SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[x] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to ss. 240.14a-12
Carver Bancorp, Inc.
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(Name of Registrant as Specified in its Charter)
Boston Bank of Commerce
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0- 11(Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
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THOMSON FINANCIAL
[GRAPHIC OMITTED]
Proxy Analysis:
CARVER BANCORP, INC
Ticker: CNY
Proxy Contest Meeting: February 24, 2000
Record Date: January 11, 2000
Security ID: 146875109 (CUSIP)
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MEETING AGENDA
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Item Code Proposals Mgt. Rec. ISS REC.
<S> <C> <C> <C> <C>
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Management Proxy (WHITE CARD)
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|_|1 M0201 Elect Directors For AGAINST
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|_|2 M0101 Ratify Auditors For FOR
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Shareholder Proposals
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|_|3 S0617 Hire Advisor/Maximize Shareholder Value Against AGAINST
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Dissident Proxy (BLUE CARD)
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|_|1 M0225 Elect Directors (Opposition Slate) For FOR
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|_|2 M0101 Ratify Auditors For FOR
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|_|3 S0617 Hire Advisor/Maximize Shareholder Value Against AGAINST
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*To follow ISS's vote recommendation, execute your votes on the dissident BLUE
proxy card and discard management's WHITE proxy card.
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FINANCIAL SUMMARY
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INCOME STATEMENT SUMMARY (amounts in millions except per share data)
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1997 1998 1999 ACG*
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<S> <C> <C> <C> <C>
Net Interest Income $10.36 $12.81 $13.66 14.80%
Net Income -1.74 1.05 -4.45 NMF
EPS (Basic) -0.80 0.48 -2.02 NMF
Dividend 0.00 0.05 0.05 NMF
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* Annual Compound Growth
Fiscal Year Ended: March 31
Source: 10-K
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PERFORMANCE SUMMARY
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1-Year 3-Year 5-Year
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Total shareholder returns, company -40.9% 0.1% NA
Total shareholder returns, index -1.2% 10.5% NA
Total shareholder returns, peer group -26.5% 8.3% NA
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Source: Proxy Statement
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BUSINESS: Holding company for Carver Federal Savings Bank
STATE OF INCORPORATION: Delaware
ACCOUNTANTS: KPMG LLP
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CORPORATE GOVERNANCE PROFILE
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GOVERNANCE PROVISIONS
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Blank check preferred stock (Charter)
Classified board (Bylaw)
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GOVERNANCE MILESTONES
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Adoption of officer and director stock ownership requirements
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SEVERANCE AGREEMENTS
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Golden parachute executive severance agreements triggered by termination of
employment following a change in control
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STATE STATUTES: Delaware
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Labor contract provision
Three-year freezeout provision
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DIRECTOR PROFILES
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Name Classification Term Dir. No
Ends Since. Stock
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MANAGEMENT NOMINEES
David R. Jones IO 2003 1989
David N. Dinkins IO 2003 1996
DISSIDENT NOMINEES
Kevin Cohee IO 2003 2000
Teri Williams IO 2003 2000
CONTINUING DIRECTORS
Deborah C. Wright I 2001 1999
Linda H. Dunham IO 2000 1996
Robert J. Franz IO 2000 1997
Pazel G. Jackson, Jr. IO 2001 1997
Herman Johnson, CPA IO 2001 1981
Frederick O. Terrell IO 2000 2000
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Classified board: Yes CEO as chairman: No
Current nominees: 2 Retired CEO on board: No
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COMPOSITION OF COMMITTEES
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Audit Type Compensation Type Nominating Type
<S> <C> <C> <C> <C> <C>
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David R. Jones IO David R. Jones IO Linda H. Dunham IO
Linda H. Dunham IO Robert J. Franz IO Robert J. Franz IO
Robert J. Franz IO Pazel G. Jackson, Jr. IO Pazel G. Jackson, Jr. IO
Pazel G. Jackson, Jr. IO Herman Johnson, CPA IO
Herman Johnson, CPA IO
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Committee Name Assigned by Company:
Audit: Audit Committee
Compensation: Compensation Committee
Nominating: Nominating Committee
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EQUITY CAPITAL
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Type Votes Per Share Issued Authorized
<S> <C> <C> <C>
Series A preferred stock 2.08 60,000 1,000,000
Series B preferred stock 2.08 60,000 1,000,000
Common stock 1.00 2,314,275 5,000,000
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Ownership - Series B preferred Stock Number of Shares % of Class
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Officers & Directors 60,000 100.00
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Ownership - Common stock Number of Shares % of Class
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Officers & Directors 267,067 11.54
Institutions 389,261 16.82
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As of: Jan. 11, 2000
Sources: Proxy Statement, Bloomberg Business News
Note: The company has three types of voting stock: common, Series A
convertible preferred, and Series B convertible preferred. Each share of
common stock entitles its holder to one vote, and each share of preferred
entitles its holder to 2.083 votes.
