<PAGE>
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11 (c) or Rule 14a-12
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
GOLDEN STATE BANCORP INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GOLDEN STATE BANCORP INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of filing fee (Check the appropriate box):
[ ] No Fee Required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
[X] 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.
- --------------------------------------------------------------------------------
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE>
GOLDEN STATE BANCORP INC.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
July 15, 1998
Dear Golden State Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Golden State Bancorp Inc., a Delaware corporation ("Golden State"), which will
be held on Monday, August 17, 1998 at 10:00 a.m., local time, at The Red Lion
Hotel, 100 West Glenoaks Boulevard, Glendale, California (the "Special
Meeting").
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Reorganization (as
amended, the "Agreement") and a related Agreement and Plan of Merger (the "Plan
of Merger") pursuant to which the businesses of California Federal Bank, A
Federal Savings Bank ("Cal Fed") and two of its parent entities will be
combined with those of Golden State and our Glendale Federal Bank, Federal
Savings Bank subsidiary ("Glendale Federal"). Pursuant to the Plan of Merger,
among other things, First Nationwide (Parent) Holdings Inc., a Delaware
corporation ("Parent Holdings"), will merge with and into Golden State (the
"Golden State Merger"). The Agreement also contemplates that First Nationwide
Holdings Inc., a subsidiary of Parent Holdings and the parent holding company
of Cal Fed ("FNH"), will merge with and into Golden State Financial
Corporation, a wholly owned subsidiary of Golden State ("Golden State
Financial"), and that Glendale Federal will merge with and into Cal Fed
(together with the Golden State Merger, the "Mergers").
Cal Fed is controlled, through intermediate entities, by MacAndrews &
Forbes Holdings Inc. and Gerald J. Ford, the Chairman of the Board and Chief
Executive Officer of Cal Fed. Upon consummation of the Merger, the board of
directors of the combined company will consist of 15 members, with five
directors designated by Golden State and ten directors designated by Parent
Holdings. Mr. Ford will serve as Chairman of the Board and Chief Executive
Officer of the combined company, and Carl B. Webb, the President and Chief
Operating Officer of Cal Fed, will become President and Chief Operating Officer
of the combined company.
Your shares of Golden State common stock will not be affected by the
Mergers. Upon consummation of the Mergers, it is expected that current
stockholders of Golden State will own between 55% and 58%, and current
stockholders of FNH and Parent Holdings will own between 42% and 45%, of Golden
State's common stock outstanding on a fully diluted basis (without giving
effect to shares issuable pursuant to Golden State's Litigation Tracking
Warrants (Trademark) , or to the potential issuance of additional shares to the
stockholders of FNH and Parent Holdings under the Agreement, which issuance of
additional shares to such stockholders will increase their proportional
ownership of the combined company and correspondingly decrease the proportional
ownership of existing Golden State stockholders).
The Mergers have been unanimously approved by the Boards of Directors of
each of the parties thereto. Your Board of Directors believes that the Mergers
will provide significant value to Golden State's stockholders by extending the
markets served by Golden State and allowing Golden State to provide a broader
array of services to a larger customer base. The resulting company, which will
be named California Federal Bank at the operating level and Golden State
Bancorp Inc. at the holding company level, will be, after taking into account
other pending mergers in the thrift industry, California's fourth-largest
depository institution, with a 6.4% statewide deposit market share, as well as
a leading in-state provider of consumer, business and mortgage banking
services. In addition, the combined entity will be, after taking into account
other pending mergers in the thrift institution industry, the second-largest
thrift institution in the country and, after merger-related branch
consolidations, will operate approximately 370 branches.
As a group, you, as stockholders of Golden State, now own 100% of an
institution which, after taking into consideration our recent acquisitions of
CENFED Financial Corporation and RedFed Bancorp, Inc., has approximately $19
billion in assets, $12 billion in deposits and $1.3 billion in stockholders'
equity
<PAGE>
(based on financial information as of March 31, 1998). Immediately after
consummation of the transactions contemplated by the Agreement, you as a group
will own between 55% and 58% of an institution that, on a pro forma basis at
March 31, 1998, would have total assets of approximately $52 billion, deposits
of $28 billion, stockholders' equity of $2.3 billion and the seventh-largest
mortgage-servicing portfolio in the country at over $100 billion.
YOUR BOARD HAS DETERMINED THAT THE MERGERS ARE IN THE BEST INTERESTS OF
GOLDEN STATE AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE AGREEMENT AND THE PLAN OF MERGER. The investment
banking firm of Credit Suisse First Boston Corporation ("CSFB") has issued a
written opinion to your Board of Directors that, as of the date of the Proxy
Statement, the consideration to be paid by Golden State in the Mergers pursuant
to the Agreement is fair, from a financial point of view, to Golden State
stockholders. The material analyses underlying that opinion are described in
the accompanying Proxy Statement under "THE MERGERS--Opinion of Golden State's
Financial Advisor" and the written opinion of CSFB is reproduced in full as
Appendix D to the Proxy Statement. Golden State's stockholders are urged to
read such description and opinion carefully in their entirety.
Consummation of the Mergers is subject to certain conditions, including
the approval of the Agreement and the Plan of Merger by the holders of a
majority of the outstanding shares of Golden State common stock and the
approval of the Mergers by the appropriate regulatory authorities.
It is very important that your shares are represented at the Special
Meeting, whether or not you plan to attend in person. A failure to vote will
have the same effect as a vote against the Agreement and the Plan of Merger.
Therefore, I urge you to execute, date and return the enclosed proxy card in
the enclosed postage-paid envelope as soon as possible to assure that your
shares will be voted at the Special Meeting.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR approval and adoption of the Agreement.
Sincerely,
/s/ Stephen J. Trafton
Stephen J. Trafton
Chairman, President
and Chief Executive Officer
IMPORTANT: IF YOUR COMMON STOCK IS HELD IN THE NAME OF A BROKERAGE FIRM OR
NOMINEE, ONLY THAT FIRM OR NOMINEE CAN EXECUTE A PROXY ON YOUR BEHALF. TO
ENSURE THAT YOUR STOCK IS VOTED, WE URGE YOU TO FOLLOW THE VOTING INSTRUCTIONS
PROVIDED TO YOU BY SUCH FIRM OR NOMINEE WITH THIS PROXY STATEMENT OR TO
TELEPHONE THE INDIVIDUAL RESPONSIBLE FOR YOUR ACCOUNT TODAY AND OBTAIN
INSTRUCTIONS ON HOW TO DIRECT HIM OR HER TO EXECUTE A PROXY.
IF YOU HAVE ANY QUESTIONS OR NEED HELP IN VOTING YOUR STOCK OR NEED
DIRECTIONS TO THE SPECIAL MEETING, PLEASE TELEPHONE OUR INVESTOR RELATIONS
DEPARTMENT AT (818) 500-2723, OR CALL OUR PROXY SOLICITOR, CORPORATE INVESTOR
COMMUNICATIONS, INC. AT (888) 203-7301.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE SPECIAL MEETING, IS
REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT
DELAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY
TIME PRIOR TO ITS EXERCISE. A PROXY MAY BE REVOKED BY FILING WITH THE SECRETARY
OF GOLDEN STATE A WRITTEN REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER
DATE. ANY STOCKHOLDER PRESENT AT THE SPECIAL MEETING OR AT ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH
MATTER BROUGHT BEFORE THE SPECIAL MEETING.
<PAGE>
GOLDEN STATE BANCORP INC.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 17, 1998
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Golden
State Bancorp Inc., a Delaware corporation ("Golden State"), will be held at
The Red Lion Hotel, 100 West Glenoaks Boulevard, Glendale, California, on
Monday, August 17, 1998, at 10:00 a.m. local time (the "Special Meeting"), for
the following purposes, all of which are more fully described in the
accompanying Proxy Statement:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization, dated as of February 4, 1998 (as
amended, the "Agreement"), by and among Golden State, First Nationwide
(Parent) Holdings Inc. ("Parent Holdings"), First Nationwide Holdings Inc.
("FNH"), First Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., and
Golden State Financial Corporation ("Golden State Financial"), and a
related Agreement and Plan of Merger, dated as of February 4, 1998 (the
"Plan of Merger"), by and between Golden State and Parent Holdings, and the
consummation of the transactions contemplated thereby, pursuant to which,
among other things, Parent Holdings will merge with and into Golden State,
FNH will merge with and into Golden State Financial and certain
stockholders of Parent Holdings and FNH will become stockholders of Golden
State. Copies of the Agreement and the Plan of Merger are attached as
Appendix A to the accompanying Proxy Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof including,
without limitation, a motion to adjourn or postpone the Special Meeting to
another time and/or place for the purpose of soliciting additional proxies
in order to approve and adopt the Agreement and the Plan of Merger.
The Golden State Board of Directors has fixed the close of business on
July 6, 1998 as the record date for the determination of stockholders entitled
to notice of and to vote at the Special Meeting and any adjournments or
postponements thereof. Only stockholders of record at the close of business on
such date are entitled to notice of and to vote at the Special Meeting.
The affirmative vote of the holders of a majority of the outstanding
shares of Golden State common stock is required for approval and adoption of
the Agreement and the Plan of Merger. In the event there are not sufficient
shares represented for a quorum or votes to approve the Agreement and the Plan
of Merger at the time of the Special Meeting, the Special Meeting may be
adjourned in order to permit further solicitation of proxies by Golden State.
By Order of the Board of Directors,
/s/ James R. Eller, Jr.
James R. Eller, Jr.
Secretary
Glendale, California
July 15, 1998
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE PROPOSAL
TO APPROVE AND ADOPT THE AGREEMENT AND THE PLAN OF MERGER
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD
TODAY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE
<PAGE>
---------------------
GOLDEN STATE BANCORP INC.
PROXY STATEMENT
---------------------
SPECIAL MEETING OF STOCKHOLDERS
AUGUST 17, 1998
This Proxy Statement (the "Proxy Statement") is being furnished to
stockholders of Golden State Bancorp Inc., a Delaware corporation ("Golden
State"), in connection with the solicitation of proxies by Golden State's Board
of Directors for use at a special meeting of stockholders of Golden State
(including any adjournments or postponements thereof) to be held August 17,
1998 at 10:00 a.m., local time (the "Special Meeting").
At the Special Meeting, Golden State's stockholders will consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Reorganization,
dated as of February 4, 1998, by and among Golden State, First Nationwide
(Parent) Holdings Inc., a Delaware corporation ("Parent Holdings"), First
Nationwide Holdings Inc., a Delaware corporation ("FNH"), First Gibraltar
Holdings Inc., a Delaware corporation ("FGH"), Hunter's Glen/Ford, Ltd., a
Texas limited partnership ("Hunter's Glen"), and Golden State Financial
Corporation, a Delaware corporation and a wholly owned subsidiary of Golden
State ("Golden State Financial"), as amended by Amendment No. 1 thereto, dated
as of July 13, 1998 (as so amended, the "Agreement"), and the related Agreement
and Plan of Merger, dated as of February 4, 1998 (the "Plan of Merger"), by and
between Golden State and Parent Holdings. Pursuant to the Agreement and the
Plan of Merger, and based on financial information as of March 31, 1998, the
existing holders of common stock, par value $1.00 per share, of Golden State
(the "Golden State Common Stock"), who now own all of the common stock of an
institution which, after taking into consideration Golden State's recent
acquisitions of CENFED Financial Corporation ("CENFED") and RedFed Bancorp,
Inc., ("RedFed"), has approximately $19 billion in assets, $12 billion in
deposits and $1.3 billion in stockholders' equity, will, immediately after
consummation of the transactions contemplated thereby, and without giving
effect to the potential issuances of shares described below, own between 55%
and 58% (on a fully-diluted basis) of an institution with approximately $52
billion in assets, $28 billion in deposits and $2.3 billion in stockholders'
equity.
The Agreement and the Plan of Merger provide that, subject to the terms
thereof, Parent Holdings will merge with and into Golden State (the "Golden
State Merger") and FNH will merge with and into Golden State Financial (the
"FNH Merger"). The Agreement also contemplates that immediately following the
Golden State Merger and the FNH Merger, Glendale Federal Bank, Federal Savings
Bank, a wholly owned subsidiary of Golden State Financial ("Glendale Federal"),
will merge (the "Subsidiary Bank Merger") with and into California Federal
Bank, A Federal Savings Bank, a wholly owned subsidiary of FNH ("Cal Fed"). The
Golden State Merger and the FNH Merger are sometimes referred to herein
collectively as the "Holding Company Mergers," and the Holding Company Mergers
and the Subsidiary Bank Merger are sometimes referred to herein collectively as
the "Mergers." Immediately prior to the consummation of the Mergers, FNH will
contribute all of its assets, including the outstanding common stock of Cal
Fed, to, and its long-term debt will be assumed by, a newly-formed subsidiary
of FNH incorporated for that purpose ("New FNH").
The outstanding common stock of FNH is owned 80% by Parent Holdings and
20% by Hunter's Glen. FGH, the sole stockholder of Parent Holdings, is an
indirect wholly owned subsidiary of MacAndrews & Forbes Holdings Inc., which is
wholly owned, through an intermediate entity, by Ronald O. Perelman. Hunter's
Glen is a limited partnership controlled by Gerald J. Ford, the Chairman, Chief
Executive Officer and a director of Cal Fed and the President and a director of
Parent Holdings.
Pursuant to the Agreement, FGH and Hunter's Glen will receive at the
closing of the Mergers, in respect of their interests as stockholders of Parent
Holdings and FNH, a number of shares of Golden State
<PAGE>
Common Stock, as determined pursuant to a formula set forth in the Agreement,
that will constitute, in the aggregate, between 42% and 45% of the common stock
of the combined company outstanding, immediately after giving effect to the
Mergers, on a fully diluted basis (without giving effect to shares issuable
pursuant to the Litigation Tracking Warrants (Trademark) as described herein
under "INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation
Tracking Warrants (Trademark) "). The actual ownership percentage of FGH and
Hunter's Glen will be determined based upon the adjusted average price of
Golden State Common Stock during a specified pricing period ending shortly
before the closing of the Mergers. FGH and Hunter's Glen will receive shares of
Golden State Common Stock constituting 42% of such outstanding common stock if
the adjusted average price of Golden State Common Stock is $32.00 or less, with
such percentage increasing incrementally to up to 45% of such outstanding
common stock if such adjusted average price is $33.00 or more. The adjusted
average price of Golden State Common Stock will be the daily volume-weighted
average price per share for Golden State Common Stock on The New York Stock
Exchange ("NYSE") for 15 randomly selected trading days during a 30 trading-day
period ending three days before the closing date of the Mergers, adjusted by
subtracting therefrom the per share value attributable to the portion of Golden
State's potential recovery in the Glendale Goodwill Litigation (as defined
herein) not distributed to Golden State stockholders through distribution of
the Litigation Tracking Warrants (Trademark) .
In addition, the Agreement provides that FGH and Hunter's Glen will be
entitled to receive contingent consideration, through the issuance by Golden
State of additional shares of Golden State Common Stock to FGH and Hunter's
Glen following consummation of the Mergers, based on (i) the use by the
combined company of certain potential tax benefits resulting from certain net
operating loss carryforwards of the consolidated group of which Parent Holdings
is a part, and the realization of certain other potential tax assets and
liabilities of Golden State and Parent Holdings and (ii) Cal Fed's net
after-tax recovery in certain specified litigation, including a percentage of
the net after-tax recovery, if any, in Cal Fed's goodwill litigation against
the United States (following payment by Cal Fed of all amounts due to the
holders of its contingent litigation recovery participation interests (the
"CALGZs") and its secondary contingent litigation recovery participation
interests (the "CALGLs") and the retention of certain amounts of such recovery
by the combined company). The issuance of such contingent consideration to FGH
and Hunter's Glen will reduce the proportion of the common stock of the
combined company owned by existing Golden State stockholders and will
correspondingly increase the proportion of such common stock owned by FGH and
Hunter's Glen. See "SUMMARY--Issuance of Golden State Common Stock in the
Mergers" and "THE MERGERS--Issuance of Golden State Common Stock in the
Mergers" for a more complete description of the method for calculating the
number of shares of Golden State Common Stock to be issued to FGH and Hunter's
Glen at the closing of the Mergers and the circumstances under which additional
shares of Golden State Common Stock may be issued to FGH and Hunter's Glen
following such time.
Consummation of the Mergers is subject to a number of conditions,
including regulatory approval and approval and adoption of the Agreement and
the Plan of Merger by the holders of Golden State Common Stock.
Additionally, Parent Holdings and FNH intend to refinance (the
"Refinancing") all of the existing long-term debt of Parent Holdings and FNH
and to offer to purchase all of the outstanding preferred stock of Cal Fed with
the net proceeds of a proposed private offering of fixed and floating rate
notes (which notes will become obligations of New FNH upon consummation of the
Refinancing), and to the extent necessary, with a dividend from Cal Fed and
short-term borrowings by New FNH under a new senior unsecured credit facility.
It is expected that the Refinancing will be completed subsequent to the
consummation of the Mergers. While no assurances can be given that the
Refinancing will be completed in the time frame or on the terms currently
anticipated or that the benefits currently expected will be realized, it is
expected that the Refinancing will result in (i) after-tax savings of
approximately $60.6 million annually related to reductions in interest and
dividend payments and amortization of deferred
- ----------
"Litigation Tracking Warrant (Trademark) " and "LTW" are trademarks of Credit
Suisse First Boston Corporation in connection with its investment banking
services.
<PAGE>
debt issuance costs, (ii) the elimination of certain restrictive covenants
contained in existing indebtedness of Parent Holdings and FNH and (iii) a
simpler capital structure of the combined company after the Mergers. For a
description of the Refinancing, see "INFORMATION ABOUT PARENT HOLDINGS--
Description of Business of Parent Holdings--Proposed Refinancing."
The Agreement and the Plan of Merger are attached as Appendix A hereto and
are incorporated herein by reference. For information concerning the financial
effect of the Mergers and the Refinancing on a pro forma basis, see "SELECTED
FINANCIAL DATA," "SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS" and "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
This Proxy Statement and the accompanying forms of proxy are first being
mailed to holders of Golden State Common Stock on or about July 16, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION ............................................................. 1
FORWARD-LOOKING STATEMENTS ........................................................ 2
SUMMARY ........................................................................... 3
General .......................................................................... 3
Parties to the Mergers ........................................................... 3
The Special Meeting .............................................................. 5
Recommendation of Board of Directors ............................................. 5
Effects of the Mergers ........................................................... 5
Effective Time ................................................................... 7
Issuance of Golden State Common Stock in the Mergers ............................. 7
Opinion of Golden State's Financial Advisor ...................................... 8
Impact on Tangible Book Value .................................................... 9
Interests of Certain Persons in the Mergers ...................................... 9
Conditions; Regulatory Approvals ................................................. 10
Accounting Treatment ............................................................. 10
Certain Federal Income Tax Consequences of the Mergers ........................... 10
No Appraisal Rights .............................................................. 11
Board of Directors and Management Following the Mergers .......................... 11
Termination; Termination Fee ..................................................... 11
Stock Option Agreement ........................................................... 11
Litigation Management Agreement .................................................. 11
Registration Rights Agreement .................................................... 12
Certain Litigation ............................................................... 12
SELECTED FINANCIAL DATA ........................................................... 13
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS ............................................................. 19
UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA .................................... 22
MARKET PRICES AND DIVIDEND INFORMATION ............................................ 25
SPECIAL MEETING ................................................................... 26
Date, Time and Place; Purpose of Special Meeting ................................. 26
Record Date ...................................................................... 26
Voting and Revocation of Proxies; Votes Required ................................. 26
Solicitation of Proxies .......................................................... 27
Voting Securities and Principal Holders .......................................... 27
THE MERGERS ....................................................................... 28
General .......................................................................... 28
Background of the Mergers ........................................................ 28
Recommendation of the Golden State Board of Directors and Reasons for the Mergers 30
Opinion of Golden State's Financial Advisor ...................................... 32
Effective Time ................................................................... 36
Issuance of Golden State Common Stock in the Mergers ............................. 36
Effect on Existing Golden State Stockholders ..................................... 46
Conditions to the Mergers ........................................................ 46
Regulatory Approvals Required for the Mergers .................................... 48
Impact on Tangible Book Value .................................................... 49
Interests of Certain Persons in the Mergers ...................................... 49
Conduct of Business Pending the Mergers .......................................... 53
Issuance of Litigation Tracking Warrants (Trademark) ............................ 56
Certain Covenants ................................................................ 56
Covenants of FGH and Hunter's Glen ............................................... 57
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Representations and Warranties .......................................................... 57
Termination; Termination Fee ............................................................ 58
Waiver and Amendment .................................................................... 59
Employee Matters ........................................................................ 59
Accounting Treatment .................................................................... 59
Certain Federal Income Tax Consequences of the Mergers .................................. 59
No Appraisal Rights ..................................................................... 60
Expenses ................................................................................ 60
Stock Option Agreement .................................................................. 60
Litigation Management Agreement ......................................................... 64
Subsidiary Merger Agreement ............................................................. 67
Registration Rights Agreement ........................................................... 67
Certain Litigation ...................................................................... 67
MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE
MERGERS ................................................................................. 68
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 70
INFORMATION ABOUT GOLDEN STATE ........................................................... 88
General ................................................................................. 88
Beneficial Ownership of Golden State Common Stock by Management ......................... 91
Beneficial Ownership of Golden State Common Stock by Others ............................. 92
INFORMATION ABOUT PARENT HOLDINGS ........................................................ 93
Description of Business of Parent Holdings .............................................. 93
Management's Discussion and Analysis of Financial Condition and Results of Operations
-- Three Months Ended March 31, 1998 .................................................. 142
Management's Discussion and Analysis of Financial Condition and Results of Operations
-- Year Ended December 31, 1997 ....................................................... 162
Directors and Executive Officers of Parent Holdings and Cal Fed ......................... 192
LEGAL MATTERS ............................................................................ 196
EXPERTS .................................................................................. 196
OTHER BUSINESS ........................................................................... 196
STOCKHOLDER PROPOSALS .................................................................... 196
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE .......................................... 197
FINANCIAL STATEMENTS OF FIRST NATIONWIDE (PARENT) HOLDINGS INC.
AND SUBSIDIARIES ........................................................................ F-1
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION .................................................... A-1
AGREEMENT AND PLAN OF MERGER ............................................................ A-45
APPENDIX B
STOCK OPTION AGREEMENT .................................................................. B-1
APPENDIX C
LITIGATION MANAGEMENT AGREEMENT ......................................................... C-1
APPENDIX D
OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION ....................................... D-1
</TABLE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT OR
INCORPORATED BY REFERENCE HEREIN IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY GOLDEN STATE, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GOLDEN STATE OR ANY OTHER
PERSON. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF GOLDEN STATE OR PARENT HOLDINGS SINCE THE DATE OF THIS PROXY
STATEMENT OR THAT THE INFORMATION HEREIN OR THE DOCUMENTS OR REPORTS
INCORPORATED BY REFERENCE HEREIN ARE CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH
DATE.
ii
<PAGE>
AVAILABLE INFORMATION
Each of Golden State, Parent Holdings and FNH is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements (in the case of Golden State only) and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Golden State, Parent Holdings and FNH
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661. Copies of such material also can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or from the Web Site
maintained by the Commission at "http://www.sec.gov." Golden State Common Stock
is listed on the NYSE and The Pacific Exchange, Inc. (the "Pacific Exchange").
Reports, proxy statements and other information concerning Golden State may
also be inspected at the offices of the NYSE located at 20 Broad Street, New
York, New York 10005 and at the offices of the Pacific Exchange located at 301
Pine Street, San Francisco, California 94104.
In addition, Cal Fed is, and Glendale Federal was prior to July 24, 1997
(the date on which Golden State became Glendale Federal's parent holding
company), subject to the informational requirements of the Exchange Act and, in
accordance therewith, Cal Fed files, and Glendale Federal has filed and
continues to file on a voluntary basis, reports and other information with the
Office of Thrift Supervision (the "OTS") under OTS Docket Nos. 5099 and 3088,
respectively. Such reports and other information filed by Cal Fed and Glendale
Federal with the OTS may be inspected and copied at the public reference
facilities maintained by the OTS at 1700 G Street, N.W., Washington D.C. 20552,
and at the OTS Western Regional Office at One Montgomery Street, Suite 400, San
Francisco, California 94120. The reports and other information filed by Cal Fed
and Glendale Federal with the OTS may also be inspected at the office of the
NYSE referred to above and, in the case of reports and other information with
respect to Cal Fed, at the offices of The National Association of Securities
Dealers, 1735 K Street, N.W., Washington, D.C. 20006.
All information contained in this Proxy Statement concerning Parent
Holdings and its subsidiaries, including information with respect to the
proposed refinancing of the debt and preferred stock of Parent Holdings and its
subsidiaries, has been supplied by Parent Holdings and has not been
independently verified by Golden State. Except as otherwise identified herein,
all other information contained in this Proxy Statement has been supplied by
Golden State.
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
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FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS AND INCORPORATES BY REFERENCE CERTAIN
FORWARD LOOKING STATEMENTS WITH RESPECT TO MANAGEMENT BELIEFS, ESTIMATES,
PROJECTIONS, ASSUMPTIONS AND THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF GOLDEN STATE AND PARENT HOLDINGS AND THEIR RESPECTIVE SUBSIDIARIES
AND OF GOLDEN STATE FOLLOWING THE CONSUMMATION OF THE MERGERS, INCLUDING
STATEMENTS RELATING TO: (A) THE COST SAVINGS THAT ARE EXPECTED TO BE REALIZED
FROM THE MERGERS, (B) THE PRO FORMA ASSETS AND DEPOSITS OF THE COMBINED
COMPANY, (C) PROJECTED EARNINGS PER SHARE AND CASH EARNINGS PER SHARE OF THE
COMBINED COMPANY, (D) THE RESTRUCTURING CHARGES EXPECTED TO BE INCURRED IN
CONNECTION WITH THE MERGERS, AND (E) THE NUMBER OF CONTINGENT SHARES (AS
DEFINED HEREIN) THAT MAY BE ISSUED FOLLOWING THE CONSUMMATION OF THE MERGERS.
SEE "SUMMARY," "THE MERGERS," "MANAGEMENT AND OPERATIONS OF GOLDEN STATE
FOLLOWING THE MERGERS," "SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS" AND "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS FROM THE MERGERS CANNOT BE
FULLY REALIZED OR REALIZED WITHIN THE EXPECTED TIME FRAME OR THEREAFTER; (2)
REVENUES FOLLOWING THE MERGERS ARE LOWER THAN EXPECTED; (3) COMPETITIVE
PRESSURE AMONG DEPOSITORY INSTITUTIONS INCREASES SIGNIFICANTLY; (4) COSTS OR
DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF GOLDEN STATE AND
PARENT HOLDINGS ARE GREATER THAN EXPECTED; (5) CHANGES IN THE INTEREST RATE
ENVIRONMENT REDUCE INTEREST MARGINS; (6) GENERAL ECONOMIC CONDITIONS, EITHER
NATIONALLY OR IN THE MARKETS IN WHICH THE COMBINED COMPANY WILL BE DOING
BUSINESS, ARE LESS FAVORABLE THAN EXPECTED; (7) LEGISLATION OR REGULATORY
REQUIREMENTS OR CHANGES ADVERSELY AFFECT THE BUSINESSES IN WHICH THE COMBINED
COMPANY WOULD BE ENGAGED; (8) THE RESPECTIVE GOODWILL LAWSUITS OF GLENDALE
FEDERAL AND CAL FED ARE NOT FINALLY RESOLVED IN THE TIME FRAMES EXPECTED BY THE
PARTIES, OR A FINAL RESOLUTION OF EITHER OR BOTH OF SUCH LAWSUITS DOES NOT
RESULT IN A NET RECOVERY OR RESULTS IN A NET RECOVERY THAT IS LESS THAN THAT
ANTICIPATED BY THE PARTIES; (9) THE NET AMOUNTS OF ANY CONTINGENT TAX ASSETS
(INCLUDING ANY NET OPERATING LOSS CARRYFORWARDS OF PARENT HOLDINGS AND ITS
SUBSIDIARIES THAT ARE AVAILABLE FOR USE BY THE COMBINED COMPANY) ACTUALLY
REALIZED OR UTILIZED BY THE COMBINED COMPANY ARE LESS THAN ANTICIPATED; AND
(10) CHANGES IN MANAGEMENT POLICIES OR GOLDEN STATE'S BUSINESS FOLLOWING
CONSUMMATION OF THE MERGERS.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. As this summary is necessarily incomplete, reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained or incorporated by reference in this Proxy Statement and
the Appendices hereto. Stockholders of Golden State are urged to read this
Proxy Statement and the Appendices hereto in their entirety. Certain
capitalized terms which are used but not defined in this summary are defined
elsewhere in this Proxy Statement.
GENERAL
This Proxy Statement, notice of the Special Meeting to be held on August
17, 1998 and form of proxy solicited in connection therewith are first being
mailed to holders of Golden State Common Stock ("Golden State Stockholders") on
or about July 16, 1998.
At the Special Meeting, Golden State Stockholders will consider and vote
on a proposal to approve and adopt the Agreement and the Plan of Merger and the
transactions contemplated thereby.
The Agreement and the Plan of Merger are set forth as Appendix A to this
Proxy Statement and each is incorporated herein by reference.
PARTIES TO THE MERGERS
Golden State, Golden State Financial and Glendale Federal. Golden State
was incorporated under Delaware law on June 9, 1997 by Glendale Federal for the
purpose of becoming the holding company for Glendale Federal pursuant to the
Reorganization (as defined under "INFORMATION ABOUT GOLDEN STATE--General"),
which was consummated on July 24, 1997. Upon completion of the Reorganization,
Glendale Federal became a savings bank subsidiary of Golden State, which
conducted no business prior to the Reorganization. Glendale Federal is a
federally chartered savings bank and is one of the largest savings institutions
in the United States. At March 31, 1998, Golden State had total consolidated
assets of approximately $16 billion, deposits of $9.7 billion and stockholders'
equity of $1.1 billion. Golden State's business consists primarily, through
Glendale Federal, of attracting deposits from the general public and using such
deposits, together with the proceeds of borrowings and its stockholders'
equity, to originate and purchase loans, including residential real estate
loans as well as business and consumer loans and other products. Glendale
Federal is headquartered in Glendale, California and, at the date hereof,
operated 192 banking offices and 22 loan offices located throughout the State
of California. The principal executive offices of Golden State are located at
414 North Central Avenue, Glendale, California 91203 and the telephone number
of such offices is (818) 500-2000. All references herein to Golden State refer
to Golden State Bancorp Inc. and its subsidiaries on a consolidated basis,
unless the context otherwise requires. References to Golden State herein with
respect to periods preceding the effective date of the Reorganization refer to
Glendale Federal and its subsidiaries on a consolidated basis, unless the
context otherwise requires. For additional information regarding Golden State
and the combined company that would result from the Mergers, see "THE MERGERS,"
"SELECTED FINANCIAL DATA," "MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING
THE MERGERS," "INFORMATION ABOUT GOLDEN STATE" and "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS." See also "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
On April 21, 1998, Golden State completed its acquisition of CENFED
through the merger of CENFED with and into Golden State Financial (the "CENFED
Merger"). At March 31, 1998, CENFED had total assets of $2.0 billion, deposits
of $1.4 billion and stockholders' equity of $139 million and operated 18 branch
offices located in Los Angeles, Orange, Riverside and San Bernardino Counties
in Southern California. The CENFED Merger was accounted for using the purchase
method of accounting under generally accepted accounting principles ("GAAP").
As a result of the CENFED Merger, Golden State issued approximately 7,372,308
shares of Golden State Common Stock and Glendale Federal became a subsidiary of
Golden State Financial.
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On July 13, 1998, Golden State announced that it had completed its
acquisition of RedFed through the merger of RedFed with and into Golden State
Financial (the "RedFed Merger"). At March 31, 1998, RedFed had total assets of
$1.0 billion, deposits of $861 million and stockholders' equity of $89 million,
and operated 15 banking offices in Southern California's Riverside and San
Bernardino Counties. The RedFed Merger was accounted for using the purchase
method of accounting under GAAP. As a result of the RedFed Merger, Golden State
issued approximately 5.2 million shares of Golden State Common Stock to former
stockholders of RedFed.
Parent Holdings, FNH and Cal Fed. Parent Holdings is a savings and loan
holding company organized under Delaware law. Parent Holdings has no business
operations of its own, and its only significant asset is its ownership of 80%
of the common stock of FNH, a savings and loan holding company organized under
Delaware law. FNH owns all of the common stock of Cal Fed, a federal stock
savings bank and the fourth largest thrift institution in the United States as
measured by total assets. Parent Holdings is a wholly owned subsidiary of FGH,
an indirect subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews
Holdings").
FNH is 80% owned indirectly by MacAndrews Holdings, a Delaware corporation
wholly owned through Mafco Holdings Inc. ("Mafco Holdings" and together with
MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman, and is 20%
owned by Hunter's Glen, a Texas limited partnership controlled by Gerald J.
Ford, the Chairman of the Board, Chief Executive Officer and a director of Cal
Fed and the President and a director of Parent Holdings.
Cal Fed is a diversified financial services company whose principal
business consists of (i) operating retail deposit branches which serve
customers in California and, to a lesser extent, in Nevada, (ii) originating
and/or purchasing, on a nationwide basis, 1-4 unit residential loans and, to a
lesser extent, certain commercial real estate and consumer loans, for
investment and (iii) conducting mortgage banking activities, including
originating and servicing 1-4 unit residential loans for others. Recently, with
its entry into the non-prime automobile finance business, Cal Fed broadened its
complement of consumer lending products. These operating activities are
financed principally with customer deposits, secured short-term and long-term
borrowings, collections on loans, asset sales and retained earnings.
At March 31, 1998, Parent Holdings had total consolidated assets of $32.2
billion, deposits of $16.4 billion and stockholder's equity of $237.4 million.
The principal executive offices of Parent Holdings are located at 135 Main
Street, San Francisco, California 94105, and its telephone number is (415)
904-0100.
On March 29, 1998, Cal Fed entered into a Purchase and Sale Agreement (the
"Florida Branch Sale Agreement") with Union Planters Bank of Florida ("Union
Planters Florida") pursuant to which Cal Fed will sell its 24 branch banking
offices in the State of Florida to Union Planters Florida (the "Florida Branch
Sale"). As of March 31, 1998, the 24 Florida branches of Cal Fed had total
deposits of $1.5 billion. The Florida Branch Sale is subject to regulatory
approval and is expected to close in the third quarter of 1998.
Additionally, Parent Holdings and FNH intend to refinance all of the
existing long-term debt of Parent Holdings and FNH and to offer to purchase all
of the outstanding preferred stock of Cal Fed with the net proceeds of a
proposed private offering of fixed and floating rate notes (which notes will
become obligations of New FNH upon the consummation of the Refinancing), and to
the extent necessary, with a dividend from Cal Fed and short-term borrowings by
New FNH under a new senior unsecured credit facility. It is expected that the
Refinancing will be completed simultaneously with or subsequent to the
consummation of the Mergers. While no assurances can be given that the
Refinancing will be completed in the time frame or on the terms currently
anticipated or that the benefits currently expected will be realized, it is
expected that if 100% of the outstanding principal amount of the FNH Notes and
all of the Cal Fed Preferred Stock is purchased in the Refinancing or is
subsequently redeemed by Cal Fed, the Refinancing will result in (i) after-tax
savings of approximately $60.6 million annually related to reductions in
interest and dividend payments and amortization of deferred debt issuance
costs, (ii) the elimination of certain restrictive covenants contained in
existing indebtedness of Parent Holdings and FNH and (iii) a simpler capital
structure of the combined company after the Mergers. In connection with the
Refinancing, Parent Holdings and FNH expect to incur, in the aggregate,
expenses (including premiums, fees and other expenses) of approximately $186.4
million, net of taxes. For a description of the Refinancing, see "INFORMATION
ABOUT PARENT HOLDINGS--Description of Business of Parent Holdings--Proposed
Refinancing."
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For more information about Parent Holdings, FNH and Cal Fed, reference is
made to "INFORMATION ABOUT PARENT HOLDINGS," "FINANCIAL STATEMENTS OF FIRST
NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES" and "AVAILABLE
INFORMATION."
THE SPECIAL MEETING
The Special Meeting will be held at 10:00 a.m. on Monday, August 17, 1998
at the Red Lion Hotel, 100 West Glenoaks Boulevard, Glendale, California. The
purpose of the Special Meeting is to consider and vote upon a proposal to
approve and adopt the Agreement and the Plan of Merger and the consummation of
the transactions contemplated thereby.
Only holders of record of Golden State Common Stock at the close of
business on July 6, 1998 (the "Record Date") will be entitled to vote at the
Special Meeting. The affirmative vote of the holders of a majority of the
outstanding shares of Golden State Common Stock entitled to vote on such date
is required to approve and adopt the Agreement and the Plan of Merger. As of
the Record Date, there were 55,485,151 shares of Golden State Common Stock
outstanding and entitled to be voted at the Special Meeting.
The directors and executive officers of Golden State and their affiliates
beneficially owned, as of July 6, 1998, less than 1% of the outstanding shares,
of Golden State Common Stock entitled to vote at the Special Meeting, and all
such persons have indicated a present intent to vote their shares for approval
and adoption of the Agreement and the Plan of Merger. See "SPECIAL
MEETING--Record Date" and "--Voting and Revocation of Proxies; Votes Required."
As of July 6, 1998, neither Parent Holdings nor its subsidiaries nor, to the
best knowledge of Parent Holdings, the directors and executive officers of
Parent Holdings, beneficially owned any shares of Golden State Common Stock.
RECOMMENDATION OF BOARD OF DIRECTORS
THE GOLDEN STATE BOARD OF DIRECTORS (THE "GOLDEN STATE BOARD") HAS
UNANIMOUSLY APPROVED THE AGREEMENT AND THE PLAN OF MERGER AND HAS DETERMINED
THAT THE MERGERS ARE FAIR TO, AND IN THE BEST INTERESTS OF, GOLDEN STATE AND
ITS STOCKHOLDERS. THE GOLDEN STATE BOARD THEREFORE UNANIMOUSLY RECOMMENDS THAT
GOLDEN STATE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE AGREEMENT AND
THE PLAN OF MERGER. See "THE MERGERS--Recommendation of the Golden State Board
of Directors and Reasons for the Mergers."
EFFECTS OF THE MERGERS
Pursuant to the Agreement, at the Effective Time (as defined herein), FNH
will be merged with and into Golden State Financial, Parent Holdings will be
merged with and into Golden State, and FGH and Hunter's Glen will become
stockholders of Golden State. Prior to consummation of the Mergers, FNH will
contribute all of its assets (including all of the outstanding common stock of
Cal Fed) to New FNH. Upon consummation of the Refinancing, the fixed and
floating rate notes issued in connection with the Refinancing will become
obligations of New FNH.
In addition, the Board of Directors of Parent Holdings will have the right
to appoint two-thirds of the initial members of the Board of Directors of the
combined company and it is expected that affiliates of Parent Holdings, FNH and
Cal Fed generally will be in a position to control the management of the
combined company. See "THE MERGERS--Issuance of Golden State Common Stock in
the Mergers" and "MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE
MERGER."
Following the Holding Company Mergers, Glendale Federal will merge with
and into Cal Fed. Cal Fed will continue as an indirect, wholly owned subsidiary
of Golden State. See "THE MERGERS--General."
The diagram on the following page indicates the anticipated structure of
the combined company following consummation of the Mergers and giving effect to
the Refinancing.
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ORGANIZATIONAL STRUCTURE OF GOLDEN STATE AND SUBSIDIARIES FOLLOWING THE
MERGERS*
Public
Stockholders
- Common Stock
- Litigation Tracking Warrants
- Golden State
Preferred Stock
FGH
Hunter's
Glen
Common
Stock
Common
Stock
Golden State
Common
Stock
Golden State
Financial
Common
Stock
New FNH
- New FNH
Notes
Common
Stock
Public
Securityholders
- CALGZs
- CALGLs
Cal Fed
- ----------
* This chart omits certain debt and equity-equivalent interests. For a
description of the Parent Holdings 12 1/2% Senior Notes, the FNH Notes, the
Cal Fed debt securities, the Cal Fed preferred stock and the Refinancing,
see "INFORMATION ABOUT PARENT HOLDINGS -- Description of Business of Parent
Holdings--Sources of Funds" and "--Proposed Refinancing."
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EFFECTIVE TIME
The Golden State Merger and the FNH Merger will become effective at the
dates and times set forth in the certificates of merger with respect thereto
(the "Certificates of Merger") which will be filed with the Secretary of State
of the State of Delaware on the Closing Date (as defined below). The date and
time when the Golden State Merger becomes effective and the date and time when
the FNH Merger becomes effective, in each case as set forth in the Certificate
of Merger with respect thereto, are referred to herein collectively as the
"Effective Time." "Effective Date" means the date on which the Effective Time
occurs. The Certificates of Merger will be filed on the first day (the "Closing
Date") which is (a) the last business day of a month and (b) at least two
business days after the satisfaction or waiver (subject to applicable law) of
the conditions to consummation of the Mergers set forth in the Agreement (other
than those conditions which relate to actions to be taken at the closing of the
Mergers), unless another date is agreed to by Golden State and Parent Holdings.
See "THE MERGERS --Effective Time."
