issue the Subordinated Notes. However, there can be no assurance that HSBC will provide any approval that may be requested by the Company in the future for the payment in cash of any installments of interest or any prepayment of principal and premium, if any, prior to the dates such cash payments are required to be made under the terms of the Subordinated Notes.
Acceptance Results of the Exchange Offer. On December 28, 1998, the Company announced that it had completed its offer to exchange $25.94 principal amount of its newly-authorized Subordinated Notes for each outstanding share of its
Series A Preferred Stock properly tendered to, and accepted by, the Company in accordance with the provisions of the Exchange Offer. At the expiration of the Exchange Offer on December 24, 1998, 415,273 shares of the Series A Preferred Stock had been properly tendered and accepted by the Company for exchange.
Subsequent to the expiration of the Exchange Offer, the Company accepted private requests for the exchange of its Series A Preferred Stock from individuals under terms identical to those of the Exchange Offer. As a result, 32,950 shares of the Company's Series A Preferred Stock were exchanged during the quarter ended March 31, 1999 and an additional 14,000 were exchanged during the quarter ended June 30, 1999.
As a result of these exchanges, the Company's total Stockholder's Equity and other liabilities were reduced by $11.19 million and $432,000, respectively, and its Subordinated Notes liability increased by $11.38 million. Following the acceptance of the exchanges of the Preferred Stock, described above, 462,223 shares of the Series A Preferred Stock (representing approximately 33.0% of the 1,400,000 shares of Series A Preferred Stock outstanding before the commencement of the Exchange Offer) had been properly tendered and accepted by the Company. No members of the Organized Group tendered any shares of the Series A Preferred Stock in the Exchange Offer. The Company does not believe that there will be any additional exchanges of Preferred Stock for Subordinated Notes subsequent to June 30, 1999.
Interest Expense. The Subordinated Notes carry an interest rate of 8%, which will rise to 8.5% for the 37th to 42nd month following the issuance date and to 9.0% in the 43rd to 48th months following the issuance date. All interest will be compounded semi-annually, following December 30, 1998, the date of Subordinated Notes issuance. The Subordinated Notes were discounted at issuance, on the Financial Statements of the Company, by $363 in order to provide a level cost of funds for the Subordinated Notes of 9.0%. This rate is consistent with debt instruments of similar credit quality and maturity structure at the time the Subordinated Notes were issued. During the year ended June 30, 2000, accrued interest expense, in the amount of $1,181 (including accretion expense for the effective yield discount and debt issuance costs of $191) was recognized for the year ended June 30, 2000.
FINANCIAL SCHEDULES
RB ASSET, INC. June 30, 2000 Index to Consolidated Financial Schedules
Page
Valuation and Qualifying Accounts (Schedule II) Year ended June 30, 2000
Real Estate and Accumulated Depreciation (Schedule III) Year ended June 30, 2000
Investments in Real Estate Assets (Schedule IV) Year ended June 30, 2000
RB ASSET, INC. FORM 10-K VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II) JUNE 30, 2000 (dollars in thousands)
Notes to Valuation and Qualifying Accounts Schedule:
Note 1 - Addition to valuation reserve for marketable equity securities charged to Stockholder's Equity in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Note 2 - Reduction in valuation reserve for marketable equity securities added to Stockholder's Equity in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Note 3 - Uncollectible loan assets written off, net of recoveries.
RB ASSET, INC. FORM 10-K REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III) JUNE 30, 2000 (dollars in thousands)
The aggregate cost for Federal income tax purposes was approximately $121.3 million at June 30, 2000.
See notes to this schedule on the following page.
RB ASSET, INC. FORM 10-K REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III) JUNE 30, 2000 (dollars in thousands)
Notes to Real Estate and Accumulated Depreciation Schedule (previous page)
Note 1 - Property acquired, in substantially completed form, through foreclosure or transfer and satisfaction of obligations of borrowers prior to 1996.
Note 2 - Improvements totaling $4,322 were made to refurbish individual units in preparation for sale during the four year period ended June 30, 2000. Proceeds of unit sales during the same four year period, after selling costs other than refurbishment costs, were $18,414. Accordingly, net proceeds of unit sales, after selling and refurbishment costs, were $14,092 during the four year period ended June 30, 2000.
Note 3 - For additional information related to this write down of the asset's carrying value, see "Management Discussion and Analysis - Results of Operations" contained within the RB Asset, Inc. annual report on Form 10-K, dated June 30, 2000.
Note 4 - During the year ended June 30, 1999 the Company transferred $13,959 of loans sold with recourse to real estate held for investment as a result of the funding of the remaining recourse amounts on these loans.
RB ASSET, INC. FORM 10-K INVESTMENTS IN REAL ESTATE ASSETS (SCHEDULE IV) JUNE 30, 2000 (dollars in thousands)
Principal amount of loans subject Description to delinquent principal or interest - -------------------------------------------------------------------------------- Residential 1-4 family and other real estate loans New York, NY $ 242 (1) Anita Terrace Co-op Rego Park, NY 13,444 (2) Anita Terrace Co-op Rego Park, NY
Totals $ 13,686
See notes to this schedule on the following page.
RB ASSET, INC. FORM 10-K REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE IV) JUNE 30, 2000 (dollars in thousands)
Notes to Investments in Real Estate Assets Schedule (previous page)
Note 1 - The Company's 1-4 family residential loans are carried as non-accrual assets, whereby interest income is recognized only when received. At June 30, 2000 there were loans aggregating $206 in outstanding principal balance that were delinquent 60 days or longer.
Note 2 - This loan asset has been categorized as a non-accrual loan. Accrued interest related to this loan has been fully reserved for at June 30, 2000. Loan principal continues to be repaid from the proceeds of apartment unit sales of the property serving as collateral for this loan.
EXHIBIT INDEX
10.1 Amended and Restated Credit Agreement 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule
E-1