Carver Bancorp., Inc., faces a proxy contest initiated by Boston Bank of
Commerce (BBOC), a privately held, African-American owned bank that owns
7.4 percent of Carver's voting stock. Majority-controlled by the
husband-and-wife team of Kevin Cohee and Teri Williams, its CEO/chairman
and vice president of marketing, respectively, BBOC is now seeking the
election of its own nominees to replace the two incumbent Carver directors
who are up for reelection this year. BBOC has nominated Mr. Cohee and Ms.
Williams to take the seats currently occupied by David Jones, Carver's
chairman, and David Dinkins. If successful, BBOC will have two seats on
Carver's eight-member, classified board.
As of Jan. 11, 2000, the incumbent board and management beneficially owned
approximately 10.1 percent of the company's fully diluted common stock.
This amount
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includes 60,000 shares of Series B convertible preferred stock issued to
Provender Capital Group, LLC, in a January 2000 transaction that is a
significant issue in the present contest. Pursuant to the terms of the
preferred stock placement, Frederick Terrell, Provender's managing partner
and CEO, was appointed to Carver's board.
Background
Since its founding over 50 years ago, Carver has grown into the largest
African American-run financial institution in the United States, with over
$400 million in assets at the end of fiscal 1999. Committed to providing
banking resources to the traditionally underserved markets of inner city
New York, Carver has become perhaps the most well-known and prominent of
roughly 40 African-American-owned and operated banks. Indeed, in 1994 the
company went public in an effort to capitalize on its preeminence in the
minority banking community.
Over the past several years, however, Carver has come under increasing
criticism from outside as it has struggled to eke out a profitable
existence in its market. The company has suffered losses in two of the last
three years, including a loss of over $4 million in fiscal 1999, raising
serious concerns in a community that has already endured the failure of one
high-profile black-owned financial institution, Freedom National Bank, in
1991. And shareholder value has suffered, too, with Carver's one-year and
three-year stock price performance coming in at -40.9 and 0.1 percent,
respectively, for the periods ending March 31, 1999. To top things off,
these losses have occurred even as many other thrift savings banks have
done relatively well, creating a stark contrast between Carver's
performance and that of its peers. As a result, the company and management
have come under mounting pressure to take action to stem the bleeding and
prevent a recurrence of the Freedom meltdown.
To this end, Carver's board in January 1999 fired Thomas Clark, Jr., who
had been the company's CEO since 1998, and commenced a search for outside
help to turn the thrift around. It is in this context, then, that the
dissidents entered the scene, setting in motion a chain of events that has
led to the present contest. In early 1999, Mr. Cohee, chairman and CEO of
BBOC, approached Carver's board to suggest a possible merger of his
privately owned institution and Carver.
Bold though this approach may have been, Mr. Cohee brought plenty of
ammunition in support of his proposal. When Mr. Cohee and his wife, Ms.
Williams, arrived at BBOC in 1995, that bank was a troubled, $55 million
institution operating under a cease-and-desist order relating to unsafe and
unsound banking practices. The bank had also been rated at the lowest level
by the Federal Deposit Insurance Corp. (FDIC). In the years after Mr. Cohee
and Ms. Williams acquired and began running BBOC, however, the bank became
profitable, grew assets to $150 million, and received the FDIC's highest
ranking. When he
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approached Carver's board suggesting a merger, therefore, Mr. Cohee touted
his success at BBOC to suggest that he and his colleagues could do the same
for Carver.
The dissidents ultimately made two unsolicited proposals to Carver's board,
each of which called for Carver to acquire BBOC in return for shares of
Carver stock. BBOC's proposals also contemplated that Mr. Cohee would be
named as CEO of the resulting company, and that BBOC's principal officers
would become the officers of the combined institution. Carver's board
rejected the first proposal in March, noting that Cohee's proposal valued
Carver at its market price, which was below book value, while valuing BBOC
at book. BBOC returned with a revised offer, valuing both institutions at
book, but the board again demurred and in April 1999 announced that it had
instead hired Debra Wright to lead Carver's turnaround.
Mr. Cohee and his colleagues at BBOC, which owns 170,700 shares of Carver
common stock, have not faded quietly into the background, however. In the
wake of Carver's decision to hire Ms. Wright and proceed on its own, Mr.
Cohee has publicly questioned the board's business judgment, Ms. Wright's
fitness for the job, and Carver's prospects going forward. In June 1999, he
notified Carver of his intention to propose his own nominees for election
to the board, and Cohee has kept up the pressure in the ensuing months.
BBOC has also filed a lawsuit in the Delaware Court of Chancery, seeking a
preliminary injunction to reverse certain issuances of Carver preferred
stock that BBOC maintains was effected in order to "stuff the ballot box"
at the annual meeting (see below). The court recently refused to grant the
preliminary injunction, leaving the merits of the dissidents' claim to be
determined at trial.
In evaluating this proxy contest, ISS met and spoke with Mr. Cohee on
behalf of the dissidents and with Ms. Wright on behalf of management.
Dissident Position
BBOC contends that Carver's board, as presently constituted, is ill-suited
to lead the company through the coming turnaround. Characterizing the
incumbent directors as "supine," unversed in banking, and incapable of
evaluating the company's strategic alternatives or overseeing the actions
of management, Mr. Cohee maintains that the election of the dissident
nominees is necessary to re-enfranchise shareholders who have too long been
ignored or abused by Carver's leadership. In the person of himself and Ms.