ISSUANCE OF GOLDEN STATE COMMON STOCK IN THE MERGERS
Pursuant to the Agreement, FGH and Hunter's Glen will receive at the
closing of the Mergers, in respect of their interests as stockholders of Parent
Holdings and FNH, a number of shares of Golden State Common Stock, as
determined pursuant to a formula set forth in the Agreement, that will
constitute, in the aggregate, between 42% and 45% of the common stock of the
combined company outstanding, immediately after giving effect to the Mergers,
on a fully-diluted basis (without giving effect to shares issuable pursuant to
the Litigation Tracking Warrants (Trademark) as described herein under
"INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation Tracking
Warrants (Trademark) "). The actual ownership percentage of FGH and Hunter's
Glen will be determined based upon the adjusted average price of Golden State
Common Stock during a specified pricing period ending shortly before the
closing of the Mergers. FGH and Hunter's Glen will receive shares of Golden
State Common Stock constituting 42% of such outstanding common stock if the
adjusted average price of Golden State Common Stock is $32.00 or less, with
such percentage increasing incrementally to up to 45% of such outstanding
common stock if such adjusted average price is $33.00 or more. The adjusted
average price of Golden State Common Stock will be the daily volume-weighted
average price per share for Golden State Common Stock on the NYSE for 15
randomly selected trading days during a 30 trading-day period ending three days
before the closing date of the Mergers, adjusted by subtracting therefrom the
per share value attributable to the 15% of the value of Golden State's
potential recovery in the Glendale Goodwill Litigation (as defined herein) not
distributed to Golden State stockholders through distribution of the Litigation
Tracking Warrants (Trademark) . See "THE MERGERS--Issuance of Golden State
Common Stock in the Mergers--Conversion of Shares on the Closing Date."
In addition, the Agreement provides that FGH and Hunter's Glen will be
entitled to receive contingent consideration, through the issuance by Golden
State of additional shares of Golden State Common Stock ("Contingent Shares")
to FGH and Hunter's Glen following consummation of the Mergers, based on (i)
the use by the combined company of certain potential tax benefits resulting
from certain net operating loss carryforwards of the consolidated group of
which Parent Holdings is a part, and the realization of certain other potential
tax assets and liabilities of Golden State and Parent Holdings and (ii) Cal
Fed's net after-tax recovery in certain specified litigation, including a
percentage of the net after-tax recovery, if any, in the Cal Fed Goodwill
Litigation (as defined herein) (following payment by Cal Fed of all amounts
due, if any, to the holders of the CALGZs and the CALGLs (see "INFORMATION
ABOUT PARENT HOLDINGS--Description of Business of Parent Holdings--Other
Activities") and the retention of certain amounts of such recovery by the
combined company). The Litigation Tracking Warrants (Trademark) , which were
distributed by Golden State to its stockholders on May 29, 1998, represent the
right to receive upon exercise thereof Golden State Common Stock having an
aggregate value equal to 85% of the net after-tax recovery, if any, in the
Glendale Goodwill Litigation. The Agreement provides generally that the amount
of the net after-tax recovery, if any, resulting from the Cal Fed Goodwill
Litigation which will be excluded in determining the number of Contingent
Shares issuable in respect of the Cal Fed Goodwill Litigation will be based on
the 15% of the value of the net after-tax recovery in the Glendale Goodwill
Litigation to be excluded for purposes of determining the number of shares of
Golden State Common Stock issuable upon exercise of the Litigation Tracking
Warrants (Trademark) , adjusted to reflect the pro forma ownership interest of
FGH and Hunter's Glen in the combined company at the time of consummation of
the Mergers. See "THE MERGERS--Issuance of Golden State Common
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Stock in the Mergers--Issuances of Contingent Shares After the Closing Date"
and "INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation
Tracking Warrants (Trademark) ."
The number of Contingent Shares cannot be determined at the present time
and also will not be determinable at the time of the consummation of the
Mergers, as such number depends upon factors that are not or will not be
subject to determination at such times. These factors include, among other
things, the net value to the combined company of certain contingent assets and
liabilities of Golden State and Parent Holdings (including potential recoveries
in the Glendale Goodwill Litigation, the Cal Fed Goodwill Litigation and
certain other litigation to which affiliates of Parent Holdings are parties
(the "Other Litigation"), and potential tax benefits resulting from the use of
certain net operating loss carryforwards of the consolidated group of which
Parent Holdings is a part and the realization of certain other contingent tax
assets and liabilities of Golden State and Parent Holdings) and the market
price of the common stock of the combined company at such times as issuance of
Contingent Shares would be required under the Agreement.
Subject to the foregoing, assuming for illustrative purposes only a
valuation of the Cal Fed Goodwill Litigation of approximately $440 million
(based on the trading prices of the CALGZs and the CALGLs at the time of the
execution of the Agreement) a valuation of the Glendale Goodwill Litigation of
approximately $550 million (based on the range of recent trading prices of the
Litigation Tracking Warrants (Trademark) ), and tax benefits of Parent Holdings
of approximately $350 million, the number of Contingent Shares issuable under
the Agreement would result in an incremental increase in the percentage
ownership of outstanding common stock of the combined company by FGH and
Hunter's Glen of approximately 4.3 to 5.5 percentage points, assuming that
during all relevant periods the market price of a share of common stock of the
combined company is between $35 and $45 per share. Due to the preliminary stage
of the Other Litigation, no value has been ascribed thereto in the above
illustration. In addition to the variables that may affect the number of
Contingent Shares to be issued pursuant to the Agreement, a number of
additional variables, including without limitation other changes in the number
of shares of the combined company outstanding or deemed to be outstanding
(including, for example, the number of shares outstanding after exercise of the
Litigation Tracking Warrants (Trademark) ), could affect the relative ownership
of a stockholder of the combined company. Further, the timing of the issuance
of the Contingent Shares is not presently ascertainable, and Contingent Shares
with respect to the use by the combined company of Parent Holdings' net
operating loss carryforwards, which will be subject to limitation under the
Code (as defined herein) in any particular tax year, may be issued over a
substantial number of years.
The foregoing estimates and assumptions, and the ownership percentages
derived from them, are presented for illustrative purposes only and are not
intended to represent the view of Golden State, Parent Holdings, their
respective managements or any other person as to likely actual damages, results
or values, or the appropriate amount of damages in the Glendale Goodwill
Litigation or the Cal Fed Goodwill Litigation, and there can be no assurance
that the foregoing illustration will prove to be accurate or that the actual
number of Contingent Shares, or the change in percentage ownership, will not be
substantially different than the estimate disclosed herein.
OPINION OF GOLDEN STATE'S FINANCIAL ADVISOR
Credit Suisse First Boston Corporation ("CSFB") has rendered its opinions
to the Golden State Board dated February 4, 1998 (the date the Golden State
Board approved the Agreement) and as of the date of this Proxy Statement to the
effect that, as of such dates and based upon and subject to certain matters
stated therein, the consideration to be paid by Golden State pursuant to the
Agreement was fair, from a financial point of view, to holders of Golden State
Common Stock. In connection with its opinions, CSFB considered, among other
things, the potential financial impact of the issuance of the Contingent Shares
and the receipt of recoveries in the Glendale Goodwill Litigation and the Cal
Fed Goodwill Litigation. CSFB's opinion dated the date of this Proxy Statement
(the "CSFB Opinion") is attached as Appendix D to this Proxy Statement. Golden
State Stockholders are urged to read the CSFB Opinion in its entirety, and the
summary thereof set forth under "THE MERGERS--Opinion of Golden State's
Financial Advisor," for a description of the procedures followed, assumptions
made, matters considered
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<PAGE>
and limitations and qualifications on the review undertaken by CSFB in
connection therewith. The CSFB Opinion is directed to the Golden State Board,
relates only to the fairness of the consideration to be paid by Golden State
pursuant to the Agreement from a financial point of view, does not address any
other aspect of the Mergers and does not constitute a recommendation as to how
any Golden State Stockholder should vote at the Special Meeting. See "THE
MERGERS--Opinion of Golden State's Financial Advisor."
IMPACT ON TANGIBLE BOOK VALUE
Due principally to the use of purchase accounting for the Mergers and
prior acquisitions under GAAP, Parent Holdings' consolidated balance sheet
contains, and the consolidated balance sheet of the combined company on a
pro-forma basis will contain, significantly more goodwill compared to that of
Golden State on a standalone basis. Additionally, the capital structure of
Parent Holdings is more leveraged than that of Golden State and it is expected
that the tangible book value per common share of the combined company will
decrease as a result of the premium paid in the Refinancing to holders of the
outstanding indebtedness and preferred stock of Parent Holdings and its
subsidiaries and the write off of the unamortized issuance expense relating to
such outstanding indebtedness. See "INFORMATION ABOUT PARENT
HOLDINGS--Description of Business of Parent Holdings--Proposed Refinancing" and
Notes D and I to the Notes to Unaudited Pro Forma Condensed Combined Financial
Statements. Based on financial data as of March 31, 1998, giving effect to the
Mergers, the CENFED Merger, the RedFed Merger and the Refinancing on a pro
forma basis, it is expected that the tangible book value per common share of
the combined company would be $2.80 compared to $17.67 for Golden State on a
standalone basis (before giving effect to the CENFED Merger and the RedFed
Merger). Golden State expects that after giving effect to the Mergers, the
CENFED Merger, the RedFed Merger and the Refinancing, the federal savings bank
subsidiary of the combined company will remain well-capitalized under
applicable regulatory guidelines. In considering whether to enter into the
Agreement and to recommend adoption of the Agreement to Golden State
Stockholders, the Golden State Board, and in rendering the CSFB Opinion, CSFB,
considered the impact of the Mergers on the pro forma financial condition and
results of operations of the combined company, including the impact on tangible
book value per share. See "THE MERGERS -- Opinion of Golden State's Financial
Advisor -- Selected Companies Analysis -- Pro Forma." The Golden State Board
also considered the expected impact of the Refinancing on the pro forma
financial condition and results of operations of the combined company in
recommending that Golden State Stockholders adopt the Agreement.
For more information concerning the pro forma impact of the Mergers and of
the Refinancing on the financial condition and the results of operations of the
combined company, see "SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS," "UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA" and "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Certain members of Golden State's management and the Golden State Board
have interests in the Mergers in addition to their interests as stockholders of
Golden State. These include, among other things, provisions in the Agreement
relating to indemnification, the composition of the Golden State Board and the
Board of Directors of Cal Fed after the Mergers, the employment of Stephen J.
Trafton, Chairman, Chief Executive Officer and President of Golden State, and
Richard A. Fink, Vice Chairman of Golden State, following the Effective Time
pursuant to a Litigation Management Agreement, dated February 4, 1998, by and
among Golden State, Glendale Federal, Cal Fed and Messrs. Trafton and Fink (the
"Litigation Management Agreement"), the payment to officers of Golden State of
certain retention bonuses and certain severance benefits under existing
employment agreements and the acceleration of the vesting of stock options held
by certain officers and directors of Golden State. The estimated aggregate
dollar amounts expected to be paid to executive officers of Golden State in the
form of retention bonuses
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<PAGE>
and severance benefits under existing employment agreements are approximately
$3 million and $13 million, respectively. The Golden State Board was aware of
these interests and considered them, among other matters, in unanimously
approving the Agreement and the transactions contemplated thereby. In addition,
certain members of Cal Fed's senior management will be entitled to receive
amounts payable pursuant to FNH's Management Incentive Plan and Cal Fed's
Deferred Executive Compensation Plan upon consummation of the Mergers. See "THE
MERGERS--Interests of Certain Persons in the Mergers" and "--Litigation
Management Agreement."
CONDITIONS; REGULATORY APPROVALS
Consummation of the Mergers is subject to various mutual conditions,
including, among others, receipt of the stockholder approval solicited hereby,
receipt of all regulatory approvals required to consummate the Mergers (the
"Requisite Regulatory Approvals"), receipt of opinions of counsel regarding
certain federal income tax consequences of the Mergers and certain other
closing conditions. See "THE MERGERS--Conditions to the Mergers."
The Requisite Regulatory Approvals include the prior approval of the
Holding Company Mergers and the Subsidiary Bank Merger by the OTS. Applications
for these approvals have been filed with the OTS. There can be no assurance
that the Requisite Regulatory Approvals will be granted. If such approvals are
received, there can be no assurance as to the date of such approvals or the
absence of any litigation challenging such approvals. There likewise can be no
assurance that the United States Department of Justice (the "Department of
Justice") or any state attorney general will not attempt to challenge the
Holding Company Mergers or the Subsidiary Bank Merger on antitrust grounds or,
if such a challenge is made, as to the result thereof. See "THE
MERGERS--Regulatory Approvals Required for the Mergers."
ACCOUNTING TREATMENT
The Mergers will be accounted for under the purchase method of accounting
under GAAP. Golden State will be treated as the acquired corporation for such
purposes. Golden State's assets, liabilities and other items will be adjusted
to their estimated fair value at the closing date of the Mergers and combined
with the historical book values of the assets and liabilities of Parent
Holdings. Applicable income tax effects of such adjustments will be included as
a component of the combined entity's deferred tax asset or liability. The
difference between the estimated fair value of the assets, liabilities and
other items (adjusted as discussed above) and the purchase price will be
recorded as goodwill and amortized against earnings over a 15-year period
following consummation of the Mergers. For further information concerning the
amount of goodwill to be recorded in connection with the Mergers and the
amortization thereof, see Note D to the Unaudited Pro Forma Condensed Combined
Financial Statements. See "THE MERGERS--Accounting Treatment" and "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
Golden State and Parent Holdings intend that the Mergers will qualify as
reorganizations within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). It is a condition to the respective
obligations of each of Golden State, Golden State Financial, Parent Holdings
and FNH to consummate the Mergers that such party shall have received an
opinion of its counsel to the effect that the Mergers will be treated as
reorganizations within the meaning of Section 368(a) of the Code and that,
accordingly, for federal income tax purposes (i) no gain or loss will be
recognized by Golden State, Golden State Financial, Parent Holdings or FNH as a
result of the Golden State Merger or the FNH Merger; (ii) no gain or loss will
be recognized by Cal Fed or Glendale Federal as a result of the Subsidiary Bank
Merger (except to the extent Cal Fed or Glendale Federal may be required to
recognize income due to the recapture of bad debt reserves as a result of the
Subsidiary Bank Merger); and (iii) no gain or loss
10
<PAGE>
will be recognized by the stockholders of Parent Holdings or FNH solely as a
result of the receipt of Golden State Common Stock at the Effective Time in
exchange for Parent Holdings Common Stock or FNH Class B Common Stock pursuant
to the Holding Company Mergers. Each of these conditions is waivable at the
option of the party in whose favor the condition runs.
There will be no United States federal income tax consequences to Golden
State Stockholders as a result of either voting on the proposal described
herein or the consummation of the Mergers.
Golden State Stockholders should read carefully the discussion of the
material United States federal income tax consequences of the Mergers set forth
under "THE MERGERS--Certain Federal Income Tax Consequences of the Mergers."
NO APPRAISAL RIGHTS
No stockholders of Golden State are entitled to appraisal rights in
connection with, or as a result of, the Mergers. See "THE MERGERS--No Appraisal
Rights."
BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE MERGERS
The Agreement provides that, immediately after the consummation of the
Mergers, the Golden State Board will be composed of 15 directors, with five
directors designated by Golden State and the remaining ten directors designated
by Parent Holdings. Upon consummation of the Mergers, Mr. Ford will serve as
Chairman of the Board and Chief Executive Officer of the combined company, and
Carl B. Webb, the President and Chief Operating Officer of Cal Fed, will become
President and Chief Operating Officer of the combined company. See "MANAGEMENT
AND OPERATIONS OF GOLDEN STATE FOLLOWING THE MERGERS," "THE MERGERS--Interests
of Certain Persons in the Mergers" and "----Litigation Management Agreement."
TERMINATION; TERMINATION FEE
The Agreement may be terminated at any time prior to the Effective Time by
the mutual consent of Golden State and Parent Holdings and by either of them
individually under certain specified circumstances, including if the Holding
Company Mergers have not been consummated by December 31, 1998. Additionally,
the Agreement provides that Golden State will be required to pay Parent
Holdings a $50 million termination fee under circumstances that would cause the
Option granted by Golden State to Parent Holdings pursuant to the Stock Option
Agreement to become exercisable. See "THE MERGERS--Stock Option Agreement" and
"--Termination; Termination Fee."
STOCK OPTION AGREEMENT
As an inducement to Parent Holdings to enter into the Agreement, on
February 4, 1998, Parent Holdings and Golden State entered into a Stock Option
Agreement (the "Stock Option Agreement") pursuant to which Golden State granted
to Parent Holdings an option (the "Option") to purchase, upon the terms and
subject to the conditions set forth therein, up to 10,165,950 shares of Golden
State Common Stock (approximately 19.9% of the total number of outstanding
shares of Golden State Common Stock) at a price of $24.00 per share. Pursuant
to the Stock Option Agreement, the aggregate amount that Parent Holdings may
realize in respect of the Option, or the shares of Golden State Common Stock
issued pursuant to the Option, may not exceed $25 million. The Option will
become exercisable only upon the occurrence of certain events, none of which
has occurred as of the date hereof. The Stock Option Agreement is attached as
Appendix B to this Proxy Statement. See "THE MERGERS--Stock Option Agreement."
The Stock Option Agreement is intended to increase the likelihood that the
Mergers will be consummated in accordance with the terms of the Agreement.
Consequently, certain aspects of the Stock Option Agreement may have the effect
of discouraging persons who might now or prior to the Effective Time be
interested in acquiring all or a significant interest in Golden State from
considering or proposing such an acquisition.
11
<PAGE>
LITIGATION MANAGEMENT AGREEMENT
In connection with the execution of the Agreement, Golden State, Glendale
Federal, Cal Fed and Messrs. Trafton and Fink entered into the Litigation
Management Agreement, pursuant to which, among other things, Messrs. Trafton
and Fink will continue to oversee and manage the Glendale Goodwill Litigation,
and will oversee and manage the Cal Fed Goodwill Litigation, following the
consummation of the Mergers. In connection with the Litigation Management
Agreement, Messrs. Trafton and Fink will also be subject to certain
restrictions on their involvement in businesses competitive with Golden State
in California and on their ability to solicit for employment employees of
Golden State. For their services under the Litigation Management Agreement and
as compensation for these restrictions, Messrs. Trafton and Fink will be
entitled to (i) annual salaries of $600,000 and $400,000, respectively; (ii) an
incentive fee payable to each in an amount equal to 0.25% of the aggregate
value of any pre-tax recovery payable on receipt of a final nonappealable
judgment or in the event of a final settlement of the Glendale Goodwill
Litigation and the Cal Fed Goodwill Litigation (provided that the right to such
fee may be divested in certain circumstances involving the termination of Mr.
Trafton's or Mr. Fink's employment under the Litigation Management Agreement);
(iii) a lifetime annual pension benefit of $1 million and $325,000,
respectively; and (iv) certain medical benefits. See "THE MERGERS--Litigation
Management Agreement."
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Agreement, at the Effective Time, Golden State will enter
into a registration rights agreement with FGH and Hunter's Glen pursuant to
which, at the request of FGH or Hunter's Glen and under the circumstances set
forth therein, Golden State will be required to file registration statements
under the Securities Act of 1933, as amended (the "Securities Act") with
respect to the shares of Golden State Common Stock issued to FGH and Hunter's
Glen in connection with the Mergers. See "THE MERGERS--Registration Rights
Agreement."
CERTAIN LITIGATION
Following the public announcement of the Agreement and the proposed
Mergers, several separate purported class action lawsuits were filed by certain
stockholders of Golden State, naming Golden State, its individual directors
and, in certain cases, FNH and MacAndrews Holdings, as defendants. The
litigation was consolidated into one action in the Delaware Court of Chancery,
captioned In re Golden State Bancorp Inc. Shareholders Litigation, Consolidated
C.A. No. 16175NC. The plaintiffs in such litigation have alleged, among other
things, that the individual members of the Golden State Board breached their
fiduciary duties to Golden State's stockholders by entering into the Agreement.
The plaintiffs are seeking, on behalf of themselves and all similarly situated
stockholders of Golden State, among other things: (i) class certification, (ii)
an order enjoining, preliminarily and permanently, the Mergers (or, in the
event the Mergers are consummated prior to the entry of a final order,
rescission of the Mergers and/or damages, including rescissory damages) and
(iii) costs and disbursements, including attorneys' fees. In addition, several
purported class action complaints alleging substantially similar claims and
seeking substantially similar relief have been filed in Los Angeles County
Superior Court in the State of California. The plaintiffs in such actions have
agreed to a stay of such action pending disposition of the consolidated action
pending in the Delaware Court of Chancery. Golden State believes that it has
meritorious defenses to each of the claims made in connection with each
litigation described above.
12
<PAGE>
SELECTED FINANCIAL DATA
The following tables present summary selected consolidated financial data
for each of Golden State and Parent Holdings on an historical basis, and
summary selected unaudited pro forma financial data of Golden State reflecting
the consummation by Golden State of the CENFED Merger, the RedFed Merger, the
Mergers, and also reflecting the Refinancing. The selected unaudited pro forma
financial data have been prepared giving effect to the Mergers, the RedFed
Merger and the CENFED Merger using the purchase method of accounting and for
purposes of such selected pro forma financial data, the CENFED, RedFed, and
Parent Holdings financial information has been recast to conform to the June 30
fiscal year end used by Golden State. See "THE MERGERS--Accounting Treatment."
In addition, the Parent Holdings statement of operations for the year ended
June 30, 1997 gives effect to the Cal Fed Acquisition, the issuance of the 10
5/8% Notes, and the issuance of the REIT Preferred Stock (each as defined below
under "INFORMATION ABOUT PARENT HOLDINGS--Description of Business of Parent
Holdings--General," and defined collectively as the "Other Pro Forma Events")
as if each had occurred at the beginning of such period. The selected unaudited
pro forma financial data reflect the Mergers, the RedFed Merger and the CENFED
Merger based upon preliminary purchase accounting adjustments. Actual
adjustments, which may include additional adjustments to assets, liabilities
and other items, will be made on the basis of appraisals and evaluations as of
the effective time of the consummation of the RedFed Merger, the CENFED Merger
or the Mergers, as the case may be, and, therefore, actual amounts are expected
to differ from those reflected below.
The summary selected historical financial data for Golden State for each
of the nine-month periods ended March 31, 1998 and March 31, 1997, and for each
of the five years ended June 30, 1997 are based on and derived from, and should
be read in conjunction with, the historical consolidated financial statements
and the related notes thereto of Golden State (and its predecessor, Glendale
Federal) which are incorporated by reference herein. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE." The summary selected historical financial data
for Parent Holdings for each of the three-month periods ended March 31, 1998
and March 31, 1997, and for each of the five years ended December 31, 1997 are
based on and derived from, and should be read in conjunction with, the
historical consolidated financial statements and the related notes thereto of
Parent Holdings which are included herein. See "FINANCIAL STATEMENTS OF FIRST
NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES." The summary selected
financial data for Golden State as of March 31, 1998 and for the nine-month
periods ended March 31, 1998 and 1997 are unaudited. The summary selected
financial data for Parent Holdings as of March 31, 1998 and for the three-month
periods ended March 31, 1998 and 1997 are unaudited. The information set forth
in the selected unaudited pro forma financial data should be read in
conjunction with the unaudited pro forma condensed combined financial
statements appearing elsewhere herein. Results of Golden State for less than a
full financial year are not necessarily indicative of results expected for the
entire year. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
13
<PAGE>
GOLDEN STATE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998
----------------
<S> <C>
ASSETS
Cash and amounts due from banks $ 284,113
Federal funds sold and assets
purchased under resale
agreements .......................... 520,000
Other investments .................... 27,335
Loans receivable, net ................ 11,807,318
Mortgage-backed securities, net ...... 2,178,372
Real estate held for sale or
investment .......................... 6,124
Real estate acquired in settlement
of loans ............................ 33,466
Investment in capital stock of
FHLB, at cost ....................... 271,749
Mortgage servicing assets ............ 247,914
Goodwill and other intangible
assets .............................. 92,510
Assets held for Florida disposition,
net ................................. --
Other assets ......................... 455,349
------------
$ 15,924,250
============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ............................. $ 9,692,874
Securities sold under agreements to
repurchase .......................... --
Borrowings from the FHLB ............. 4,824,000
Other borrowings ..................... 73
Other liabilities .................... 292,431
Stockholders' equity ................. 1,114,872
------------
$ 15,924,250
============
Common shares outstanding ............ 51,328
Book value per common share(1) ....... $ 19.47
Tangible book value per common
share(1) ............................ $ 17.67
<CAPTION>
AS OF JUNE 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due from banks $ 221,557 $ 153,608 $ 139,697 $ 164,576 $ 217,689
Federal funds sold and assets
purchased under resale
agreements .......................... 632,000 433,000 296,000 315,961 842,767
Other investments .................... 31,799 18,877 42,326 166,040 523,725
Loans receivable, net ................ 11,905,093 10,727,909 9,899,297 9,595,780 10,850,039
Mortgage-backed securities, net ...... 2,279,534 2,240,790 4,723,457 5,363,779 4,044,744
Real estate held for sale or
investment .......................... 8,689 12,072 13,303 16,995 48,040
Real estate acquired in settlement
of loans ............................ 61,500 78,249 105,730 146,835 194,187
Investment in capital stock of
FHLB, at cost ....................... 259,587 192,842 185,799 139,678 126,390
Mortgage servicing assets ............ 284,472 127,399 99,122 68,719 83,217
Goodwill and other intangible
assets .............................. 99,533 59,216 63,538 47,781 385,754
Assets held for Florida disposition,
net ................................. -- -- -- 257,363 --
Other assets ......................... 434,495 412,602 475,977 519,524 592,281
------------ ------------ ------------ ------------ ----------
$ 16,218,259 $ 14,456,564 $ 16,044,246 $ 16,803,031 $17,908,833
============ ============ ============ ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ............................. $ 9,356,909 $ 8,723,976 $ 8,734,880 $ 10,919,806 $11,615,529
Securities sold under agreements to
repurchase .......................... 768,682 758,050 2,695,176 2,306,274 3,064,995
Borrowings from the FHLB ............. 4,788,000 3,838,000 3,495,000 2,443,428 2,192,272
Other borrowings ..................... 10,782 10,599 28,883 96,890 141,971
Other liabilities .................... 281,812 168,488 148,460 158,419 233,779
Stockholders' equity ................. 1,012,074 957,451 941,847 878,214 660,287
------------ ------------ ------------ ------------ -----------
$ 16,218,259 $ 14,456,564 $ 16,044,246 $ 16,803,031 $17,908,833
============ ============ ============ ============ ===========
Common shares outstanding ............ 50,349 46,730 40,720 37,737 (2)
Book value per common share(1) ....... $ 17.81 $ 17.37 $ 18.19 $ 17.24 (2)
Tangible book value per common
share(1) ............................ $ 15.83 $ 16.11 $ 16.63 $ 10.89 (2)
</TABLE>
- ----------
(1) Calculated net of Golden State Preferred Stock at its liquidation value.
(2) Prior to Glendale Federal's comprehensive recapitalization on September
17, 1993.
14
<PAGE>
GOLDEN STATE
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income ...................... $852,882 $796,609
Interest expense ..................... 532,399 517,493
-------- --------
Net interest income ................. 320,483 279,116
Provision for loan losses ............ 417 21,326
-------- --------
Net interest income after
provision for loan losses ......... 320,066 257,790
Other income:
Fee income .......................... 73,288 66,713
Gain (loss) on sale of
loans, net ......................... (597) (275)
Gain (loss) on sale of mortgage-
backed securities, net ............. 1,323 (1,573)
Gain on sale of banking
operations ......................... -- --
Other income (loss), net ............ 1,461 113
-------- --------
Total other income ................. 75,475 64,978
Other expenses:
Compensation and
employee benefits .................. 100,620 84,498
Occupancy expense, net .............. 25,245 23,363
Regulatory insurance ................ 5,748 13,759
Advertising and promotion ........... 16,555 17,725
Furniture, fixtures and
equipment .......................... 11,024 8,974
Stationery, supplies
and postage ........................ 10,527 8,476
Other general and administrative
expenses ........................... 46,759 38,618
-------- --------
Total general and
administrative expenses .......... 216,478 195,413
Savings Association Insurance
Fund ("SAIF") special
assessment ......................... -- 58,672
Acquisition and restructuring
costs .............................. 3,433 --
Legal expense--goodwill lawsuit ..... 15,231 13,720
Operations of real estate held for
sale or investment ................. (690) 716
Operations of real estate
acquired in settlement of loans (1,567) 5,906
Amortization of goodwill and
other intangible assets ............ 6,101 3,924
Write-off of assets held for
Florida disposition ................ -- --
-------- --------
Total other expenses ............... 238,986 278,351
Earnings (loss) before income tax
provision (benefit) and
extraordinary items ................. 156,555 44,417
Income tax provision (benefit) ....... 67,106 18,288
-------- --------
Earnings (loss) before
extraordinary items ................. 89,449 26,129
Extraordinary items, net ............. -- --
-------- --------
Net earnings (loss) ................ $ 89,449 $ 26,129
======== ========
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest income ...................... $1,072,956 $1,080,035 $1,086,658 $ 989,945 $1,134,310
Interest expense ..................... 693,972 746,970 768,939 678,664 774,997
---------- ---------- ---------- ---------- ----------
Net interest income ................. 378,984 333,065 317,719 311,281 359,313
Provision for loan losses ............ 25,204 40,350 66,150 139,726 251,261
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ......... 353,780 292,715 251,569 171,555 108,052
Other income:
Fee income .......................... 90,696 69,977 69,311 60,513 58,051
Gain (loss) on sale of
loans, net ......................... (291) (690) 146 665 3,147
Gain (loss) on sale of mortgage-
backed securities, net ............. (1,804) (34,222) (11,725) 1,099 29,258
Gain on sale of banking
operations ......................... -- -- 73,713 -- --
Other income (loss), net ............ 62 (707) 3,001 (1,936) (3,461)
---------- ---------- ---------- ---------- ----------
Total other income ................. 88,663 34,358 134,446 60,341 86,995
Other expenses:
Compensation and
employee benefits .................. 114,270 101,502 105,218 126,037 123,388
Occupancy expense, net .............. 31,777 29,698 31,433 37,691 39,535
Regulatory insurance ................ 16,317 27,491 29,077 38,233 34,881
Advertising and promotion ........... 24,416 24,798 18,855 16,285 11,078
Furniture, fixtures and
equipment .......................... 12,585 11,605 14,559 24,793 29,585
Stationery, supplies
and postage ........................ 11,628 10,158 9,065 11,174 11,221
Other general and administrative
expenses ........................... 52,231 41,683 35,265 37,449 30,440
---------- ---------- ---------- ---------- ----------
Total general and
administrative expenses .......... 263,224 246,935 243,472 291,662 280,128
Savings Association Insurance
Fund ("SAIF") special
assessment ......................... 55,519 -- -- -- --
Acquisition and restructuring
costs .............................. -- -- -- -- --
Legal expense--goodwill lawsuit ..... 24,058 1,929 369 304 1,525
Operations of real estate held for
sale or investment ................. 935 1,242 (31) 2,690 31,488
Operations of real estate
acquired in settlement of loans 6,623 8,426 15,034 24,089 44,367
Amortization of goodwill and
other intangible assets ............ 5,530 5,147 1,724 9,764 16,028
Write-off of assets held for
Florida disposition ................ -- -- -- 136,209 --
---------- ---------- ---------- ---------- ----------
Total other expenses ............... 355,889 263,679 260,568 464,718 373,536
Earnings (loss) before income tax
provision (benefit) and
extraordinary items ................. 86,554 63,394 125,447 (232,822) (178,489)
Income tax provision (benefit) ....... 36,131 21,342 52,146 (10,171) (39,299)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary items ................. 50,423 42,052 73,301 (222,651) (139,190)
Extraordinary items, net ............. -- -- 1,755 14,092 58,344
---------- ---------- ---------- ---------- ----------
Net earnings (loss) ................ $ 50,423 $ 42,052 $ 75,056 $ (208,559) $ (80,846)
========== ========== ========== ========== ==========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
--------------------- ---------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ------------ ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss) applicable to
common shareholders:
Net earnings (loss) .............. $ 89,449 $ 26,129 $ 50,423 $ 42,052 $ 75,056 $ (208,559) $(80,846)
Dividends declared on preferred
stock ........................... (7,583) (8,313) (10,841) (16,156) (17,668) (13,759) --
Premium on exchange of
preferred stock for common
stock ........................... -- (4,173) (4,173) (9,443) -- -- --
-------- -------- --------- --------- --------- ---------- --------
$ 81,866 $ 13,643 $ 35,409 $ 16,453 $ 57,388 $ (222,318) $(80,846)
======== ======== ========= ========= ========= ========== ========
Earnings (loss) per share(1):
Basic ............................ $ 1.61 $ 0.28 $ 0.72 $ 0.39 $ 1.43 $ (6.10) (2)
Diluted .......................... $ 1.27 $ 0.25 $ 0.64 $ 0.36 $ 1.25 $ (6.10) (2)
Weighted average shares
outstanding:
Common shares .................... 50,790 48,687 49,095 42,185 40,243 36,469 (2)
Common shares and dilutive
potential common shares ......... 70,409 54,410 55,169 45,946 60,039 36,469 (2)
</TABLE>
- ----------
(1) Earnings per share have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
(2) Prior to Glendale Federal's comprehensive recapitalization on September
17, 1993.
16
<PAGE>
PARENT HOLDINGS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- ------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due from banks........... $ 379,831 $ 350,214 $ 135,534 $ 154,758 $ 149,564 $ 1,848
Interest-bearing deposits in other
banks ................................... 128 36,164 20,619 32,778 39,219 42,156
Short-term investment securities ......... 84,305 25,933 113,716 125,035 -- --
----------- ----------- ----------- ----------- ----------- ----------
Cash and cash equivalents ................ 464,264 412,311 269,869 312,571 188,783 44,004
Securities available for sale, at fair
value ................................... 988,235 813,085 542,019 348,561 45,000 --
Securities held to maturity .............. 58,424 58,299 4,272 1,455 411,859 15,118
Mortgage-backed securities
available for sale, at fair value ....... 5,695,135 5,076,598 1,598,652 1,477,514 -- --
Mortgage-backed securities held to
maturity ................................ 1,250,639 1,337,877 1,621,662 1,524,488 3,153,812 341,224
Loans held for sale, net ................. 1,887,856 1,483,466 825,316 1,203,412 26,354 4,687
Loans receivable, net .................... 18,977,777 19,424,410 10,212,583 8,829,974 9,966,886 29,244
Receivables from FSLIC
Resolution Fund, net .................... -- -- -- -- -- 16,450
Covered assets ........................... -- -- -- 39,349 311,603 592,593
Investment in Federal Home Loan
Bank System ............................. 485,793 468,191 220,962 109,943 128,557 41,996
Office premises and equipment, net 161,047 159,349 100,164 93,509 76,523 3,272
Foreclosed real estate, net .............. 75,674 76,997 51,987 48,535 37,369 399
Accrued interest receivable .............. 196,637 188,203 106,034 100,604 87,706 2,104
Intangible assets ........................ 669,831 675,927 140,564 18,606 12,217 --
Mortgage servicing rights ................ 625,554 536,703 423,692 241,355 86,840 --
Other assets ............................. 665,699 650,740 517,297 316,905 150,050 34,131
----------- ----------- ----------- ----------- ----------- ----------
$32,202,565 $31,362,156 $16,635,073 $14,666,781 $14,683,559 $1,125,222
=========== =========== =========== =========== =========== ==========
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDER'S EQUITY
Deposits ................................. $16,403,429 $16,202,605 $ 8,501,883 $10,241,628 $ 9,196,656 $ 431,778
Securities sold under agreements to
repurchase .............................. 1,965,818 1,842,442 1,583,387 969,510 1,883,490 119,144
Borrowings ............................... 11,734,406 11,232,530 5,364,894 2,392,862 2,808,979 440,792
Other liabilities ........................ 699,517 702,959 399,446 299,635 140,832 20,614
----------- ----------- ----------- ----------- ----------- ----------
Total liabilities ...................... 30,803,170 29,980,536 15,849,610 13,903,635 14,029,957 1,012,328
----------- ----------- ----------- ----------- ----------- ----------
Minority Interest ........................ 1,161,978 1,175,704 613,852 358,991 323,935 --
----------- ----------- ----------- ----------- ----------
Stockholder's Equity:
Common stock ............................ 1 1 1 1 1 1
Additional paid-in capital .............. -- -- 161 267,055 267,055 85,569
Net unrealized holding gain on
securities available for sale .......... 24,927 28,129 36,975 50,810 8,800 --
Retained earnings (substantially
restricted) ............................ 212,489 177,786 134,474 86,289 53,811 27,324
----------- ----------- ----------- ----------- ----------- ----------
Stockholder's equity ..................... 237,417 205,916 171,611 404,155 329,667 112,894
----------- ----------- ----------- ----------- ----------- ----------
$32,202,565 $31,362,156 $16,635,073 $14,666,781 $14,683,559 $1,125,222
=========== =========== =========== =========== =========== ==========
</TABLE>
- ----------
Per share information is not presented because Parent Holdings is a closely
held corporation.
17
<PAGE>
PARENT HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income .................. $533,422 $512,751 $2,102,700 $1,233,799 $1,075,845 $293,139 $ 95,264
Interest expense ................. 382,866 359,395 1,498,417 848,294 734,815 199,845 74,728
-------- -------- ---------- ---------- ---------- -------- --------
Net interest income ............. 150,556 153,356 604,283 385,505 341,030 93,294 20,536
Provision for loan losses ........ 10,000 19,950 79,800 39,600 37,000 6,226 1,402
-------- -------- ---------- ---------- ---------- -------- --------
Net interest income after
provision for loan losses ..... 140,556 133,406 524,483 345,905 304,030 87,068 19,134
-------- -------- ---------- ---------- ---------- -------- --------
Noninterest income:
Loan servicing fees, net ........ 36,962 39,714 143,919 123,887 70,265 10,042 11,731
Customer banking fees and
service charges ................ 25,346 22,519 100,048 45,044 47,493 10,595 --
Management fees ................. 524 1,895 6,211 9,694 15,141 13,121 --
Gain (loss) on sales of
assets, net .................... (379) 22 38,230 38,118 173 6 24,373
Gain on sale of branches ........ -- -- 3,569 363,342 -- -- 140,877
Gain (loss) on sales of
loans, net ...................... 14,505 2,869 24,721 17,802 (26) (158) --
Gain from termination of
Assistance Agreement ........... -- -- -- 25,632 -- -- --
Dividends on FHLB stock ......... 7,007 5,962 24,790 11,670 6,546 -- --
Other income .................... 5,813 5,858 22,996 18,189 11,381 7,552 13,895
-------- -------- ---------- ---------- ---------- -------- --------
Total noninterest income 89,778 78,839 364,484 653,378 150,973 41,158 190,876
-------- -------- ---------- ---------- ---------- -------- --------
Noninterest expense:
Compensation and
employee benefits .............. 62,981 64,480 256,448 204,818 154,288 48,846 24,951
Occupancy and equipment 21,483 20,682 81,914 51,936 49,897 12,247 5,343
Data processing ................. 2,840 2,935 12,402 10,491 9,787 2,888 3,739
Savings Association
Insurance Fund deposit
insurance premium .............. 2,573 2,653 10,680 81,149 22,262 6,813 3,259
Marketing ....................... 3,505 4,068 20,186 10,908 10,810 3,385 --
Professional fees ............... 8,710 9,103 48,771 18,986 11,202 2,622 --
Loan expense .................... 9,595 7,824 60,437 31,282 12,431 1,132 --
Foreclosed real estate
operations, net ................ (1,720) 1,005 (3,304) (7,390) (927) (528) --
Amortization of intangible
assets ......................... 11,089 12,106 49,153 9,445 1,474 222 468
Other ........................... 24,200 28,868 113,882 80,111 61,329 18,671 25,632
-------- -------- ---------- ---------- ---------- -------- --------
Total noninterest
expense ....................... 145,256 153,724 650,569 491,736 332,553 96,298 63,392
-------- -------- ---------- ---------- ---------- -------- --------
Income before income taxes,
extraordinary item and
minority interest ............... 85,078 58,521 238,398 507,547 122,450 31,928 146,618
Income tax expense (benefit) 13,890 10,194 41,315 (75,807) (57,185) 2,558 2,500
-------- -------- ---------- ---------- ---------- -------- --------
Income before extraordinary
item and minority interest ...... 71,188 48,327 197,083 583,354 179,635 29,370 144,118
Extraordinary items--(loss)
gain on early
extinguishment of debt, net -- -- -- (1,586) 1,967 1,376 --
-------- -------- ---------- ---------- ---------- -------- --------
Income before minority
interest ........................ 71,188 48,327 197,083 581,768 181,602 30,746 144,118
Minority interest ................ 35,774 31,839 131,851 161,191 59,138 4,259 --
-------- -------- ---------- ---------- ---------- -------- --------
Net income ...................... $ 35,414 $ 16,488 $ 65,232 $ 420,577 $ 122,464 $ 26,487 $144,118
======== ======== ========== ========== ========== ======== ========
</TABLE>
- ----------
Earnings per share data are not presented because Parent Holdings is a closely
held corporation.