Williams, Mr. Cohee avers, Carver will gain two experienced banking experts
committed to restoring the idea that "shareholders own the company." In
support of his position, Mr. Cohee makes two basic contentions with respect
to Carver's board:
(1) The board has presided over a protracted period of poor corporate
performance without acting aggressively to preserve shareholder value.
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During the most recent three fiscal years from March 31, 1996, to March 31,
1999, the dissidents note, Carver lost an aggregate of $5 million, or
almost $1.7 million per year, and shareholders' equity dropped ten percent
while asset growth came in at less than five percent per year. Over the
same period, Mr. Cohee maintains, Carver's peer institutions, including
BBOC, enjoyed significantly better results than Carver, offering a stark
contrast with Carver's troubled operations. The blame for Carver's dismal
performance, Mr. Cohee concludes, lays squarely at the feet of the
company's incumbent board, which should have acted more promptly to
scrutinize the company's financials, evaluate the bank's strategy, and make
necessary changes in management.
Carver's board finally took action in 1999, firing former CEO Mr. Clark and
installing Ms. Wright and her team to turn the company around. However, Mr.
Cohee believes that the appointment of Ms. Wright was yet another misstep
on the part of the board. Mr. Cohee points out that Ms. Wright is from the
nonprofit sector and has no direct banking experience, raising doubts as to
whether she can lead Carver into a profitable future. Mr. Cohee has
publicly questioned whether Ms. Wright and her team even have a strategic
plan, and he is flatly dismissive of those elements of Ms. Wright's plan
that have been made public. He decries proposals to expand Carver's branch
operations in Harlem and Brooklyn, for example, as a dead-end, and regards
planned forays into phone and Internet banking as ill-advised given
Carver's traditional customer base of lower-income, inner city residents.
Similarly, he views the offering of mutual fund products as a half-measure
that is unlikely to yield any substantial profits to Carver. Instead, Mr.
Cohee asserts, Carver needs to be re-engineered at the most basic level,
with the overriding goal of cutting costs and growing profitability as
efficiently as possible. More ambitious designs will waste Carver's limited
resources to no good end.
BBOC's initial argument, therefore, comes down to a simple proposition:
Carver's board presided over a dismal run that has left shareholders
gasping for air, was slow to react to the company's troubles, and when it
did, chose an executive untried in the banking industry and endorsed a
flawed strategic plan. Concluding that the current group of directors lacks
the expertise to effectively guide the company, BBOC believes that Mr.
Cohee and Ms. Williams would be a valuable and necessary addition to the
board.
(2) The board failed to check management's predatory actions, in breach of
its fiduciary duty to shareholders.
Second, and more damning in many respects, is BBOC's contention that
Carver's board was an unwitting accomplice in a series of predatory actions
pursued by Ms. Wright and her team in an attempt to delay or prevent the
election of BBOC's director nominees. These actions include (1) Carver's
delay in the scheduling of its annual meeting, traditionally held in the
month of August, until now; and (2) management's recently closed
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deal to issue voting preferred stock to Morgan Stanley Dean Witter and
Provender Capital Management, LLC, with whom Ms. Wright has friendly
contacts.
With respect to the delayed annual meeting, BBOC maintains that Carver's
stalling tactics clearly demonstrate the board's willingness to subvert
basic shareholder rights (here, the right to vote at an annual meeting) in
order to entrench management. Mr. Cohee notes that not until BBOC filed
suit to compel that the meeting be held, in fact, did Carver relent and
finally set the Feb. 24 date for the pending meeting.
The Morgan Stanley/Provender transaction, however, draws the brunt of the
dissidents' ire, prompting charges that management has "stuffed the ballot
box" in an attempt to secure additional votes for Messrs. Dinkins and Jones
in the present proxy contest. The details of the preferred stock placement
are as follows: On Jan. 11, 2000, the record date for the annual meeting,
Carver issued an aggregate of 100,000 shares of preferred stock to Morgan
Stanley Dean Witter and Provender Capital, an African-American owned
investment fund. Each of the preferred shares is convertible into 2.083
shares of common stock, and each share is entitled to an equivalent number
of votes. The shares were issued at a slight premium to the company's
then-market value, but at discount to book, and carry dividends that yield
their holders a 7.8-percent return. In aggregate, Carver received $2.5
million from Morgan Stanley and Provender.
As a result of the preferred share placements, Morgan Stanley and Provender
together own approximately 8.4 percent of Carver's voting stock. Pursuant
to the terms of the stock issuance agreement, however, the holders of the
preferred stock may not grant proxies without the consent of Carver's
board. Therefore, BBOC concludes, the issuance of the preferred shares has
essentially locked up over eight percent of the vote at the coming meeting
for management's nominees to the board.
As evidence that the primary purpose of the preferred share issuance was to
buy votes, Mr. Cohee and BBOC cite several factors. First, they note that
the timing of the transactions, which closed just in time to make the
shares eligible to vote at the meeting, is a veritable "smoking gun"
demonstrating the true purpose of the transactions. The dissidents
maintain, in addition, that Carver's board rushed the transactions through,
failing to exercise the normal standard of care in evaluating the
desirability of the stock issuances. Third, the dissidents argue that there
was no immediate financing need behind the transactions; in fact, Mr. Cohee
asserts that the company had no prior plan requiring the sudden infusion of
funds. And finally, Mr. Cohee argues that the pricing, dividend, and other
terms of the preferred stock are so inimical to Carver and its shareholders
as to rebut any claims that the transactions served a legitimate financing
purpose. In particular, Mr. Cohee believes that the slight premium to
market paid by Morgan Stanley and Provender was insignificant, since one
could have anticipated that Carver's stock price would quickly spike up,
narrowing the premium, upon announcement of the transactions. Mr. Cohee
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concludes that the board has yet again displayed its inability or
unwillingness to effectively oversee management by approving a preferred
stock issuance with so many glaring problems.
At root, then, BBOC suggests that Carver's current board has been seriously
remiss in fulfilling its obligations in recent periods, and complacent in
the face of management's overt efforts to subvert the electoral process.
Based on Carver's historical financial troubles and management's
questionable actions in recent months, and the board's failure to act in
either situation, BBOC has concluded that Mr. Cohee and Ms. Williams should
replace the two incumbent directors who are coming up for reelection. The
dissidents believe that their candidates will infuse the board with needed
banking expertise and a renewed commitment to shareholders.
Management's Position
While conceding the seriousness of Carver's present situation and the
weakness of its performance over the past few years, management argues that
the election of BBOC's nominees is unnecessary, in light of Carver's recent
top-level shake-up, and could be potentially counterproductive. Ms. Wright
stipulates that the current board is effective and has already seen
benefits from the addition of Frederick Terrell, Provender Capital's
representative on the board (Mr. Terrell was appointed pursuant to the
terms of the preferred stock issuance). As Carver launches its crucial and
delicate turnaround campaign, management concludes, shareholders would be
best served by retaining Messrs. Dinkins and Jones rather than inviting
potentially divisive, out-of-town nominees to take their place.
During discussions with ISS, Ms. Wright as an initial matter defended the
actions of the incumbent board, noting that it allowed her to launch a
comprehensive "top to bottom" restructuring of the bank's operations. Ms.
Wright also defended the board's decision to choose her as CEO, noting that
she has had extensive experience working with New York businesses and
financial institutions in her prior capacity as president and CEO of the
Upper Manhattan Empowerment Zone Development Corp. On the other hand,
management argues, shareholders would be well advised to question the
ability of Mr. Cohee and Ms. Williams. Noting that the dissidents are not
natives of the New York marketplace, management questions whether the
owners of a small, Boston bank have much to offer to a significantly larger
New York institution in terms of knowledge about how to run a larger bank
or familiarity with the local marketplace.
Furthermore, Ms. Wright argues that BBOC's performance under Mr. Cohee and
Ms. Williams has been far less impressive than Mr. Cohee claims. She
suggests that the BBOC's earnings may have been boosted with fourth quarter
asset sales and points out that the value of BBOC's common equity has
decreased during Cohee's tenure. In addition,
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she notes that BBOC's asset growth shows up primarily in the value of
securities held rather than in the core measure of deposits, and that
BBOC's loan portfolio has actually shrunk in recent periods. Ms. Wright
closes by questioning whether Mr. Cohee is really the banking prodigy he
purports to be, and whether he and Ms. Williams really bring needed
expertise to Carver's board.
Perhaps most central to management's arguments, however, is Ms. Wright's
contention that the dissidents are pursuing this contest not merely in
their capacity as a large, concerned shareholder, but rather as a would-be
acquirer of the company. Noting that Mr. Cohee expressed his intention to
nominate a dissident slate only a few months after the board had rebuffed
his merger overtures, Ms. Wright is frankly dismissive of suggestions that
BBOC has abandoned its designs on Carver. Indeed, management notes that
BBOC's avowed desire to expand into a national franchise by "rolling up"
other black-owned banks has been well-documented in the media. To suggest
that Mr. Cohee has undergone a sudden change of heart and is now nothing
more than a concerned investor in Carver is, management suggests, blatantly
disingenuous.
Furthermore, Ms. Wright notes that Mr. Cohee and Ms. Williams, as majority
owners and executives of BBOC, are potential competitors of Carver.
Although BBOC is just beginning its interstate expansion and Carver is at
present only in New York and focused on its turnaround, Ms. Wright
maintains that the nature of the banking industry will certainly require
Carver to expand at some point in the future, if it is to truly succeed in
this intensely competitive sector. And it is fair to assume that BBOC, as
the first African American-owned interstate bank and an institution with an
aggressive expansion strategy, could ultimately be a significant competitor
of a growing Carver. To invite Mr. Cohee and Ms. Williams to sit on the
board, Ms. Wright concludes, would raise serious potential conflicts of
interest and would jeopardize Carver's ability to compete in the future.