18
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following sets forth certain unaudited pro forma condensed combined
financial statements for Golden State after giving effect to the Mergers, the
RedFed Merger, the CENFED Merger and the Refinancing, as if the Mergers, the
RedFed Merger, the CENFED Merger and the Refinancing each had occurred on March
31, 1998, in the case of the statement of financial condition, and at the
beginning of each of the periods presented, in the case of the statements of
operations. See "INFORMATION ABOUT GOLDEN STATE--General." In addition, the
unaudited pro forma condensed statement of operations for the year ended June
30, 1997 gives effect to the Other Pro Forma Events. See "INFORMATION ABOUT
PARENT HOLDINGS--Description of Business of Parent Holdings--General." This
information should be read in conjunction with the historical consolidated
financial statements of Golden State (and its predecessor, Glendale Federal)
and Parent Holdings, including the notes thereto, included herein or
incorporated herein by reference. Golden State financial statement data as of
March 31, 1998 and for the nine-month period ended March 31, 1998 have been
derived from unaudited financial statements. Golden State financial statement
data as of and for the year ended June 30, 1997 have been derived from the
audited historical financial statements which are incorporated by reference
herein. Parent Holdings financial statement data as of March 31, 1998 and for
the nine-month and twelve-month periods ended March 31, 1998 and June 30, 1997,
respectively, have been derived from unaudited financial statements. See
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL
CONDITION GIVING EFFECT TO THE MERGERS , THE REDFED MERGER, THE
CENFED MERGER AND THE REFINANCING
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
---------------
<S> <C>
ASSETS
Cash and amounts due from banks ......................................... $ 337,630
Federal funds sold and assets purchased under resale agreements ......... 565,762
Other investments ....................................................... 1,273,161
Loans receivable, net ................................................... 35,128,943
Mortgage-backed securities, net ......................................... 9,500,351
Real estate held for sale or investment ................................. 7,700
Real estate acquired in settlement of loans ............................. 120,404
Investment in capital stock of FHLB, at cost ............................ 790,035
Mortgage servicing assets ............................................... 900,223
Goodwill and other intangible assets .................................... 1,828,097
Other assets ............................................................ 1,739,844
------------
$ 52,192,150
============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Deposits ................................................................ $ 28,386,836
Securities sold under agreements to repurchase .......................... 2,029,156
Borrowings from the FHLB ................................................ 15,134,795
Other borrowings ........................................................ 2,328,606
Other liabilities ....................................................... 1,546,802
Minority interest ....................................................... 500,352
Stockholders' equity .................................................... 2,265,603
------------
$ 52,192,150
============
Common shares outstanding ............................................... 114,906
Book value per common share ............................................. $ 18.71
Tangible book value per common share .................................... $ 2.80
</TABLE>
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
GIVING EFFECT TO THE MERGERS , THE REDFED MERGER, THE CENFED MERGER, THE
REFINANCING AND THE OTHER PRO FORMA EVENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
------------------- --------------
<S> <C> <C>
Interest income .................................................... $2,613,051 $3,400,113
Interest expense ................................................... 1,774,618 2,321,242
---------- ----------
Net interest income ............................................. 838,433 1,078,871
Provision for loan losses .......................................... 53,260 114,081
---------- ----------
Net interest income after provision for loan losses ............. 785,173 964,790
Other income:
Fee income ........................................................ 266,372 337,493
Gain on sale of loans, net ........................................ 27,272 218
Gain on sale of mortgage-backed securities, net ................... 2,058 1,157
Other income, net ................................................. 62,823 128,841
---------- ----------
Total other income .............................................. 358,525 467,709
Other expenses:
Compensation and employee benefits ................................ 313,242 399,755
Occupancy expense, net ............................................ 92,054 123,358
Regulatory insurance .............................................. 14,784 105,729
Advertising and promotion ......................................... 33,765 39,650
Furniture, fixtures and equipment ................................. 15,803 19,201
Other general and administrative expenses ......................... 223,207 222,839
---------- ----------
Total general and administrative expenses ....................... 692,855 910,532
Restructuring charges ............................................. 7,046 --
SAIF special assessment ........................................... -- 188,246
Legal expense-goodwill lawsuit .................................... 15,231 24,058
Operations of real estate held for sale or investment ............. (684) 1,139
Operations of real estate acquired in settlement of loans ......... (2,541) 6,479
Amortization of goodwill and other intangible assets .............. 95,035 124,427
---------- ----------
Total other expenses ............................................ 806,942 1,254,881
Earnings before income tax provision ............................... 336,756 177,618
Income tax provision ............................................... 175,658 118,240
---------- ----------
Earnings before minority interest and extraordinary items .......... 161,098 59,378
Minority interest .................................................. 24,746 40,448
Extraordinary items, net ........................................... -- (1,586)
---------- ----------
Net earnings .................................................... $ 136,352 $ 17,344
========== ==========
Net earnings applicable to common shareholders:
Net earnings ...................................................... $ 136,352 $ 17,344
Dividends declared on preferred stock ............................. (7,583) (10,841)
Premium on exchange of preferred stock for common stock ........... -- (4,173)
---------- ----------
$ 128,769 $ 2,330
========== ==========
Earnings per share(1):
Basic ............................................................. $ 1.13 $ 0.02
Diluted ........................................................... 1.02 0.02
Weighted average shares outstanding:
Common shares ..................................................... 114,368 112,673
Common shares and dilutive potential common shares ................ 133,231 120,425
</TABLE>
20
<PAGE>
- ----------
(1) Golden State has substantially completed its planned repurchase of shares
of Golden State Common Stock in the open market in an amount not to
exceed the number of shares to be issued in the RedFed Merger. As of the
date of this Proxy Statement, Golden State has repurchased a total of
4,688,400 shares of Golden State Common Stock, for an aggregate amount of
approximately $158.0 million. For pro forma presentation purposes, the
number of shares of Golden State Common Stock expected to be issued in
the RedFed Merger was assumed to be repurchased at the beginning of each
period presented for an aggregate of $160.5 million. As a result of the
use of cash in such repurchase, pro forma net income for the nine months
ended March 31, 1998 and the year ended June 30, 1997 would be reduced by
approximately $3.9 million and $5.2 million, respectively, representing
increased interest expense at an interest rate of 5.625% and the related
income tax effect at a combined marginal rate of 42%. Accordingly, pro
forma basic and diluted earnings (loss) per share, after giving effect to
such repurchases, would be as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
------------------- --------------
<S> <C> <C>
Basic Earnings (Loss) Per Share:
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the Refinancing, the RedFed Merger and the
CENFED Merger. ........................................... $ 1.09 $ (0.03)
Diluted Earnings (Loss) Per Share:
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the Refinancing, the RedFed Merger and the
CENFED Merger ............................................ 0.99 (0.03)
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA
The following table sets forth (i) selected comparative per share data for
Golden State on a historical basis and (ii) selected unaudited pro forma
comparative per share data at December 31, 1997 and for the nine- and
twelve-month periods ended March 31, 1998 and June 30, 1997, respectively,
giving effect to the Other Pro Forma Events and the Refinancing and to the
Mergers, the RedFed Merger and the CENFED Merger using the purchase method of
accounting. No historical or pro forma equivalent per share information is
presented for Parent Holdings because Parent Holdings is a closely held
corporation. The unaudited pro forma comparative earnings per share data assume
the Mergers, the Refinancing, the Other Pro Forma Events, the RedFed Merger and
the CENFED Merger had been consummated at the beginning of each of the periods
presented. The unaudited pro forma dividends, book value and tangible book
value per share assume the Mergers, the RedFed Merger, the CENFED Merger and
the Refinancing had been consummated at the end of the periods presented. See
"THE MERGERS-- Accounting Treatment." The unaudited pro forma comparative per
share data reflect the Mergers, the RedFed Merger and the CENFED Merger based
upon preliminary purchase accounting adjustments. Actual adjustments will be
made on the basis of appraisals and evaluations as of the respective effective
times of such transactions and, therefore, actual amounts are expected to
differ from those reflected below. See "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS."
The historical and unaudited pro forma comparative per share data
presented herein are based on and derived from, and should be read in
conjunction with, the historical consolidated financial statements and the
related notes thereto of Golden State (and its predecessor, Glendale Federal)
and the historical consolidated financial statements and the related notes
thereto of Parent Holdings, which are included or incorporated by reference
herein, and the unaudited pro forma condensed combined financial data giving
effect to the Mergers, the Other Pro Forma Events, the Refinancing, the RedFed
Merger and the CENFED Merger, including the related notes thereto, appearing
elsewhere herein. See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "FINANCIAL STATEMENTS OF FIRST NATIONWIDE (PARENT)
HOLDINGS INC. AND SUBSIDIARIES," "SELECTED FINANCIAL DATA" and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS." Pro forma amounts are not
necessarily indicative of results of operations or the combined financial
position that would have resulted had the Mergers, the Other Pro Forma Events,
the Refinancing, the RedFed Merger and the CENFED Merger been consummated at
the beginning or at the end of the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
------------------- --------------
<S> <C> <C>
GOLDEN STATE COMMON STOCK
Basic Earnings Per Common Share(1):
Historical ................................................... $ 1.61 $ 0.72
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the Refinancing, the RedFed Merger and the
CENFED Merger(2)(3)(7)(8)(9) ............................... 1.13 0.02
Diluted Earnings Per Common Share(1):
Historical ................................................... $ 1.27 $ 0.64
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the Refinancing, the RedFed Merger and the
CENFED Merger(2)(3)(7)(8)(9) ............................... 1.02 0.02
Cash Dividends Declared Per Common Share(4):
Historical ................................................... $ -- $ --
Pro forma giving effect to the Mergers, the RedFed Merger, the
CENFED Merger and the Refinancing(2)(9) .................... -- --
Book Value Per Common Share (as of end of period):
Historical ................................................... $ 19.47 $ 17.81
Pro forma giving effect to the Mergers, the RedFed Merger, the
CENFED Merger and the Refinancing(5)(8)(9) ................. 18.71 18.39
Tangible Book Value Per Common Share (as of end of period):
Historical ................................................... $ 17.67 $ 15.83
Pro forma giving effect to the Mergers, the RedFed Merger, the
CENFED Merger and the Refinancing(6)(8)(9) ................. 2.80 0.85
</TABLE>
22
<PAGE>
- ----------
(1) Earnings per share for the nine months ended March 31, 1998 have been
calculated in accordance with Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"). Earnings per share for the
year ended June 30, 1997 have been restated to reflect the adoption of
SFAS 128.
(2) Golden State has a fiscal year ending June 30, and CENFED, RedFed and
Parent Holdings each have a fiscal year ending December 31. The unaudited
pro forma comparative per share data reflect the combined financial
information of Golden State for the fiscal year ended June 30, 1997 and
of CENFED, RedFed and Parent Holdings (considering the Other Pro Forma
Events) for the twelve-month period ended June 30, 1997, and the combined
financial information of Golden State for the nine months ended March 31,
1998 and of CENFED, RedFed and Parent Holdings for the nine months ended
March 31, 1998.
(3) The pro forma average common shares used in the basic earnings per share
calculation reflects the sum of the historical weighted average
outstanding shares of Golden State Common Stock plus the new shares of
Golden State Common Stock to be issued in the CENFED Merger (based on the
number of shares of CENFED common stock outstanding and the number of
shares of CENFED common stock issuable upon the exercise of outstanding
CENFED stock options at March 31, 1998 multiplied by the exchange ratio
of 1.2 in the CENFED Merger), plus additional shares of Golden State
Common Stock to be issued in the Mergers. The pro forma average common
shares used in the diluted earnings per share calculation for the year
ended June 30, 1997 is the same number as that used in the basic earnings
per share computation because an increase in shares would produce an
anti-dilutive result. The pro forma average common shares used in the
diluted earnings per share calculation for the nine months ended March
31, 1998 starts with the number that is used in the basic earnings per
share computation and adds the dilutive impact of the assumed conversion
of options and warrants. The conversion of the Golden State Preferred
Stock (and the corresponding addition of preferred stock dividends to net
earnings available to common stockholders) is not assumed in this
calculation as it would produce an anti-dilutive result.
(4) Golden State has not paid cash dividends on the Golden State Common
Stock.
(5) The pro forma book value per common share was calculated by dividing
total pro forma stockholders' equity (net of the Golden State Preferred
Stock at its liquidation value) by the sum of the number of shares of
Golden State common stock outstanding (at the end of the period
presented) plus the number of shares of Golden State Common Stock to be
issued in the CENFED Merger (based on the number of shares of CENFED
common stock outstanding and the number of shares of CENFED common stock
issuable upon the exercise of outstanding CENFED stock options at March
31, 1998 multiplied by the exchange ratio of 1.2 in the CENFED Merger),
and adding the number of additional shares of Golden State Common Stock
to be issued in the Mergers.
(6) The pro forma tangible book value per common share was calculated in the
same manner as pro forma book value per common share as described in Note
5, except that total pro forma stockholders' equity was reduced by total
pro forma goodwill and other intangible assets.
(7) Golden State has substantially completed its planned repurchase of shares
of Golden State Common Stock in the open market in an amount not to
exceed the number of shares to be issued in the RedFed Merger. As of the
date of this Proxy Statement, Golden State has repurchased a total of
4,688,400 shares of Golden State Common Stock for an aggregate amount of
approximately $158.0 million. For pro forma presentation purposes, the
number of shares of Golden State Common Stock expected to be issued in
the RedFed Merger was assumed to be repurchased at the beginning of each
period presented for an aggregate amount of $160.5 million. As a result
of the use of cash in such repurchase, pro forma net income for the nine
months ended March 31, 1998 and the year ended June 30, 1997 would be
reduced by approximately $3.9 million and $5.2 million, respectively,
representing increased interest expense at an interest rate of 5.625% and
the related income tax effect at a combined marginal rate of 42%.
Accordingly, pro forma basic and diluted earnings (loss) per share, after
giving effect to such repurchases, would be as follows:
23
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
------------------ --------------
<S> <C> <C>
Basic Earnings (Loss) Per Share:
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the RedFed Merger, the CENFED Merger and the
Refinancing(9). .......................................... $ 1.09 $ (0.03)
Diluted Earnings (Loss) Per Share:
Pro forma giving effect to the Mergers, the Other Pro Forma
Events, the RedFed Merger, the CENFED Merger and the
Refinancing(9) ........................................... 0.99 (0.03)
</TABLE>
(8) The pro forma amounts do not reflect issuance of any Contingent Shares.
See Note K of the Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
(9) Parent Holdings and FNH intend, through the Refinancing, to refinance all
of the existing long-term debt of Parent Holdings and FNH and to offer to
purchase all of the outstanding preferred stock of Cal Fed, with the net
proceeds of a proposed private offering of fixed and floating rate notes
(which new indebtedness will become obligations of New FNH upon
consummation of the Refinancing) and to the extent necessary, with a
dividend from Cal Fed and short-term borrowings by New FNH under a senior
secured credit facility. It is expected that the proposed Refinancing
will be completed subsequent to the consummation of the Mergers. While no
assurances can be given that the Refinancing will be completed in the
time frame or on the terms currently anticipated or that the benefits
currently expected will be realized, it is expected that if 100% of the
outstanding principal amount of the FNH Notes and all of the Cal Fed
Preferred Stock is purchased in the Refinancing, or is subsequently
redeemed by Cal Fed, the Refinancing will result in (i) after-tax savings
of approximately $60.6 million annually related to reductions in interest
and dividend payments and amortization of deferred debt issuance costs,
(ii) the elimination of certain restrictive covenants contained in
existing indebtedness of Parent Holdings and FNH and (iii) a simpler
capital structure of the combined company after the Mergers. In
connection with the Refinancing, Parent Holdings and FNH expect to incur,
in the aggregate, expenses (including premiums, fees and other expenses)
of approximately $186.4 million, net of taxes. The pro forma amounts
reflect the consummation of the Refinancing. See Note I to Notes to
Unaudited Pro Forma Condensed Combined Financial Statements.
24
<PAGE>
MARKET PRICES AND DIVIDEND INFORMATION
Golden State Common Stock is listed on the NYSE and the Pacific Exchange
and traded under the symbol "GSB." Prior to July 24, 1997 (the date on which
Glendale Federal became a subsidiary of Golden State), the common stock of
Glendale Federal was listed on the NYSE and the Pacific Exchange and traded
under the symbol "GLN." See "INFORMATION ABOUT GOLDEN STATE--General."
The following table sets forth, for the periods indicated, the high and
low reported sale prices per share for the Golden State Common Stock, or with
respect to the period prior to July 24, 1997, the common stock of Glendale
Federal, as reported on the NYSE. On May 29, 1998, Golden State distributed to
its stockholders the Litigation Tracking Warrants (Trademark) (see
"INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation Tracking
Warrants (Trademark) "). On and after June 1, 1998, the Golden State Common
Stock was traded on the NYSE "regular way" separate from the Litigation
Tracking Warrants (Trademark) .
During all periods reflected in the table below, neither Glendale Federal
(prior to July 24, 1997) nor Golden State (thereafter) paid cash dividends to
holders of its common stock. Golden State has made no determination concerning
whether it will alter this dividend policy. As a result of the Mergers,
subsidiaries of Golden State will assume certain obligations under indentures
relating to outstanding debt securities of Parent Holdings and FNH, and
covenants in these indentures may affect, among other things, the ability of
Golden State to pay dividends on shares of Golden State Common Stock. See
"INFORMATION ABOUT PARENT HOLDINGS--Description of Business of Parent
Holdings--Sources of Funds."
<TABLE>
<CAPTION>
HIGH LOW
---------- --------
<S> <C> <C>
1997 FISCAL YEAR
Quarter ended September 30, 1996 ................................. 20 15 7/8
Quarter ended December 31, 1996 .................................. 23 7/8 17 3/8
Quarter ended March 31, 1997 ..................................... 28 1/8 22 1/2
Quarter ended June 30, 1997 ...................................... 27 22 1/4
1998 FISCAL YEAR
Quarter ended September 30, 1997 ................................. 31 7/8 26 1/8
Quarter ended December 31, 1997 .................................. 37 3/4 30 1/16
Quarter ended March 31, 1998 ..................................... 39 3/8 29 7/8
Quarter ended June 30, 1998 ...................................... 41 13/16 29 3/4
1999 FISCAL YEAR
Quarter ended September 30, 1998 (through July 10, 1998) ......... 30 7/16 29 1/2
</TABLE>
The following table sets forth the high, low and last reported sales price
per share of Golden State Common Stock on (i) February 4, 1998, the last
business day preceding public announcement of the execution of the Agreement,
(ii) May 29, 1998, the last NYSE trading day before the Golden State Common
Stock began trading separately from the Litigation Tracking Warrants
(Trademark) , and (iii) July 10, 1998, the last practicable trading day prior
to the date of this Proxy Statement:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
--------- --------- ---------
<S> <C> <C> <C>
February 4, 1998 ................. $36 7/8 $35 3/8 $35 3/4
May 29, 1998 ..................... $38 3/8 $36 7/8 $38 5/16
July 10, 1998 .................... $30 5/8 $30 1/16 $30 7/16
</TABLE>
GOLDEN STATE STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR GOLDEN STATE COMMON STOCK. It is expected that the market price of Golden
State Common Stock will fluctuate between the date of this Proxy Statement and
the date on which the Mergers are consummated and thereafter.
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SPECIAL MEETING
DATE, TIME AND PLACE; PURPOSE OF SPECIAL MEETING
This Proxy Statement is being furnished to Golden State Stockholders in
connection with the solicitation of proxies by the Golden State Board for use
at the Special Meeting to be held at The Red Lion Hotel, 100 West Glenoaks
Boulevard, Glendale, California, on Monday, August 17, 1998 at 10:00 a.m. local
time. At the Special Meeting, Golden State Stockholders will be asked to: (i)
approve and adopt the Agreement and the Plan of Merger and the consummation of
the transactions contemplated thereby, which are more fully described herein,
and (ii) act upon such other matters as may properly be brought before the
Special Meeting and at any adjournments or postponements thereof. A copy of
each of the Agreement and the Plan of Merger is attached as Appendix A hereto.
THE GOLDEN STATE BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND THE PLAN
OF MERGER AND HAS DETERMINED THAT THE MERGERS ARE FAIR TO, AND IN THE BEST
INTERESTS OF, GOLDEN STATE AND ITS STOCKHOLDERS. THE GOLDEN STATE BOARD
THEREFORE UNANIMOUSLY RECOMMENDS THAT GOLDEN STATE STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE AGREEMENT AND THE PLAN OF MERGER. SEE "THE
MERGERS--BACKGROUND OF THE MERGERS" AND "--RECOMMENDATION OF THE GOLDEN STATE
BOARD AND REASONS FOR THE MERGERS."
RECORD DATE
The Golden State Board has fixed July 6, 1998 as the record date (the
"Record Date") for the determination of those Golden State Stockholders
entitled to notice of and to vote at the Special Meeting. Only holders of
record of Golden State Common Stock at the close of business on the Record Date
will be entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were 55,485,151 shares of Golden State Common Stock
outstanding and entitled to vote, held by approximately 5,572 holders of
record.
VOTING AND REVOCATION OF PROXIES; VOTES REQUIRED
Each holder of record of shares of Golden State Common Stock on the Record
Date is entitled to cast one vote per share on the proposal to approve and
adopt the Agreement and the Plan of Merger, and on any other matter properly
submitted for the vote of the Golden State Stockholders at the Special Meeting.
The presence, either in person or by properly executed proxy, of the holders of
a majority of the outstanding shares of Golden State Common Stock entitled to
vote at the Special Meeting is necessary to constitute a quorum at the Special
Meeting. Abstentions will be counted as present for purposes of determining the
presence or absence of a quorum at the Special Meeting. If a broker indicates
on its proxy that the broker does not have discretionary authority with respect
to certain shares to vote on the proposal to approve and adopt the Agreement
and the Plan of Merger, those shares ("broker non-votes") will nonetheless be
counted as present for purposes of determining the presence or absence of a
quorum at the Special Meeting.
The approval and adoption of the Agreement and the Plan of Merger by
Golden State Stockholders will require the affirmative vote of the holders of a
majority of the outstanding shares of Golden State Common Stock entitled to
vote thereon. As described in "THE MERGERS--Conditions to the Mergers," such
stockholder approval is a condition to consummation of the Mergers. Under
applicable Delaware law, in determining whether the proposal has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the proposal.
HOLDERS OF GOLDEN STATE COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE,
SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY TO GOLDEN
STATE IN THE ENCLOSED POSTAGE-PAID ADDRESSED ENVELOPE.
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GOLDEN STATE STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
All shares of Golden State Common Stock which are entitled to be voted and
are represented at the Special Meeting by properly executed proxies received
prior to or at the meeting, and not revoked, will be voted at such meeting, and
any adjournments or postponements thereof, in accordance with the instructions
indicated on such proxies. If no contrary instructions are indicated, such
proxies will be voted: (i) FOR approval and adoption of the Agreement and the
Plan of Merger, and (ii) otherwise in the discretion of the proxy holders as to
any other matter which may come before the Special Meeting or any adjournment
or postponement thereof, including, among other things, a motion to adjourn or
postpone the Special Meeting to another time and/or place for the purpose of
soliciting additional proxies or otherwise; provided, however, that no proxy
which is voted against the proposal to approve and adopt the Agreement and the
Plan of Merger will be voted in favor of any such adjournment or postponement.
If any other matters are properly presented at the Special Meeting for
consideration, the persons named in the form of proxy enclosed herewith and
acting thereunder will have discretionary authority to vote on such matters in
accordance with their best judgment; provided, however, that such discretionary
authority will only be exercised to the extent possible under applicable
federal and state securities and corporation laws. Golden State does not have
any knowledge of any matters to be presented at the Special Meeting other than
the matters set forth above under "--Date, Time, and Place; Purpose of Special
Meeting."
The presence of a stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. However, any proxy given by a
Golden State Stockholder pursuant to this solicitation may be revoked by the
person giving it at any time before it is exercised by (i) delivering to the
Secretary of Golden State a written notice of revocation bearing a later date
than the proxy; (ii) delivering to the Secretary of Golden State a duly
executed proxy bearing a later date than a previously submitted proxy; or (iii)
attending the Special Meeting and voting in person. Any written notice of
revocation or subsequently executed proxy should be sent so as to be delivered
to Golden State Bancorp Inc., 414 North Central Avenue, Glendale, California
91203, Attention: James R. Eller, Jr., Secretary, or hand delivered to Golden
State's Secretary at such address at or before the taking of the vote at the
Special Meeting.
SOLICITATION OF PROXIES
Golden State will bear all expenses of this solicitation of proxies from
the holders of Golden State Common Stock, the cost of printing and mailing this
Proxy Statement and all filing and other fees. In addition to solicitation by
use of the mails, proxies may be solicited by directors, officers and employees
of Golden State in person or by telephone, fax or other means of communication.
Such directors, officers and employees will not be additionally compensated,
but may be reimbursed for reasonable out-of-pocket expenses in connection with
such solicitation. Golden State has retained Corporate Investor Communications
Inc., a proxy soliciting firm, to assist in such solicitation. The fee to be
paid to such firm is not expected to exceed $15,000 plus reasonable
out-of-pocket costs and expenses. In addition, Golden State will make
arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse such
parties for their expenses in doing so.
VOTING SECURITIES AND PRINCIPAL HOLDERS
As of the Record Date, directors and executive officers of Golden State
and their affiliates beneficially owned less than 1% of the shares of Golden
State Common Stock outstanding as of the Record Date. Such persons have
informed Golden State that they intend to vote or direct the vote of all such
shares of Golden State Common Stock for approval and adoption of the Agreement
and the Plan of Merger. As of the Record Date, neither Parent Holdings nor its
subsidiaries, nor, to the best knowledge of Parent Holdings, any of the
directors and executive officers of Parent Holdings, beneficially owned any
shares of Golden State Common Stock. Additional information with respect to
beneficial ownership of Golden State Common Stock by persons and entities
owning more than 5% of such stock and more detailed information with respect to
beneficial ownership of Golden State Common Stock by directors and executive
officers of Golden State is set forth herein under "INFORMATION ABOUT GOLDEN
STATE--Beneficial Ownership of Golden State Common Stock by Management" and
"--Beneficial Ownership of Golden State Common Stock by Others."
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THE MERGERS
The following information concerning the Mergers, including the
description of the material terms and provisions of the Agreement and the Plan
of Merger, the Stock Option Agreement and the Litigation Management Agreement,
describes the material aspects of the Mergers and related matters but does not
purport to be a complete description and is qualified in its entirety by
reference to the Agreement and the Plan of Merger, the Stock Option Agreement
and the Litigation Management Agreement, which are set forth as Appendices A, B
and C, respectively, to this Proxy Statement and are incorporated herein by
reference.
GENERAL
Pursuant to the terms of the Agreement, subject to the satisfaction or
waiver (where permissible) of certain conditions, including, among other
things, the receipt of all necessary regulatory approvals, the expiration of
all waiting periods in respect thereof and the approval and adoption of the
Agreement and the Plan of Merger by the requisite vote of the Golden State
Stockholders, FNH will be merged with and into Golden State Financial and
immediately thereafter Parent Holdings will be merged with and into Golden
State. Prior to consummation of the Holding Company Mergers, FNH will
contribute all of its assets (including all of the outstanding common stock of
Cal Fed) to New FNH.
Golden State and Golden State Financial will be the surviving corporations
in the Holding Company Mergers and will continue their corporate existences
under the laws of the State of Delaware. Upon consummation of the Holding
Company Mergers, the separate corporate existences of Parent Holdings and FNH
will terminate. Following consummation of the Holding Company Mergers, Glendale
Federal will merge with and into Cal Fed. Upon consummation of the Refinancing,
the fixed and floating rate notes issued in connection with the Refinancing
will become obligations of New FNH. See "SUMMARY--Organizational Structure of
Golden State and Subsidiaries Following the Mergers" for a diagram depicting
the anticipated structure of the combined companies following the Mergers and
giving effect to the Refinancing.
In addition, the Board of Directors of Parent Holdings will have the right
to appoint two-thirds of the initial members of the Board of Directors of the
combined company and it is expected that affiliates of Parent Holdings, FNH and
Cal Fed generally will be in a position to control the management of the
combined company. See "MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE
MERGER."
THE GOLDEN STATE BOARD BELIEVES THAT THE MERGERS ARE FAIR TO AND IN THE
BEST INTEREST OF GOLDEN STATE AND GOLDEN STATE STOCKHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT GOLDEN STATE STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE
AGREEMENT AND THE PLAN OF MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
This section of the Proxy Statement describes certain aspects of the
proposed Mergers, including the principal provisions of the Agreement, the
Stock Option Agreement and the Litigation Management Agreement. Certain
capitalized items used herein without definition have the meanings ascribed to
them in the Agreement.
BACKGROUND OF THE MERGERS
The management of Golden State has periodically explored and assessed, and
discussed with the Golden State Board, strategic options for Golden State,
including strategies for the growth of Golden State's business internally
through business and marketing initiatives and by targeted acquisitions of
other financial institutions, and, in view of the accelerating trend toward
consolidation in the banking and thrift industry both in California and
nationwide, the possibility of a strategic business combination involving
Golden State and a variety of financial institutions of equivalent or larger
size. None of these discussions regarding such a possible strategic business
combination proceeded beyond the exploratory stage and no understanding with
respect to the definitive terms of any such transaction was reached.
Prior to January 3, 1997, Cal Fed was a publicly owned savings bank
headquartered in southern California ("Old Cal Fed") and Parent Holdings owned
a northern California-based savings bank. From time to time over an extended
period prior to 1997 representatives of Glendale Federal and Old Cal Fed
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informally discussed the possibility of a business combination between those
two companies, but did not reach agreement as to how such a combination could
be achieved. Following Parent Holdings' acquisition of Old Cal Fed in January
1997, informal discussions between representatives of Parent Holdings and
Glendale Federal regarding the possibility of a business combination between
Glendale Federal and Cal Fed took place, and Messrs. Ford and Trafton met
briefly in March 1997. These informal discussions terminated without the
parties agreeing on a structure for a combination or upon any other terms
thereof. In November 1997, Messrs. Ford and Trafton met to continue these prior
informal discussions. In these prior discussions, executive managements of
Golden State and Cal Fed had recognized the potential strategic value of a
combination between their companies, but no agreement on the specific terms of
such a combination was reached. At the November 1997 meeting, Messrs. Ford and
Trafton discussed a number of the issues potentially presented by such a
transaction, including the structure of the transaction, the pro forma
ownership of the combined entity by stockholders of Golden State and Parent
Holdings, treatment of the Glendale Goodwill Litigation and the Cal Fed
Goodwill Litigation in such a transaction and management issues with respect to
the combined entity. Although no agreement was reached on the definitive terms
of such a transaction, Messrs. Ford and Trafton agreed that, based on their
knowledge of and experience in the financial services industry, the combined
entity resulting from such a transaction would have significant strategic and
competitive advantages (including a substantially greater scale of operations
and resulting efficiencies in volume-sensitive businesses such as retail
banking and mortgage servicing, enhanced distribution channels through which
each bank's products could be offered, and the marketing and customer retention
advantages that could be expected to result from a broader retail and
commercial presence) compared to Glendale Federal and Cal Fed each operating
separately and that further discussions should take place to determine if an
agreement on definitive terms could be reached.
During the following months, further discussions took place between the
executive managements of Golden State and Cal Fed with respect to the terms of
a possible business combination. Working with their respective financial
advisors, Golden State and Cal Fed discussed the outline of the terms of a
possible business combination, including that the pro forma ownership of the
stockholders of the respective companies in a business combination should
generally be determined independently of the value attributable to any expected
recovery in the Glendale Goodwill Litigation or the Cal Fed Goodwill Litigation
(and that after any such combination, the securities issued or planned to be
issued by Golden State and Cal Fed in respect of such litigation would continue
to be outstanding and to represent a right to participate in the potential
recovery of the respective underlying litigations); that the preferred
structure in such a combination would be a stock-for-stock merger that would
qualify as a "reorganization" for purposes of Section 368(a) of the Code and in
which Golden State would be the surviving corporation; that members of the
Golden State Board would comprise a significant number of the members of the
board of directors of the surviving corporation; and that Messrs. Trafton and
Fink would manage the Glendale Goodwill Litigation and the Cal Fed Goodwill
Litigation on behalf of the combined entity and the holders of the related
securities following any such transaction. During this time and at earlier
times, Mr. Trafton had, through informal discussions with other industry
executives and with representatives of the press and the analyst community,
suggested that Golden State would be receptive to exploring the possibility of
a strategic business combination, provided that the combination could be
expected to provide the benefits of efficiency, scale and enhanced
competitiveness in a consolidating industry that management of Golden State
believed to be important. None of these prior discussions proceeded beyond the
exploratory stage, and none resulted in any definitive proposals for such a
business combination. Also during this time, representatives of CSFB, on behalf
of Golden State, contacted another major thrift institution to determine its
level of interest in a potential business combination with Golden State, and
were informed that such institution did not wish to pursue discussions relating
to such a business combination.
At a regularly scheduled meeting of the Golden State Board on January 27,
1998, Messrs. Trafton and Fink updated the other members of the Golden State
Board on the status of discussions with management of Cal Fed concerning the
possible business combination. Mr. Trafton described the "collar" pricing
mechanism that had been preliminarily proposed as a result of negotiations
between the parties concerning the Golden State franchise value net of any
expected recovery in the Glendale Goodwill Litigation, and indicated that it
had been tentatively agreed that Golden State stockholders would retain
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between 55% and 58% of the combined entity (with the exact percentage depending
on the trading price of Golden State Common Stock during a determination period
following the distribution of the Litigation Tracking Warrants (Trademark) and
prior to the closing of the transaction, reduced by the value per share of the
15% of the value of the potential recovery in the Glendale Goodwill Litigation
to be excluded for purposes of determining the number of shares of Golden State
Common Stock issuable upon exercise of the Litigation Tracking Warrants
(Trademark) , as determined by the trading value of the Litigation Tracking
Warrants (Trademark) ). Mr. Trafton also indicated that it was proposed that he
and Mr. Fink would manage the Glendale Goodwill Litigation and the Cal Fed
Goodwill Litigation after the consummation of any such transaction, and that
existing directors of Golden State would comprise between 30% and 40% of the
board of directors of the combined company. Mr. Trafton also indicated that he
expected that the combined holding company would continue under the "Golden
State Bancorp" name and that the combined bank would probably operate as
"California Federal." Mr. Trafton indicated that negotiations were continuing
with respect to the terms of a definitive agreement. At the conclusion of the
meeting, the Golden State Board authorized Messrs. Trafton and Fink to continue
to negotiate with executive management of Parent Holdings and Cal Fed with
respect to a potential business combination.
During the period between January 27 and February 3, 1998, the executive
managements of Golden State and Cal Fed and their respective legal and
financial advisors continued negotiations with respect to the definitive terms
of a merger agreement between Golden State and Parent Holdings and also
negotiated the terms of the Litigation Management Agreement and the Stock
Option Agreement. Also during this period, representatives of Golden State
conducted due diligence investigations of Parent Holdings, and representatives
of Cal Fed conducted due diligence investigations of Golden State.
At a meeting of the Golden State Board on February 4, 1998, Mr. Trafton
and representatives of CSFB and Golden State's legal advisors reviewed the
historical discussions and contacts between the managements of Golden State and
Cal Fed (noting that exploratory discussions between the parties concerning a
possible business combination had taken place over an extended period and had
predated the acquisition of Old Cal Fed (as defined herein) by Parent Holdings
in January 1997) and updated the Golden State Board on the process that had
taken place since January 27, 1998 with respect to discussions with
representatives of Parent Holdings and Cal Fed. CSFB representatives then
described the financial terms of the proposed merger in detail, the proposed
accounting and tax treatment of the transaction and the proposed arrangements
with respect to the board of directors of the combined company and the
management of the Glendale Goodwill Litigation and the Cal Fed Goodwill
Litigation, and also reviewed financial and other information relating to
Parent Holdings, Cal Fed and pro forma information for the combined company.
CSFB also reviewed for the Golden State Board the various valuation
methodologies it had used in connection with its assessment of the proposed
transaction and then rendered to the Golden State Board its opinion that the
consideration to be paid by Golden State pursuant to the Agreement was fair
from a financial point of view to the holders of Golden State Common Stock.
Golden State's legal advisors then reviewed the key provisions of the
Agreement, the Plan of Merger, the Stock Option Agreement and the Litigation
Management Agreement and the retention and severance arrangements for officers
and employees of Golden State proposed in connection with the transaction.
Following discussion and questions to Golden State's executive management and
Golden State's financial and legal advisors, the Golden State Board unanimously
approved the Agreement and the Plan of Merger, the Stock Option Agreement, the
Litigation Management Agreement and the matters and transactions contemplated
thereby. Two directors who, due to scheduling conflicts, were unable to attend
the February 4, 1998 meeting subsequently ratified the Golden State Board's
approval of each of the matters considered thereat.
RECOMMENDATION OF THE GOLDEN STATE BOARD OF DIRECTORS AND REASONS FOR THE
MERGERS
The Golden State Board has determined that the Agreement and the Mergers
are fair to, and in the best interests of, Golden State and the Golden State
Stockholders. Accordingly, the Golden State Board unanimously recommends that
Golden State Stockholders vote "FOR" approval and adoption of the Agreement.
In reaching its determination to approve and adopt the Agreement, the
Golden State Board consulted with Golden State's executive management and its
financial and legal advisors, and considered a number of factors, including the
following:
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(i) the Golden State Board's familiarity with and review of Golden
State's business, operations, financial condition and earnings on an
historical and prospective basis;
(ii) the Golden State Board's knowledge and review, based in part on its
historical familiarity with Cal Fed and in part on presentations by CSFB
and Golden State's management based on their discussions and due diligence
investigations, of the business, operations, financial condition, earnings,
capital structure and ownership profile of Parent Holdings on an historical
and prospective basis and of the combined company on a pro forma basis;
(iii) the current and prospective economic and competitive environment
facing the financial services industry generally, and Golden State in
particular, including continued rapid consolidation in the industry,
increasing competition from thrift institutions and non-thrift financial
service providers and the increasing importance of operational scale and
financial resources in maintaining efficiency and remaining competitive
over the long term (in this regard, the Golden State Board noted, among
other things, that the combined company resulting from the Subsidiary Bank
Merger would, based on information available at the time, be the third
largest thrift institution in the United States (with approximately $52
billion in assets and $28 billion in deposits) and the fifth largest
depository institution in California (with approximately 6.4% of deposits
and substantial market presence in a number of the most attractive markets
in California), and would have a mortgage servicing portfolio of
approximately $96 billion, the seventh largest nationally);
(iv) Golden State management's long-standing view that a business
combination of Glendale Federal and Cal Fed could likely produce
substantial strategic benefits compared to what each company could achieve
on its own in a comparable time frame (including, among other things,
accelerated achievement of financial goals, a broadening of each bank's
geographic network and distribution channels, and a larger client base on
which to build the combined company's consumer and business banking
franchise) (see "--Background of the Mergers");
(v) the presentation of CSFB to the Golden State Board on February 4,
1998 and the opinion of CSFB, rendered on February 4, 1998, that, as of
such date, the consideration to be paid by Golden State pursuant to the
Agreement was fair from a financial point of view to the holders of Golden
State Common Stock (see "--Opinion of Golden State's Financial Advisor");
(vi) the Golden State Board's evaluation of the financial terms and
consequences of the Mergers (see "--Issuance of Golden State Common Stock
in the Mergers") and their potential effect on Golden State and Golden
State Stockholders, and the Golden State Board's belief that such terms are
fair to and in the best interests of Golden State and Golden State
Stockholders, taking into account that the Mergers are expected to be
accretive to Golden State's cash earnings per share in calendar 1999 (by
approximately 17%) and calendar 2000 (by approximately 28%) (the foregoing
is based on management projections, and assumes the achievement of certain
projected cost savings and leverage expense reductions after the Mergers,
and the combined company's ability to achieve such results is dependent
upon various factors, a number of which will be beyond its control,
including the regulatory environment, economic conditions, unanticipated
changes in business conditions and inflation, and there can be no assurance
in this regard), and the anticipated pro forma impact of the Mergers on the
book value and tangible book value per share of Golden State Common Stock
(as detailed more fully under "--Impact on Tangible Book Value") and the
belief of the Golden State Board, after consultation with its financial
advisors, that it was likely that the market price of Golden State Common
Stock after giving effect to the Mergers would principally be based on a
multiple of the combined company's earnings per share rather than its
tangible book value per share. See "--Opinion of Golden State's Financial
Advisor--Selected Companies Analysis--Pro Forma."
(vii) the terms of the Agreement and of the Stock Option Agreement,
including the range of pro forma ownership of the common stock of the
combined company by existing Golden State Stockholders upon consummation of
the Mergers, the provisions pursuant to which FGH and Hunter's Glen could
be expected to receive Contingent Shares, the provisions intended to
protect holders of Litigation Tracking Warrants (Trademark) and existing
Golden State Stockholders against dilution of their interests in a
potential recovery in the Glendale Goodwill Litigation and the degree of
certainty provided by the terms of the Agreement with respect to
consummation of the Mergers;
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(viii) the anticipated cost savings (totalling approximately $131 million
annually, when fully phased in), operating efficiencies and opportunities
for revenue enhancement available to the combined company from the Mergers,
the perceived compatibility and strategic fit of the parties to the
Agreement and the substantial experience of the senior management of Cal
Fed in the consummation of acquisition transactions and its record of
achieving cost savings, operating efficiencies and revenue enhancements in
connection with the integration of acquired companies. See "MANAGEMENT AND
OPERATIONS OF GOLDEN STATE FOLLOWING THE MERGERS";
(ix) the fact that five members of the Golden State Board (the "GSB
Directors") would be members of the board of directors of the combined
company after consummation of the Mergers (see "MANAGEMENT AND OPERATIONS
OF GOLDEN STATE FOLLOWING THE MERGERS");
(x) the terms of the Litigation Management Agreement, including without
limitation the fact that Messrs. Trafton and Fink would be Executive Vice
Presidents of the combined company and would continue to manage and oversee
the Glendale Goodwill Litigation and matters related to the Litigation
Tracking Warrants (Trademark) , and in such capacity would report to a
committee of the board of directors of the combined company composed of the
GSB Directors or their designated successors (see "--Litigation Management
Agreement," "MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE
MERGERS" and "--Interests of Certain Persons in the Merger");
(xi) the fact that certain officers and other employees of Golden State
could be expected to receive compensation and other benefits in connection
with the Mergers, including the arrangements between Golden State and
Messrs. Trafton and Fink contemplated by the Litigation Management
Agreement (see "SUMMARY--Interests of Certain Persons in the Merger" and
"--Interests of Certain Persons in the Merger");
(xii) the expectation that each of the Mergers will be treated as a
"reorganization" under Section 368(a) of the Code (see "--Certain Federal
Income Tax Consequences");
(xiii) the general impact that the Mergers could be expected to have on
the constituencies served by Golden State, including its customers,
employees and communities; and
(xiv) the Golden State Board's assessment, in consultation with counsel,
of the likelihood of obtaining all regulatory approvals required for the
Mergers (see "--Regulatory Approvals Required for the Mergers").