Finally, Ms. Wright maintains that the recently completed preferred stock
placements are legitimate transactions that provide a variety of benefits
to Carver. First, the $2.5 million in proceeds will help fund the company's
efforts to broaden its distribution and product lines with new ATMs, branch
offices, phone and internet banking, and the like. Second, Ms. Wright is
confident that Morgan Stanley and Provender will be able to provide
invaluable advice as Carver seeks to enter strategic partnerships that
minimize risks while assisting its growth. Third and finally, management
notes the market's positive response to announcement of the preferred stock
placements. Since the date of the announcement, Carver's stock price has
risen by 20 percent. The market's voice, management suggests, clearly
demonstrates that investors trust the underlying merits of the preferred
stock transactions. Ms. Wright states that the timing of the transactions
to close on the record date is nothing more than unfortunate coincidence;
in fact, she maintains, the company could have closed the transactions
sooner had it wished.
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Based on these factors, management avers that Carver's best course of
action is to retain its existing board members, who are familiar with the
New York market and with the workings of the company, and to let the new
management team proceed with its turnaround plans free of the distractions
that the dissident nominees would bring. Noting that the board has now
taken decisive action, and has already added a new, outside member in the
person of Mr. Terrell, management discounts the need for further change.
Furthermore, the election of Mr. Cohee and Ms. Williams would pose special
risks, raising clear conflicts of interest as a jilted suitor with
expansionist designs would receive two seats on the board, and giving a
potential competitor a bird's eye view of Carver's innermost workings.
Analysis
Financial Results
It is indisputable that Carver's financial results have been weak in the
past few years and particularly in the most recent fiscal year, ended March
1999. As BBOC notes, Carver's earnings, shareholders' equity, and asset
growth have all suffered of late, raising justifiable concerns about the
company's prospects going forward. The company's stock price was similarly
weak before a flurry of activity surrounding the past months' developments,
and Carver's loan portfolio, a core measure of the company's success in the
fundamental business of a thrift, has diminished as well.
It is arguably true, however, as management argues, that the Carver
described by the dissidents no longer exists in the wake of the company's
restructuring last year. And it is certainly true that by firing its CEO
last January (before this contest had even begun) and bringing in a new
team, the board has stolen a certain measure of BBOC's fire, proving itself
capable of taking action to help turn the company around. As a general
rule, while poor historical performance always compels taking a close look
at dissident proposals, shareholders are often best served by giving new
management teams time to implement their plans before veering in another
direction.
BBOC argues that the incumbent directors' failures extend beyond the
company's historical financial troubles, however, and that the board's
recent action, far from a sign of strength, offers more evidence of the
current directors' lack of fitness for the job. In particular, Mr. Cohee
maintains that the board has erred in selecting as the new CEO a person
"with absolutely no commercial banking experience." Looking at Carver's
recently released results for the third quarter (ended Dec. 31) of fiscal
1999, BBOC notes that net income actually decreased from the previous
quarter (although improving on the loss the company realized in the same
quarter of 1998), return on assets came in low relative to Carver's peers
(at 0.53 percent, or 0.27 percent after excluding tax loss carry forwards),
and some earnings were apparently generated through a reduction in loan
loss reserves.
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Based on these results, the dissidents suggest that Carver's new strategy
is not working. However, we do not believe one can fairly judge new
management's performance on the basis of a single quarter of results. Even
Mr. Cohee has conceded, in discussions with ISS, that the proper time frame
for assessing how the company is faring is at least a year (see Item 3,
below). It would be premature to conclude that Ms. Wright's strategy is not
working on the basis of only a few months' work.
At first glance, therefore, it appears that shareholders might be best
served by reelecting management's nominees and letting Ms. Wright work.
However, notwithstanding much of the rhetoric in this contest, election of
the dissident nominees would not force Ms. Wright from office. At stake in
this election are only two seats on Carver's eight member board. Even if
elected, BBOC's nominees would not be able to single-handedly dictate a
change in the company's business plan or the replacement of Ms. Wright. Mr.
Cohee and Ms. Williams could effect change (until next year's annual
meeting, at least), only through negotiation and persuasion of other
members of the board.
And we recognize, too, that the dissident nominees would bring substantial
credentials to the table if they were put on the board. Although management
downplays the dissidents' accomplishments with criticisms of BBOC's
financial results, it is indisputable that BBOC has been a success story
since it was acquired by Mr. Cohee and Ms. Williams. It is also apparent
that BBOC has secured the trust of regulators and the banking community,
obtaining improved ratings and shedding its troubled past, and that BBOC
has succeeded on a fundamental level at which Carver, in recent years, has
not. We conclude, therefore, as an initial matter, that while Carver's
financial performance does not, in and of itself, compel replacement of
Messrs. Jones and Dinkins, neither is the prospect of electing the
dissident nominees entirely unappealing to shareholders.
Conflicts of Interest and Competition
While the performance issue fails to yield a clear winner in this contest,
management scores much bigger points when it points out that Mr. Cohee and
Ms. Williams, whatever their expertise and credentials, should not be put
on the board because they have clear conflicts of interest with the company
and its shareholders. While Mr. Cohee maintains that he no longer wants to
merge BBOC with Carver because the New York bank is unprofitable while his
bank is not, such protestations are not entirely convincing. After all, the
dissidents launched this contest almost immediately after Carver's board
had rebuffed their merger overtures, and many of the dissidents' arguments
in the contest are eerily similar to those they used in advocating the
merger last year. Indeed, it appears clear that the Carver board's decision
to reject the BBOC merger was a significant factor leading Cohee to
conclude that the board is "incapable" of fulfilling its obligation to the
bank.
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In this context, management's concerns that the dissidents are interested
first and foremost in continuing to push for a merger, and only secondarily
about growing value for Carver's shareholders, appear entirely valid. While
Mr. Cohee and BBOC maintain that they are motivated only by their
substantial equity stake in Carver, one could easily draw the opposite
conclusion from the available evidence.
We also share Ms. Wright's concern with the implications of appointing
officers of a potential competitor to Carver's board. While BBOC and Carver
are not presently direct competitors, BBOC's expansionist ambitions and the
imperatives of an increasingly consolidated and competitive market make it
likely that, somewhere down the road, BBOC and Carver may come
head-to-head.
The dissidents could have assuaged both of these concerns had they chosen
"independent" persons, unaffiliated with BBOC, as one or both of their
director nominees. There is some debate in governance circles about what
constitutes the ideal dissident nominee. Are shareholders best served by
"insider" dissidents who, by virtue of their association with the dissident
group, are likely to own a sizable amount of the target company's common
stock and who can claim alignment with other shareholders? Or, on the other
hand, are "independent" nominees without apparent connections to the
dissident group, but who probably own little or no stock, more desirable
director candidates? These questions are unresolved, and their answers
almost certainly will vary from case to case, but in the present contest it
appears clear that all parties would have been better served had BBOC gone
the "independent" route. After all, it is certainly arguable that the
primary reason BBOC continues to hold 7.4 percent of the Carver common
stock is in the hope that it can force a merger of the companies, and not
because the dissidents value a stand-alone Carver as a long-term
investment. Because of this fact, the dissident nominees' stock ownership
is less effective as an indicator of alignment with shareholder than it
might have been in other circumstances. Furthermore, since Mr. Cohee and
Ms. Williams' conflicts are so obvious in this instance, any attempts to
prove "alignment" with shareholders are likely to fall flat in any case.
Instead, the clear potential for conflicts of interest between BBOC and
Carver makes this an ideal situation for naming independent dissident
nominees.
We give substantial weight, therefore, to management's concerns with the
nature of the dissident nominees. However, we also believe that certain
factors mitigate the risks cited by Ms. Wright and management. Most
significant is the fact that this contest concerns only two seats, a
minority position on Carver's eight-person board. As a result, even if
elected, Mr. Cohee and Ms. Williams would not be able to push through a
merger for at least the next year. Only by winning all three of the seats
coming open at the 2000 meeting, in fact, could Mr. Cohee and Ms. Williams
control a majority of the board. And even then, they would almost certainly
be precluded from participating in any merger discussions between Carver
and BBOC because of the inherent conflicts of interest in such a situation.
Therefore, while we understand management's concerns that this contest is a
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"backdoor" route to a merger, we believe there are sufficient procedural
and legal hurdles to any such end-run to ensure that shareholder interests
are protected. In addition, Mr. Cohee and Ms. Williams would, if elected,
have a fiduciary duty to Carver's shareholders, the breach of which would
subject them to legal action. While fiduciary duty is not a cure-all for
potential conflicts of interest, it does reduce the risk posed by such
conflicts, and provides shareholders a recourse when those conflicts affect
board decisions. Finally, with respect to the risk that BBOC and Carver
could ultimately become competitors, that day appears unlikely to arrive in
the near future. Carver is currently focused exclusively on the New York
market, where there is still plenty of room for growth. If and when the
companies appear in danger of competing, there should be ample time to
arrange a smooth separation of the dissident nominees and Carver. We
conclude that management's concerns, while real, are not sufficient to
reject the dissident candidates if other factors favor replacement of the
incumbents.
The Preferred Stock
By contrast, we believe that the Morgan Stanley and Provender preferred
share issuances raise serious questions about the board and management
without the presence of any clear ameliorating factors. As a result of the
issuances, Carver's new strategic partners received a voting stake slightly
larger than that held by the dissident group on the last possible date to
be eligible to vote at the meeting. Just as it is difficult to dismiss the
inference that this contest is related to BBOC's desire to merge with
Carver, it is counterintuitive to suggest, as management does, that the
last minute issuance of voting stock to parties clearly allied with
management was not motivated, at least in part, by the desire to strengthen
support going into this contest.
We concede, as do the dissidents, that the Provender and Morgan Stanley
transactions offer various benefits to the company, not the least of which
is the mere association of Carver with such established names in the
financial community. Indeed, the stock market's reaction to the alliances
confirms the public relations benefits of the stock issuance. However, it
is not clear that the issuance of preferred shares that provide substantial
financial benefits to the recipients (in the form of a dividend and a price
that reflects a slight premium to market value and a discount from book)
was absolutely necessary in this case.