This discussion of the information considered by the Golden State Board is
not intended to be exhaustive but includes each of the material factors
considered thereby. In reaching its determination to approve and recommend the
Mergers, the Golden State Board did not assign any relative or specific weights
to the factors considered in reaching such determination, and individual
directors may have given differing weights to different factors.
THE GOLDEN STATE BOARD BELIEVES THAT THE MERGERS ARE FAIR TO AND IN THE
BEST INTERESTS OF GOLDEN STATE AND GOLDEN STATE STOCKHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT GOLDEN STATE STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE
AGREEMENT AND THE PLAN OF MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
OPINION OF GOLDEN STATE'S FINANCIAL ADVISOR
CSFB has acted as financial advisor to Golden State in connection with the
Mergers. CSFB was selected by Golden State based on CSFB's experience,
expertise and familiarity with Golden State and its business. CSFB is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with CSFB's engagement, Golden State requested that CSFB
evaluate the fairness of the consideration to be paid by Golden State pursuant
to the Agreement to the holders of Golden State
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Common Stock from a financial point of view. On February 4, 1998, at a meeting
of the Golden State Board held to evaluate the Mergers, CSFB rendered to the
Golden State Board an opinion to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the consideration
to be paid by Golden State pursuant to the Agreement was fair from a financial
point of view to the holders of Golden State Common Stock. CSFB confirmed its
February 4, 1998 opinion by delivery of the CSFB Opinion dated the date of this
Proxy Statement. In connection with the CSFB Opinion, CSFB updated certain of
the analyses performed in connection with its opinion of February 4, 1998 and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
THE FULL TEXT OF THE CSFB OPINION, WHICH SETS FORTH THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY CSFB, IS ATTACHED AS APPENDIX D TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF GOLDEN STATE COMMON STOCK ARE
URGED TO READ THE CSFB OPINION CAREFULLY IN ITS ENTIRETY. CSFB HAS CONSENTED TO
THE INCLUSION OF THE CSFB OPINION AS APPENDIX D HERETO. IN GIVING SUCH CONSENT,
CSFB DOES NOT ADMIT THAT IT COMES WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT
IS REQUIRED UNDER SECTION 7 OF THE SECURITIES ACT OR THE RULES AND REGULATIONS
OF THE COMMISSION THEREUNDER NOR DOES IT THEREBY ADMIT THAT IT IS AN EXPERT
WITH RESPECT TO ANY PART OF THIS PROXY STATEMENT WITHIN THE MEANING OF THE TERM
"EXPERTS" AS USED IN THE SECURITIES ACT OR THE RULES AND REGULATIONS OF THE
COMMISSION THEREUNDER. THE CSFB OPINION IS DIRECTED TO THE GOLDEN STATE BOARD
AND RELATES ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE PAID BY GOLDEN
STATE FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
MERGERS OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE CSFB OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion dated February 4, 1998, CSFB reviewed the
Agreement, including without limitation the provisions thereof with respect to
the potential issuance of the Contingent Shares, and certain publicly available
business and financial information relating to Golden State and Parent
Holdings. CSFB also reviewed certain other information relating to Golden State
and Parent Holdings, including financial forecasts, provided to CSFB by Golden
State and Parent Holdings, and met with the managements of Golden State and
Parent Holdings to discuss the businesses and prospects of Golden State and
Parent Holdings. CSFB also considered certain financial and stock market data
of Golden State and certain financial data of Parent Holdings and compared
those data with similar data for other publicly held companies in businesses
similar to those of Golden State and Parent Holdings and considered, to the
extent publicly available, the financial terms of certain other business
combinations and other transactions recently effected. CSFB considered the
potential financial impact of the issuance of shares of Golden State Common
Stock pursuant to the Litigation Tracking Warrants (Trademark) and the
issuance of Contingent Shares following the receipt of recoveries in the
Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation. CSFB also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB and relied on such information being complete and accurate in
all material respects. With respect to the financial forecasts (including
estimates of future cost savings, operating synergies and revenue enhancements
expected to be achieved as a result of the Mergers), CSFB assumed that such
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Golden State and Parent
Holdings as to the future financial performance of Golden State and Parent
Holdings. CSFB was not requested to make, and did not make, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Golden State or Parent Holdings nor was CSFB furnished with any such
evaluations or appraisals. CSFB's opinions were necessarily based upon
financial, economic, market and other conditions as they existed and could be
evaluated on the date of such opinion. CSFB did not express any opinion as to
the actual value of Golden State Common Stock when issued to the stockholders
of Parent Holdings or the prices at which such stock will trade subsequent to
the Mergers.
In preparing its opinion dated February 4, 1998, to the Golden State
Board, CSFB performed a variety of financial and comparative analyses,
including those described below. The summary of CSFB's analyses set forth below
does not purport to be a complete description of the analyses underlying its
33
<PAGE>
opinions. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant
methods of financial analyses and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinions, CSFB made
qualitative judgments as to the significance and relevance of each analysis and
factor considered by it. Accordingly, CSFB believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinions. In
its analyses, CSFB made numerous assumptions with respect to Golden State,
Parent Holdings, industry performance, regulatory, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Golden State and Parent Holdings. No company, transaction or
business used in such analyses as a comparison is identical to Golden State,
Parent Holdings or the Mergers, nor is an evaluation of the results of such
analyses entirely mathematical; rather, such analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. CSFB's opinions and financial analyses were only one of many
factors considered by Golden State Board in its evaluation of the Mergers and
should not be viewed as determinative of the views of the Golden State Board or
management of Golden State with respect to the Mergers or the consideration to
be paid by Golden State therein.
The following is a summary of the material financial analyses performed by
CSFB in connection with its opinion dated February 4, 1998:
Selected Companies Analysis--Golden State Standalone. CSFB compared
certain financial, operating and stock market data of Golden State and certain
financial and operating data of Parent Holdings to corresponding data of
selected publicly traded companies in the thrift industry. Such companies
included: Washington Mutual, Inc.; Golden West Financial Corporation; H.F.
Ahmanson & Company; Downey Financial Corp; Bay View Capital Corporation;
Washington Federal, Inc.; Dime Bancorp, Inc.; Charter One Financial, Inc.;
Sovereign Bancorp, Inc.; Greenpoint Financial Corp.; and Astoria Financial
Corp. (collectively, the "Selected Companies"). EPS estimates for the Selected
Companies were based on estimates of selected investment banking firms as
compiled by First Call. EPS estimates for Golden State were based on internal
estimates of the management of Golden State. Earnings estimates for Parent
Holdings were based on internal estimates of the management of Parent Holdings.
All multiples were based on closing stock prices on January 26, 1998. This
analysis indicated a range of multiples for the Selected Companies of estimated
calendar 1998 EPS, estimated calendar 1999 EPS, and book value and tangible
book value as of December 31, 1997, of 12.3x to 16.2x (with a median of 13.4x),
10.8x to 15.5x (with a median of 12.0x), 1.3x to 2.8x (with a median of 2.0x)
and 1.8x to 4.2x (with a median of 2.5x), respectively. Applying the range of
multiples derived for the Selected Companies to corresponding financial data of
Golden State indicated an implied equity reference range for Golden State of
approximately $26 to $28 per share, or approximately $2.0 to $2.2 billion in
the aggregate, representing an implied ownership in the combined company of
between 56% and 57%.
Selected Companies Analysis--Pro Forma. In its presentation to the Golden
State Board, CSFB performed an additional analysis in which it compared
multiples of market price to estimated 1999 cash EPS, estimated 2000 cash EPS,
book value per share at December 31, 1997, tangible book value per share at
December 31, 1997 and the market price premium to deposits at December 31,
1997, in each case of the Selected Companies, to corresponding projected pro
forma data for the combined company. In this analysis, market data was based on
closing stock prices on February 3, 1998.
34
<PAGE>
<TABLE>
<CAPTION>
SELECTED
PRO FORMA VALUE FOR COMPANY MEDIAN IMPLIED VALUE PER
COMBINED COMPANY MULTIPLE SHARE OF COMBINED COMPANY
--------------------- ---------------- --------------------------
<S> <C> <C> <C>
1999 Estimated Cash Earnings Per Share $ 2.88 12.7 x $ 36.60
2000 Estimated Cash Earnings Per Share 3.31 11.4 37.70
Book Value Per Share 20.97 2.22 46.60
Tangible Book Value Per Share 5.78 2.71 15.70
Deposits Per Share 200.65 13.3% 32.50
</TABLE>
With regard to the implied equity reference value of $15.70 based on pro
forma tangible book value, CSFB advised the Golden State Board that, in its
view, the common stock of the combined company would be more likely to trade in
a valuation range approximating a peer group multiple to EPS rather than to
tangible book value. This view was based on CSFB analyses, including
consideration of the relationship between multiples of tangible book value and
cash returns on equity. CSFB advised the Golden State Board that, given the
combined company's pro forma cash return on equity, which CSFB determined to be
substantially higher than the cash return on equity of any of the Selected
Companies (based on data for the quarter ended December 31, 1997), the
application of tangible book value multiples derived from the Selected
Companies as a valuation methodology was a less relevant analysis for the
combined company. Pro forma financial data for the combined company, including
the value of $5.78 for tangible book value per share, were necessarily based on
facts and circumstances as they existed as of the date of CSFB's presentation
to the Golden State Board and certain projections and assumptions regarding the
operations of the combined company following the Merger. As such, they are not
directly comparable to the pro forma financial data provided elsewhere herein.
See "--Impact on Tangible Book Value" and "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS."
Discounted Cash Flow Analysis. CSFB performed a discounted cash flow
analysis to determine a range of present values for Golden State and Parent
Holdings as stand alone entities. CSFB estimated the present value of the
future streams of after-tax free cash flows that both Golden State and Parent
Holdings could produce on a stand-alone basis through calendar year 2002 based
on an estimate of capital available for distribution to stockholders of Golden
State and Parent Holdings in the form of dividends and share repurchases. The
range of estimated terminal values was calculated by applying multiples ranging
from 11x to 13x to the projected 2002 reported net income of Golden State and
multiples ranging from 10x to 12x to the projected calendar 2002 cash net
income of Parent Holdings. The free cash flow streams and estimated terminal
values were then discounted to present values using discount rates ranging from
12 percent to 14 percent. This analysis indicated an implied stand alone equity
reference range for Golden State of approximately $24 to $28 per share, or
approximately $1.9 billion to $2.2 billion in the aggregate, representing an
implied ownership in the combined company of approximately 56%.
CSFB estimated the present value of certain cost savings anticipated by
the management of Parent Holdings to result from the Mergers. Based on a
discount rate of 13% and a terminal value based on a 3% perpetual growth rate
after calendar 2002, CSFB calculated that the present value for the projected
cost savings (approximately $131 million annually, when fully phased in) was
approximately $800 million in the aggregate. The aggregate of Golden State's
stand alone equity reference range, Parent Holdings' stand alone equity
reference range and the present value of certain cost savings anticipated by
the management of Parent Holdings to result from the Mergers totaled
approximately $4.2 to $4.7 billion. Based on the consideration to be paid by
Golden State, this analysis implied a value per share reference range for the
Golden State Common Stock of approximately $30 to $35 per share.
Contribution Analysis. CSFB analyzed the relative contributions of Golden
State and Parent Holdings to, among other things, the estimated assets,
deposits and tangible equity of the pro forma combined company, the estimated
reported and cash net income of the pro forma combined company for calendar
1998 (before giving effect to certain cost savings (approximately $131 million
annually, when fully phased in) anticipated by the management of Parent
Holdings to result from the Mergers), and the estimated reported and cash net
income of the pro forma combined company for calendar 1999 (before giving
effect to such cost savings), with particular focus on the estimated cash net
income contributions of Golden State and Parent Holdings. This analysis
indicated that (i) without giving effect to such cost savings, Golden State
would contribute approximately 59 percent and 61 percent of the reported net
35
<PAGE>
income of the combined company in calendar 1998 and 1999, respectively, and
(ii) before giving effect to such cost savings, Golden State would contribute
approximately 51 percent and 55 percent of the cash net income of the combined
company in calendar 1998 and 1999, respectively. Based on the consideration to
be paid by Golden State, current holders of Golden State Common Stock would own
between 55 percent and 58 percent of the combined company upon consummation of
the Mergers.
Selected Transaction Analysis. Using publicly available information, CSFB
analyzed the purchase prices and implied transaction multiples paid in the
following selected transactions in the thrift industry (acquiror/target):
Washington Mutual, Inc./Keystone Holdings, Inc.; First Nationwide Bank/Cal Fed
Bancorp, Inc.; Washington Mutual, Inc./Great Western Financial Corporation;
Golden State Bancorp Inc./CENFED Financial Corporation; and H.F. Ahmanson &
Company/Coast Savings Financial, Inc. (collectively, the "Selected
Transactions"). All multiples were based on information available at the time
of announcement of the transaction. This analysis indicated a range of
multiples for the Selected Transactions of estimated forward EPS, estimated
one-year forward EPS and most recent book value and tangible book value of
11.0x to 17.8x (with an average of 14.4x), 8.3x to 15.7x (with an average of
12.3x), 1.5x to 2.7x (with an average of 2.0x) and 1.5x to 3.1x (with an
average of 2.0x), respectively. In addition, CSFB reviewed the premiums to
deposits paid in the Selected Transactions, which indicated a range of premiums
to deposits of approximately 3.3 percent to 19.6 percent (with an average of
9.0 percent). Applying the range of multiples derived for the Selected
Transactions to corresponding financial data of Golden State indicated an
implied equity reference range for Golden State of approximately $27 to $30 per
share.
Pro Forma Merger Analysis. CSFB analyzed the potential pro forma effect of
the Mergers on the EPS of Golden State during calendar years 1998 through 2000
(with particular focus on calendar years 1999 and 2000) and the book value and
tangible book value of Golden State as of September 30, 1997. This analysis
indicated that the Mergers could be accretive to the cash EPS of Golden State
in calendar years 1999 and 2000, after giving effect to certain cost savings
(approximately $131 million annually, when fully phased in) anticipated by the
management of Parent Holdings to result from the Mergers. The actual results
achieved by the combined company may vary from projected results and the
variations may be material. See "MANAGEMENT AND OPERATIONS OF GOLDEN STATE
FOLLOWING THE MERGER" and "FORWARD-LOOKING STATEMENTS."
Certain Other Factors. In addition to the analyses described above, CSFB
considered, among other things, a comparison of certain financial statistics of
certain other potential strategic partners and a financial and business
overview of Parent Holdings and the combined company. CSFB also noted Golden
State management's long-standing view that a business combination of Glendale
Federal and Cal Fed could likely produce substantial strategic benefits
compared to what each company could achieve on its own in a comparable time
frame. See "--Background of the Mergers."
Miscellaneous. Pursuant to the terms of CSFB's engagement, Golden State
has agreed to pay CSFB for its services in connection with the Mergers an
aggregate financial advisory fee equal to 0.70 percent of the aggregate
consideration payable in the Mergers (which fee upon consummation of the
Mergers would be approximately $17.3 million if calculated as of March 31,
1998, based on 77,234,492 shares of Golden State Common Stock outstanding as of
such date (on a fully diluted basis, without giving effect to shares issuable
upon exercise of the Litigation Tracking Warrants (Trademark) ) and a share
price of $32.00 based on the lower share price utilized in the Pro Forma Factor
determination, provided that the actual fee paid upon consummation of the
Mergers will be calculated based on the actual aggregate consideration as of
the Effective Date and not as of March 31, 1998). Golden State also has agreed
to indemnify CSFB and certain related persons and entities against certain
liabilities, including liabilities under the federal securities laws, arising
out of CSFB's engagement, and to reimburse CSFB for reasonable out-of-pocket
expenses, including the reasonable fees and expenses of its legal counsel,
incurred by CSFB in connection with its engagement.
CSFB has in the past provided financial services to Golden State and
Parent Holdings and certain of their affiliated companies unrelated to the
Mergers, for which services CSFB has received compensation. Such services have
included acting as financial advisor to Golden State in connection with the
CENFED Merger, the RedFed Merger and the Litigation Tracking Warrants
(Trademark) , for which it is anticipated that CSFB will receive fees
aggregating approximately $5 million. CSFB also acted as financial advisor to
Cal Fed in connection with the Florida Branch Sale, for which services CSFB
will receive a fee of approximately
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<PAGE>
$700,000. In addition, CSFB has acted as agent for Golden State in connection
with its share repurchase program related to the RedFed Merger, for which CSFB
will receive a customary fee. In the ordinary course of its business, CSFB and
its affiliates may actively trade the debt or equity securities of Golden State
and Parent Holdings for their own accounts and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
EFFECTIVE TIME
The Holding Company Mergers will become effective as set forth in the
Certificates of Merger which will be filed with the Secretary of State of the
State of Delaware on the Closing Date. The date and time when the Golden State
Merger becomes effective and the date and time when the FNH Merger becomes
effective, in each case as set forth in the Certificate of Merger with respect
thereto, are referred to herein collectively as the "Effective Time."
"Effective Date" means the date on which the Effective Time occurs. The
Certificates of Merger will be filed on the first day which is (a) the last
business day of a month and (b) at least two business days after the
satisfaction or waiver (subject to applicable law) of the conditions to
consummation of the Mergers set forth in the Agreement (other than those
conditions which relate to actions to be taken at the closing of the Mergers),
unless another date is agreed to by Golden State and Parent Holdings.
ISSUANCE OF GOLDEN STATE COMMON STOCK IN THE MERGERS
Pursuant to the Agreement, FGH and Hunter's Glen will receive at the
closing of the Mergers, in respect of their interests as stockholders of Parent
Holdings and FNH, a number of shares of Golden State Common Stock, as
determined pursuant to a formula set forth in the Agreement, that will
constitute, in the aggregate, between 42% and 45% of the common stock of the
combined company outstanding, immediately after giving effect to the Mergers,
on a fully diluted basis (without giving effect to shares issuable pursuant to
the Litigation Tracking Warrants (Trademark) as described herein under
"INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation Tracking
Warrants (Trademark) "). The actual ownership percentage of FGH and Hunter's
Glen will be determined based upon the adjusted average price of Golden State
Common Stock during a specified pricing period ending shortly before the
closing of the Mergers. FGH and Hunter's Glen will receive shares of Golden
State Common Stock constituting 42% of such outstanding common stock if the
adjusted average price of Golden State Common Stock is $32.00 or less, with
such percentage increasing incrementally to up to 45% of such outstanding
common stock if such adjusted average price is $33.00 or more. The adjusted
average price of Golden State Common Stock will be the daily volume-weighted
average price per share for Golden State Common Stock for 15 randomly selected
trading days during a 30 trading-day period ending three days before the
closing date of the Mergers, adjusted by subtracting therefrom the per share
value attributable to the 15% of the value of Golden State's potential
recovery, if any, in the Glendale Goodwill Litigation to be excluded in the
calculation of the aggregate number of shares of Golden State Common Stock
issuable upon exercise of the Litigation Tracking Warrants (Trademark) (which
per share value, based on the recent trading range of the Litigation Trading
Warrants (Trademark) , is approximately $1).
In addition, the Agreement provides that FGH and Hunter's Glen will be
entitled to receive contingent consideration, through the issuance by Golden
State of additional shares of Golden State Common Stock to FGH and Hunter's
Glen following consummation of the Mergers, based on (i) the use by the
combined company of certain potential tax benefits resulting from certain net
operating loss carryforwards of the consolidated group of which Parent Holdings
is a part, and the realization of certain other potential tax assets and
liabilities of Golden State and Parent Holdings and (ii) Cal Fed's net
after-tax recovery in certain specified litigation, including a percentage of
the net after-tax recovery in the Cal Fed Goodwill Litigation (following
payment by Cal Fed of all amounts due to the holders of the CALGZs and the
CALGLs (see "INFORMATION ABOUT PARENT HOLDINGS--Description of Business of
Parent Holdings--Other Activities") and the retention by the combined company
of certain amounts of such recovery as provided in the Agreement). The
Litigation Tracking Warrants (Trademark) , which were distributed by Golden
State to its stockholders on May 29, 1998, represent the right to receive upon
exercise thereof Golden State Common Stock having an aggregate value equal to
85% of the net after-tax recovery, if any, in the Glendale Goodwill Litigation.
The Agreement provides generally that the amount of the net after-tax recovery,
if any, resulting from the Cal Fed Goodwill Litigation which will be excluded
for purposes of calculating the number of Contingent Shares issuable to FGH and
Hunter's Glen will be
37
<PAGE>
based on the 15% of the value of the net after-tax recovery in the Glendale
Goodwill Litigation to be excluded in the calculation of the number of shares
issuable on exercise of the Litigation Tracking Warrants (Trademark) , adjusted
to reflect the pro forma ownership interest of FGH and Hunter's Glen in the
combined company at the time of consummation of the Mergers.
The number of Contingent Shares cannot be determined at the present time
and also will not be determinable at the time of the consummation of the
Mergers, as such number depends upon factors that are not or will not be
subject to determination at such times. These factors include, among other
things, the net value to the combined company of certain contingent assets and
liabilities of Golden State and Parent Holdings (including potential recoveries
in the Glendale Goodwill Litigation, the Cal Fed Goodwill Litigation and the
Other Litigation, potential tax benefits resulting from certain net operating
loss carryforwards of the consolidated group of which Parent Holdings is a part
and other contingent tax assets and liabilities of Golden State and Parent
Holdings) and the market price of the common stock of the surviving company at
such time as issuance of Contingent Shares would be required under the
Agreement.
Subject to the foregoing, assuming for illustrative purposes only a
valuation of the Cal Fed Goodwill Litigation of approximately $440 million
(based on the trading prices of the CALGZs and the CALGLs at the time of the
execution of the Agreement), a valuation of the Glendale Goodwill Litigation of
approximately $550 million (based on the range of recent trading prices of the
Litigation Tracking Warrants (Trademark) ), and tax benefits of Parent Holdings
of approximately $350 million, the number of Contingent Shares issuable under
the Agreement would result in an incremental increase in the percentage
ownership of outstanding common stock of the combined company on a fully
diluted basis (without giving effect to shares issuable pursuant to the
Litigation Tracking Warrants (Trademark) ) by FGH and Hunter's Glen of
approximately 4.3 to 5.5 percentage points, assuming that during all relevant
periods the market price of a share of common stock of the combined company is
between $35 and $45 per share. Due to the preliminary stage of the Other
Litigation, no value has been ascribed thereto for these illustrative purposes.
In addition to the variables that may affect the number of Contingent Shares, a
number of additional variables, including without limitation other changes in
the number of shares of the combined company outstanding or deemed outstanding
(including, without limitation, the number of shares outstanding after exercise
of the Litigation Tracking Warrants (Trademark) ), could affect the relative
ownership of a stockholder of the combined company. Further, the timing of the
issuance of the Contingent Shares is not presently ascertainable, and
Contingent Shares with respect to the use by the combined company of Parent
Holdings net operating loss carryforwards, which will be subject to limitation
under the Code in any particular tax year, may be issued over a substantial
number of years.
The foregoing estimates and assumptions, and the ownership percentages
derived from them, are presented for illustrative purposes only and are not
intended to represent the view of Golden State, its management or of any other
person as to likely actual damages, results or values, or the appropriate
amount of damages in the Glendale Goodwill Litigation or the Cal Fed Goodwill
Litigation, and there can be no assurance that the foregoing estimates and
assumptions will prove to be accurate or that the actual number of Contingent
Shares, or the actual change in such percentage ownership, will not be
substantially different than the estimate disclosed herein.
For a brief description of the Glendale Goodwill Litigation, see
"INFORMATION ABOUT GOLDEN STATE--General--Distribution of Litigation Tracking
Warrants (Trademark) ." For a brief description of the Cal Fed Goodwill
Litigation, see "INFORMATION ABOUT PARENT HOLDINGS--Description of Business of
Parent Holdings--Other Activities."
Set forth below is a summary of the relevant provisions contained in the
Agreement with respect to the issuance of Golden State Common Stock to FGH and
Hunter's Glen on the Closing Date and the issuance of Contingent Shares to FGH
and Hunter's Glen following the Closing Date.
Conversion of Shares on the Closing Date
Pursuant to the Agreement and the Plan of Merger, at the Effective Time:
(i) the 1,000 shares of the common stock, par value $1.00 per share, of Parent
Holdings ("Parent Holdings Common Stock") issued and outstanding will be
converted into and exchangeable for (a) that number of shares of Golden State
Common Stock equal to (x) the Closing Issuance Number (as defined below) less
(y) the Ford Shares Number (as defined below), and (b) the right to receive the
contingent consideration attributable to FGH
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<PAGE>
(see "--Issuance of Contingent Shares after the Closing Date"); (ii) each of
the 800 shares of Class A common stock, par value $1.00 per share, of FNH (the
"FNH Class A Common Stock") issued and outstanding will be canceled and no
consideration will be paid in respect thereof; and (iii) the 200 shares of
Class B common stock, par value $1.00 per share, of FNH (the "FNH Class B
Common Stock") issued and outstanding will be converted into and exchangeable
for (x) that number of shares of Golden State Common Stock (rounded up to the
nearest share) equal to the Ford Shares Number, and (y) the right to receive
the contingent consideration attributable to Hunter's Glen (see "--Issuance of
Contingent Shares after the Closing Date").
For all purposes under the Agreement, the following terms have the
meanings indicated:
"Closing Issuance Number" means (x) the Pro Forma Shares Number less (y)
the Outstanding Shares Number.
"Ford Shares Number" means the number of shares obtained by (I) dividing
(A) (1) the product of the Closing Issuance Number and the Average Daily
Price, plus (2) the sum of $455 million and the amount of all interest on
the outstanding principal amount of 12 1/2% Senior Notes (as defined
herein) which is accrued but unpaid as of the Closing Date, less (3) the
aggregate amount of cash and cash equivalents held by Parent Holdings as of
the Closing Date, by (B) the Average Daily Price and (II) multiplying the
result obtained in clause (I) by 0.2.
"Pro Forma Shares Number" means the number of shares, rounded up to the
nearest whole share, obtained by dividing (x) the Outstanding Shares Number
by (y) the Pro Forma Factor.
"Average Daily Price" means the daily volume weighted average price per
share of Golden State Common Stock on the NYSE (as reported by Bloomberg
Financial Services ("Bloomberg") or, if not reported by Bloomberg, in
another mutually agreed upon authoritative source) for 15 randomly selected
days during the 30 consecutive NYSE trading days ending on the third
business day prior to the Closing Date. The random selection will be made
in a manner reasonably acceptable to both Golden State and Parent Holdings.
"Outstanding Shares Number" means the total number of fully-diluted
shares of Golden State Common Stock as of the Closing Date (excluding
shares of Golden State Common Stock issuable upon exercise of Litigation
Tracking Warrants (Trademark) or upon exercise of the Option (as defined
herein), with all Golden State Options (as defined herein) which have been
surrendered for a cash payment pursuant to the terms of the Agreement (see
"--Interests of Certain Persons in the Mergers") treated as if they had
remained outstanding, and computed on the "treasury stock method" of
calculating earnings per share under Statement of Financial Accounting
Standards No. 128 as in effect as of February 4, 1998, in all cases using
the Average Daily Price as the "market price" of Golden State Common Stock.
"Pro Forma Factor" is determined as follows:
<TABLE>
<CAPTION>
IF THE ADJUSTED THE PRO FORMA
AVERAGE DAILY PRICE IS: FACTOR IS:
- ------------------------------------------------------------- --------------
<S> <C>
$32.00 or less ................................... 0.58
greater than $32.00 but less than $32.50 ......... 0.57
$32.50 or greater but less than $33.00 ........... 0.56
$33.00 or greater ................................ 0.55
</TABLE>
"Adjusted Average Daily Price" means (a) the Average Daily Price less (b)
the quotient obtained by dividing (1) the product of (x) the Glendale
Litigation Value and (y) 0.15, by (2) the Outstanding Shares Number.
"Glendale Litigation Value" means the quotient obtained by dividing (1)
the product of (x) the Average Daily LTW price and (y) the total number of
Litigation Tracking Warrants (Trademark) outstanding plus those reserved
for issuance as of the business day immediately prior to the Closing Date,
by (2) 0.85.
"Average Daily LTW Price" means the daily volume weighted average price
of the Litigation Tracking Warrants (Trademark) on Nasdaq, or on such
other stock market or securities trading system on which
39
<PAGE>
the Litigation Tracking Warrants (Trademark) may be listed or quoted from
time to time (as reported by Bloomberg or, if not reported thereby, another
mutually agreed upon authoritative source) for 15 randomly selected days
during the 30 consecutive trading days ending on the third business day
prior to the Closing Date. The random selection shall be made in a manner
reasonably acceptable to both Golden State and Parent Holdings.
Issuance of Contingent Shares after the Closing Date
Set forth below is a summary of the terms and provisions of the Agreement
with respect to the circumstances under which FGH and Hunter's Glen will be
entitled to receive Contingent Shares.
Cal Fed Goodwill Litigation Recovery. FGH and Hunter's Glen will be
entitled to receive Contingent Shares in respect of Cal Fed's net after-tax
recovery in the Cal Fed Goodwill Litigation in accordance with the
following terms and provisions of the Agreement:
(i) Not later than the tenth business day following the date on which Cal
Fed receives a cash payment (or cash resulting from monetization of any
non-cash payment) in respect of a final, nonappealable judgment in or final
settlement of the Cal Fed Goodwill Litigation (the "Cal Fed Cash Payment"),
Golden State will issue to FGH and Hunter's Glen an aggregate number of
shares of Golden State Common Stock (the "Goodwill Recovery Shares Number")
equal to the number of shares obtained by dividing (x) the Cal Fed
Litigation Distribution Amount (as defined below) by (y) the daily volume
weighted average price per share of Golden State Common Stock on the NYSE
(as reported by Bloomberg or, if not reported by Bloomberg, in another
mutually agreed upon authoritative source) (the "Average Stock Price") for
15 randomly selected days during the 30 consecutive trading-day period
ending on the business day immediately prior to the date of issuance of
such shares. The number of such shares to be issued to FGH will be 80% of
the Goodwill Recovery Shares Number, and the number of such shares to be
issued to Hunter's Glen will be 20% of the Goodwill Recovery Shares Number.
(ii) In the event that a final, nonappealable judgment in or final
settlement of the Cal Fed Goodwill Litigation does not result in a Cal Fed
Cash Payment, or in the event that the sum of the Net Cash Payment (defined
below) and the Cal Fed Litigation Tax Benefits (defined below) is less than
the sum of the Litigation Recovery Retention Amount (defined below) and the
Interest Factor (defined below), then FGH and Hunter's Glen will each make
a cash payment to Golden State, within twenty business days following the
date of such final judgment or settlement, which cash payments will equal,
in the aggregate, an amount (the "Contribution Amount") equal to the
difference between (x) the sum of the Litigation Recovery Retention Amount
and the Interest Factor, and (y) the sum of the Net Cash Payment and the
Cal Fed Litigation Tax Benefits, with FGH being severally liable for 80% of
the Contribution Amount and Hunter's Glen being severally liable for 20% of
the Contribution Amount; provided, however, that in lieu of paying such
amounts to Golden State in cash, each of FGH and Hunter's Glen may elect to
tender shares of Golden State Common Stock in payment of all or a portion
of such party's percentage share of the Contribution Amount, with such
shares being accepted as payment by Golden State at a per share value equal
to the Average Stock Price for 15 randomly selected days during the 30
trading-day period ending on the business day immediately prior to the date
of payment.
(iii) In the event that Cal Fed receives the Cal Fed Cash Payment prior
to the time Glendale Federal receives a Glendale Federal Payment (as
defined below), then Golden State will issue shares of Golden State Common
Stock to FGH and Hunter's Glen as described in (i) above, except that for
purposes of calculating the Cal Fed Litigation Distribution Amount, the
Litigation Recovery Retention Amount will be estimated as the excess of (x)
the quotient obtained by dividing (1) the product of the Glendale
Litigation Value and 0.15, by (2) the Pro Forma Factor, over (y) the
product of the Glendale Litigation Value and 0.15 (the result of such
calculation being referred to as the "Estimated Litigation Recovery
Retention Amount") (provided that for purposes of calculating the Glendale
Litigation Value in this paragraph, the Average Daily LTW Price will be
calculated for 15 randomly-selected days during a 30 trading-day period
ending on the business day immediately prior to the date of issuance of the
shares of Golden State Common Stock). Within ten business days
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following the actual receipt by Glendale Federal of a Glendale Federal
Payment, the Estimated Litigation Recovery Retention Amount will be
compared to the actual Litigation Recovery Retention Amount calculated
pursuant to the foregoing, and the parties will effect a settlement as
follows:
(A) if the Estimated Litigation Recovery Retention Amount exceeds the
Litigation Recovery Retention Amount, then Golden State will issue to
FGH and Hunter's Glen additional shares of Golden State Common Stock
having an aggregate value (valued at the Average Stock Price for 15
randomly selected days during the 30 trading-day period ending on the
business day immediately prior to the date of issuance of such shares)
equal to the amount of such excess, with 80% of such shares being issued
to FGH and 20% of such shares being issued to Hunter's Glen; or
(B) if the Estimated Litigation Recovery Retention Amount is less than
the Litigation Recovery Retention Amount, then each of FGH and Hunter's
Glen will contribute the difference in cash and/or stock, at its
election, in the same manner and proportion as described in paragraph
(ii) above.
(iv) As used in the Agreement, the following defined terms have the
meanings indicated:
"Cal Fed Litigation Distribution Amount" means (i) the sum of (A) the
amount of the Net Cash Payment and (B) the Cal Fed Litigation Tax Benefits,
less (ii) the sum of (A) the Litigation Recovery Retention Amount and (B)
the Interest Factor.
"Cal Fed Litigation Tax Benefits" means the tax benefits (other than tax
benefits taken into account in determining the aggregate amount of payments
to the holders of the CALGZs and the CALGLs), if any, actually realized by
the Taxpayer (as defined herein--see "--Tax Benefits") for a Taxable Period
(as defined herein--see "--Tax Benefits") as a result of tax items
(including items of loss or deduction and recovery of basis but not
including any exclusion from income) derived from the receipt or paying
over of the proceeds of the Cal Fed Goodwill Litigation, including from the
basis (if any) of the property that is the subject of the Cal Fed Goodwill
Litigation that are not reflected on the books of Parent Holdings, FNH, Cal
Fed or any subsidiary of Cal Fed as of the Effective Date, measured by the
excess of the federal income tax liability that would have been incurred by
the Taxpayer for the Taxable Period without such items over the federal
income tax liability actually incurred by the Taxpayer for the Taxable
Period.
"Cal Fed Goodwill Litigation" means California Federal Bank v. United
States, Civil Action No. 92-138C, filed on February 28, 1992, in the United
States Court of Federal Claims.
"Glendale Litigation Retention Amount" means an amount equal to 0.15
multiplied by the amount obtained from the following equation: (a) the
aggregate amount (the "Glendale Federal Payment") of any cash payment and
the fair market value (as determined pursuant to the Litigation Management
Agreement) of any property actually received by Glendale Federal pursuant
to a final, nonappealable judgment in or final settlement of the Glendale
Goodwill Litigation (including any post-judgment interest actually received
by Glendale Federal or a successor thereto on any such payment), minus (b)
the sum of the following: (i) the aggregate expenses incurred previously
and hereafter by Glendale Federal or its successor in prosecuting the
Glendale Goodwill Litigation and obtaining the Glendale Federal Payment,
(ii) the aggregate expenses incurred by Golden State or its successor in
connection with the creation, issuance and trading of the Litigation
Tracking Warrants (Trademark) , including, without limitation, legal,
financial advisory and accounting fees and the fees and expenses of the
warrant agent; and (iii) an amount equal to the net Glendale Federal
Payment (the Glendale Federal Payment less the expenses described in the
preceding clauses (i) and (ii)) multiplied by the highest combined
statutory rate of federal, state and local income taxes in effect during
the tax year in which the full Glendale Federal Payment is received.
"Glendale Litigation Tax Benefits" means the tax benefits, if any,
actually realized by the Taxpayer for any Taxable Period as a result of tax
items (including items of loss or deduction and recovery of basis) derived
from the receipt or paying over of the proceeds of the Glendale Goodwill
Litigation, including from the basis (if any) of the property that is the
subject of the Glendale Goodwill Litigation that are not reflected on the
books of Golden State or any subsidiary of Golden
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State as of the Effective Date or from the permanent exclusion from income
of the receipt of any payment of proceeds from the Glendale Goodwill
Litigation, measured by the excess of the federal income tax liability that
would have been incurred by the Taxpayer for the Taxable Period without
such items over the federal income tax liability actually incurred by the
Taxpayer for such Taxable Period.
"Glendale Goodwill Litigation" means Glendale Federal Bank, F.S.B., v.
United States, Civil Action No. 90-772C, filed on August 15, 1990, in the
United States Court of Federal Claims.
"Interest Factor" means an amount equal to the interest deemed to be
accrued on the Litigation Recovery Retention Amount, at a rate of 10.0% per
annum, compounded semiannually, from the date on which Glendale Federal
actually receives the Glendale Federal Payment (or if the Glendale Federal
Payment is received in installments, the final installment of the Glendale
Federal Payment) to and including the date on which Cal Fed actually
receives the full amount of the Cal Fed Cash Payment.
"Litigation Recovery Retention Amount" means the sum of (1) (x) the
quotient obtained by dividing the Glendale Litigation Retention Amount by
the Pro Forma Factor, less (y) the Glendale Litigation Retention Amount and
(2) the Glendale Litigation Tax Benefits.
"Net Cash Payment" means (A) the Cal Fed Cash Payment minus (B) the sum
of the following: (i) the aggregate expenses incurred previously and
hereafter by Cal Fed in prosecuting the Cal Fed Goodwill Litigation and
obtaining such Cal Fed Cash Payment, (ii) the expenses incurred by Cal Fed
in connection with the creation, issuance and trading of the CALGZs and the
CALGLs, including, without limitation, legal and accounting fees and the
fees and expenses of the interest agent, (iii) an amount equal to the
taxable portion of the net Cal Fed Cash Payment (the taxable portion of the
Cal Fed Cash Payment less the expenses described in the preceding clauses
(i) and (ii)) multiplied by the highest combined statutory rate of federal,
state and local income taxes in effect in the taxable year in which the Cal
Fed Cash Payment is received, (iv) the aggregate amount of the payments due
to the holders of the CALGZs, and (v) the aggregate amount of the payments
due to the holders of the CALGLs.
Other Litigation Recovery. Not later than the tenth business day
following the date on which Cal Fed actually receives a cash payment or
other property (the "Other Litigation Payment") pursuant to a final,
nonappealable judgment in, or final settlement of the Other Litigation,
Golden State will issue to FGH and Hunter's Glen an aggregate number of
shares of Golden State Common Stock (the "Other Litigation Recovery Shares
Number") equal to the quotient obtained by dividing (x) the aggregate
amount of any such cash payment plus the fair market value (as determined
by the Board of Directors of Golden State in good faith) of any such other
property, less the sum of (1) the aggregate expenses incurred previously
and hereafter by Cal Fed in prosecuting the Other Litigation and obtaining
the Other Litigation Payment and (2) an amount equal to the net amount of
the taxable portion of the Other Litigation Payment after deducting the
expenses in clause (1) above, multiplied by the highest combined statutory
rate of federal, state and local income taxes in effect in the taxable year
in which the Other Litigation Payment is received, by (y) the Average Stock
Price for 15 randomly selected days during the 30 trading-day period ending
on the business day immediately prior to the date of issuance of the
shares. The number of such shares to be issued to FGH will be 80% of the
Other Litigation Recovery Shares Number, and the number of such shares to
be issued to Hunter's Glen will be 20% of the Other Litigation Recovery
Shares Number. The "Other Litigation" means Cal Fed's case against the
United States in the United States Court of Federal Claims captioned First
Nationwide Bank, et al., v. United States, Civil Action No. 96-590C, filed
on September 20, 1996.
Tax Benefits.
(i) For each taxable period that ends after the Effective Date (a
"Taxable Period"), without duplication of any amount payable to FGH or
Hunter's Glen in respect of the recovery in the Cal Fed Goodwill Litigation
or the recovery in the Other Litigation as described above, Golden State
will make a payment (a "Tax Payment") to each of FGH and Hunter's Glen
within five days after the filing of the federal income tax return for such
Taxable Period of any Taxpayer or the receipt of a refund under the
provisions of the Agreement described in paragraph (ii)(C)(2) below, of an
amount
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equal to 80%, in the case of FGH, and 20%, in the case of Hunter's Glen, of
the Federal Net Tax Benefits (as defined below) of Parent Holdings, FNH,
Cal Fed or any subsidiary of Cal Fed, if any, as and when realized by the
Taxpayer in the Taxable Period. In the event that the Federal Net Tax
Benefits are less than zero for any Taxable Period, FGH and Hunter's Glen
will pay Golden State 80% and 20%, respectively, of such amount.