Furthermore, while management claims the transactions provided necessary
funding ($2.5 million) for the company's planned expansion, Carver recently
announced a dividend of $0.05 per common share, payable to shareholders on
March 15, 2000. The company's willingness to pay a dividend of this size
and at this time calls into question management's assertions that the
preferred stock was issued to meet a pressing financial need.
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In her meeting with ISS, Ms. Wright conceded that the timing of the
preferred transactions was regrettable. The circumstances surrounding the
issuances may have generated at least the appearance of possible
impropriety, and Ms. Wright concedes that, in retrospect, it would likely
have been preferable to issue the preferred stock either substantially
before or after the record date. Ms. Wright insists, however, that the
transactions were not intended to bolster management's position going into
this meeting, and she argues that the size of the transactions,
approximately 8.4 percent of the voting stock, is in any event too small to
have a real impact on this contest.
In a proxy contest, though, as in many matters of corporate governance,
appearance counts for a lot. While we cannot entirely discount management's
professions that its motives were benign, it is clear that management and
the board have substantially bolstered their position with the issuance of
voting preferred stock to friendly parties. Furthermore, we reject the
contention that the issuance of shares reflecting "only" eight percent of
the voting power is trivial or immaterial. Eight percent can be the
difference between a ringing endorsement of management and a plea for
change, and in a closely contested election, the gain or loss of eight
percent of the votes can be of critical importance.
Finally, we believe that management's decision to pay a cash dividend
offers further proof that certain of Carver's recent decisions have been
motivated more by the desire to gain momentum going into this proxy contest
than by legitimate financial and business-related concerns. Given Carver's
delicate position as a troubled bank that is only just beginning the
difficult process of restoring consistent profitability, we are troubled by
the issuance of a cash dividend so close in time to a contested election of
directors.
We conclude, therefore, that Carver's board has displayed poor judgment in
its decision to approve the preferred stock issuance at this time, and an
apparent inattention to basic principles of good corporate governance. The
first and most fundamental right of any shareholder is the right to vote on
issues that are material to the well being of his or her company, and there
are few issues more material to a company's well being than the issue of
who will guide its future progress. By placing a substantial block of
voting stock with friendly parties so close in time to a contested board
election, the board has eroded its credibility with shareholders. The best
remedy to this erosion, we conclude, would be the prompt addition of the
dissident nominees to the board.
Conclusion
On balance, we conclude that shareholders would be best served by electing
the dissident nominees in this year's election. Mr. Cohee and Ms. Williams
will bring a proven track record, demonstrated expertise, and a high level
of energy to a board that faces the daunting task of restoring Carver's
profitability in an era of rapid change and competition in the financial
services arena. Furthermore, we believe that the current board has
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seriously erred in failing to raise the significant governance issues
raised by the Provender/Morgan Stanley transaction. The only easy way to
remove the resulting appearance of impropriety, we believe, and to ease
concerns that the board and management are unduly entrenched, is to
promptly add outside directors. While Mr. Cohee and Ms. Williams are
imperfect candidates, largely because of their potential conflicts of
interest, we nonetheless conclude that their election is preferable to
retention of the incumbents.
Management Proxy (WHITE CARD)
|_| Item 1: Elect Directors
Carver Bancorp, Inc., classifies its eight directors into three director
classes. This proposal seeks election of two directors for three-year terms
expiring in 2003.
The full board comprises one insider and seven independent outsiders. The
Audit, Compensation, and Nominating committees comprise five, four, and
four independent outsiders, respectively. David Jones and Herman Johnson,
independent outside directors, have served on the board for a period of ten
years or more.
- We support the independent nature of the company's key committees, which
comprise only independent outsiders.
We recommend a vote AGAINST Item 1.
|_| Item 2: Ratify Auditors
The board recommends that KPMG LLP be approved as the company's independent
accounting firm for the coming year. Note that the auditor's report
contained in the annual report is unqualified, meaning that in the opinion
of the auditor, the company's financial statements are fairly presented in
accordance with generally accepted accounting principles.
In 1999, the company changed its audit firm from Mitchell & Titus. There
were no disagreements of any type with the company's former auditor on any
matter of accounting principles, financial statement disclosure, or
auditing scope.
We recommend a vote FOR Item 2.
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Shareholder Proposals
|_| Item 3: Hire Advisor/Maximize Shareholder Value
A shareholder has submitted this request to adopt a nonbinding resolution
recommending that the board immediately engage the services of a nationally
recognized investment banker to explore all alternatives to enhance
shareholder value, including the possible sale or merger of the company.
In support of the resolution, the proponent states that the company's
historical performance over the past several years has been dismal, that
the current stock price is unacceptable, and that management has been
ineffective. Among other things, the proponent notes that the company has
suffered significant losses and that its stock price has traded below its
offering price in every year since 1994. In addition, the proponent
believes the company's return on equity has been unacceptable, and that the
company's "excessive overhead costs, high levels of non-earning assets and
potential requirements for additional reserves" bode ill for the bank's
prospects going forward. The proponent notes that similar resolutions
received 24.1 percent and 28.4 percent shareholder votes, respectively, at
the 1997 and 1998 annual meetings.