(ii) For purposes of the Agreement:
(A) "Tax Benefits" means, with respect to Parent Holdings, FNH, Cal
Fed or any subsidiary of Cal Fed, the sum of:
(1) the excess (if any) of "deductible temporary differences" over
"taxable temporary differences" as those terms are defined in
Statement of Financial Accounting Standards No. 109 (including,
without limitation, net operating loss, capital loss, credit
carryovers, including alternative minimum tax credit, and other
carryovers but not including any tax benefits taken into account in
determining the aggregate amount of payments to the holders of the
CALGZs and CALGLs immediately after the Effective Date) not including
the amount of any taxable temporary difference attributable to the
Cal Fed Goodwill Litigation (but taking into account the
deconsolidation of Parent Holdings and FNH from the Mafco Holdings
Inc. group and the ownership change that will occur with respect to
Parent Holdings and FNH under Section 382 of the Code as a result of
the Mergers); provided, however, such amount will be adjusted for any
final determination of tax liability or tax attributes for taxable
periods ending on or before the date of the Effective Time; provided
further, however, that such deductible temporary differences and
taxable temporary differences will not be adjusted for any purchase
accounting adjustments as a result of the transactions contemplated
by the Agreement, and
(2) any federal income tax benefit (other than tax benefits taken
into account in determining the aggregate amount of payments to the
holders of the CALGZs and CALGLs) actually realized by the Taxpayer
in any Taxable Period by reason of the treatment as interest under
Section 483 of the Code (or any successor provision thereto) of any
Tax Payment, payment of the Goodwill Recovery Shares Number or
payment of the Other Litigation Recovery Shares Number or any other
payment of Contingent Shares, or any increase in any such payment.
In addition, Amendment No. 1 to the Agreement and Plan of
Reorganization (the "Amendment") provides that in the calculation of
the Tax Benefits, any deductions arising from the Refinancing will be
excluded (for a description of the Refinancing, see "INFORMATION
ABOUT PARENT HOLDINGS--Description of Business of Parent Holdings--
Proposed Refinancing").
(B) "Taxpayer" means:
(1) after the Effective Date, the affiliated group of corporations
(within the meaning of Section 1504 of the Code) of which Golden
State or its successor is the common parent and Parent Holdings, FNH,
Cal Fed or their successors are members, or
(2) after the Effective Date, each of Golden State, Parent
Holdings, FNH, New FNH, Cal Fed or any successor.
(C) "Federal Net Tax Benefits" will be equal to the aggregate of:
(1) the excess, if any, of (x) the federal income tax liability for
the Taxable Period (calculated with all carryovers and carrybacks to
the Taxable Period that would have been allowable) which would have
been incurred by the Taxpayer if the Tax Benefits had not been
deducted, credited or used to offset income or tax liability in the
Taxable Period, over (y) the federal income tax liability for the
Taxable Period (calculated with all available carryovers and
carrybacks to the Taxable Period) actually incurred by the Taxpayer
(for purposes of determining the use of items of any deductible
temporary differences and taxable temporary differences for purposes
of (C) (1) (x) above, such items will be deemed deductible or taxable
to the extent of the amount of such items at the Effective Date
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multiplied by a fraction the numerator of which is the actual use of
the net operating loss carryover for any Taxable Period and the
denominator of which is the total net operating loss carryover
immediately after the Effective Date), plus
(2) any federal income tax refunds with Applicable Interest (as
defined below) (including refunds or interest with respect to
payments in lieu of federal income taxes under the Tax Sharing
Agreement (as defined below)) of Parent Holdings, FNH, Cal Fed, any
subsidiary of Cal Fed or any predecessor of any of them for any
taxable period ending on or before the Effective Date that have not
been reflected on the books of Parent Holdings, FNH, Cal Fed or any
subsidiary of Cal Fed as of the Effective Date, minus
(3) any federal income tax deficiencies with Applicable Interest
(including any tax sharing payment obligations or interest with
respect to payments in lieu of federal income taxes under the Tax
Sharing Agreement), of Parent Holdings, FNH, Cal Fed, any subsidiary
of Cal Fed or any predecessor of any of them for any taxable period
ending on or before the Effective Date that have not been reflected
on the books of Parent Holdings, FNH, Cal Fed or any subsidiary of
Cal Fed as of the Effective Date.
In addition, the Amendment provides that if the closing of the
Florida Branch Sale occurs on or before the Effective Date, then the
term "Federal Net Tax Benefits" will include any federal income tax
savings resulting from the Florida Branch Sale, calculated as the
difference between (i) the product of the amount of the gain
recognized by Cal Fed for federal income tax purposes as a result of
the Florida Branch Sale and the highest marginal federal income tax
rate applicable to corporations for the taxable year in which the
Florida Branch Sale occurs, and (ii) the amount of any federal income
taxes actually paid as a result of such sale (including any payment
in lieu of federal income taxes under the Tax Sharing Agreement by
Cal Fed).
(D) "Applicable Interest" means (A) for federal income tax refunds,
the interest received that has not been reflected on the books of Parent
Holdings, FNH, Cal Fed, or any subsidiary of Cal Fed as of the Effective
Date, less the product of such excess interest times the highest
combined statutory rates of federal, state, and local income taxes in
effect during the tax year in which the interest is received, or (B) for
federal income tax deficiencies, the interest paid for any federal
income tax that has not been reflected on the books of Parent Holdings,
FNH, Cal Fed, or any subsidiary of Cal Fed as of the Effective Date,
less the product of such excess interest times the highest combined
statutory rates of federal, state, and local income taxes in effect
during the tax year in which the interest is paid.
(E) "Tax Sharing Agreement" means the tax sharing agreement entered
into on January 1, 1994, by and among Mafco Holdings Inc., FNH, and
First Madison Bank, FSB, the predecessor of Cal Fed.
(iii) All Tax Payments will be made in shares of Golden State Common
Stock valued at the daily volume weighted average price per share of Golden
State Common Stock for the Taxable Period, except that in the case of a
further Tax Payment pursuant to the provisions of the Agreement described
in paragraph (iv) below, payment will be made in shares of Golden State
Common Stock valued at the daily volume weighted average price per share of
Golden State Common Stock for 15 randomly selected days during the 30
trading-day period ending on the date immediately prior to the date of such
Tax Payment; provided, however, that no Tax Payment need be made in Golden
State Common Stock to the extent that the aggregate Tax Payments, including
any adjustment pursuant to the provisions of the Agreement described in
paragraph (iv) below (provided, however, that for this purpose only,
Federal Net Tax Benefits will not include any Tax Benefits used to offset
any recovery attributable to the Glendale Goodwill Litigation), exceed $100
million times the number of years from the year of the Closing until the
year of such Tax Payment (the "Limitation"). The amount of any Tax Payment
that exceeds the Limitation will carry forward and become a Tax Payment in
the succeeding year. Notwithstanding the foregoing, any return of Tax
Payment pursuant to the provisions of the Agreement described in paragraph
(iv) below will be made in cash except that any return of Tax Payment made
within six months of a Tax Payment will be made in shares of Golden
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State Common Stock valued at the value of such stock for purposes of such
Tax Payment. Any payment by FGH or Hunter's Glen pursuant to the provisions
of the Agreement described in the last sentence of paragraph (i) above will
be made in cash.
(iv) If for any reason there is any adjustment to Tax Benefits for any
Taxable Period, Federal Net Tax Benefits will be recalculated and either a
further Tax Payment (in the case of an increase in Federal Net Tax Benefit)
or a return of Tax Payment (in the case of a decrease in Federal Net Tax
Benefit) will be made by Golden State or by FGH and Hunter's Glen, as the
case may be, to the other party, in accordance with the provisions of the
Agreement described in paragraph (iii) above, within five days of the
filing of a federal income tax return, claim for refund or final assessment
or other event finally fixing such adjustment.
(v) At any time following the Closing, if Golden State incurs any federal
or state tax liability arising out of any adjustment or adjustments (each,
a "Tax Attribute Adjustment Event") to certain tax attributes of Glendale
Federal and its subsidiaries resulting from certain transactions effected
in 1993 pursuant to the Reorganization Agreement, then Golden State will
issue to FGH and Hunter's Glen an aggregate amount of shares of Golden
State Common Stock equal to the quotient obtained by dividing (A) the
product of (x) one minus the Pro Forma Factor times (y) the increase in
federal and state tax liability plus interest and penalties arising thereon
on account of any Tax Attribute Adjustment Event (such increase, the "Tax
Attribute Adjustment Amount"), by (B) the Average Stock Price for 15
randomly selected days during the 30 trading-day period immediately
preceding the date of issuance of such shares (such quotient, the "Tax
Attribute Adjustment Number"). If Golden State suffers any increase in
federal or state tax liability arising out of a Tax Attribute Adjustment
Event which occurs after the date of the Agreement and prior to the
Effective Date, then Golden State will issue to FGH and Hunter's Glen on
the Effective Date, in addition to the shares otherwise issuable on the
Closing Date, a number of shares of Golden State Common Stock equal to the
Tax Attribute Adjustment Number with respect to such Tax Attribute
Adjustment Event. In all cases under the provisions of the Agreement
described in this paragraph (v), the number of shares to be issued to FGH
will be 80% of the Tax Attribute Adjustment Number, and the number of such
shares to be issued to Hunter's Glen will be 20% of the Tax Attribute
Adjustment Number.
Netting of Obligations; Certain Limitations on Payments. The provisions
with respect to the issuance of Contingent Shares contained in the Agreement
and described above are further subject to the following provisions:
(i) Whenever FGH and Hunter's Glen are required to pay an amount to
Golden State pursuant to the provisions of the Agreement relating to the
issuance of Contingent Shares, such amount (expressed as the number of
shares of Golden State Common Stock required assuming FGH and Hunter's Glen
had elected to tender payment in such form, regardless of whether FGH and
Hunter's Glen had the right to make such an election) will be limited to
the number of shares of Golden State Common Stock previously issued to FGH
and Hunter's Glen under the Contingent Shares provisions of the Agreement
(the "Notional Share Amount"). The Notional Share Amount will be adjusted
upwards from time to time to reflect the issuance of additional shares to
FGH and Hunter's Glen and downwards, but not below zero, to reflect any
amount paid or payable by FGH and Hunter's Glen (expressed as the number of
shares of Golden State Common Stock required assuming FGH and Hunter's Glen
had elected to tender payment in such form, regardless of whether Hunter's
Glen and FGH had the right to make such an election). If, but for the
immediately preceding sentence, any payment to Golden State by FGH and
Hunter's Glen would result in a Notional Share Amount that is less than
zero, such negative number (expressed as a positive number and converted to
a dollar amount based on the Average Stock Price for 15 randomly selected
days during the 30 trading-day period ending on the date such payment is
due) will be added to the balance of a notional account (the "Shortfall
Account"). The balance of the Shortfall Account will be $0.00 on the
Effective Date, and any positive balance in the Shortfall Account will bear
interest, compounded semiannually, at the rate contemplated in the
definition of "Interest Factor" from the date such balance is established
until there is an offsetting debit against such balance as set forth in the
following paragraph.
(ii) At any time that Golden State would otherwise be obligated to issue
shares of Golden State Common Stock to FGH and Hunter's Glen pursuant to
the Contingent Shares provisions of the Agreement, the Cal Fed Litigation
Distribution Amount, the Other Litigation Payment or the Tax
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Payment, as the case may be, will be offset by the balance of the Shortfall
Account as of such time for purposes of determining the number of shares of
Golden State Common Stock to be issued. If, as a result of such offset, the
number of shares of Golden State Common Stock to be issued to FGH and
Hunter's Glen would be zero or less, no such shares will be issued; in all
other cases the number of such shares to be issued will be calculated
pursuant to the applicable Contingent Shares provision set forth above,
after application of such offset. In either case, the balance of the
Shortfall Account will be reduced, but not below $0.00, by the amount of
such offset.
(iii) All computations of the Notional Share Amount and the balance of
the Shortfall Account from time to time will be performed by the parties to
the Agreement.
(iv) For purposes of calculating all amounts under the Contingent Shares
provision of the Agreement, (a) any payments required to be made to FGH and
Hunter's Glen pursuant the Contingent Shares provisions, and the amount of
the Glendale Litigation Tax Benefits and the Cal Fed Litigation Tax
Benefits, will be calculated net of all third party out-of-pocket expenses
incurred by Golden State or Parent Holdings or any of their respective
subsidiaries in connection with the event or recovery giving rise to such
payment or its determination (including, without limitation, all attorneys'
fees incurred in any proceedings or discussions with any tax authority, but
excluding any allocation of general management overhead or similar internal
expenses) and (b) any Tax Attribute Amount calculated pursuant to the
Contingent Shares provisions will include (and will be increased by) the
aggregate amount of all third party out-of-pocket expenses incurred by
Golden State or Parent Holdings or any of their respective subsidiaries, as
the case may be, in connection with the determination of such amounts
(including, without limitation, all attorneys' fees incurred in any
proceedings or discussions with any tax authority, but excluding any
allocation of general management overhead or similar internal expenses).
All third party out-of-pocket expenses referred to in this paragraph will
be computed on a tax-effected basis (taking into account any tax benefits
actually realized as a result of the payment thereof).
(v) The aggregate amount of the value of the shares of Golden State
Common Stock (based on the Average Stock Price calculated for the purpose
of issuing such shares in accordance with the applicable Contingent Shares
provisions) issued to FGH and Hunter's Glen pursuant to the Contingent
Shares provisions (net of the value of any payments, in cash or stock, made
by FGH and Hunter's Glen to Golden State pursuant to the Contingent Shares
provisions) will in no event exceed the aggregate value of the shares of
Golden State Common Stock issued to FGH and Hunter's Glen pursuant to the
provisions of the Agreement described under the caption "--Conversion of
Shares of the Effective Date" (valued at the Average Daily Price).
(vi) In the event that there is a business combination or similar
transaction involving Golden State as a result of which Golden State Common
Stock is no longer publicly traded, all payments due any party pursuant to
the Contingent Shares provisions after the date of such transaction (the
"Determination Date") will be payable in cash and not in shares of Golden
State Common Stock; provided, however, that, solely for the purposes of
determining the Notional Share Amount and the Shortfall Account from time
to time, such subsequent payments will be deemed to be made in shares of
Golden State Common Stock, as though there continued to be a public market
in such shares, and the number of shares of Golden State Common Stock
represented by any such payment will be determined using a valuation per
share equal to the Notional Market Value. The "Notional Market Value" as of
any date will equal the Average Stock Price of Golden State Common Stock
for 15 randomly selected days during the 30 trading-day period ending on
the Determination Date, grown during the period from the Determination Date
to such date at the rate of interest (compounded semiannually) contemplated
by the definition of "Interest Factor."
EFFECT ON EXISTING GOLDEN STATE STOCKHOLDERS
Shares of Golden State capital stock (including Golden State Common Stock)
issued and outstanding immediately prior to the Effective Time will remain
issued and outstanding and will not be affected by the Mergers, and holders of
such stock will not be required to exchange the certificates representing such
stock or take any other action by reason of the consummation of the Mergers.
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CONDITIONS TO THE MERGERS
The respective obligations of Golden State, Parent Holdings, FNH and
Golden State Financial to effect the Mergers are subject to the satisfaction at
or prior to the Effective Time of the following conditions: (i) approval and
adoption of the Agreement and the Plan of the Merger by the requisite vote of
the holders of the outstanding Golden State Common Stock; (ii) receipt of the
Requisite Regulatory Approvals and the expiration of all statutory waiting
periods in respect thereof (See "--Regulatory Approvals Required for the
Mergers"); (iii) no order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Mergers or any of the other
transactions contemplated by the Agreement or the Subsidiary Merger Agreement
shall be in effect; and (iv) amendment of the Golden State Certificate of
Incorporation to increase the total number of shares of Golden State Common
Stock authorized for issuance thereunder to 250,000,000 (which amendment was
approved by the Golden State Stockholders at a special stockholders meeting
held on April 23, 1998).
The obligation of Parent Holdings and FNH to effect the Mergers is also
subject to the satisfaction, or waiver by Parent Holdings and FNH, at or prior
to the Effective Time of the following conditions: (i) the representations and
warranties of Golden State set forth in the Agreement must be true and correct
as of the date of the Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date; provided, however, that for purposes of
determining the satisfaction of this condition, such representations and
warranties will be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct, individually
or in the aggregate, has had or would have a Material Adverse Effect on Golden
State, except that certain representations and warranties of Golden State
(relating to Golden State's capitalization and the inapplicability to the
Mergers of certain antitakeover provisions of Delaware Laws and the Golden
State Certificate) must be true and correct in all material respects as of the
date of the Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made
on and as of the Closing Date; (ii) Golden State and Golden State Financial
shall have performed in all material respects all obligations required to be
performed by them under the Agreement at or prior to the Closing Date; (iii) no
proceeding initiated by any governmental entity seeking an Injunction shall be
pending; (iv) Parent Holdings shall have received an opinion of counsel, dated
the Effective Date (in form and substance reasonably satisfactory to Parent
Holdings), substantially to the effect that on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Mergers will be
treated as reorganizations within the meaning of Section 368(a) of the Code and
that, accordingly, for federal income tax purposes (A) no gain or loss will be
recognized by Golden State, Golden State Financial, Parent Holdings or FNH as a
result of the Holding Company Mergers; (B) no gain or loss will be recognized
by Cal Fed or Glendale Federal as a result of the Subsidiary Bank Merger
(except to the extent Cal Fed or Glendale Federal may be required to recognize
income due to the recapture of bad debt reserves as a result of the Subsidiary
Bank Merger); and (C) no gain or loss will be recognized by the stockholders of
Parent Holdings or FNH solely as a result of the receipt of Golden State Common
Stock at the Effective time in exchange for Parent Holdings Common Stock or FNH
Class B Common Stock pursuant to the Holding Company Mergers (see "--Certain
Federal Income Tax Consequences of the Mergers"); (v) Golden State shall have
received the director resignations, and the Golden State Board shall have been
expanded and the vacancies resulting from such resignations and expansion shall
have been filled, in each case as contemplated by the Agreement (see
"MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE MERGERS"); (vi) Golden
State shall have executed the Registration Rights Agreement (see "--Registration
Rights Agreement"); (vii) Golden State shall have issued and distributed to its
stockholders the Litigation Tracking Warrants (Trademark) as contemplated by
the Agreement, which distribution occurred on May 29, 1998 (see "INFORMATION
ABOUT GOLDEN STATE--General--Distribution of Litigation Trading Warrants
(Trademark) "); and (viii) the shares of Golden State Common Stock to be issued
upon consummation of the Mergers shall have been authorized for listing on the
NYSE, subject to official notice of issuance.
The obligations of Golden State and Golden State Financial to effect the
Mergers are also subject to the satisfaction, or waiver by Golden State and
Golden State Financial, at or prior to the Effective Time of the following
conditions: (i) the representations and warranties of Parent Holdings, Hunter's
Glen and
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FGH set forth in the Agreement must be true and correct as of the date of the
Agreement and (except to the extent such representations and warranties speak
as of an earlier date) as of the Closing Date as though made on and as of the
Closing Date; provided, however, that for purposes of determining the
satisfaction of this condition, such representations and warranties will be
deemed to be true and correct unless the failure or failures of such
representations and warranties to be so true and correct, individually or in
the aggregate, has had or would have a Material Adverse Effect on Parent
Holdings, except certain representations and warranties of Parent Holdings,
Hunter's Glen and FGH (relating to the capitalization of Parent Holdings and
FNH and the ownership by FGH and Hunter's Glen of capital stock of Parent
Holdings, FNH and Golden State) must be true and correct in all material
respects as of the date of the Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; (ii) Parent Holdings and FNH
shall have performed in all material respects all obligations required to be
performed by them under the Agreement at or prior to the Closing Date; (iii) no
proceeding initiated by any governmental entity seeking an Injunction shall be
pending; (iv) Golden State shall have received an opinion of counsel, in form
and substance reasonably satisfactory to Golden State, dated the date of the
Effective Time, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Mergers will be
treated as reorganizations within the meaning of Section 368(a) of the Code and
that accordingly for federal income tax purposes (A) no gain or loss will be
recognized by Golden State, Golden State Financial, Parent Holdings or FNH as a
result of the Holding Company Mergers; (B) no gain or loss will be recognized
by Cal Fed or Glendale Federal as a result of the Subsidiary Bank Merger
(except to the extent Cal Fed or Glendale Federal may be required to recognize
income due to the recapture of bad debt reserves as a result of the Subsidiary
Bank Merger); and (C) no gain or loss will be recognized by the stockholders of
Parent Holdings or FNH solely as a result of the receipt of Golden State Common
Stock at the Effective Time in exchange for Parent Holdings Common Stock or FNH
Class B Common Stock pursuant to the Holding Company Mergers (see "--Certain
Federal Income Tax Consequences of the Mergers" below); and (v) Golden State
shall have issued and distributed to its stockholders the Litigation Tracking
Warrants (Trademark) as contemplated by the Agreement, which distribution
occurred on May 29, 1998.
The Agreement defines a "Material Adverse Effect," when applied to a party
to the Agreement, as a material adverse effect on (i) the business, results of
operations or financial condition of such party and its subsidiaries taken as
whole, other than any such effect attributable to or resulting from (w) a
change in banking or similar laws, rules, regulations of general applicability
or interpretations thereof by courts or governmental authorities, (x) any
change in GAAP or regulatory accounting principles applicable to banks, thrifts
or their holding companies generally, (y) any action or omission of Parent
Holdings or Golden State or any subsidiary of either of them taken with the
prior written consent of the other party hereto, or (z) any expenses incurred
by such party in connection with the Agreement or the transactions contemplated
thereby, or (ii) the ability of such party and its subsidiaries to consummate
the transactions contemplated by the Agreement.
No assurance can be provided as to when, or whether, the regulatory
consents and approvals necessary to consummate the Mergers will be obtained or
whether all of the other conditions precedent to the Mergers will be satisfied
or waived by the party permitted to do so. See "--Regulatory Approvals Required
for the Mergers" below. If the Mergers are not effected on or before December
31, 1998, the Agreement may be terminated by a vote of a majority of the Board
of Directors of either Parent Holdings or Golden State unless the failure to
effect the Mergers by such date is due to the breach by the party seeking to
terminate the Agreement of any covenant or agreement contained in the
Agreement.
REGULATORY APPROVALS REQUIRED FOR THE MERGERS
Consummation of the Mergers is subject to the receipt of all Requisite
Regulatory Approvals. See "THE MERGERS--Conditions to the Mergers."
The Holding Company Mergers are subject to the prior approval of the OTS,
under the Home Owners' Loan Act, as amended (the "HOLA"), and related OTS
regulations. In reviewing an application for such approvals under the HOLA, the
OTS is required to consider, among other factors, the financial and managerial
resources and future prospects of the parties to the transaction, the effect of
the acquisition on the insured institutions, the insurance risk to the Savings
Association Insurance Fund and the convenience and needs of the communities to
be served. In assessing financial and managerial factors,
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the OTS will consider the degree to which the parties to the transaction have
taken appropriate steps to assure that their electronic data processing systems
and those of their service providers can safely accommodate the upcoming change
to the new millennium and plans for ensuring Year 2000 readiness of the
resulting organization. In addition, the OTS may not approve a transaction that
will result in a monopoly or be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the savings and loan business in any
part of the United States, or if its effect in any section of the country may
be substantially to lessen competition or to tend to create a monopoly, or if
it would in any other manner be a restraint of trade, unless the OTS finds that
the anticompetitive effects of the transaction are clearly outweighed in the
public interest by the probable effect of the transaction on meeting the
convenience and needs of the communities to be served. As part of the
application process, the OTS is required to seek comments from the United
States Attorney General on the competitive factors involved.
In addition, the Subsidiary Bank Merger is subject to the prior approval
of the OTS under the Bank Merger Act and related OTS regulations. In reviewing
applications under the Bank Merger Act, the OTS must consider factors
substantially similar to the factors described in the prior paragraph with
respect to applications under the HOLA, including the financial and managerial
resources and future prospects of the existing and proposed institutions, and
the convenience and needs of the communities to be served. Also, the OTS
generally may not approve a transaction that will result in anticompetitive
effects. The OTS also considers the fairness and disclosure of the combination
plan, the proposed treatment of goodwill and the tax effect of the proposed
merger in evaluating the Subsidiary Bank Merger.
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), the
OTS must take into account the record of performance of each of Glendale
Federal and Cal Fed in meeting the credit needs of the entire communities they
serve, including low and moderate income neighborhoods. The application process
includes publication and opportunity for comment by the public. The OTS may
receive, and must consider, properly filed comments and protests from community
groups and others regarding (among other issues) each institution's CRA
performance.
Any transaction approved by the OTS under the Bank Merger Act and the
related OTS regulations may not be consummated until 30 days after such
approval, during which time the Department of Justice may challenge the
transaction on antitrust grounds and seek the divestiture of certain assets and
liabilities. With the approval of the OTS and the Department of Justice, this
waiting period may be reduced to no less than 15 days.
Golden State is not aware of any regulatory approvals that would be
required for consummation of the transactions contemplated by the Agreement
other than as described above. Should any other approvals be required, it is
presently contemplated that such approvals would be sought. There can be no
assurance that any other approvals, if required, will be obtained.
The Mergers will not proceed in the absence of the Requisite Regulatory
Approvals. Parent Holdings has informed Golden State that, on February 27,
1998, Parent Holdings filed an application with the OTS seeking the
aforementioned approvals under the HOLA, the Bank Merger Act and related OTS
regulations. There can be no assurance that the regulatory approvals will be
obtained, and if obtained, there can be no assurance as to the date of any such
approval. There can likewise be no assurance that the Department of Justice or
any state attorney general will not challenge the proposed transactions or, if
such a challenge is made, as to the result thereof.
For OTS approval requirements in connection with the exercise of the
Option, see "--Stock Option Agreement."
IMPACT ON TANGIBLE BOOK VALUE
Due principally to the use of purchase accounting for the Mergers and
prior acquisitions under GAAP, Parent Holdings' consolidated balance sheet
contains, and the consolidated balance sheet of the combined company on a
pro-forma basis will contain, significantly more goodwill compared to that of
Golden State on a standalone basis. Additionally, the capital structure of
Parent Holdings is more leveraged than that of Golden State and it is expected
that the tangible book value per common share of the combined company will
decrease as a result of the premium paid in the Refinancing to holders of the
outstanding indebtedness and preferred stock of Parent Holdings and its
subsidiaries and the write off of
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the unamortized issuance expense relating to such outstanding indebtedness. See
"INFORMATION ABOUT PARENT HOLDINGS--Description of Business of Parent
Holdings--Proposed Refinancing" and Notes D and I to the Notes to Unaudited Pro
Forma Condensed Combined Financial Statements. Based on financial data as of
March 31, 1998, giving effect to the Mergers, the CENFED Merger, the RedFed
Merger and the Refinancing on a pro forma basis, it is expected that the
tangible book value per common share of the combined company would be $2.80
compared to $17.67 for Golden State on a standalone basis (before giving effect
to the CENFED Merger and the RedFed Merger). Golden State expects that after
giving effect to the Mergers, the CENFED Merger, the RedFed Merger and the
Refinancing, the federal savings bank subsidiary of the combined company will
remain well-capitalized under applicable regulatory guidelines. In considering
whether to enter into the Agreement and to recommend adoption of the Agreement
to Golden State Stockholders, the Golden State Board, and in rendering the CSFB
Opinion, CSFB, considered the impact of the Mergers on the pro forma financial
condition and results of operations of the combined company, including the
impact on tangible book value per share. See "--Opinion of Golden State's
Financial Advisor--Selected Companies Analysis--Pro Forma." The Golden State
Board also considered the expected impact of the Refinancing on the pro forma
financial condition and results of operations of the combined company in
recommending that Golden State Stockholders adopt the Agreement.
For more information concerning the pro forma impact of the Mergers and of
the Refinancing on the financial condition and the results of operations of the
combined company, see "SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS," "UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA" and "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Certain members of the Golden State management and of the Golden State
Board have certain arrangements with respect to the management and board of
directors of Golden State following the Mergers, certain retention bonus
opportunities and certain benefits under existing employment agreements and
benefit plans. The Agreement also contains provisions relating to the
indemnification of Golden State directors and officers and directors' and
officers' liability insurance. Messrs. Trafton and Fink also have certain
arrangements with Golden State, Glendale Federal and Cal Fed pursuant to the
Litigation Management Agreement. The Golden State Board was aware of these
interests and considered them, among other matters, in approving the Agreement
and the transactions contemplated thereby. In addition, certain members of
senior management of Cal Fed will be entitled to receive payments pursuant to
FNH's Management Incentive Plan upon the consummation of the Mergers.
Existing Employment Agreements. Certain executive officers of Glendale
Federal (the "Covered Executive Officers"), including Mr. Trafton and Mr. Fink,
are parties to change of control employment agreements with Glendale Federal
(as amended, the "Employment Agreements"). The Employment Agreements provide
for employment of each of the Covered Executive Officers for a three-year (in
the case of Mr. Trafton) or two-and-one-half-year (in the case of the remaining
Covered Executive Officers) period (the "Employment Period") commencing on a
"change of control" (as defined in the Employment Agreements) of Golden State
or Glendale Federal. Consummation of the Mergers will be a "change of control"
of Golden State for purposes of the Employment Agreements. Each Employment
Agreement provides for certain compensation, benefits and perquisites during
the Employment Period, including but not limited to an annual base salary at
least equal to the highest annual base salary paid or payable, including any
base salary that will have been earned but deferred, to the Covered Executive
Officer by Glendale Federal and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Employment
Period commences (such salary subject to review, as provided in the Employment
Agreements, and possible increase, but not to reduction after any such
increase) and an annual bonus, for each fiscal year during the Employment
Period, paid in cash and at least equal to such Covered Executive Officer's
highest bonus under Glendale Federal's executive incentive plans, or any
comparable bonus under any predecessor or successor plan, for the last three
full fiscal years prior to the commencement of the Employment Period
(annualized in the event that the Covered Executive Officer was not employed by
Glendale Federal for the whole of such fiscal year) (the "Recent Annual Target
Bonus"). Each Employment Agreement further provides for certain payments and
benefits if the Covered Executive Officer to which such Employment Agreement
applies is
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terminated by Glendale Federal other than for "cause," as defined therein, or
if such Covered Executive Officer terminates his or her employment for "good
reason," as defined therein during the Employment Period. Pursuant to the
Agreement, the parties thereto have agreed that such payments and benefits will
be paid to Messrs. Trafton and Fink under their respective Employment
Agreements at the Effective Time as if they had each been terminated without
cause thereunder at such time. If Glendale Federal terminates a Covered
Executive Officer's employment other than for cause or disability (as defined
in the Employment Agreements) or if a Covered Executive Officer terminates
employment for good reason, (a) Glendale Federal will pay such Covered
Executive Officer in a lump sum in cash within 30 days after the date of such
termination an amount equal to the aggregate of (1) the sum of such Covered
Executive Officer's base salary through the date of such termination to the
extent not previously paid, such Covered Executive Officer's Recent Annual
Target Bonus, pro rated to reflect the portion of the year that has passed at
the date of such termination and any compensation previously deferred by such
Covered Executive Officer (with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not previously paid, (2)
an amount equal the product of 3 (in the case of Mr. Trafton) or 2.5 (in the
case of the other Covered Executive Officers) and the sum of such Covered
Executive's annual base salary and the Recent Annual Target Bonus and (3) an
amount equal to the excess of (A) the actuarial equivalent of the benefit under
Glendale Federal's qualified defined benefit retirement plan (the "Retirement
Plan") (using actuarial assumptions no less favorable to such Covered Executive
Officer than those in effect under the Retirement Plan immediately prior to the
commencement of the Employment Period), and any excess or supplemental
retirement plan in which such Covered Executive Officer participates (together,
the "SERP") which such Covered Executive Officer would receive if his or her
employment continued for three years after the date of such termination
assuming for such purpose that all accrued benefits are fully vested, and,
assuming that such Covered Executive Officer's compensation in each of the
three years is as contemplated by the Employment Agreement, over (B) the
actuarial equivalent of such Covered Executive Officer's actual benefit (paid
or payable), if any, under the Retirement Plan and the SERP as of the date of
such termination; (b) for three years (in the case of Mr. Trafton) or 30 months
(in the case of the other Covered Executive Officers) after such termination,
or such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, Glendale Federal will continue to provide medical
and other welfare benefits to such Covered Executive Officer and/or his or her
family at least equal to those contemplated by the Employment Agreements or, if
more favorable to such Covered Executive Officer, as in effect generally at any
time thereafter with respect to other peer executives of Glendale Federal and
its affiliated companies and their families (subject to certain limitations in
the case of reemployment of such Covered Executive Officer), and for purposes
of determining eligibility (but not the time of commencement of benefits) of
such Covered Executive Officer for retiree welfare benefits such Covered
Executive Officer will be considered to have remained employed until 3 years
(in the case of Mr. Trafton) or 30 months (in the case of the other Covered
Executive Officers) after the date of such termination and to have retired on
the last day of such period; (c) to the extent not previously paid or provided,
Glendale Federal will timely pay or provide to such Covered Executive Officer
any other amounts or benefits required to be paid or provided or that such
Covered Executive Officer is eligible to receive under any plan, program,
policy or practice or contract or agreement of Glendale Federal and its
affiliated companies; and (d) all stock awards will immediately vest. See
"--Golden State Option Plan." Each Covered Executive Officer will be entitled
to receive an additional payment (a "Gross-up Payment") in an amount sufficient
for such Covered Executive Officer to be made whole with respect to the
payments due to such Covered Executive Officer from Golden State or its
affiliates (whether pursuant to the relevant Employment Agreement or otherwise)
(collectively, the "Payments") notwithstanding the imposition of any excise tax
under Section 4999 of the Code (or any interest or penalties in respect of the
imposition thereof), provided that if all Payments do not exceed 110% of the
greatest amount that could be paid to such Covered Executive Officer without
giving rise to any such excise tax, no Gross-up Payment will be made to such
Covered Executive Officer and the Payments will be reduced to the amount
necessary to prevent application of the excise tax.
Golden State Option Plan. Executive officers and non-employee directors of
Golden State hold options to purchase Golden State Common Stock issued pursuant
to the Amended and Restated Golden State Bancorp Inc. Stock Option and
Long-Term Performance Incentive Plan, as amended (the "Golden State Option
Plan"). The Golden State Option Plan provides that, upon a "change in control"
of Golden State (as defined in the award agreements evidencing grants
thereunder) and contingent upon the
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consummation thereof, participants in the Golden State Option Plan will have
the right to exercise the stock options granted to them thereunder,
notwithstanding any other restrictions that would otherwise apply. Consummation
of the Mergers will constitute a "change in control" for purposes of the Golden
State Option Plan and the award agreements evidencing grants thereunder. The
Agreement provides that each holder of an option (a "Golden State Option")
granted under the Golden State Option Plan, or under option plans of CENFED or
RedFed assumed by Golden State in the CENFED Merger or RedFed Merger, that is
outstanding and unexercised on the day immediately prior to the closing date of
the Mergers may elect to surrender such option in exchange for a lump sum cash
payment in an amount equal to the sum of (x) the Average Daily Price less the
per share exercise price of such option, multiplied by the number of shares of
Golden State Common Stock covered thereby and (y) at the election of the holder
of such option, either one Litigation Tracking Warrant (Trademark) in respect
of each share of Golden State Common Stock underlying such option, or an amount
in cash equal to the product of the number of shares of Golden State Common
Stock underlying such option and the Average Daily LTW Price. As of the date of
this Proxy Statement, Mr. Trafton, Mr. Fink, and the non-employee directors and
other executive officers of Golden State as a group, held Golden State Options
with respect to 1,500,000, 375,000, and 1,376,417 shares, respectively, of
Golden State Common Stock, of which options in respect of 666,667, 85,000 and
460,617 shares, respectively, will become exercisable in connection with the
consummation of the Mergers.
Indemnification; Insurance. The Agreement generally provides that, in the
event of any threatened or actual claim, action, suit, proceeding or
investigation in which any person who is, has been or becomes a director,
officer or employee of Golden State or its subsidiaries prior to the Effective
Time, is or is threatened to be made a party based in whole or in part on (i)
such person's status as a director, officer or employee of Golden State or (ii)
the Agreement or any of the transactions contemplated thereby, Golden State
will, after the Effective Time, indemnify each such person to the fullest
extent permitted by law against any liability or expense incurred in connection
with any such claim or proceeding, subject to certain conditions. Parent
Holdings will use its reasonable best efforts to cause the persons serving as
officers and directors of Golden State immediately prior to the Effective Time
to be covered for a period of six years from the Effective Time by the
directors' and officers' liability insurance policy maintained by Golden State
(except that effective as of the Effective Time the single aggregate coverage
limit shall be increased to $100 million, and provided that Parent Holdings may
substitute for such policy policies of directors' and officers' liability
insurance of at least the same coverage and amounts and containing terms and
conditions which are not less advantageous to such directors and officers of
Golden State than the terms and conditions of such policy) with respect to acts
or omissions occurring prior to the Effective Time which were committed by such
officers and directors in their capacity as such; provided that Parent Holdings
will not be required to pay premiums in excess of 300% of the amount currently
expended by Golden State to obtain such insurance, and if such insurance cannot
be obtained for such premium, Parent Holdings will obtain for such persons the
maximum coverage that may be obtained for such premiums.
Retention Bonus Pool. Parent Holdings has agreed that it will, or will
cause Cal Fed to, establish prior to the Effective Time a key employee
retention and severance pool consisting of $14 million in cash to be
distributed among employees of Glendale Federal by Mr. Trafton in consultation
with the executive management of Glendale Federal. As of the date of this Proxy
Statement, the amount of the retention and severance pool to be distributed to
executive management of Golden State had not yet been determined, but is
expected to be less than $3 million in the aggregate. The balance of the
retention and severance pool has been allocated to key non-executive management
employees of Glendale Federal.
Board of Directors of Golden State After the Mergers. The Agreement
provides that the Golden State Board immediately after the Effective Time will
be comprised of fifteen directors, five of whom (the "GSB Directors") will be
designated from among the incumbent members of the Golden State Board at the
Effective Time. The GSB Directors will serve on a committee of the Golden State
Board that will have the authority to, among other things, prosecute and
otherwise manage the Glendale Goodwill Litigation. See "MANAGEMENT AND
OPERATIONS OF GOLDEN STATE FOLLOWING THE MERGERS" and "THE MERGERS--Litigation
Management Agreement."
Litigation Management Agreement. In connection with the execution and
delivery of the Agreement, Golden State, Glendale Federal and Cal Fed entered
into the Litigation Management Agreement with Messrs. Trafton and Fink.
Pursuant to the Litigation Management Agreement, Golden State, as the
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surviving corporation in the Mergers, has agreed to employ and retain,
effective as of the Effective Time, Messrs. Trafton and Fink as litigation
managers (in such capacity, the "Litigation Managers") with respect to each of
the Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation. The
authority, powers and obligations of the Litigation Managers will, as of the
Effective Time, be as set forth in the Litigation Management Agreement and as
described herein under the caption "THE MERGERS--Litigation Management
Agreement." Pursuant to the Litigation Management Agreement, each Litigation
Manager will, among other things and subject to the terms thereof, prosecute,
appeal, negotiate, resolve, settle, compromise, arbitrate or otherwise pursue
the Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation, in whole
or in part, and will oversee for Golden State after the Effective Time all
matters related to the Litigation Tracking Warrants (Trademark) , the CALGZs
and the CALGLs. Moreover, each Litigation Manager has agreed that as of the
Effective Time and for three years thereafter and subject to certain limited
exceptions, he will not directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or otherwise
be connected as an officer, employee, partner, director or otherwise with, or
have any financial interest in, any business principally engaged in the savings
and loan or federally insured thrift business in California that is in material
competition with the business conducted by Golden State, and that he will not
directly or indirectly solicit for employment by other than Golden State any
person employed by Golden State at the Effective Time or any person known to be
employed at the time by Golden State. Each Litigation Manager will be an
Executive Vice President of Golden State and will be entitled, with certain
exceptions specified in the Litigation Management Agreement, to participate in
employee welfare benefit plans, policies and perquisites on a basis no less
beneficial that that made available to any other Executive Vice President of
Golden State after the Mergers (or its successors). For their services under
the Litigation Management Agreement, Messrs. Trafton and Fink are entitled to
(i) annual salaries of $600,000 and $400,000, respectively; (ii) an incentive
fee (the "Incentive Fee") to each Litigation Manager in an amount equal to
0.25% of the aggregate value of the pre-tax recovery, including post-judgment
interest, payable on receipt of a final nonappealable judgment or in the event
of a final settlement (a "Final Resolution") (provided that a Litigation
Manager will be divested of his right to receive an Incentive Fee in connection
with the Glendale Goodwill Litigation or the Cal Fed Goodwill Litigation if his
employment in respect of such litigation, as the case may be, is terminated
prior to the date of a Final Resolution (1) by the Litigation Manager other
than for good reason (as defined in the Litigation Management Agreement), death
or incapacity or (2) by Golden State for cause (as defined in the Litigation
Management Agreement)); (iii) an annual pension benefit (the "Pension Benefit")
of $1 million and $325,000, respectively, and (iv) during their employment as
Litigation Managers and thereafter, upon termination of employment under the
Litigation Management Agreement for any reason and for the remainder of the
Litigation Manager's life and that of his spouse, medical benefits pursuant to
an indemnity plan reasonably acceptable to the Litigation Manager (the "Medical
Benefits"), each Litigation Manager being fully vested in the Medical Benefits
at the Effective Time. Upon a Litigation Manager's death, and provided that the
Pension Benefit has not previously been paid as a lump sum, the Litigation
Manager's spouse, if she survives him, will be entitled to an annual pension
benefit, payable monthly, of 50% of the Pension Benefit. Mr. Trafton will be
fully vested in his Pension Benefit at the Effective Time, and Mr. Fink's
Pension Benefit will vest in two equal installments on each of the first and
second anniversaries of the Effective Time and will be fully vested on the
earlier to occur of the second anniversary of the Effective Time or upon Mr.
Fink's termination of employment as a Litigation Manager by Mr. Fink for good
reason, by Golden State without cause or upon Mr. Fink's disability (as defined
in Mr. Fink's change of control employment agreement, dated as of December 31,
1997, with Glendale Federal). A Litigation Manager may be removed from his
position (with respect to either or both of the Glendale Goodwill Litigation
and the Cal Fed Goodwill Litigation) only for cause and only upon the unanimous
vote of the Glendale Committee (as defined herein) in respect of the Glendale
Goodwill Litigation or the Cal Fed Committee (as defined herein) in respect of
the Cal Fed Goodwill Litigation, and a Litigation Manager will only be removed
as an Executive Vice President of Golden State upon such removal as to both the
Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation. On the
removal, resignation, retirement, death or incapacity of a Litigation Manager
with respect to the Glendale Goodwill Litigation, the Cal Fed Goodwill
Litigation or both, the Litigation Manager will not be replaced and the
remaining Litigation Manager will continue to serve in that capacity until his
service is terminated pursuant to the Litigation Management Agreement.
Resignation or removal as to either the Glendale Goodwill Litigation or the Cal
Fed Goodwill Litigation will not affect a Litigation Manager's rights, powers,
privileges, immunities
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or obligations under the Litigation Management Agreement with respect to the
litigation as to which that Litigation Manager has not resigned or been
removed. If a Litigation Manager resigns, is removed or ceases to serve as such
for any reason, the remaining Litigation Manager will be entitled to the former
Litigation Manger's rights under the Litigation Management Agreement, including
compensation and benefits, other than such former Litigation Manager's Pension
Benefits and Medical Benefits. In addition, the Litigation Management Agreement
provides that, with certain exceptions, the Litigation Managers will not be
liable, and will be indemnified (which indemnification will include the right
to payments for expenses in advance of a resolution of a proceeding) and held
harmless by Golden State with respect to claims, demands, obligations,
liabilities and expenses relating to, their conduct as Litigation Managers.
FNH Management Incentive Plan. Effective October 1, 1995, FNH adopted the
Management Incentive Plan (the "Incentive Plan") with respect to certain
executive officers of Cal Fed (the "Participants"). Awards under the Management
Incentive Plan are made in the form of performance units. Each performance unit
entitles the Participants to receive cash and/or stock options ("Bonuses")
based on the Participant's vested interest in a bonus pool. Generally, the
Management Incentive Plan provides for the payment of Bonuses to the
Participants only upon the occurrence of certain events. Bonuses vest at 20%
per year beginning October 1, 1995. The Mergers constitute a change in control
pursuant to the terms of the Management Incentive Plan and, as such, payments
totaling $40 million in the aggregate will be paid to the Participants at the
Closing.
Cal Fed Deferred Executive Compensation Plan. On May 19, 1997, Cal Fed
adopted a Deferred Executive Compensation Plan ("Deferred Compensation Plan")
with respect to certain officers of Cal Fed (the "Officers"). The Deferred
Compensation Plan provides for an award to be made in respect of each fiscal
year, beginning with fiscal 1997, to each eligible Officer in an amount equal
to a percentage of such Officer's base annual salary. The percentage upon which
the award for any fiscal year will be calculated is determined based upon the
net income of Cal Fed with respect to such fiscal year as compared to the
target net income established by the board of directors of Cal Fed with respect
to such fiscal year. Each Officer's award with respect to any fiscal year is
payable in five equal annual installments on each of the first five
anniversaries of the date of grant of such award, with each installment of the
award bearing interest from the date of grant at the rate of 6% per annum. The
first award under the Deferred Compensation Plan was made in respect of fiscal
1997. As a result of the Mergers, the Deferred Compensation Plan will be
terminated upon consummation of the Mergers, and terminating payments totaling
approximately $12 million will be paid to the Officers effective December 31,
1998.
CONDUCT OF BUSINESS PENDING THE MERGERS
During the period from the date of the Agreement and continuing until the
Effective Time, except as expressly contemplated or permitted by the Agreement,
the Subsidiary Merger Agreement, the Litigation Management Agreement or the
Stock Option Agreement or with the prior written consent of the other parties
to the Agreement, each of Golden State and Parent Holdings will, and will cause
its subsidiaries to, carry on their respective businesses in the ordinary
course consistent with past practice. Without limiting the generality of the
foregoing, and except as disclosed by Parent Holdings or Golden State or as
otherwise contemplated by the Agreement, the Subsidiary Merger Agreement, the
Litigation Management Agreement or the Stock Option Agreement or consented to
in writing by the other parties, neither Golden State nor Parent Holdings will,
and neither of them will permit any of its subsidiaries to:
(i) declare or pay any dividends on, or make other distributions in
respect of, any of its capital stock, other than (a) in the case of Golden
State, dividends payable on the outstanding shares of Golden State
Preferred Stock, (b) in the case of Parent Holdings and its Subsidiaries,
dividends payable on outstanding shares of preferred stock, (c) in the case
of any subsidiary of Golden State or Parent Holdings, as applicable, the
payment of dividends to the extent necessary to enable its direct and
indirect parent companies to pay all preferred stock dividends and all
principal and interest payments on its outstanding debt obligations, to
enable FNH to redeem its outstanding shares of FNH Preferred Stock (as
defined herein) as permitted in the Agreement, to fund the cash settlement
of Golden State Options, or to enable California Federal Preferred Capital
Corporation to maintain its status as a real estate investment trust and
(d) any payments made to holders of the CALGZs, CALGLs or Litigation
Tracking Warrants (Trademark) in accordance with the terms of such
securities;
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(ii) (a) split, combine or reclassify any shares of its capital stock or,
other than the Litigation Tracking Warrants (Trademark) , issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, except upon the
exercise or fulfillment of rights or options issued or existing pursuant to
employee benefit plans, programs or arrangements, all to the extent
outstanding and in existence on the date of the Agreement and in accordance
with their present terms, or (b) repurchase, redeem or otherwise acquire
(except for the acquisition of shares in a fiduciary capacity or in respect
of a debt previously contracted) any shares of its capital stock or the
capital stock of any of its subsidiaries, or any securities convertible
into or exercisable for any shares of its capital stock or the capital
stock of any of its Subsidiaries, or any CALGZs, CALGLs or Litigation
Tracking Warrants (Trademark) , except (A) in the case of Golden State, for
repurchases by Golden State of Golden State Common Stock made prior to the
commencement of the 30 trading-day period contemplated by the definition of
"Average Daily Price" and in an amount not to exceed the aggregate number
of shares of Golden State Common Stock issued pursuant to the RedFed Merger
Agreement, (B) in addition to the repurchases contemplated by the preceding
clause (A), Golden State may use all proceeds obtained through the exercise
of outstanding Golden State Options, Five-Year Warrants and Seven-Year
Warrants to repurchase shares of Golden State Common Stock, (C) Golden
State may redeem outstanding shares of Golden State Preferred Stock in
accordance with the terms of the Certificate of Designations relating
thereto, and (D) FNH may redeem outstanding shares of FNH Series A
Preferred Stock and FNH Series B Preferred Stock;
(iii) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any
of the foregoing, other than the issuance of the Litigation Tracking
Warrants (Trademark) and the issuance of Golden State Common Stock
pursuant to (a) stock options or similar rights to acquire Golden State
Common Stock granted pursuant to the Golden State Option Plans and
outstanding prior to the date of the Agreement, in each case in accordance
with their present terms, (b) the CENFED Merger Agreement and the RedFed
Merger Agreement, (c) the exercise of Five-Year Warrants or Seven-Year
Warrants outstanding prior to the date of the Agreement and in each case in
accordance with their present terms, (d) the conversion of shares of Golden
State Preferred Stock in accordance with their terms, and (e) the exercise
of Litigation Tracking Warrants (Trademark) in accordance with their
terms;
(iv) amend its Certificate of Incorporation, By-laws or other similar
governing documents;
(v) make any capital expenditures other than those which (a) are made in
the ordinary course of business or are necessary to maintain existing
assets in good repair and (b) in any event are in an amount of no more than
$10 million in the aggregate (excluding, in the case of Parent Holdings or
any subsidiary, capital expenditures made in connection with the
consummation of the transactions contemplated hereby);
(vi) enter into any new line of business;
(vii) other than as contemplated by the CENFED Merger Agreement and the
RedFed Merger Agreement, acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof or otherwise acquire any assets, which would be
material, individually or in the aggregate, to such party and its
subsidiaries, other than in connection with foreclosures, settlements in
lieu of foreclosure or troubled loan or debt restructurings in the ordinary
course of business consistent with past practice;
(viii) take any action that is intended to result in any of its
representations and warranties set forth in the Agreement being or becoming
untrue in any material respect, or that is intended or may reasonably be
expected to result in any of the conditions to the Mergers set forth in the
Agreement not being satisfied;
(ix) change its methods of accounting in effect at September 30, 1997,
except as required by changes in GAAP or regulatory accounting principles
as concurred in by such party's independent auditors;
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(x) (a) except as required by applicable law or as required to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any
employee benefit plan or any agreement, arrangement, plan or policy between
such party and one or more of its current or former directors, officers or
employees or (b) except in the ordinary course of business or except as
required by applicable law, increase in any manner the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by any plan or agreement as in effect as of February 4, 1998
(including, without limitation, the granting of stock options, stock
appreciation rights, restricted stock, restricted stock units or
performance units or shares);
(xi) other than activities in the ordinary course of business, sell,
lease, encumber, assign or otherwise dispose of, or agree to sell, lease,
encumber, assign or otherwise dispose of, any of its material assets,
properties or other rights or agreements;
(xii) other than (a) as a result of the CENFED Merger or the RedFed
Merger or as required to fund the cash settlement of Golden State Options
contemplated by the Agreement or (b) in the ordinary course of business,
incur any indebtedness for borrowed money or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity;
(xiii) other than in connection with the CENFED Merger and the RedFed
Merger, file any application to relocate or terminate the operations of any
banking office;
(xiv) create, renew, amend or terminate or give notice of a proposed
renewal, amendment or termination of, any material contract, agreement or
lease for goods, services or office space to which such party or any of its
subsidiaries is a party or by which such party or any of its subsidiaries
or their respective properties is bound, other than the renewal in the
ordinary course of business of any lease or contract the term of which
expires prior to the Closing Date;
(xv) other than in prior consultation with the other parties to the
Agreement, restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or
the manner in which the portfolio is classified or reported;
(xvi) take or cause to be taken any action which would disqualify the
Mergers as tax free reorganizations under Section 368(a) of the Code;
(xvii) reduce, or authorize the reduction of, the exercise, conversion or
"strike" price of any of any warrants, options or other rights to acquire
any of its securities; or
(xviii) agree to do any of the foregoing.
In addition, in the Agreement, each of Golden State and Parent Holdings
has agreed that, prior to the Effective Time, it will not, and will not permit
its subsidiaries to, authorize or permit any of its officers, directors,
employees or agents to directly or indirectly solicit, initiate or encourage
any inquiries relating to, or the making of any proposal which constitutes, a
Takeover Proposal (as defined below), or recommend or endorse any Takeover
Proposal, or participate in any discussions or negotiations, or provide third
parties with any nonpublic information, relating to any such inquiry or
proposal or otherwise facilitate any effort or attempt to make or implement a
Takeover Proposal; provided, however, that a party may communicate information
about any such Takeover Proposal to its stockholders if, in the judgment of
such party's Board of Directors, based upon the advice of outside counsel, such
communication is required under applicable law. Golden State and Parent
Holdings have agreed to: immediately cease and cause to be terminated any
existing activities, discussions or negotiations previously conducted with any
parties other than the parties to the Agreement and their representatives with
respect to any of the foregoing; take all actions necessary or advisable to
inform the appropriate individuals or entities referred to in the first
sentence hereof of the obligations undertaken; notify the other party
immediately if any such inquiries or Takeover Proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, such party; and, to promptly inform
the other in writing of all of the relevant details with respect to the
foregoing. "Takeover Proposal" means any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving Golden State or
Parent Holdings or any subsidiary thereof or any proposal or offer
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to acquire in any manner a substantial equity interest in, or a substantial
portion of the assets of, Golden State or Parent Holdings or any subsidiary
thereof other than the transactions contemplated or permitted by the Agreement,
the Subsidiary Merger Agreement and the Stock Option Agreement.
ISSUANCE OF LITIGATION TRACKING WARRANTS (Trademark)
In the Agreement, Golden State agreed to take all actions necessary, and
to use its reasonable best efforts, to cause the issuance and distribution of
the Litigation Tracking Warrants (Trademark) to the stockholders of Golden
State as soon as practicable and to use its best efforts to cause the
Litigation Tracking Warrants (Trademark) to be listed on the NYSE or Nasdaq.
It is a condition to the obligations of each of the parties to the Agreement to
consummate the Mergers that Golden State shall have issued and distributed the
Litigation Tracking Warrants (Trademark) to Golden State Stockholders. Golden
State distributed the Litigation Tracking Warrants (Trademark) to the Golden
State Stockholders on May 29, 1998 and the Litigation Tracking Warrants
(Trademark) are authorized for quotation on Nasdaq under the symbol "GSBNZ."
For more information concerning the Litigation Tracking Warrants (Trademark) ,
see "INFORMATION ABOUT GOLDEN STATE--General-- Distribution of Litigation
Tracking Warrants (Trademark) ."
CERTAIN COVENANTS
The Agreement contains certain other covenants made by the parties thereto
to be performed prior to the Effective Time, including, among other things, the
following: (i) the parties will cooperate with each other and use their
reasonable best efforts to promptly prepare, file, effect, and obtain as
promptly as practicable all permits, consents, approvals and authorizations of
all third parties and governmental entities necessary in connection with the
transactions contemplated by the Agreement; (ii) subject to applicable laws,
each of Golden State and Parent Holdings will provide the other with access to
its properties, books, contracts, commitments, records, officers, employees,
accountants, counsel and other representatives and make available all
information concerning its business, properties and personnel; (iii) each of
Parent Holdings and Golden State will, and will cause its subsidiaries to, use
its reasonable best efforts (a) to take, or cause to be taken, all actions
necessary to comply promptly with all legal requirements with respect to the
Mergers and, subject to applicable conditions, to consummate the transactions
contemplated by the Agreement and (b) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any governmental entity and any other third party in connection
with the Mergers and the other transactions contemplated by the Agreement, and
to comply with the terms and conditions of such consent, authorization, order
or approval; (iv) for any taxable period ending after the Effective Time, (1)
Golden State will, at the Effective Time, replace Mafco Holdings Inc. under the
Tax Sharing Agreement and will assume all of the rights and obligations of
Mafco Holdings Inc. under the Tax Sharing Agreement with respect to such
taxable periods, (2) New FNH will, at the Effective Time, replace FNH under the
Tax Sharing Agreement and will assume all of the rights and obligations of FNH
under the Tax Sharing Agreement with respect to such taxable periods, and (3)
Cal Fed will continue to be bound by the Tax Sharing Agreement; (v) for any
taxable period ending on or before the Effective Time, (1) New FNH will be at
the Effective Time the successor to FNH pursuant to the Tax Sharing Agreement,
and will assume all of the rights and obligations of FNH under the Tax Sharing
Agreement, and (2) Cal Fed and Mafco Holdings, Inc. will continue to be bound
by the Tax Sharing Agreement; (vi) each party to the Agreement will promptly
pay all sales, use, privilege, transfer, documentary, gains, stamp, duties,
recording and similar taxes and fees imposed upon such party or incurred in
connection with the transactions contemplated by the Agreement; (vii) Parent
Holdings will not, and will cause its subsidiaries not to, purchase or
otherwise acquire, directly or indirectly (other than in a fiduciary capacity
or in respect of a debt previously contracted or as contemplated by the Stock
Option Agreement), any shares of Golden State Common Stock (1) during the
period beginning fourteen days prior to the 30 trading-day period contemplated
by the definition of "Average Daily Price" and ending on the Closing Date, or
(2) at any time prior to the Closing Date, if the purchase price paid in such
transaction would be more than $30.00 per share; (viii) Golden State will use
its reasonable best efforts to cause the shares of Golden State Common Stock to
be issued pursuant to the Agreement to be approved for listing on the NYSE,
subject to official notice of issuance; and (ix) prior to the Effective Time,
Parent Holdings will use its commercially reasonable efforts to cause Cal Fed
to amend its federal stock charter for the purposes of granting to the holders
of preferred stock of Cal Fed and to the holders of the CALGZs and the CALGLs
voting rights not to exceed in the aggregate 10% of the aggregate voting power
of all voting securities of Cal Fed.
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COVENANTS OF FGH AND HUNTER'S GLEN
The Agreement provides that (x) prior to the Effective Time, FGH will not,
and will use its reasonable best efforts to cause its affiliates not to,
contract to sell, sell or otherwise transfer or dispose of any of the shares of
Parent Holdings Common Stock or the FNH Class A Common Stock, and prior to the
Effective Time, Hunter's Glen will not, and will use its reasonable best
efforts to cause its affiliates not to, contract to sell, sell or otherwise
transfer or dispose of any of the shares of FNH Class B Common Stock, or in
each case any interest therein or securities convertible thereinto or any
voting rights with respect thereto, other than pursuant to the Mergers or with
Golden State's prior written consent; (y) each of Hunter's Glen and FGH will
not, and each will use its reasonable best efforts to cause its affiliates
(other than those affiliates that are parties to the Agreement) not to,
purchase or otherwise acquire, directly or indirectly (other than in a
fiduciary capacity or in respect of a debt previously contracted or as
contemplated by the Stock Option Agreement), any shares of Golden State Common
Stock (1) during the period beginning fourteen days prior to the 30 trading-day
period contemplated by the definition of "Average Daily Price" and ending on
the Closing Date, or (2) at any time prior to the Closing Date at a purchase
price in excess of $30.00 per share; and (z) FGH will vote all of the shares of
Parent Holdings Common Stock beneficially owned by it, or over which FGH has
voting power or control, directly or indirectly, in favor of the Agreement and
the Plan of Merger and the transactions contemplated thereby, and against any
proposal by a party other than Golden State for a business combination, merger,
consolidation or similar transaction.
REPRESENTATIONS AND WARRANTIES
Under the Agreement, Golden State has made certain representations and
warranties to Parent Holdings, including those with regard to (i) the
organization, existence, good standing and status of Golden State, Glendale
Federal and Golden State's other subsidiaries; (ii) capitalization of Golden
State and its subsidiaries; (iii) corporate power and authority with respect to
the Agreement, the Stock Option Agreement and the Litigation Management
Agreement, and the absence of violations of law, organizational documents or
agreements; (iv) consents and approvals required for the Mergers; (v)
regulatory reports; (vi) financial statements, Exchange Act filings, and books
and records; (vii) broker's fees; (viii) absence of any Material Adverse Effect
on Golden State; (ix) legal proceedings; (x) tax matters; (xi) employee benefit
plans; (xii) certain contracts; (xiii) certain regulatory matters (xiv)
environmental matters; (xv) compliance with applicable laws; (xvi) loan
information; and (xvii) certain state takeover laws and charter provisions.
Under the Agreement, Parent Holdings has made certain representations and
warranties to Golden State, including those with regard to (i) the
organization, existence, good standing and status of Parent Holdings, FNH and
Cal Fed and their various subsidiaries; (ii) capitalization of Golden State and
its subsidiaries; (iii) corporate power and authority with respect to the
Agreement, the Stock Option Agreement and the Litigation Management Agreement,
and the absence of violations of law, organizational documents or agreements;
(iv) consents and approvals required for the Mergers; (v) regulatory reports;
(vi) financial statements, Exchange Act filings, and books and records; (vii)
broker's fees; (viii) absence of any Material Adverse Effect on Parent
Holdings; (ix) legal proceedings; (x) tax matters; (xi) employee benefit plans;
(xii) certain contracts; (xiii) certain regulatory matters (xiv) environmental
matters; (xv) compliance with applicable laws; and (xvi) loan information.
TERMINATION; TERMINATION FEE
The Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval by the Golden State Stockholders of the
matters presented in connection with the Mergers, as summarized below:
(i) by mutual consent of Golden State and Parent Holdings in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(ii) by either Golden State or Parent Holdings upon written notice to the
other party (a) 60 days after the date on which any request or application
for a Requisite Regulatory Approval has been denied or withdrawn at the
request or recommendation of the governmental entity which must grant such
Requisite Regulatory Approval, unless within the 60-day period following
such denial or
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withdrawal a petition for rehearing or an amended application has been
filed with the applicable governmental entity (provided that no party will
have the right to terminate the Agreement if such denial or request or
recommendation for withdrawal is due to the failure of the party seeking to
terminate the Agreement to perform or observe its covenants and agreements)
or (b) if any governmental entity of competent jurisdiction has issued a
final nonappealable order enjoining or otherwise prohibiting the Mergers;
(iii) by either Parent Holdings or Golden State if the Holding Company
Mergers have not been consummated on or before December 31, 1998, unless
the failure of the Closing to occur by such date is due to the failure of
the party seeking to terminate the Agreement to perform or observe any of
its covenants or agreements;
(iv) by either Parent Holdings or Golden State (provided that if the
terminating party is Golden State, Golden State is not in material breach
of any of its obligations with respect to the Special Meeting) if any
approval of the stockholders of Golden State required for the consummation
of the Mergers has not been obtained by reason of the failure to obtain the
required vote at a duly held meeting of such stockholders or at any
adjournment or postponement thereof;
(v) by either Parent Holdings or Golden State (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained in the Agreement) if there
has been a material breach of any of the representations or warranties on
the part of the other party which is not cured within thirty days following
written notice to the party committing such breach, or which breach, by its
nature, cannot be cured prior to the Closing; provided, however, that
neither party will have the right to terminate the Agreement unless the
breach of representation or warranty, together with all other such
breaches, would entitle the party receiving such representation or warranty
not to consummate the Mergers; or
(vi) by either Parent Holdings or Golden State (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement) if there has been a material breach
of any of the covenants or agreements on the part of the other party which
has not been cured within thirty days following receipt by the breaching
party of written notice of such breach, or which breach, by its nature
cannot be cured prior to the Closing.
In the event of termination of the Agreement by either Parent Holdings or
Golden State, the Agreement will immediately become void and have no effect
except (i) certain provisions of the Agreement relating to confidential
information and payment of expenses will survive any termination of the
Agreement, (ii) notwithstanding anything to the contrary contained in the
Agreement, no party will be relieved or released from any liabilities or
damages arising out of its willful breach of any provision of the Agreement,
and (iii) at or following any such termination, in the event that both an
Initial Triggering Event and a Subsequent Triggering Event (each as defined in
the Stock Option Agreement) shall have occurred prior to the occurrence of an
Exercise Termination Event (as defined in the Stock Option Agreement), then, in
addition to any rights which Parent Holdings may have under the Stock Option
Agreement, Golden State will pay to Parent Holdings a cash termination fee of
$50 million (the "Termination Fee"). See "--Stock Option Agreement."
WAIVER AND AMENDMENT
The Agreement may be amended by the parties to the Agreement, by action
taken or authorized by their respective Boards of Directors, at any time before
or after approval of the matters presented in connection with the Mergers by
the stockholders of Golden State by a written instrument signed on behalf of
each of the parties to the Agreement.
At any time prior to the Effective Time, each of the parties to the
Agreement, by action taken or authorized by its Board of Directors, may, to the
extent legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of any of the other parties, (b) waive any
inaccuracies in the representations and warranties of the other party, or in
any document delivered by the other party, pursuant to the Agreement and (c)
waive compliance with any of the agreements or conditions of the other party
contained in the Agreement. Any agreement on the part of a party to any such
extension or
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waiver will be valid only if set forth in a written instrument signed on behalf
of such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition will not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
EMPLOYEE MATTERS
Following the Mergers, the employees of Glendale Federal (the "Glendale
Federal Employees") will be entitled to participate in the employee benefit
plans of Cal Fed in which similarly situated employees of Cal Fed participate,
to the same extent as similarly-situated employees of Cal Fed (it being
understood that inclusion of Glendale Federal Employees in Cal Fed's employee
benefit plans may occur at different times with respect to different plans).
With respect to each employee benefit plan of Cal Fed, for purposes of
determining eligibility to participate, vesting, and entitlement to benefits,
including for severance benefits and vacation entitlement (but not for accrual
of pension benefits), service with Glendale Federal will be treated as service
with Cal Fed; provided however, that such service will not be recognized to the
extent that such recognition would result in a duplication of benefits.
Following the Mergers and the Subsidiary Merger, Golden State will honor and
will cause Cal Fed to honor in accordance with their terms all employment,
severance and other compensation agreements and arrangements existing on or
prior to the execution of the Agreement which are between Golden State or
Glendale Federal and any director, officer or employee thereof and which have
been disclosed by Golden State to Parent Holdings.
ACCOUNTING TREATMENT
The Mergers will each be accounted for as a "purchase," as such term is
used under GAAP, for accounting and financial reporting purposes. Golden State
will be treated as the acquired corporation for such purposes. Golden State's
assets, liabilities, and other items will be adjusted to their estimated fair
value at the closing date of the Mergers and combined with the historical book
values of the assets and liabilities of Parent Holdings. Applicable income tax
effects of such adjustments will be included as a component of the combined
entity's deferred tax asset or liability. The difference between the estimated
fair value of the assets, liabilities and other items (adjusted as discussed
above) and the purchase price will be recorded as goodwill and amortized
against earnings over a 15-year period following consummation of the Mergers.
For further information concerning the amount of goodwill to be recorded in
connection with the Mergers and the amortization thereof, see Note D of Notes
to the Unaudited Pro Forma Condensed Combined Financial Statements.
The unaudited pro forma condensed combined financial information contained
in this Proxy Statement has been prepared using the purchase method of
accounting. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The following is a summary of the material United States federal income
tax consequences of the Mergers to Golden State Stockholders. The discussion is
based on laws, regulations, rulings and decisions in effect on the date hereof,
all of which are subject to change (possibly with retroactive effect) and
differing interpretations. This discussion does not address all aspects of
federal taxation that may be relevant to particular Golden State Stockholders
in light of their particular circumstances, nor does it address the state,
local or foreign tax consequences of the Mergers.
No gain or loss will be recognized by Golden State Stockholders solely as
a result of the Mergers.
The respective obligations of the parties to consummate the Mergers are
conditioned upon the receipt by Parent Holdings of the opinion of Skadden,
Arps, Slate, Meagher & Flom LLP, and upon the receipt by Golden State of the
opinion of Wachtell, Lipton, Rosen & Katz (the "Tax Opinions"), each dated the
Effective Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such Tax Opinions, and which are
consistent with the state of facts existing at the Effective Time, for United
States federal income tax purposes, the Mergers will each qualify as a
"reorganization" within the meaning of Section 368(a) of the Code, and that,
accordingly, for federal income tax purposes:
(1) No gain or loss will be recognized by Parent Holdings, FNH, Golden
State or Golden State Financial as a result of the Holding Company Mergers;
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(2) No gain or loss will be recognized by Cal Fed and Glendale Federal as
a result of the Subsidiary Bank Merger (except to the extent that Cal Fed
or Glendale Federal may be required to recognize income due to the
recapture of bad debt reserves as a result of the Subsidiary Bank Merger);
and
(3) No gain or loss will be recognized by the stockholders of Parent
Holdings or FNH solely as a result of the receipt of Golden State Common
Stock at the Effective Time in exchange for Parent Holdings Common Stock or
FNH Class B Common Stock pursuant to the Holding Company Mergers.
NO APPRAISAL RIGHTS
Pursuant to Section 262(b) of the Delaware General Corporation Law, the
stockholders of a constituent corporation in a merger generally are not
entitled to appraisal rights if the shares of stock they own are, as of the
record date fixed to determine stockholders entitled to notice of and to vote
at the meeting to act upon the agreement providing for such merger, either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc., or held of record by more than 2,000 stockholders.
Golden State Stockholders are not entitled to appraisal rights in connection
with the Golden State Merger because, as of the Record Date, the shares of
Golden State Common Stock were listed on the NYSE and were held of record by
more than 2,000 holders.
EXPENSES
All costs and expenses incurred in connection with the Agreement, the
Stock Option Agreement and the transactions contemplated thereby will be paid
by the party incurring such expense.
STOCK OPTION AGREEMENT
The following is a summary of the material provisions of the Stock Option
Agreement, dated as of February 4, 1998 (the "Stock Option Agreement"), by and
between Parent Holdings and Golden State, which is attached hereto as Appendix
B. The following summary is qualified in its entirety by reference to the Stock
Option Agreement.
As an inducement to Parent Holdings to enter into the Agreement, Parent
Holdings and Golden State entered into the Stock Option Agreement. Pursuant to
the Stock Option Agreement, Golden State granted to Parent Holdings an option
to purchase up to 10,165,950 shares (the "Option Shares") of Golden State
Common Stock (representing approximately 19.9% of the issued and outstanding
shares of such Golden State Common Stock without giving effect to the shares
that may be issued upon exercise of such option) at an exercise price of $24.00
per share (the "Exercise Price"), subject to the terms and conditions set forth
therein. Further, Golden State and Parent Holdings agreed that Parent Holdings
will not be entitled to any Litigation Tracking Warrants (Trademark) or any
payment in respect thereof by virtue of the Option and, in the event Parent
Holdings becomes entitled to receive any shares of Golden State Common Stock
pursuant the terms of the Stock Option Agreement, Golden State may make such
provisions as are necessary to effectuate the foregoing.
The Stock Option Agreement provides that Parent Holdings may exercise the
Option, from time to time, in whole or in part, subject to regulatory approval,
if both an Initial Triggering Event (as defined below) and a Subsequent
Triggering Event (as defined below) shall have occurred prior to the occurrence
of an Exercise Termination Event (as defined below); provided that Parent
Holdings will have sent to Golden State written notice of such exercise within
90 days following such Subsequent Triggering Event (subject to extension as
provided in the Stock Option Agreement). The terms Initial Triggering Event and
Subsequent Triggering Event generally relate to attempts by one or more third
parties to acquire a significant interest in Golden State. Any exercise of the
Stock Option will be deemed to occur on the date such notice is sent.
For purposes of the Stock Option Agreement:
(a) The term "Initial Triggering Event" means the occurrence of any of
the following events or transactions after February 4, 1998: (i) Golden
State or any subsidiary of Golden State, without
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Parent Holdings' prior written consent, enters into an agreement to engage
in, or the Golden State Board authorizes, recommends or proposes (or
publicly announces its intention to take any of the foregoing actions) an
Acquisition Transaction (as defined below) with any person other than
Parent Holdings or any subsidiary of Parent Holdings, or the Golden State
Board publicly withdraws or modifies, or publicly announces its interest in
taking such action, in any manner adverse to Parent Holdings, its
recommendation to the Golden State Stockholders to approve the Mergers in
anticipation of an Acquisition Transaction; (ii) any person other than
Parent Holdings, any subsidiary of Parent Holdings or any subsidiary of
Golden State acting in a fiduciary capacity in the ordinary course of its
business acquires beneficial ownership or the right to acquire beneficial
ownership of 10% or more of the outstanding shares of Golden State Common
Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act,
and the rules and regulations thereunder); (iii) any person other than
Parent Holdings or any subsidiary of Parent Holdings makes a bona fide
proposal to Golden State or its stockholders by public announcement or
written communication that is or becomes the subject of public disclosure
to engage in an Acquisition Transaction; (iv) after an overture is made by
a third party to Golden State or its stockholders to engage in an
Acquisition Transaction, Golden State breaches any covenant or obligation
contained in the Agreement and such breach (x) would entitle Parent
Holdings to terminate the Agreement and (y) has not been cured prior to the
Notice Date (as defined below); or (v) any person other than Parent
Holdings or any Subsidiary of Parent Holdings, other than in connection
with a transaction to which Parent Holdings has given its prior written
consent, files an application or notice with the Federal Reserve Board, or
other federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in an
Acquisition Transaction;
(b) The term "Acquisition Transaction" means (i) a merger or
consolidation, or any similar transaction, involving Golden State or any of
its significant subsidiaries, (ii) a purchase, lease or other acquisition
of all or a substantial portion of the assets or deposits of Golden State
or its significant subsidiaries, (iii) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Golden State, or
(iv) any substantially similar transaction (other than mergers,
consolidations, purchases or similar transactions involving only Golden
State and its existing subsidiaries or any two or more such subsidiaries in
a transaction that does not violate the Agreement); and
(c) The term "Subsequent Triggering Event" means the occurrence of either
of the following events or transactions after February 4, 1998: (i) the
acquisition by any person of beneficial ownership of 20% or more of the
then outstanding shares of Golden State Common Stock; or (ii) the
occurrence of the Initial Triggering Event described above in clause
(a)(i), except that the percentage referred to in subclause (iii) of the
definition of "Acquisition Transaction" set forth above shall be 20%.
The Option will expire upon the occurrence of an "Exercise Termination
Event," defined as: (i) the Effective Time; (ii) termination of the Agreement
in accordance with the provisions thereof if such termination occurs prior to
the occurrence of an Initial Triggering Event except a termination by Parent
Holdings as a result of Golden State's breach of a covenant set forth in the
Agreement (unless the breach by Golden State giving rise to such right of
termination is nonvolitional); or (iii) twelve months after the termination of
the Agreement if such termination occurs after the occurrence of an Initial
Triggering Event or is a termination by Parent Holdings as a result of Golden
State's breach of a covenant set forth in the Agreement (unless the breach by
Golden State giving rise to such right of termination is non-volitional).
The closing of a purchase of shares pursuant to the Stock Option Agreement
is subject to receipt of all necessary governmental approvals, provided,
however, that if the Option cannot be exercised because of an injunction, order
or similar restraint issued by a court of competent jurisdiction, the Option
shall expire no earlier than on the tenth business day after such injunction,
order or restraint shall have been dissolved or shall have become permanent and
no longer subject to appeal, as the case may be.
As of the date of this Proxy Statement, to the knowledge of Golden State,
no Initial Triggering Event or Subsequent Triggering Event has occurred.
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The number and type of securities subject to the Option and the Exercise
Price will be adjusted for any change in or distribution in respect of the
Golden State Common Stock by reason of a stock dividend, split-up, merger,
recapitalization, combination, subdivision, conversion, exchange of shares or
similar transaction so as to fully preserve the economic benefits provided
under the Stock Option Agreement. The number of shares of Golden State Common
Stock subject to the Option will also be adjusted in the event additional
shares of Golden State Common Stock are issued or otherwise become outstanding
or are redeemed, repurchased, retired or otherwise cease to be outstanding
after the date of the Stock Option Agreement such that the number of shares of
Golden State Common Stock subject to the Option, together with shares
previously purchased pursuant thereto, represents 19.9% of the Golden State
Common Stock then issued and outstanding, without giving effect to shares
subject to or issuable pursuant to the Option. In no event will the number of
shares of Golden State Common Stock for which the Option is exercisable exceed
19.9% of Golden State Common Stock then issued and outstanding, without giving
effect to the shares subject to or issuable pursuant to the Option.
Immediately prior to the occurrence of a Repurchase Event (as defined
below), (i) following a request of the holder or holders of the Option (the
"Holder"), delivered prior to an Exercise Termination Event, Golden State (or
any successor thereto) will repurchase the Option from the Holder at a price
(the "Option Repurchase Price") equal to the amount by which (A) the
Market/Offer Price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which the Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered within 90 days of such occurrence (or such longer period as provided
in the Option Agreements), Golden State will repurchase such number of the
Option Shares from the Owner as the Owner designates at a price equal to the
Market/Offer Price multiplied by the number of Option Shares so designated.
A "Repurchase Event" will be deemed to have occurred upon (a) the
consummation of any merger, consolidation or similar transaction involving
Golden State or any purchase, lease or other acquisition of all or a
substantial portion of the assets of Golden State (other than transactions not
constituting an Acquisition Transaction) or (b) the acquisition by any person
of beneficial ownership of 50% or more of the then outstanding shares of Golden
State Common Stock.
The term "Market/Offer Price" means the highest of (i) the price per share
of Golden State Common Stock at which a tender offer or exchange offer therefor
has been made, (ii) the price per share of Golden State Common Stock to be paid
by any third party pursuant to an agreement with Golden State, (iii) the
highest closing price for shares of Golden State Common Stock within the
six-month period immediately preceding the date the Holder or the Owner, as the
case may be, gives notice of the required repurchase of this Option or any
Option Shares, as the case may be, or (iv) in the event of a sale of all or a
substantial portion of Golden State's assets, the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
Golden State as determined by a nationally recognized investment banking firm
selected by the Holder or the Owner, as the case may be, and reasonably
acceptable to Golden State, divided by the number of shares of Golden State
Common Stock outstanding at the time of such sale. In determining the
Market/Offer Price, the value of consideration other than cash will be
determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to Golden
State.
Pursuant to the terms of the Stock Option Agreement, Parent Holdings'
Total Profit (as defined below) may not exceed $25 million. "Total Profit" is
defined to mean the aggregate (before taxes) of (i) any amount received
pursuant to Golden State's repurchase of the Option (or any portion thereof)
pursuant to the terms of the Stock Option Agreement, (ii) any amount received
pursuant to Golden State's repurchase of the Option Shares (less the purchase
price of such Option Shares), (iii) any net cash received pursuant to the sale
of Option Shares to any unaffiliated party (less the purchase price of such
Option Shares), (iv) any amounts received on transfer of the Option or any
portion thereof to any unaffiliated party and (v) any equivalent amounts
received with respect to the Substitute Option (as hereinafter defined). In
addition, Parent Holdings may not exercise the Option for a number of Option
Shares as would, as of the date of such exercise, result in Parent Holdings (if
it were immediately to sell such Option Shares, together with all other Option
Shares held by Parent Holdings and its affiliates as of such date, at the
closing market price of Golden State Common Stock on the immediately preceding
trading day) realizing a net gain in excess of $25 million.
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The Stock Option Agreement provides that neither party may assign any of
its rights or obligations thereunder without the written consent of the other
party, except that if a Subsequent Triggering Event occurs prior to an Exercise
Termination Event, Parent Holdings may, subject to certain limitations, assign
its rights and obligations thereunder in whole or in part within 90 days
following such Subsequent Triggering Event (subject to extension as described
the Stock Option Agreement).
In the event that, prior to an Exercise Termination Event, Golden State
enters into any agreement (i) to merge into or consolidate with any person
other than Parent Holdings or one of its subsidiaries such that Golden State is
not the surviving corporation, (ii) to permit any person, other than Parent
Holdings or one of its subsidiaries, to merge into Golden State and Golden
State is the surviving corporation, but, in connection with such merger, the
then outstanding shares of Golden State Common Stock are changed into or
exchanged for stock or other securities of any other person or cash or any
other property or the outstanding shares of Golden State Common Stock prior to
such merger shall after such merger represent less than 50% of the outstanding
voting shares and voting share equivalents of the merged company, or (iii) to
sell or otherwise transfer all or substantially all of its assets to any person
other than Parent Holdings or one of its subsidiaries, then, and in each such
case, the agreement governing the transaction must provide that, upon
consummation of the transaction, the Option will be converted into or exchanged
for an option (the "Substitute Option") to purchase securities of either the
acquiring person (including Golden State if Golden State is the surviving
entity), or any person that controls the acquiring person, in either case at
the election of the Holder.
Golden State has granted Parent Holdings certain registration rights with
respect to the Option and any Option Shares. These rights include requiring
Golden State to file up to two registration statements under the Securities Act
in order to permit the sale or other disposition of the Option and any Option
Shares. In addition, in the event that at the time of any request by Parent
Holdings for registration, Golden State is in registration with respect to an
underwritten public offering of shares of Golden State Common Stock, Golden
State will allow Parent Holdings to participate in such registration, subject
to certain limitations. In connection with any registration described above,
the Holder may require Golden State to become a party to any underwriting
agreement relating to the sale of shares thereunder, but only to the extent of
obligating itself in respect of customary representations, warranties,
indemnities and other customary agreements.
Certain rights and obligations of the parties under the Stock Option
Agreement are subject to receipt of required regulatory approvals. See
"--Regulatory Approvals Required for the Mergers." Parent Holdings and Golden
State will each use its best efforts to make all filings with, and to obtain
consents of, all third parties and governmental authorities necessary for the
consummation of the transactions contemplated by the Stock Option Agreement,
including without limitation making application to list the shares of Golden
State Common Stock issued pursuant to the Stock Option Agreement on the NYSE
upon official notice of issuance and applying to the Federal Reserve Board
and/or the OTS, as applicable, for approval to acquire such shares, but Parent
Holdings will not be obligated to apply to state banking authorities for
approval to acquire the shares of Golden State Common Stock issuable pursuant
to the Stock Option Agreement until such time, if ever, as it deems appropriate
to do so.
Effect of Stock Option Agreement. Golden State entered into the Stock
Option Agreement and agreed to the Termination Fee as an inducement to Parent
Holdings to enter into the Agreement. The Stock Option Agreement and the
Termination Fee are intended to increase the likelihood that the Mergers will
be consummated in accordance with the terms of the Agreement. Consequently,
certain aspects of the Stock Option Agreement and the Termination Fee may have
the effect of discouraging persons who might now or prior to the Effective Time
be interested in acquiring all of or a significant interest in Golden State
from considering or proposing such an acquisition. The acquisition of Golden
State or an interest in Golden State, or an agreement to do either, could cause
the Option to become exercisable and the Termination Fee to become payable. The
existence of the Option and the Termination Fee could increase the cost to a
potential acquiror of acquiring Golden State compared to its cost had the Stock
Option Agreement and the Agreement not been entered into. Such increased cost
might discourage a potential acquiror from considering or proposing an
acquisition or might result in a potential acquiror proposing to pay a lower
per share price to acquire Golden State than it might otherwise have proposed
to pay.