The board opposes the proposal, arguing that it has already taken
significant steps to address the financial problems cited by the proponent,
including installing Ms. Wright as CEO and bringing in an entirely new,
experienced management team. In addition, the board argues that the formal
retention of an investment banker would consume time and resources that
could be better spent positioning the company for the future. Finally, the
board believes that now is not the right time to sell the company, due to
"current trends in the stock market."
Shareholder value maximization proposals that suggest exploring
alternatives, including a sale or merger, should be considered on a
case-by-case basis. While under normal circumstances the decision to buy,
sell, or engage in a merger is best left in the hands of management and the
board, we recognize that certain situations may justify the adoption of
such proposals, such as a prolonged period of poor or sluggish performance
with no turnaround in sight. Support of such proposals is further justified
in cases where the board and management have become entrenched. Adoption of
poison pills, golden parachutes, and other antitakeover provisions in the
face of an attractive offer may be signs of entrenchment.
On the plus side, hiring an investment banker to seek alternatives to
enhance share value often results in a higher stock price, as investors
expect the company to seek competing
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merger offers soon. The end result may be an offer price that represents a
market premium to most or all shareholders. On the downside, a period of
poor stock performance is often the worst time for a company to be "put
into play" because "bottom feeders" are likely to approach a company with
offers that represent a premium to only a few short-term investors and
speculators seeking a quick profit, to the detriment of long-term
shareholders who purchased their shares at a higher price. This scenario is
only beneficial to long-term shareholders when the company's prospects are
dim for reasons such as the permanent decline of an industry or
company-specific factors, such as poor management, ineffective strategy, or
unwise acquisitions, and share price cannot reasonably expected to rebound.
In this case, we believe that the board has outlined a reasonable strategic
plan of action to enhance shareholder value, as discussed in our previous
discussion of the ongoing proxy contest. In Ms. Wright and her team, the
board has put in place new management that appears qualified to effect a
turnaround of the bank. Also, even BBOC believes that now is not the right
time to sell Carver, notwithstanding its well-publicized issues with the
board and management. Shareholders would be best served, at this time, by
allowing the newly installed management team time to implement its plan and
move the company forward.
Finally, one of the primary benefits of nonbinding shareholder resolutions
like this one are that they can spur a complacent board and management to
action, clearly demonstrating shareholder concerns. The ongoing proxy
contest has already served this purpose, making approval of this proposal
unnecessary. In any event, we agree that the sale of the company now, at a
time of relative weakness and before Ms. Wright has had the opportunity to
grow Carver's value in the market, would be adverse to many of the
company's long-term shareholders.
We recommend a vote AGAINST Item 3.
Dissident Proxy (BLUE CARD)
|_| Item 1: Elect Directors (Opposition Slate)
See discussion above.
We recommend a vote FOR the dissident director nominees.
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|_| Item 2: Ratify Auditors
See discussion above.
We recommend a vote FOR the auditors.
|_| Item 3: Hire Advisor/Maximize Shareholder Value
See discussion above.
We recommend a vote AGAINST Item 3.
-------------------------
Carver Bancorp, Inc
75 West 125th Street
New York, New York 10027-4512
(212) 876-4747
Company Solicitor: Morrow & Co. (800) 634-4458
Shareholder Proposal Deadline: September 19, 2000
This proxy analysis has not been submitted to, or received approval from,
the Securities and Exchange Commission. While ISS exercised due care in
compiling this analysis, we make no warranty, express or implied, regarding
the accuracy, completeness, or usefulness of this information and assume no
liability with respect to the consequences of relying on this information
for investment or other purposes.
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Vote Record Form:
CARVER BANCORP, INC
Ticker: CNY
Proxy Contest Meeting: February 24, 2000 Record Date: January 11, 2000
Account ID Code: Shares Held on Record Date:
Shares Voted: Date Voted:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MEETING AGENDA
- ------------------------------------------------------------------------------------------------------------------------------------
Item Code Proposals Mgt. Rec. ISS REC. Vote Cast
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Management Proxy (WHITE CARD)
- ------------------------------------------------------------------------------------------------------------------------------------
|_|1 M0201 Elect Directors For AGAINST
- ------------------------------------------------------------------------------------------------------------------------------------
|_|2 M0101 Ratify Auditors For FOR
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholder Proposals
- ------------------------------------------------------------------------------------------------------------------------------------
|_|3 S0617 Hire Advisor/Maximize Shareholder Value Against AGAINST
- ------------------------------------------------------------------------------------------------------------------------------------
Dissident Proxy (BLUE CARD)
- ------------------------------------------------------------------------------------------------------------------------------------
|_|1 M0225 Elect Directors (Opposition Slate) For FOR
- ------------------------------------------------------------------------------------------------------------------------------------
|_|2 M0101 Ratify Auditors For FOR
- ------------------------------------------------------------------------------------------------------------------------------------
|_|3 S0617 Hire Advisor/Maximize Shareholder Value Against AGAINST
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