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LITIGATION MANAGEMENT AGREEMENT
Golden State, Glendale Federal and Cal Fed have entered into a litigation
management agreement (the "Litigation Management Agreement") with the
Litigation Managers. The provisions of the Litigation Management Agreement
generally become effective at the Effective Time of the Mergers. Pursuant to
the Litigation Management Agreement, as of the Effective Time, Golden State
will employ and retain the Litigation Managers to manage and pursue the
Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation and oversee
the matters related to the Litigation Tracking Warrants (Trademark) , CALGZs
and CALGLs (collectively referred to as the "Litigation Securities") in a
manner consistent with the best interests of the holders of such securities
(the "Holders"), Golden State, Glendale Federal and Cal Fed. In addition, the
Golden State Board will establish a committee of its board of directors (the
"Glendale Committee") that will be vested with the powers and rights of the
Golden State Board with respect to matters related to the Glendale Goodwill
Litigation and the Litigation Tracking Warrants (Trademark) and a committee of
its board of directors (the "Cal Fed Committee") that will be vested with the
powers and rights of the Golden State Board with respect to all matters related
to the Cal Fed Goodwill Litigation, the CALGZs and the CALGLs. The Litigation
Managers will report directly to the Glendale Committee with respect to the
Glendale Goodwill Litigation and the Litigation Tracking Warrants (Trademark)
and will report directly to the Cal Fed Committee with respect to matters
related to the Cal Fed Goodwill Litigation, the CALGZs and the CALGLs. The
Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation are sometimes
collectively referred to herein as the "Goodwill Litigation."
Subject to the terms of the Litigation Management Agreement, the
Litigation Managers will have authority to prosecute, appeal, negotiate,
resolve, settle, compromise, arbitrate or otherwise pursue the Goodwill
Litigation, in whole or in part, and to oversee the matters related to the
Litigation Securities and the recovery, disposition or other handling of the
proceeds of the Goodwill Litigation and any expenses thereof. The Litigation
Managers will have the power to carry out their responsibilities in their sole
discretion subject to periodic consultation with the appropriate Litigation
Committee and the approval of such Litigation Committee with respect to any
final settlement of the litigation, any decision to permanently abandon or
otherwise cease to prosecute such litigation or any decision to expend funds of
Golden State or Cal Fed. The powers and authority of the Litigation Managers
will include, without limitation, the power and authority: (i) without prior or
further authorization, to control and exercise authority over, subject to the
terms of the Litigation Securities, the management and conduct of the Goodwill
Litigation and matters relating to the Litigation Securities; (ii) to
coordinate and manage the application for any regulatory, stock exchange, stock
market or other approvals or the making of any filings required to carry out
the transactions contemplated by the Litigation Securities, including without
limitation directing Golden State to issue the shares of common stock of Golden
State or any successor upon exercise of the Litigation Tracking Warrants
(Trademark) ; (iii) to authorize the payment by Golden State or its
subsidiaries of expenses relating to the Goodwill Litigation and the Litigation
Securities; (iv) to retain counsel and advisors, including accountants,
investment bankers, experts and others in connection with the Goodwill
Litigation and the Litigation Securities (or any other matters contemplated by
the Litigation Management Agreement), or to retain sub-managers or other
agents, and to cause the same to be reasonably compensated by Golden State or
its subsidiaries for services rendered; (v) to enter into contracts, agreements
and other arrangements and to execute pleadings, affidavits and other court
documents, and to participate in, initiate or request settlement or other
conferences, hearings or discussions on behalf of Golden State, Glendale
Federal or Cal Fed or their successors, necessary or appropriate to carry out
their responsibilities under the Litigation Management Agreement; (vi) subject
to certain restrictions described in the next paragraph, to make any
determinations or valuations contemplated by the terms of the Litigation
Tracking Warrants (Trademark) or that are otherwise required to be made in
order to fulfill the intent of the terms of such securities; (vii) with respect
to any non-cash proceeds of the Goodwill Litigation, to sell, convey, transfer,
pledge, encumber or liquidate on behalf of Golden State such non-cash proceeds
or any part thereof or any interest therein, upon such terms and for such
consideration as the Litigation Managers in their sole and absolute discretion
deem desirable; and (viii) to publish or mail any notices contemplated by the
Litigation Securities or otherwise deemed advisable by the Litigation Managers
in connection with such securities. Notwithstanding anything to the contrary
contained in the Litigation Management Agreement, the Golden State Board
(solely through the Glendale Committee in the case of the Glendale Goodwill
Litigation and the Litigation Tracking Warrants (Trademark) ) will have and
maintain ultimate authority with respect to all matters relating to the
Goodwill
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Litigation, the Litigation Tracking Warrants (Trademark) and the CALGZs and
CALGLs, and nothing will be deemed to relieve the Golden State Board (or, with
respect to matters related to the Glendale Goodwill Litigation and the
Litigation Tracking Warrants (Trademark) , the Glendale Committee) of any of
its rights, authorities or obligations under applicable law or to create any
obligations in conflict with or in derogation of such rights, authorities or
obligations.
Any determinations or valuations contemplated by the terms of the
Litigation Securities or otherwise required to fulfill the intent of the terms
of such securities will first be made by the Litigation Managers. Such
determinations and valuations will be subject to review by the appropriate
Litigation Committee, the decision of which will be final and binding absent
manifest error. In making such determinations or valuations, the Litigation
Managers may retain such accountants, investment bankers, counsel or other
advisers and experts as they deem appropriate, and will be fully protected in
relying upon the foregoing.
Golden State, Cal Fed and Glendale Federal, and their respective
successors, will cooperate with the Litigation Managers with respect to the
duties and responsibilities of the Litigation Managers and, without limiting
the generality of the foregoing, will provide the Litigation Managers with such
access to their books, records, offices and other facilities and to their
employees, agents, attorneys and independent accountants as the Litigation
Managers reasonably require for the purpose of performing their respective
duties and exercising their powers under the Litigation Management Agreement.
The Litigation Managers will have authority to consult with and instruct
attorneys of Cal Fed and Glendale Federal in connection with the Cal Fed
Goodwill Litigation and the Glendale Goodwill Litigation, respectively. Golden
State will use its reasonable best efforts to cause the relevant officers,
employees, agents and representatives of Cal Fed and its successors to be
available to provide testimony and to execute documents, in each case required
in the reasonable judgment of the Litigation Managers, for the purpose of
prosecuting the Goodwill Litigation, including execution of any complaints,
motions, answers and other pleadings, affidavits, requests and notices, other
than pursuant to instructions that are determined to be unreasonable by the
appropriate Litigation Committee.
For their service as Litigation Managers, each of Messrs. Trafton and Fink
will be entitled to certain compensation and benefits. The Litigation Managers
will be bound by certain noncompetition and nonsolicitation covenants. See
"--Interests of Certain Persons in the Merger." If at any time there are no
Litigation Managers with respect to either the Glendale Goodwill Litigation or
the Cal Fed Goodwill Litigation (or the remaining Litigation Manager has
informed Golden State in writing that such Litigation Manager intends to
retire, resign or otherwise cease to serve in such capacity), the respective
Litigation Committee may appoint a successor Litigation Manager or Litigation
Managers. Golden State may not effect or permit a change of control (as defined
in the Litigation Management Agreement) unless the proposed acquiror or
successor agrees to take such actions as are necessary and appropriate to
assure that the rights of the Litigation Managers under the Litigation
Management Agreement, as well as the rights of the Holders, are honored and not
affected in any adverse manner.
The Litigation Management Agreement provides that the initial directors of
the Glendale Committee will be the GSB Directors, and the initial members of
the Cal Fed Committee will be Mr. Ford, Mr. Webb, Howard Gittis, Paul M. Bass,
Jr. and George W. Bramblett, Jr. (see "INFORMATION ABOUT PARENT
HOLDINGS--Directors and Executive Officers of Parent Holdings and Cal Fed").
Each Litigation Committee will at all times have at least two members. The
Litigation Committee members will also be members of the Golden State Board
and/or the board of directors of Cal Fed, provided that the members of the
Litigation Committees will not be required to be members of such boards of
directors after a change of control (as defined in the Litigation Management
Agreement) of Golden State. The Golden State Board will, subject to the
provisions described in the remainder of this paragraph, nominate the members
of the Litigation Committees from time to time to be elected to further terms
as directors of Golden State or Cal Fed, as the case may be. If a Litigation
Committee member resigns, dies or otherwise becomes unable to act as a member
of such Litigation Committee, a majority of the remaining members of such
Litigation Committee will have the sole authority to appoint a successor. If
such successor is required to be a member of the Golden State Board, then,
provided that such individual is reasonably acceptable to the Golden State
Board, the Golden State Board will promptly appoint the individual chosen as
successor to the Golden State Board and will cause such individual to be
nominated
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for election to the Golden State Board at the next meeting at which directors
are to be elected. A majority of a Litigation Committee's members may vote at
any time to remove a Litigation Committee member and to appoint a new member to
fill the vacancy so created.
Subject to the authority delegated to the Litigation Managers under the
Litigation Management Agreement, each Litigation Committee may commit to and
will cause to be paid its attorneys' compensation for services rendered and
expenses incurred, may enter into arrangements on such terms as may be approved
by such Committee with such counsel and may commit to and will cause to be paid
all such persons or entities that it retains compensation for services rendered
and expenses incurred. The Golden State Committee (in the case of the Glendale
Goodwill Litigation), the Cal Fed Committee (in the case of the Cal Fed
Goodwill Litigation) and the Litigation Managers will have the power to
authorize the expenditure by Golden State of all funds deemed by such
Litigation Committee or Litigation Manager to be reasonably necessary to pursue
the Goodwill Litigation or in respect of the Litigation Securities (and such
funds are expected to amount to at least $10 million in the case of the
Glendale Goodwill Litigation and $20 million in the case of the Cal Fed
Goodwill Litigation), such expenditures including, without limitation, all
legal and other professional fees and costs incurred in connection with the
respective Goodwill Litigation, the respective Litigation Securities, the
compensation and expense reimbursements of the Litigation Committees under the
Litigation Management Agreement, payment of any expenses incurred by or on
behalf of the Litigation Managers and the compensation of the Litigation
Managers, costs and expenses of counsel and experts retained by the respective
Litigation Committee and any amounts paid pursuant to the indemnity and
insurance provisions of the Litigation Management Agreement. The parties expect
to allocate costs attributable to the salary of the Litigation Managers to the
Glendale Goodwill Litigation or the Cal Fed Goodwill Litigation, as the case
may be, based upon the percentage of such Litigation Manager's time spent
working on matters related to such litigation, and expect to allocate costs
attributable to each Litigation Manager's Pension Benefit and Medical Benefits
equally as expenses of the Glendale Goodwill Litigation and the Cal Fed
Goodwill Litigation. See "--Interests of Certain Persons in the Merger."
Each Litigation Committee may act only with the concurrence of a majority
of its members; provided, however, that a Litigation Committee may designate a
Chairman to act as the administrative Litigation Committee member. A Litigation
Committee may delegate to its Chairman such authority as the Litigation
Committee may determine.
Litigation Committee members will be entitled to receive reasonable fees
(equal to at least the highest fees received by members of other committees of
the Golden State Board) for their service as such as determined by the Golden
State Board.
The Litigation Committees, the members thereof and the Litigation Managers
will not be liable to Golden State, any subsidiary thereof or the Holders for
any action, omission, decision, determination or undertaking unless it has been
shown by clear and convincing evidence in a court of competent jurisdiction
that such action, omission, decision, determination or undertaking was
undertaken with deliberate intent to cause substantial injury to Golden State
or the Holders or with reckless disregard for the best interests of such
persons. If a Litigation Committee, any member thereof or a Litigation Manager
consults with counsel or other experts in connection with its, his or her
duties under the Litigation Management Agreement, such person or committee will
be fully protected with respect to any action, omission, decision,
determination or undertaking taken, suffered or permitted by it or them in good
faith and in accordance with the advice of such counsel or other experts.
Litigation Committee members and the Litigation Managers will be indemnified
and held harmless by Golden State against all claims, demands, obligations,
liabilities and expenses, including amounts paid in satisfaction of judgments,
in settlements approved by Golden State or as fines or penalties and counsel
fees reasonably incurred by such person in connection with the defense or
disposition of any action, suit or other proceeding by one or more Holders or
by any other person, whether civil or criminal, in which such person may be
involved, or with which such person may be threatened, by reason of the fact
that such person is or was a Litigation Committee member or Litigation Manager,
provided that such Litigation Committee member or Litigation Manager will not
be entitled to indemnity in respect of any matter as to which it is shown in a
court of competent jurisdiction that the conduct at issue was undertaken with
deliberate intent to cause substantial injury to Golden State or the Holders or
with reckless disregard for the best interests of such persons. Golden State
will also use its reasonable best efforts to cause an endorsement to its
directors and
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officers insurance policy to adequately ensure that each of the members of such
Litigation Committee and the Litigation Managers will be indemnified against
any loss, liability or damage for which such person is entitled to be
indemnified under the Litigation Management Agreement and that is attributable
to the Goodwill Litigation or the Litigation Securities. In addition to the
rights under the Litigation Management Agreement, each Litigation Committee
member and Litigation Manager will be indemnified and insured as a director and
employee of Golden State to the fullest extent provided to directors and
executive officers, respectively, of Golden State, provided that no such
indemnification or insurance will be less favorable than that provided by
Golden State in favor of such persons as the date of the Litigation Management
Agreement.
The Litigation Management Agreement will automatically terminate and be of
no further force or effect upon the earlier to occur of (a) the termination of
the Agreement in accordance with its terms or (b) the occurrence of all of the
following events: (i) a final nonappealable judgment or order in, or a final
settlement of, the Goodwill Litigation, (ii) fulfillment of all obligations to
the Holders under the terms of the Litigation Securities and (iii) the payment
of all amounts owing to the Litigation Managers under the Litigation Management
Agreement (except that in the case of a termination pursuant to the provisions
described in clause (b), the indemnity and insurance provisions of the
Litigation Management Agreement will continue for a period of six years
following such termination and obligations in respect of the Pension Benefits
and the Medical Benefits will survive such termination).
The foregoing description of the Litigation Management Agreement is not
complete and is qualified in its entirety by reference to the Litigation
Management Agreement, which is set forth as Appendix C hereto.
SUBSIDIARY MERGER AGREEMENT
In accordance with the terms of the Agreement, Cal Fed and Glendale
Federal will enter into the Subsidiary Merger Agreement. Pursuant to the
Subsidiary Merger Agreement, Glendale Federal will be merged with and into Cal
Fed following consummation of the Holding Company Mergers. The respective
obligations of Cal Fed and Golden State to consummate the Subsidiary Bank
Merger are conditioned upon satisfaction of the following conditions: (i) the
satisfaction or waiver by Golden State and Parent Holdings of all conditions to
consummation of the Holding Company Mergers set forth in the Agreement; (ii) no
order, injunction or decree preventing the consummation of the Subsidiary Bank
Merger shall be in effect, nor shall any statute, rule, regulation or similar
action be enacted or enforced which prohibits, restricts or makes illegal the
consummation of the Subsidiary Bank Merger; (iii) the approval of the
Subsidiary Merger Agreement by the respective sole stockholders of Cal Fed and
Glendale Federal; and (iv) all requisite regulatory approvals and all requisite
consents, approvals and permits of and notices to non-governmental third
parties shall have been filed or obtained and shall continue to be in full
force and effect at the time of consummation of the Subsidiary Bank Merger (see
"--Regulatory Approvals Required for the Mergers"). The Subsidiary Merger
Agreement will terminate immediately upon any termination of the Agreement, and
may be terminated prior to effectiveness of the Subsidiary Bank Merger by the
mutual consent of Glendale Federal and Cal Fed.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Agreement, on or prior to the Closing Date, FGH and
Hunter's Glen will enter into a registration rights agreement (the
"Registration Rights Agreement") with Golden State. The Registration Rights
Agreement will provide "demand rights" to FGH and Hunter's Glen pursuant to
which Golden State will file a registration statement under the Securities Act
covering the resale of shares of Golden State Common Stock issued to FGH and/or
Hunter's Glen under the Agreement upon receipt of a request from FGH or
Hunter's Glen. Additionally, if Golden State proposes to register any common
equity securities for sale pursuant to an underwritten offering, FGH and
Hunter's Glen will be entitled to include in such registration statement such
number of shares as FGH and Hunter's Glen desire to sell, subject to certain
limitations. The Registration Rights Agreement will contain other customary
covenants by Golden State, FGH and Hunter's Glen and customary indemnification,
resale restrictions and other provisions, and Golden State will pay all
registration expenses incurred in connection with the transactions contemplated
by the Registration Rights Agreement.
68
<PAGE>
CERTAIN LITIGATION
Following the public announcement of the Agreement and the proposed
Mergers, several separate purported class action lawsuits were filed by certain
stockholders of Golden State, naming Golden State, its individual directors
and, in certain cases, FNH and MacAndrews Holdings, as defendants. The
litigation was consolidated into one action in the Delaware Court of Chancery,
captioned In re Golden State Bancorp Inc. Shareholders Litigation, Consolidated
C.A. No. 16175NC. The plaintiffs in such litigation have alleged, among other
things, that the individual members of the Golden State Board breached their
fiduciary duties to Golden State's stockholders by entering into the Agreement.
The plaintiffs are seeking, on behalf of themselves and all similarly situated
stockholders of Golden State, among other things: (i) class certification, (ii)
an order enjoining, preliminarily and permanently, the Mergers (or, in the
event the Mergers are consummated prior to the entry of a final order,
rescission of the Mergers and/or damages, including rescissory damages) and
(iii) costs and disbursements, including attorneys' fees. In addition, several
purported class action complaints alleging substantially similar claims and
seeking substantially similar relief have been filed in Los Angeles County
Superior Court in the State of California. The plaintiffs in such actions have
agreed to a stay of such action pending disposition of the consolidated action
pending in the Delaware Court of Chancery. Golden State believes that it has
meritorious defenses to each of the claims made in connection with each
litigation described above.
69
<PAGE>
MANAGEMENT AND OPERATIONS OF GOLDEN STATE FOLLOWING THE MERGERS
Executive Officers. Following the consummation of the Mergers, it is
anticipated that Mr. Ford will serve as Chairman and Chief Executive Officer of
Golden State, and Carl B. Webb, the President and Chief Operating Officer of
Cal Fed, will become President and Chief Operating Officer of Golden State. For
more information on Messrs. Ford and Webb and the other executive officers of
Cal Fed, see "INFORMATION ABOUT PARENT HOLDINGS--Directors and Executive
Officers of Parent Holdings and Cal Fed."
Board of Directors. Golden State has agreed that it will use its best
efforts to obtain on or prior to the Closing Date the resignations of the
directors of Golden State and each of its subsidiaries other than the GSB
Directors, who will remain on the Golden State Board following the Effective
Time. The GSB Directors will be apportioned among the three classes of Golden
State directors such that at least one but no more than two of such directors
will serve in each of the three classes of directors following the Effective
Time. The GSB Directors are expected to be Brian P. Dempsey, John F. King, John
F. Kooken, Thomas S. Sayles and Cora M. Tellez.
Effective as of the Closing Date, Golden State will cause its Board of
Directors to be expanded to fifteen members and will appoint ten persons
designated by the Board of Directors of Parent Holdings to fill the vacancies
on the Golden State Board resulting from the aforementioned resignations and
such expansion. The following individuals currently serving on the Board of
Directors of Cal Fed are expected to be appointed as members of the Golden
State Board as of the Effective Time: Ronald O. Perelman, Gerald J. Ford, Carl
B. Webb, Paul M. Bass, Jr., George W. Bramblett, Jr., Bob Bullock, Howard
Gittis, Gabrielle K. McDonald, Lynn Schenk, and Robert Setrakian. From and
after the Effective Time until the earlier of a Change in Control (as defined
in the Litigation Management Agreement) or the resolution of all matters
relating to the Glendale Goodwill Litigation and the Litigation Tracking
Warrants (Trademark) , Golden State will continue to include each GSB Director
or his successor as designated by such GSB Directors on the list of nominees
for director presented by the Golden State Board at any annual meeting of
stockholders of Golden State at which such GSB Director's term will expire,
and, subject to the Litigation Management Agreement, Golden State will cause
each GSB Director while such GSB Director is serving on the Golden State Board
to be appointed as a member of the Glendale Committee (as defined in the
Litigation Management Agreement) and will maintain such Glendale Committee as
contemplated by the Litigation Management Agreement. See "THE
MERGERS--Interests of Certain Persons in the Mergers" and "--Litigation
Management Agreement."
For more information concerning the persons currently serving on the Board
of Directors of Cal Fed who will serve on the Golden State Board as of the
Effective Time, see "INFORMATION ABOUT PARENT HOLDINGS--Directors and Executive
Officers of Parent Holdings and Cal Fed."
Litigation Management Agreement. In connection with the execution of the
Agreement, Golden State, Glendale Federal, Cal Fed and Messrs. Trafton and Fink
entered into the Litigation Management Agreement which will generally become
effective upon the consummation of the Mergers. The Litigation Management
Agreement contemplates, among other things, that Messrs. Trafton and Fink will,
pursuant to the terms thereof, manage and be responsible for determinations
concerning the Glendale Goodwill Litigation and the Cal Fed Goodwill Litigation
on behalf of the combined company after the Mergers. In this connection,
Messrs. Trafton and Fink will report to the Glendale Committee with respect to
matters related to the Glendale Goodwill Litigation and the Litigation Tracking
Warrants (Trademark) , and the Board of Directors of such surviving corporation
will generally delegate its authority with respect to such matters to the
Glendale Committee. The Agreement provides that Golden State will cause each
GSB Director to be appointed as a member of the Glendale Committee and that it
will maintain the Glendale Committee as contemplated by the Litigation
Management Agreement. The services of Messrs. Trafton and Fink under the
Litigation Management Agreement may be terminated under certain circumstances
set forth in the Litigation Management Agreement. The description of the
provisions of the Litigation Management Agreement set forth above is not
complete and is qualified in its entirety by reference to the Litigation
Management Agreement, which is set forth as Appendix C hereto. See "THE
MERGERS--Litigation Management Agreement."
Operations. While there can be no assurances as to the achievement of such
business and financial goals, Golden State and Parent Holdings currently expect
to achieve approximately $131 million in annual
70
<PAGE>
pre-tax expense savings as a result of the Mergers (in addition to the $31
million in annual pre-tax expense savings expected to be realized as a result
of the CENFED Merger and the RedFed Merger), to be fully phased in by the end
of calendar year 1999. The expense savings will be derived through reductions
in compensation and benefit expense, occupancy and equipment costs,
efficiencies in spending for marketing initiatives and various other
reductions. In connection with the achievement of the foregoing expense
savings, Golden State expects that approximately 50 to 60 branch locations of
Glendale Federal and Cal Fed will be closed and the total workforce of the
combined company will be reduced by approximately 1,100 positions. Golden State
and Parent Holdings also expect that the combined company will incur pre-tax
merger and integration expenses (including post-merger severance and relocation
expenses) of approximately $200 million (of which it is estimated that $74
million will be charged to period earnings) in the fiscal year in which the
Mergers are consummated. Golden State's expense reduction and cost estimates
are forward looking statements. While the foregoing represents management's
current estimates of the expense savings that will be realized and the merger
and integration costs that will be incurred, the ultimate level and timing or
recognition of such savings and costs will be based on the final merger and
integration plan to be completed in the coming months; the types and amounts of
actual expense savings and costs incurred could vary materially from these
estimates if future developments differ from the underlying assumptions used by
management in determining its current estimate of these savings and costs. See
"FORWARD-LOOKING STATEMENTS."
71
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation. The following Unaudited Pro Forma Condensed
Combined Financial Statements have been prepared to reflect the Mergers, the
Other Pro Forma Events, the Refinancing (assuming that (i) 100% of the FNH
Notes are acquired in connection with the Refinancing, and (ii) all outstanding
shares of Cal Fed Preferred Stock are acquired in connection with the
Refinancing or are subsequently redeemed by Cal Fed), the RedFed Merger and the
CENFED Merger. The Mergers, the RedFed Merger and the CENFED Merger will each
be accounted for as a purchase. The recorded assets, liabilities and other
items of CENFED and RedFed will be recorded in Golden State's consolidated
financial statements at their estimated fair value at the respective closing
dates of the CENFED Merger and the RedFed Merger. The recorded assets,
liabilities and other items of Golden State will be adjusted to their estimated
fair value in Golden State's consolidated financial statements on the closing
date of the Mergers. See "THE MERGERS--Accounting Treatment." Golden State's
assets, liabilities and other items will be adjusted to their estimated fair
value at the closing date of the Mergers and combined with the historical book
values of the assets and liabilities of Parent Holdings. Applicable income tax
effects of such adjustments are included as a component of the combined
entity's deferred tax asset or liability. The difference between the estimated
fair value of the assets, liabilities and other items, adjusted as discussed
above, and the purchase price, is recorded as goodwill.
The Unaudited Pro Forma Condensed Combined Financial Statements reflect
preliminary purchase accounting adjustments in compliance with GAAP. Estimates
relating to the fair value of certain assets, liabilities, and other events
requiring recognition have been made as more fully described in the Notes to
the Unaudited Pro Forma Condensed Combined Financial Statements. Actual
adjustments will be made on the basis of actual assets, liabilities and other
items as of the respective closing dates of the Mergers, the RedFed Merger and
the CENFED Merger on the basis of appraisals and evaluations and, therefore,
actual fair value amounts are expected to differ from those reflected in the
Unaudited Pro Forma Condensed Combined Financial Statements.
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition assumes that each of the proposed mergers and the Refinancing were
consummated on March 31, 1998. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the nine months ended March 31, 1998 assumes that
each of the proposed mergers and the Refinancing were consummated on July 1,
1997. The Unaudited Pro Forma Condensed Combined Statement of Operations for
the year ended June 30, 1997 assumes that each of the proposed mergers, the
Refinancing and the Other Pro Forma Events were consummated on July 1, 1996.
See "SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS." For
purposes of pro forma presentation, CENFED's, RedFed's, and Parent Holdings'
consolidated statements of operations have been recast to conform to the June
30 fiscal year end used by Golden State.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the consolidated historical financial statements and
the related notes thereto of Golden State and Parent Holdings, which are
included or incorporated by reference herein. See "AVAILABLE INFORMATION,"
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "FINANCIAL STATEMENTS OF
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES."
The Unaudited Pro Forma Condensed Combined Financial Statements presented
are not necessarily indicative of the combined financial condition or results
of the future operations of the combined entity or the actual results that
would have been achieved had the proposed mergers been consummated prior to the
periods indicated.
CENFED Merger. Pursuant to the terms of the CENFED Merger Agreement,
CENFED was merged with and into Golden State Financial, with Golden State
Financial as the surviving corporation. Each outstanding share of CENFED common
stock was converted into 1.2 shares of Golden State Common Stock (with cash
paid in lieu of issuing fractional shares). Each option to acquire CENFED
common stock granted under the CENFED stock option plans that was outstanding
and unexercised immediately prior to the effective time of the CENFED Merger
was converted into an option to purchase
72
<PAGE>
Golden State Common Stock and continues to be governed by the terms of the
CENFED stock option plans, which were assumed by Golden State. The number of
shares of Golden State Common Stock subject to such options and the exercise
price of such options were adjusted as provided in the CENFED Merger Agreement
to give effect to the exchange ratio in the CENFED Merger.
RedFed Merger. Pursuant to the terms of the RedFed Merger Agreement,
RedFed was merged with and into Golden State Financial. Each outstanding share
of RedFed common stock was converted into 0.68271 shares of Golden State Common
Stock (with cash paid in lieu of issuing fractional shares). Each option to
acquire shares of RedFed common stock granted under RedFed's stock option plans
that was outstanding and unexercised immediately prior to the effective time of
the RedFed Merger was converted into an option to purchase Golden State Common
Stock and will continue to be governed by the terms of the RedFed stock option
plans, which were assumed by Golden State. The number of shares of Golden State
Common Stock subject to such options and the exercise price of such options was
adjusted as provided in the RedFed Merger Agreement to give effect to the
exchange ratio therein.
The Mergers. The Agreement provides, among other things, for the merger of
Parent Holdings with and into Golden State. If the Mergers are consummated, it
is expected that FGH and Hunter's Glen would together own between 42% and 45%
of the common stock of the combined company outstanding, immediately after
giving effect to the Mergers, on a fully-diluted basis (without giving effect
to shares issuable pursuant to the Litigation Tracking Warrants (Trademark) or
to the issuance of Contingent Shares), depending on the average price of Golden
State Common Stock during a period, described below, occurring after
distribution of the Litigation Tracking Warrants (Trademark) , as adjusted to
omit the value of 15% of the potential recovery in the Glendale Goodwill
Litigation excluded for purposes of calculating the number of shares of Golden
State Common Stock issuable upon exercise of the Litigation Tracking Warrants
(Trademark) . FGH and Hunter's Glen together will own 42% of such common stock
if such adjusted average price is $32.00 or less, increasing incrementally to
45% of such common stock if such adjusted average price is $33.00 or more. The
adjusted average per share price will be determined using a random sampling of
fifteen trading days' closing prices for Golden State Common Stock during a
30-day period ending three days before the closing date of the Mergers. The
Agreement provides for the potential issuance of the Contingent Shares
following the closing of the Mergers. See "SUMMARY--Issuance of Golden State
Common Stock in the Mergers" and "THE MERGERS--Issuance of Golden State Common
Stock in the Mergers."
73
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF FINANCIAL CONDITION
AS OF MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GOLDEN STATE CENFED PARENT HOLDINGS
(HISTORICAL) AND REDFED(1) (HISTORICAL)
ASSETS ----------------- --------------- -----------------
<S> <C> <C> <C>
Cash and amounts due
from banks ............... $ 284,113 $ (146,716) $ 379,831
Federal funds sold and
assets purchased
under resale
agreements ............... 520,000 45,734 --
Other investments ......... 27,335 114,935 1,131,092
Loans receivable, net ..... 11,807,318 2,336,244 20,865,633
Mortgage-backed
securities, net .......... 2,178,372 369,974 6,945,774
Real estate held for
sale or investment ....... 6,124 1,576 --
Real estate acquired in
settlement of loans ...... 33,466 11,264 75,674
Investment in capital
stock of FHLB, at
cost ..................... 271,749 32,493 485,793
Mortgage servicing
assets ................... 247,914 4,843 625,554
Goodwill and other
intangible assets ........ 92,510 158,512 669,831
Other assets .............. 455,349 62,508 1,023,383
$15,924,250 $2,991,367 $32,202,565
=========== ========== ===========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Deposits .................. 9,692,874 $2,286,769 $16,403,429
Securities sold under
agreements to
repurchase ............... -- 63,338 1,965,818
Borrowings from the
FHLB ..................... 4,824,000 398,507 9,917,459
Other borrowings .......... 73 27,865 1,816,947
Other liabilities ......... 292,431 8,573 699,517
Minority interest ......... -- -- 1,161,978
Stockholders' equity....... 1,114,872 206,315 237,417
----------- ---------- -----------
$15,924,250 $2,991,367 $32,202,565
=========== ========== ===========
Common shares
outstanding .............. 51,328(3) (4)
Book value per
common share(2) .......... $ 19.47(3) (4)
Tangible book value
per common
share(2) ................. $ 17.67(3) (4)
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE 1) COMBINED
ASSETS -------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Cash and amounts due
from banks ............... $ -- $ 517,228 ($ 179,598) $ 337,630
Federal funds sold and
assets purchased
under resale
agreements ............... 28 565,762 -- 565,762
Other investments ......... (201) 1,273,161 -- 1,273,161
Loans receivable, net ..... 119,748 35,128,943 -- 35,128,943
Mortgage-backed
securities, net .......... 6,231 9,500,351 -- 9,500,351
Real estate held for
sale or investment ....... -- 7,700 -- 7,700
Real estate acquired in
settlement of loans ...... -- 120,404 -- 120,404
Investment in capital
stock of FHLB, at
cost ..................... -- 790,035 -- 790,035
Mortgage servicing
assets ................... 21,912 900,223 -- 900,223
Goodwill and other
intangible assets ........ 907,244 1,828,097 -- 1,828,097
Other assets .............. 214,398 1,755,638 (45,107) 1,739,844
29,313
------------
$1,269,360 $ 52,387,542 ($ 195,392) $52,192,150
========== ============ ============ ===========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Deposits .................. $ 3,764 $ 28,386,836 -- $28,386,836
Securities sold under
agreements to
repurchase ............... -- 2,029,156 -- 2,029,156
Borrowings from the
FHLB ..................... (5,171) 15,134,795 -- 15,134,795
Other borrowings .......... -- 1,844,885 (1,366,279) 2,328,606
1,850,000
Other liabilities ......... 553,633 1,554,154 (20,580) 1,546,802
13,228
Minority interest ......... (175,168) 986,810 (486,458) 500,352
Stockholders' equity....... 892,302 2,450,906 (185,303) 2,265,603
---------- ------------ ------------ -----------
$1,269,360 $ 52,387,542 ($ 195,392) $52,192,150
========== ============ ============ ===========
Common shares
outstanding .............. 114,906 114,906(K)
Book value per
common share(2) .......... $ 20.32 $ 18.71(5)(K)
Tangible book value
per common
share(2) ................. $ 4.41 $ 2.80(5)(K)
</TABLE>
- ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments and the expected repurchase by Golden State of shares of
Golden State Common Stock in the open market in an amount not to exceed
the number of shares to be issued in the RedFed Merger. See "SUMMARY--
Unaudited Pro Forma Comparative Per Share Data."
(2) Calculated net of Golden State Preferred Stock at its liquidation value
of $115,550.
(3) Does not reflect the impact of 5,105 shares of Golden State Common Stock
underlying stock options, all of which will be vested prior to or as of
the consummation of the Mergers.
(4) Per share information is not presented as Parent Holdings is a closely
held corporation.
(5) The Golden State Preferred Stock is, under its terms, convertible into
Golden State Common Stock. Assuming conversion as of March 31, 1998, the
book value and tangible book value per common share would be $17.06 and
$2.55, respectively, based on common shares outstanding of 126,017.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
74
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CENFED PARENT
GOLDEN STATE AND HOLDINGS
(HISTORICAL) REDFED(1) (HISTORICAL)
-------------- ----------- --------------
<S> <C> <C> <C>
Interest income ..................... $852,882 $177,364 $1,615,523
Interest expense .................... 532,399 111,141 1,146,420
Net interest income ................ 320,483 66,223 469,103
Provision for loan losses ........... 417 2,943 49,900
-------- -------- ----------
Net interest income after
provision for loan losses ......... 320,066 63,280 419,203
Other income:
Fee income ......................... 73,288 11,005 184,544
Gain (loss) on sale of loans,
net ............................... (597) 1 27,868
Gain on sale of
mortgage-backed securities,
net ............................... 1,323 735 --
Other income, net .................. 1,461 788 60,574
-------- -------- ----------
Total other income ................ 75,475 12,529 272,986
Other expenses:
Compensation and employee
benefits .......................... 100,620 20,695 191,927
Occupancy expense, net ............. 25,245 4,256 62,553
Regulatory insurance ............... 5,748 1,233 7,803
Advertising and promotion .......... 16,555 1,203 16,007
Furniture, fixtures and
equipment ......................... 11,024 4,779 --
Other general and
administrative expenses ........... 57,286 8,276 160,687
Total general and
administrative expenses .......... 216,478 40,442 438,977
Restructuring charges .............. 3,433 3,613 --
Legal expense--goodwill
lawsuit ........................... 15,231 -- --
Operations of real estate held
for sale or investment ............ (690) 6 --
Operations of real estate
acquired in settlement of
loans ............................. (1,567) 3,193 (4,167)
Amortization of goodwill and
other intangible assets ........... 6,101 7,925 35,647
-------- -------- ----------
Total other expenses .............. 238,986 55,179 470,457
Earnings before income tax
provision .......................... 156,555 20,630 221,732
Income tax provision ................ 67,106 7,509 35,987
-------- -------- ----------
Earnings before minority interest.... 89,449 13,121 185,745
Minority interest ................... -- -- 104,725
-------- -------- ----------
Net earnings ....................... $ 89,449 $ 13,121 $ 81,020
======== ======== ==========
Net earnings applicable to
common shareholders:
Net earnings ....................... $ 89,449 $ 13,121 $ 81,020
Dividends declared on
preferred stock ................... (7,583) -- --
-------- -------- ----------
$ 81,866 $ 13,121 $ 81,020
======== ======== ==========
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
----------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Interest income ..................... $ (25,311) $2,620,458 $ (7,407) $2,613,051
Interest expense .................... (1,029) 1,788,931 (117,045) 1,774,618
102,732
-----------
Net interest income ................ (24,282) 831,527 6,906 838,433
Provision for loan losses ........... -- 53,260 -- 53,260
----------- ---------- ----------- ----------
Net interest income after
provision for loan losses ......... (24,282) 778,267 6,906 785,173
Other income:
Fee income ......................... (2,465) 266,372 -- 266,372
Gain (loss) on sale of loans,
net ............................... -- 27,272 -- 27,272
Gain on sale of
mortgage-backed securities,
net ............................... -- 2,058 -- 2,058
Other income, net .................. -- 62,823 -- 62,823
----------- ---------- ----------- ----------
Total other income ................ (2,465) 358,525 -- 358,525
Other expenses:
Compensation and employee
benefits .......................... -- 313,242 -- 313,242
Occupancy expense, net ............. -- 92,054 -- 92,054
Regulatory insurance ............... -- 14,784 -- 14,784
Advertising and promotion .......... -- 33,765 -- 33,765
Furniture, fixtures and
equipment ......................... -- 15,803 -- 15,803
Other general and
administrative expenses ........... -- 226,249 (6,504) 223,207
3,462
-----------
Total general and
administrative expenses .......... -- 695,897 (3,042) 692,855
Restructuring charges .............. -- 7,046 -- 7,046
Legal expense--goodwill
lawsuit ........................... -- 15,231 -- 15,231
Operations of real estate held
for sale or investment ............ -- (684) -- (684)
Operations of real estate
acquired in settlement of
loans ............................. -- (2,541) -- (2,541)
Amortization of goodwill and
other intangible assets ........... 45,362 95,035 -- 95,035
----------- ---------- ----------- ----------
Total other expenses .............. 45,362 809,984 (3,042) 806,942
Earnings before income tax
provision .......................... (72,109) 326,808 9,948 336,756
Income tax provision ................ 60,878 (2) 171,480 4,178 (7) 175,658
----------- ---------- ----------- ----------
Earnings before minority interest.... (132,987) 155,328 5,770 161,098
Minority interest ................... (40,295)(3) 64,430 (39,684)(8) 24,746
----------- ---------- ----------- ----------
Net earnings ....................... $ (92,692) $ 90,898 $ 45,454(9) $ 136,352
=========== ========== ============= ==========
Net earnings applicable to
common shareholders:
Net earnings ....................... $ (92,692) $ 90,898 $ 45,454 $ 136,352
Dividends declared on
preferred stock ................... -- (7,583) -- (7,583)
----------- ---------- ------------- ----------
$ (92,692) $ 83,315 $ 45,454 $ 128,769
=========== ========== ============= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
75
<PAGE>
<TABLE>
<CAPTION>
CENFED PARENT PRO FORMA
GOLDEN STATE AND HOLDINGS BEFORE REFINANCING PRO FORMA
(HISTORICAL) REDFED(1) (HISTORICAL) ADJUSTMENTS REFINANCING ADJUSTMENTS COMBINED
-------------- ----------- -------------- ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
Basic ................. $ 1.61(4) (5) $ 0.73 $ 1.13(6)(K)
Diluted ............... $ 1.27 (5) $ 0.68 $ 1.02(6)(K)
Weighted average
shares outstanding:
Common shares ......... 50,790(4) (5) 114,368 114,368
Common shares
and dilutive
potential
common shares ....... 70,409 (5) 122,120 133,231
</TABLE>
- ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments and the expected repurchase by Golden State of Golden State
Common Stock in the open market in an amount not to exceed the number of
shares to be issued in the RedFed Merger. See "UNAUDITED PRO FORMA
COMPARATIVE PER SHARE DATA."
(2) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust Parent Holdings'
historical effective tax rate to 42%.
(3) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(4) Does not reflect the impact of 5,105 shares of Golden State Common Stock
underlying stock options, all of which will be vested prior to or at
consummation of the Mergers.
(5) Per share information is not presented as Parent Holdings is a closely
held corporation.
(6) Golden State has substantially completed its planned repurchase of shares
of Golden State Common Stock in the open market in an amount not to
exceed the number of shares to be issued in the RedFed Merger. As of the
date of this Proxy Statement, Golden State has repurchased a total of
4,688,400 shares of Golden State Common Stock for an aggregate amount of
approximately $158.0 million. For purposes of the Unaudited Pro Forma
Condensed Combined Statement of Operations for the nine months ended
March 31, 1998, the number of shares of Golden State Common Stock
expected to be issued in the RedFed Merger was assumed to be repurchased
on July 1, 1997 for an aggregate amount of $160.5 million. As a result of
the use of cash in such repurchase, pro forma net income for the nine
months ended March 31, 1998 would be reduced by approximately $3.9
million, representing increased interest expense at an interest rate of
5.625% and the related income tax effect at a combined marginal rate of
42%. Accordingly, pro forma basic and diluted earnings per share, after
giving effect to such repurchase, would be $1.09 and $0.99, respectively.
(7) Represents tax expense at 42% related to pro forma refinancing
adjustments.
(8) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(9) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note I.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
76
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CENFED PARENT
GOLDEN STATE AND HOLDINGS
(HISTORICAL) REDFED(1) (HISTORICAL)(2)
-------------- ----------- -----------------
<S> <C> <C> <C>
Interest income .............. $1,072,956 $227,513 $2,142,544
Interest expense ............. 693,972 140,853 1,505,619
---------- -------- ----------
Net interest income ......... 378,984 86,660 636,925
Provision for loan losses..... 25,204 8,277 80,600
---------- -------- ----------
Net interest income
after provision for
loan losses ................ 353,780 78,383 556,325
Other income:
Fee income .................. 90,696 13,693 236,391
Gain (loss) on sale of
loans, net ................. (291) 109 400
Gain (loss) on sale of
mortgage-backed
securities, net ............ (1,804) 1,861 1,100
Other income, net ........... 62 335 128,444
---------- -------- ----------
Total other income.......... 88,663 15,998 366,335
Other expenses:
Compensation and
employee benefits .......... 114,270 28,919 256,566
Occupancy expense,
net ........................ 31,777 5,723 85,858
Regulatory insurance......... 16,317 4,297 85,115
Advertising and
promotion .................. 24,416 1,368 13,866
Furniture, fixtures and
equipment .................. 12,585 6,616 --
Other general and
administrative
expenses ................... 63,859 10,480 152,557
---------- -------- ----------
Total general and
administrative
expenses .................. 263,224 57,403 593,962
SAIF special
assessment ................. 55,519 14,527 118,200
Legal expense--
goodwill lawsuit ........... 24,058 -- --
Operations of real
estate held for sale
or investment .............. 935 204 --
Operations of real
estate acquired in
settlement of loans......... 6,623 3,193 (3,337)
Amortization of
goodwill and other
intangible assets .......... 5,530 10,578 47,836
---------- -------- ----------
Total other
expenses .................. 355,889 85,905 756,661
Earnings before income
tax provision ............... 86,554 8,476 165,999
Income tax provision ......... 36,131 1,928 31,210
---------- -------- ----------
Earnings before minority
interest and
extraordinary items ......... 50,423 6,548 134,789
Minority interest ............ -- -- 122,736
Extraordinary items, net...... -- -- (1,586)
---------- -------- ----------
Net earnings (loss) ......... $ 50,423 $ 6,548 $ 10,467
========== ======== ==========
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
----------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Interest income .............. $ (33,022) $3,409,991 $ (9,878) $3,400,113
Interest expense ............. (117) 2,340,327 (156,060) 2,321,242
136,975
----------- ---------- ---------- ----------
Net interest income ......... (32,905) 1,069,664 9,207 1,078,871
Provision for loan losses..... -- 114,081 -- 114,081
----------- ---------- ---------- ----------
Net interest income
after provision for
loan losses ................ (32,905) 955,583 9,207 964,790
Other income:
Fee income .................. (3,287) 337,493 -- 337,493
Gain (loss) on sale of
loans, net ................. -- 218 -- 218
Gain (loss) on sale of
mortgage-backed
securities, net ............ -- 1,157 -- 1,157
Other income, net ........... -- 128,841 -- 128,841
----------- ---------- ---------- ----------
Total other income.......... (3,287) 467,709 -- 467,709
Other expenses:
Compensation and
employee benefits .......... -- 399,755 -- 399,755
Occupancy expense,
net ........................ -- 123,358 -- 123,358
Regulatory insurance......... -- 105,729 -- 105,729
Advertising and
promotion .................. -- 39,650 -- 39,650
Furniture, fixtures and
equipment .................. -- 19,201 -- 19,201
Other general and
administrative
expenses ................... -- 226,896 (8,672) 222,839
4,615
----------- ---------- ---------- ----------
Total general and
administrative
expenses .................. -- 914,589 (4,057) 910,532
SAIF special
assessment ................. -- 188,246 -- 188,246
Legal expense--
goodwill lawsuit ........... -- 24,058 -- 24,058
Operations of real
estate held for sale
or investment .............. -- 1,139 -- 1,139
Operations of real
estate acquired in
settlement of loans......... -- 6,479 -- 6,479
Amortization of
goodwill and other
intangible assets .......... 60,483 124,427 -- 124,427
----------- ---------- ---------- ----------
Total other
expenses .................. 60,483 1,258,938 (4,057) 1,254,881
Earnings before income
tax provision ............... (96,675) 164,354 13,264 177,618
Income tax provision ......... 43,400 (3) 112,669 5,571 (8) 118,240
----------- ---------- ---------- ----------
Earnings before minority
interest and
extraordinary items ......... (140,075) 51,685 7,693 59,378
Minority interest ............ (29,376)(4) 93,360 (52,912)(9) 40,448
Extraordinary items, net...... -- (1,586) -- (1,586)
----------- ---------- ---------- ----------
Net earnings (loss) ......... $ (110,699) $ (43,261) $ 60,605(10) $ 17,344
=========== ========== ============= ==========
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Statements.
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
CENFED PARENT
GOLDEN STATE AND HOLDINGS
(HISTORICAL) REDFED(1) (HISTORICAL)(2)
-------------- ----------- -----------------
<S> <C> <C> <C>
Net earnings (loss)
applicable to common
shareholders:
Net earnings (loss) ......... $ 50,423 $6,548 $10,467
Dividends declared on
preferred stock ............ (10,841) -- --
Premium on exchange
of preferred stock
for common stock ........... (4,173) -- --
---------- ------ -------
$ 35,409 $6,548 $10,467
========== ====== =======
Earnings (loss) per
share:
Basic ....................... $ 0.72(5) (6)
Diluted ..................... $ 0.64 (6)
Weighted average shares
outstanding;
Common shares ............... 49,095(5) (6)
Common shares and
dilutive potential
common shares .............. 55,169 (6)
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
Net earnings (loss)
applicable to common
shareholders:
Net earnings (loss) ......... $ (110,699) $ (43,261) $60,605 $ 17,344
Dividends declared on
preferred stock ............ -- (10,841) -- (10,841)
Premium on exchange
of preferred stock
for common stock ........... -- (4,173) -- (4,173)
---------- --------- ------- --------
$ (110,699) $ (58,275) $60,605 $ 2,330
========== ========= ======= ========
Earnings (loss) per
share:
Basic ....................... $ (0.52) $ 0.02(7)(K)
Diluted ..................... $ (0.52) $ 0.02(7)(K)
Weighted average shares
outstanding;
Common shares ............... 112,673 112,673
Common shares and
dilutive potential
common shares .............. 112,673 120,425
</TABLE>
- ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments and the expected repurchase by Golden State of shares of
Golden State Common Stock in the open market in an amount not to exceed
the number of shares to be issued in the RedFed Merger. See "UNAUDITED
PRO FORMA COMPARATIVE PER SHARE DATA."
(2) Represents historical results of Parent Holdings, adjusted to reflect (i)
the impact of the Cal Fed Acquisition, (ii) the issuance of the 10 5/8%
Notes (each as defined herein), both of which occurred on January 3,
1997, and (iii) the issuance of the REIT Preferred Stock, which occurred
on January 31, 1997, as if each of such transactions had occurred on July
1, 1996, which transactions are reflected as follows (in thousands):
<TABLE>
<CAPTION>
PARENT
PARENT CAL FED REIT PREFERRED HOLDINGS
HOLDINGS ACQUISITION STOCK 10 5/8% NOTES PRO FORMA
HISTORICAL PRO FORMA (A) PRO FORMA (B) PRO FORMA (C) COMBINED
-------------- --------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Interest income ........................ $1,648,112 $494,432 $ -- $ -- $2,142,544
Interest expense ....................... 1,163,236 328,018 (16,182) 30,547 1,505,619
---------- -------- --------- --------- ----------
Net interest income ................... 484,876 166,414 16,182 (30,547) 636,925
Provision for loan losses .............. 59,700 20,900 -- -- 80,600
---------- -------- --------- --------- ----------
Net interest income after
provision for loan losses ............ 425,176 145,514 16,182 (30,547) 556,325
Other income ........................... 295,074 71,261 -- -- 366,335
Other expenses ......................... 594,496 158,847 -- 3,318 756,661
---------- -------- --------- --------- ----------
Earnings before income tax
provision (benefit) ................... 125,754 57,928 16,182 (33,865) 165,999
Income tax provision (benefit) ......... 25,386 7,593 1,618 (3,387) 31,210
---------- -------- --------- --------- ----------
Earnings before minority interest
and extraordinary item ................ 100,368 50,335 14,564 (30,478) 134,789
Extraordinary item, net ................ (1,586) -- -- -- (1,586)
Minority interest ...................... 89,358 17,398 22,076 (6,096) 122,736
---------- -------- --------- --------- ----------
Net earnings (loss) ................... $ 9,424 $ 32,937 $ (7,512) $ (24,382) $ 10,467
========== ======== ========= ========= ==========
</TABLE>
(Footnote (2) continued on next page)
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
78
<PAGE>
(a) Represents historical results of operations of Old California Federal
for the six months ended December 31, 1996, adjusted to reflect: (i) the
amortization or accretion of fair value adjustments; (ii) the
elimination of amortization of historical intangible assets; (iii) the
reduction in interest income relating to the loss in yield on the
portion of the purchase price of the Cal Fed Acquisition which was
funded with existing cash; (iv) the elimination of certain noninterest
expense due to consolidation of Old California Federal's operations with
those of Parent Holdings; and (v) income taxes and minority interest
relating to the Cal Fed Acquisition.
(b) Represents adjustments, for the six months ended December 31, 1996, to
reflect: (i) the reduction in interest expense on borrowings related to
the utilization of proceeds from the issuance of the REIT Preferred
Stock to reduce debt; (ii) dividends on the REIT Preferred Stock, net of
income tax benefit; and (iii) income taxes and minority interest
relating to (i).
(c) Represents adjustments, for the seven months ended January 31, 1997, to
reflect: (i) interest expense and amortization of debt issuance costs
associated with the 10 5/8% Notes and (ii) income taxes and minority
interest relative to (i).
(3) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust Parent Holdings'
historical effective tax rate to 42%.
(4) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(5) Does not reflect the impact of 5,105 shares of Golden State Common Stock
underlying stock options, all of which will be vested prior to or as of
the consummation of the Mergers.
(6) Per share information is not presented as Parent Holdings is a closely
held corporation.
(7) Golden State has substantially completed its planned repurchase of shares
of Golden State Common Stock in the open market in an amount not to
exceed the number of shares to be issued in the RedFed Merger. As of the
date of this Proxy Statement, Golden State has repurchased a total of
4,688,400 shares of Golden State Common Stock for an aggregate amount of
approximately $158.0 million. For purposes of the Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended June 30,
1997, the number of shares of Golden State Common Stock expected to be
issued in the RedFed Merger was assumed to be repurchased on July 1, 1996
for an aggregate amount of $160.5 million. As a result of the use of cash
in such repurchase, pro forma net income for the year ended June 30, 1997
would be reduced by approximately $5.2 million, representing increased
interest expense at an interest rate of 5.625% and the related income tax
effect at a combined marginal rate of 42%. Accordingly, pro forma basic
and diluted loss per share, after giving effect to such repurchases,
would each be $0.03.
(8) Represents tax expense at 42% related to pro forma refinancing
adjustments.
(9) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(10) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note I.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
79
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
NOTE A: BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition combines the unaudited pro forma condensed combined statements of
financial condition of Golden State, CENFED and RedFed and the historical
consolidated statement of financial condition of Parent Holdings as of March
31, 1998, as if the Mergers, the RedFed Merger, the CENFED Merger and the
Refinancing were consummated on March 31, 1998. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the nine months ended March 31,
1998 combines the unaudited pro forma condensed combined statements of
operations of Golden State, CENFED and RedFed and the historical unaudited
consolidated statement of operations of Parent Holdings for the nine months
ended March 31, 1998, as if the Mergers, the RedFed Merger, the CENFED Merger
and the Refinancing were consummated on July 1, 1997. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended June 30, 1997
combines the pro forma condensed combined statements of operations of Golden
State, CENFED, RedFed and Parent Holdings as if the Mergers, the RedFed Merger,
the CENFED Merger, the Other Pro Forma Events and the Refinancing were
consummated on July 1, 1996. Certain items in the unaudited pro forma condensed
combined financial statements related to Parent Holdings have been reclassified
to conform to the Golden State presentation.
The Mergers will be accounted for using the "purchase" method of
accounting. Golden State is treated as the acquired corporation for financial
reporting purposes. Golden State's assets, liabilities, and other items will be
adjusted to their estimated fair value at the closing date of the Mergers and
combined with the historical book values of the assets and liabilities of
Parent Holdings. Applicable income tax effects of such adjustments are included
as a component of the combined entity's deferred tax asset/liability. The
difference between the estimated fair value of the assets, liabilities and
other items, adjusted as discussed above, and the purchase price, is recorded
as goodwill.
For purposes of the Unaudited Pro Forma Condensed Combined Financial
Statements, estimates relating to the fair value of certain assets, liabilities
and other items have been made as of March 31, 1998. Actual adjustments will be
made on the basis of actual assets, liabilities and other items as of the date
of the respective mergers on the basis of appraisals and evaluations made as of
that time and, therefore, actual fair value amounts are expected to differ from
those reflected in the Unaudited Pro Forma Condensed Combined Financial
Statements.
It should be noted that management's expectations of cost savings and
other operating efficiencies are not reflected in the Unaudited Pro Forma
Condensed Combined Financial Statements. Further, it should be noted that net
interest income may increase or decrease from historical levels based upon
changes in the shape of the yield curve and current market conditions. The pro
forma financial data do not necessarily reflect the results of operations or
the financial position of Golden State that actually would have resulted had
the Mergers, the RedFed Merger, the CENFED Merger and the Refinancing occurred
at the dates indicated, or project the results of operations or financial
position of Golden State for any future date or period.
NOTE B: PURCHASE PRICE
Golden State Stockholders, as described in greater detail in the next
paragraph, initially will own approximately 55 percent to 58 percent of the
combined entity immediately after the Mergers. The ownership percentage to be
initially retained in the new entity by the existing Golden State Stockholders
will be determined based on the adjusted volume-weighted average trading price
of Golden State Common Stock during a specified period preceding the completion
of the transaction and following distribution of the Litigation Tracking
Warrants (Trademark) (the "Adjusted Average Price").
80
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
The terms of the Agreement call for Golden State Stockholders to own 58
percent of the common stock of the combined entity outstanding, immediately
after giving effect to the Mergers, on a fully-diluted basis (without giving
effect to shares issuable pursuant to the Litigation Tracking Warrants
(Trademark) or the issuance of Contingent Shares), if the Adjusted Average
Price is $32 per share or less, and to own 55 percent, on such basis, of such
common stock if that price is $33 per share or more (with intermediate
percentages corresponding to Adjusted Average Prices between $32 and $33 per
share). The Agreement also provides for the contingent issuance to FGH and
Hunter's Glen of additional shares of Golden State Common Stock in connection
with (i) the use by Golden State of certain tax benefits of Parent Holdings and
the realization of certain other potential tax benefits and liabilities of
Golden State and Parent Holdings and (ii) the receipt by the combined company
of a net after-tax recovery in certain litigation, including a portion of the
net recovery, if any, in the Cal Fed Goodwill Litigation against the United
States government.
Using an Adjusted Average Price of $29.81 (derived as described below),
Golden State's fully diluted outstanding shares, as of March 31, 1998, applying
the treasury stock method under Statement of Financial Accounting Standards No.
128, "Earnings Per Share," as required by the Agreement, would be as follows:
<TABLE>
<S> <C>
Golden State
- --------------------------------------------------------------------------------------
Common shares outstanding as of March 31, 1998 ....................................... 51,327,541
Shares issuable pursuant to outstanding Series A Preferred Stock convertible to common
stock (i) ........................................................................... 11,111,245
Shares issuable pursuant to outstanding 5 Year Warrants on common stock (ii) ......... 1,522
Shares issuable pursuant to outstanding 7 Year Warrants on common stock (iii) ........ 6,453,635
Shares issuable pursuant to outstanding Stock Options on common stock (iv) ........... 1,296,861
----------
Subtotal--Golden State fully diluted outstanding shares .............................. 70,190,804
----------
CENFED
- ---------------------------------------------------------------------------------------
Common shares outstanding as of March 31, 1998 ....................................... 6,135,966
Shares issuable pursuant to outstanding options on CENFED common stock (v) ........... 7,624
----------
Subtotal--CENFED fully diluted outstanding shares .................................... 6,143,590
Exchange Ratio ....................................................................... 1.2
----------
7,372,308
----------
Total--fully diluted outstanding shares .............................................. 77,563,112
----------
Golden State ownership percentage at $29.81 per share................................. 58%
Total outstanding shares for the combined entity ..................................... 133,729,503
===========
</TABLE>
- ----------
(i) Based on 4,621,982 shares, each convertible into 2.404 shares of
Golden State Common Stock.
(ii) Warrants convertible at an exchange rate of 10 warrants for one
share of Golden State Common Stock.
(iii) 10,801,957 warrants with $12.00 exercise price per warrant.
(iv) Based on 5,105,253 stock options with a weighted average exercise
price per share of Golden State Common Stock of $16.754.
(v) Based on 41,249 stock options with a weighted average exercise price
per share of CENFED common stock of $13.328.
81
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
The Adjusted Average Price of $29.81 per share of Golden State Common
Stock is based on the closing price of Golden State Common Stock on the NYSE of
$35.75 on the day prior to the announcement of the execution of the Agreement,
adjusted by subtracting the implied net after-tax value of the Glendale
Goodwill Litigation per share to reflect the distribution of the Litigation
Tracking Warrants (Trade Mark) and the terms of the Agreement. Such implied
value is estimated, solely for purposes of this presentation, to be $5.94 per
share of Golden State Common Stock based on a comparison to the trading value
at such time of the CALGZs and the CALGLs, including an adjustment for the time
value of money.
<TABLE>
<S> <C>
Purchase Price:
Number of Golden State fully diluted outstanding shares ......... 77,563,112
Adjusted price per share ........................................ $ 29.81
------------
Purchase price (in thousands) .................................. $ 2,312,156
============
</TABLE>
NOTE C: PURCHASE ACCOUNTING ADJUSTMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Golden State stockholders' equity, giving effect to the CENFED Merger and the
RedFed Merger .............................................................. $1,321,187
Goodwill due to the Mergers (Note D) ........................................ 907,244
Fair value adjustments, net of taxes (Note D) ............................... 86,492
Merger costs, net of taxes (Note E) ......................................... (84,867)
Goodwill litigation proceeds participation (Note F) ......................... 82,100
----------
Total purchase price ....................................................... $2,312,156
==========
</TABLE>
82
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
NOTE D: PURCHASE ACCOUNTING ADJUSTMENTS
The estimated purchase accounting adjustments relating to the Mergers are
detailed below:
<TABLE>
<CAPTION>
INTEREST- MORTGAGE
EARNING SERVICING OTHER
ASSETS ASSETS GOODWILL ASSETS
------------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of
Golden State's net
stockholders' equity,
giving effect to the
CENFED Merger and
the RedFed Merger ............ $ -- $ -- $ 990,969 $ --
Fair value adjustments, net
of taxes ..................... 125,806 21,912 (86,492) --
Merger costs, net of taxes
(Note E) ..................... -- -- 84,867 41,433
Other integration costs,
net of taxes (Note E) ........ -- -- -- 31,065
Value of Golden State's
retained participation in
the Glendale Goodwill
Litigation after issuance
of the Litigation
Tracking Warrants (Trademark)
(Note F) ..................... -- -- (82,100) 141,900
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen in respect of their
proportionate ownership
of the Cal Fed Goodwill
Litigation asset
(Note G) ..................... -- -- -- --
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen upon use of Parent
Holdings' pre-merger
tax benefits (Note H) ........ -- -- -- --
Conversion of minority
interest triggered by the
Mergers ...................... -- -- -- --
--------- -------- --------- --------
$ 125,806 $ 21,912 $ 907,244 $214,398
========= ======== ========= ========
IMPACT ON PRE-TAX
EARNINGS FOR:
Nine months ended March
31, 1998 ..................... $ (25,311) $ (2,465) $ (45,362) $ --
Year ended June 30, 1997....... $ (33,022) $ (3,287) $ (60,483) $ --
<CAPTION>
INTEREST-
BEARING OTHER MINORITY STOCKHOLDERS'
LIABILITIES LIABILITIES INTEREST EQUITY
------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of
Golden State's net
stockholders' equity,
giving effect to the
CENFED Merger and
the RedFed Merger ............ $ -- $ -- $ -- $ 990,969
Fair value adjustments, net
of taxes ..................... (1,407) 62,633 -- --
Merger costs, net of taxes
(Note E) ..................... -- 126,300 -- --
Other integration costs,
net of taxes (Note E) ........ -- 73,700 -- (42,635)
Value of Golden State's
retained participation in
the Glendale Goodwill
Litigation after issuance
of the Litigation
Tracking Warrants (Trademark)
(Note F) ..................... -- 59,800 -- --
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen in respect of their
proportionate ownership
of the Cal Fed Goodwill
Litigation asset
(Note G) ..................... -- 37,200 -- (37,200)
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen upon use of Parent
Holdings' pre-merger
tax benefits (Note H) ........ -- 194,000 -- (194,000)
Conversion of minority
interest triggered by the
Mergers ...................... -- -- (175,168) 175,168
-------- -------- ---------- ----------
$ (1,407) $553,633 $ (175,168) $ 892,302
======== ======== ========== ==========
IMPACT ON PRE-TAX
EARNINGS FOR: TOTAL
----------
Nine months ended March
31, 1998 ..................... $ 1,029 $ -- $ -- $ (72,109)
==========
Year ended June 30, 1997....... $ 117 $ -- $ -- $ (96,675)
==========
</TABLE>
83
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
---------------------------------
NINE MONTHS YEAR
ENDED ENDED
AMOUNT MARCH 31, 1998 JUNE 30, 1997
------------ ---------------- --------------
<S> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and assets repurchased under resale
agreements ......................................... $ 28 $ (28) $ (28)
Other investments .................................... (201) 201 201
Loans receivable, net ................................ 119,748 (24,920) (32,462)
Mortgage-backed securities ........................... 6,231 (564) (733)
-------- --------- ---------
$125,806 $ (25,311) $ (33,022)
======== ========= =========
Interest-Bearing Liabilities
Deposits ............................................. $ 3,764 $ 3,764 $ 3,764
Borrowings from the FHLB ............................. (5,171) (2,735) (3,647)
-------- --------- ---------
$ (1,407) $ 1,029 $ 117
======== ========= =========
</TABLE>
Premiums relating to mortgage-backed securities and loans receivable are
amortized to interest income using an interest method over the weighted average
life of the asset. The premium on mortgage servicing assets is amortized in
proportion to, and over the period of, estimated net servicing income. Goodwill
is amortized on the straight line basis over fifteen years.
NOTE E: MERGER AND INTEGRATION COSTS
The table below reflects Golden State's current estimate, for purposes of
pro forma presentation, of the aggregate merger and integration costs, net of
taxes, expected to be incurred in connection with the Mergers. While a portion
of these costs may be required to be recognized in the combined entity's
results of operations as incurred, the current estimate of these costs has been
reflected in the pro forma condensed combined statement of financial condition
to disclose the effect of these activities on Golden State's pro forma
condensed combined financial position.
<TABLE>
<CAPTION>
RELATED
GROSS TAX NET
COSTS BENEFIT COSTS
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Merger costs:
Severance costs ............................................... $ 55,000 $23,183 $ 31,817
Contract termination costs .................................... 23,100 9,737 13,363
Investment banking, legal and other professional fees ......... 40,000 5,058 34,942
Benefit plan termination costs ................................ 5,000 2,107 2,893
Branch consolidation costs .................................... 3,200 1,348 1,852
-------- ------- --------
Subtotal--merger costs included in the allocation of
the purchase price ......................................... 126,300 41,433 84,867
-------- ------- --------
Other Integration costs:
Conversion costs .............................................. 27,900 11,760 16,140
Branch consolidation costs .................................... 9,600 4,046 5,554
Transition staffing expenses .................................. 17,000 7,166 9,834
Officer benefits .............................................. 10,000 4,215 5,785
Other costs ................................................... 9,200 3,878 5,322
-------- ------- --------
Subtotal--other integration costs reflected as an
adjustment to stockholders' equity ......................... 73,700 31,065 42,635
-------- ------- --------
Total merger and integration costs ............................. $200,000 $72,498 $127,502
======== ======= ========
</TABLE>
84
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
Golden State's cost estimates are forward looking statements. While the
costs represent management's current estimate of merger and integration costs
that will be incurred, the ultimate level and timing of recognition of such
costs will be based on the final merger and integration plan to be completed in
the coming months; the types and amounts of actual costs incurred could vary
materially from these estimates if future developments differ from the
underlying assumptions used by management in determining its current estimate
of these costs. See "FORWARD-LOOKING STATEMENTS."
NOTE F: LITIGATION TRACKING WARRANTS (TRADEMARK)
Represents the estimated fair value of the 15% interest in the after-tax
recovery, if any, in the Glendale Goodwill Litigation to be excluded in
calculating the number of shares issuable upon exercise of the Litigation
Tracking Warrants (Trademark) , as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Estimated value of the net after-tax recovery in the Glendale Goodwill
Litigation (1) .......................................................... $ 550,000
---------
Estimated pre-tax litigation proceeds, net of litigation costs(2) ........ 946,000
---------
Combined entity's 15% interest ........................................... 141,900
Deferred taxes at combined federal and state tax rate of 42% ............. (59,800)
---------
Net adjustment to Golden State's net book value .......................... $ 82,100
=========
</TABLE>
- ----------
(1) Derived from trading prices of CALGLs and CALGZs at the time of execution
of the Agreement, adjusted to reflect the amount of regulatory goodwill
on Golden State's balance sheet relative to that of Cal Fed at the time
FIRREA became effective.
(2) Based on Glendale Federal's 42% combined tax rate.
The amount of the pre-tax litigation proceeds reflected above is provided
for illustrative purposes only. Such amount does not necessarily represent
management's evaluation of the likely outcome of the Glendale Goodwill
Litigation.
NOTE G: GOODWILL EQUALIZATION ADJUSTMENT
As part of the Agreement, FGH and Hunter's Glen will receive, after a
final resolution of the Cal Fed Goodwill Litigation, additional Golden State
Common Stock in an amount equal to the net after-tax proceeds, if any, from
that litigation, net of (i) the amount paid to holders of the CALGZs and the
CALGLs and (ii) an amount equal to the 15% of the net after-tax recovery in the
Glendale Goodwill Litigation to be excluded for purposes of calculating the
number of shares of Golden State Common Stock issuable upon exercise of the
Litigation Tracking Warrants (Trademark) , adjusted to reflect the pro forma
ownership interest of FGH and Hunter's Glen in the combined company at the time
of the Mergers. The estimated pre-tax difference between the amount calculated
pursuant to the preceding sentence and the amount of the Cal Fed Goodwill
Litigation asset as of December 31, 1997, $64.3 million, will be recorded as a
liability. The combined entity will reflect an offsetting benefit to deferred
taxes of $27.1 million and a $37.2 million reduction to stockholders' equity.
NOTE H: INCOME TAX BENEFITS
As part of the Agreement, FGH and Hunter's Glen will receive additional
Golden State Common Stock in the amount of the Federal Net Tax Benefits. The
portion of the related tax benefits currently
85
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
recognized as deferred tax assets on the books of Parent Holdings is
approximately $194 million. The pro forma adjustment reflects this transaction
in a manner similar to a dividend, resulting in a reduction to stockholders'
equity and an increase in other liabilities. The historical financial
statements of Parent Holdings and pro forma adjustments have been adjusted to
reflect a 42% tax rate as all the Federal Net Tax Benefits will accrue to the
benefit of FGH and Hunter's Glen.
NOTE I: REFINANCING ADJUSTMENTS
In connection with the Refinancing, Parent Holdings and FNH will make
offers to purchase or will redeem the following issues of debt and preferred
stock (dollars in thousands):
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
----------------------------
NINE MONTHS ENDED
AT MARCH 31, 1998 MARCH 31, 1998
--------------------------------- ----------------------------
PRINCIPAL INTEREST AMORTIZATION OF
OR LIQUIDATION DEFERRED EXPENSE/ DEFERRED
PREFERENCE ISSUANCE COSTS DIVIDEND ISSUANCE COSTS
---------------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
Parent Holdings 12 1/2% Senior Notes ..... $ 455,000 $14,580 $ 42,656 $1,500
less: Remaining Original Issue
Discount .............................. (3,721) -- 612 --
FNH 12 1/4% Senior Notes ................. 200,000 10,453 18,375 2,223
FNH 9 1/8% Senior Subordinated
Notes ................................... 140,000 4,674 9,581 639
FNH 10 5/8% Senior Subordinated
Notes ................................... 575,000 15,400 45,821 2,142
---------- ------- -------- ------
Total Debt Reduction ..................... $1,366,279 $45,107 $117,045 $6,504
========== ======= ======== ======
Cal Fed 11 1/2% Preferred Stock .......... 300,730 25,938
Cal Fed 10 5/8% Preferred Stock .......... 172,500 13,746
plus: Accrued and Unpaid
Dividends ............................. 13,228 --
---------- --------
Total Preferred Stock Reduction
(Minority Interest) ..................... $ 486,458 $ 39,684
========== ========
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
---------------------------
YEAR ENDED
JUNE 30, 1997
---------------------------
INTEREST AMORTIZATION OF
EXPENSE/ DEFERRED
DIVIDEND ISSUANCE COSTS
---------- ----------------
<S> <C> <C>
Parent Holdings 12 1/2% Senior Notes ..... $ 56,875 $2,000
less: Remaining Original Issue
Discount .............................. 816 --
FNH 12 1/4% Senior Notes ................. 24,500 2,964
FNH 9 1/8% Senior Subordinated
Notes ................................... 12,775 852
FNH 10 5/8% Senior Subordinated
Notes ................................... 61,094 2,856
-------- ------
Total Debt Reduction ..................... $156,060 $8,672
======== ======
Cal Fed 11 1/2% Preferred Stock .......... 34,584
Cal Fed 10 5/8% Preferred Stock .......... 18,328
plus: Accrued and Unpaid
Dividends ............................. --
--------
Total Preferred Stock Reduction
(Minority Interest) ..................... $ 52,912
========
</TABLE>
The deferred issuance costs and discount reflected above, net of taxes of
approximately $20,580, will be written off as part of the Refinancing. These
items and the premiums paid will be reflected as an "extraordinary item--early
extinguishment of debt" on the financial statements of Parent Holdings in an
amount totalling approximately $185,303 on an after-tax basis.
The following debt will be issued (in thousands):
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
--------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
---------------------------- ---------------------------
AMORTIZATION OF AMORTIZATION OF
DEFERRED INTEREST DEFERRED INTEREST DEFERRED
PRINCIPAL ISSUANCE COSTS EXPENSE ISSUANCE COSTS EXPENSE ISSUANCE COSTS
------------- ---------------- ---------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Total New Notes in multiple-tranche
transaction--estimated 7.40%
aggregate coupon ................. $1,850,000 $29,313 $102,732 $3,462 $136,975 $4,615
========== ======= ======== ====== ======== ======
</TABLE>
86
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
The use of proceeds from the Refinancing is estimated as follows (in
thousands):
<TABLE>
<S> <C> <C>
Sale of New Notes ...................................................... $ 1,850,000
FNH Debt Offers:
FNH 12 1/4% Senior Notes .............................................. 200,000
FNH 9 1/8% Senior Subordinated Notes .................................. 140,000
FNH 10 5/8% Senior Subordinated Notes ................................. 575,000
Cal Fed Preferred Stock Offers:
Cal Fed 11 1/2% Preferred Stock ....................................... 300,730
Cal Fed 10 5/8% Preferred Stock ....................................... 172,500 (1,388,230)
-------
Parent Holdings Defeasance:
FNPH 12 1/2% Senior Notes ............................................. (455,000)
Premiums, Fees and Other Expenses (net of taxes) ....................... (186,368)
------------
Net Cash Payment to be made by New FNH (from Cal Fed dividend) ......... $ (179,598)
============
</TABLE>
At an assumed rate of 5.5%, the net cash payment made would reduce pre-tax
earnings by approximately $7,407 and $9,878 for the nine months ended March 31,
1998 and the year ended June 30, 1997, respectively. To the extent any amounts
are borrowed under a short-term credit facility in lieu of the Cal Fed
dividend, interest expense on $100 million at 7% would reduce pro forma net
earnings by approximately $653 and $870 for the nine months ended March 31,
1998 and the year ended June 30, 1997, respectively.
To the extent the hedging transaction effected under the Rate Lock
Agreements (as defined herein) results in a gain or loss, such gain or loss
will be deferred and amortized over the life of the related fixed rate New
Notes through interest expense. See "INFORMATION ABOUT PARENT HOLDINGS--
Description of Business of Parent Holdings--Proposed Refinancing." The pro
forma amounts related to the Refinancing assume the New Notes will have a
weighted average interest rate of 7.40%. If this rate were to increase or
decrease by 25 basis points, the impact to pro forma net earnings would be a
reduction or increase of $2,012 and $2,682 for the nine months ended March 31,
1998 and the year ended June 30, 1997, respectively.
There can be no assurance that all of the outstanding FNH Notes and Cal
Fed Preferred Stock will be purchased in connection with the Refinancing. The
pro forma financial results assume that 100% of the outstanding principal
amount of the FNH Notes and all of the Cal Fed Preferred Stock is purchased in
the Refinancing. If FNH does not purchase all of the outstanding Cal Fed 11
1/2% and 10 5/8% Preferred Stock, New FNH intends to cause Cal Fed to redeem
any remaining Cal Fed 10 5/8% Preferred Stock on April 1, 1999 and any
remaining Cal Fed 11 1/2% Preferred Stock on September 1, 1999 (which are the
respective dates on which each series of such Preferred Stock first becomes
redeemable). As shown below, pro forma results will vary if less than 100% of
the FNH Notes or Cal Fed Preferred Stock is purchased and excess proceeds from
the Refinancing invested at 5.5% (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
% PERCENT OFFERED
TO PURCHASE INCREASE IN NET EARNINGS AT MARCH 31, 1998
- --------------------- ----------------------------------------- ---------------------------------------
CAL FED
FNH PREFERRED FOR NINE MONTHS FOR YEAR ENDED BOOK VALUE PER TANGIBLE BOOK VALUE
NOTES STOCK ENDED MARCH 31, 1998 JUNE 30, 1997 COMMON SHARE PER COMMON SHARE
- ------- ----------- ---------------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
100% 100% $45,454 $60,605 $ 18.71 $ 2.80
95% 80% 39,157 52,211 18.93 3.02
90% 75% 36,793 49,057 19.02 3.11
80% 65% 32,019 42,693 19.20 3.29
</TABLE>
87
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
NOTE J: INTEREST COVERAGE
If 100% of the outstanding principal amount of the FNH Notes and all of
the Cal Fed Preferred Stock is purchased in the Refinancing, the combined
company's interest coverage ratio, on a pro forma basis (calculated as the
amount available for debt service divided by interest expense on the New Notes)
on a cash basis and a GAAP basis would be as follows for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
--------------------------- --------------------------
GAAP CASH GAAP CASH
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Pre-Tax Earnings ............................... $ 336,756 $ 336,756 $ 177,618 $ 177,618
Add: Goodwill Amortization ..................... -- 95,035 -- 124,427
Add: Interest Expense on the New Notes ......... 102,732 102,732 136,975 136,975
Less: Dividends on the REIT Preferred Stock
(pre-tax) ..................................... (34,219) (34,219) (45,625) (45,625)
--------- --------- --------- ---------
Available for Debt Service ..................... $ 405,269 $ 500,304 $ 268,968 $ 393,395
========= ========= ========= =========
Interest Coverage Ratio ........................ 3.9x 4.9x 2.0x 2.9x
========= ========= ========= =========
</TABLE>
NOTE K: CONTINGENT SHARES
The Agreement provides for the issuance of Contingent Shares. For more
information concerning the circumstances under which Contingent Shares would be
issued following the Mergers, see the information, including the illustrative
example, set forth under the caption "SUMMARY--Issuance of Golden State Common
Stock in the Mergers" and "THE MERGERS--Issuance of Golden State Common Stock
in the Mergers." Based on such assumptions, and for illustrative purposes only,
the issuance of the Contingent Shares would have the following effect on
certain information disclosed in the Unaudited Pro Forma Condensed Combined
Financial Statements (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
PRO FORMA AMOUNTS
------------------------------------------
PER THE MARKET
PRICE AND
AS OWNERSHIP
PRESENTED ASSUMPTIONS BELOW
----------- ----------------------------
<S> <C> <C> <C>
Market price per share of common stock .................... $ 29.81 $ 35.00 $ 45.00
Incremental ownership percentage to FGH and Hunter's
Glen ..................................................... -- 5.5 % 4.3 %
Contingent shares issued to FGH and Hunter's Glen ......... -- 13,866 10,784
AT MARCH 31, 1998:
Book value per common share .............................. $ 18.71 $ 16.70 $ 17.11
Tangible book value per common share ..................... $ 2.80 $ 2.50 $ 2.56
Common shares outstanding ................................ 114,906 128,772 125,690
FOR THE NINE MONTHS ENDED MARCH 31, 1998:
Basic earnings per share (1) ............................. $ 1.13 $ 1.00 $ 1.03
Diluted earnings per share (1) ........................... $ 1.02 $ 0.93 $ 0.95
Weighted average common shares outstanding ............... 114,368 128,234 125,152
Weighted average common shares and dilutive potential
common shares outstanding .............................. 133,231 147,097 144,015
FOR THE YEAR ENDED JUNE 30, 1997:
Basic earnings per share (1) ............................. $ 0.02 $ 0.02 $ 0.02
Diluted earnings per share (1) ........................... $ 0.02 $ 0.02 $ 0.02
Weighted average common shares outstanding ............... 112,673 126,539 123,457
Weighted average common shares and dilutive potential
common shares outstanding .............................. 120,425 134,291 131,209
</TABLE>
88
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF MARCH 31, 1998 AND FOR THE NINE MONTH AND TWELVE MONTH PERIODS
ENDED MARCH 31, 1998 AND JUNE 30, 1997, RESPECTIVELY
(1) Golden State has substantially completed its planned repurchase of shares
of Golden State Common Stock in the open market in an amount not to
exceed the number of shares to be issued in the RedFed Merger. As of the
date this Proxy Statement, Golden State has repurchased a total of
4,688,400 shares of Golden State Common Stock for an aggregate amount of
approximately $158.0 million. For pro forma presentation purposes, the
number of shares of Golden State Common Stock expected to be issued in
the RedFed Merger was assumed to be repurchased at the beginning of each
period presented for an aggregate amount of $160.5 million. As a result
of the use of cash in such repurchase, pro forma net income for the nine
months ended March 31, 1998 and the year ended June 30, 1997 would be
reduced by approximately $3.9 million and $5.2 million, respectively,
representing increased interest expense at an interest rate of 5.625% and
the related income tax effect at a combined marginal rate of 42%.
Accordingly, pro forma basic and diluted earnings (loss) per share, after
giving effect to such repurchase, would be as follows for the above
illustrative examples:
<TABLE>
<S> <C> <C> <C>
FOR THE NINE MONTHS ENDED MARCH 31, 1998:
Basic earnings per share ............. 1.09 0.97 1.00
Diluted earnings per share ........... 0.99 0.90 0.92
FOR THE YEAR ENDED JUNE 30, 1997:
Basic loss per share ................. (0.03) (0.02) (0.02)
Diluted loss per share ............... (0.03) (0.02) (0.02)
</TABLE>
There can be no assurance that the foregoing illustrative examples will
prove to be accurate or that the actual number of Contingent Shares and change
in such percentage ownership will not be substantially different from the
preceding illustrative examples.
89
<PAGE>
INFORMATION ABOUT GOLDEN STATE
GENERAL
Golden State Bancorp Inc. is a corporation formed and existing under
Delaware law and is a savings and loan holding company subject to examination
and supervision by the OTS. Golden State was organized by Glendale Federal for
the purpose of becoming the holding company for Glendale Federal pursuant to an
Agreement and Plan of Reorganization, dated as of May 28, 1997 (the
"Reorganization Agreement"), by and among Glendale Federal, Golden State and
Glendale Interim Federal Savings Bank ("Glendale Interim"). Under the
Reorganization Agreement, Glendale Interim, a wholly-owned subsidiary of Golden
State, was merged with and into Glendale Federal, with, among other things, all
outstanding shares of Glendale Federal common stock (other than certain shares
held by a subsidiary of Glendale Federal) being exchanged for Golden State
Common Stock (the "Reorganization"). In the Reorganization, the stockholders of
Glendale Federal immediately prior to the effective time of the Reorganization
became the stockholders of Golden State as the holding company for Glendale
Federal. The Reorganization is described under the caption "THE REORGANIZATION"
in the Proxy Statement on Schedule 14A filed with the OTS in connection with
the July 23, 1997 meeting of Glendale Federal stockholders held in connection
with the Reorganization, and is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Glendale Federal, the sole savings and loan association subsidiary of
Golden State, is one of the largest savings institutions in the United States.
At March 31, 1998, Golden State had total consolidated assets of approximately
$16 billion, deposits of $9.7 billion and stockholders' equity of $1.1 billion.
Glendale Federal's business consists primarily of attracting deposits from the
public and originating and purchasing loans secured by mortgages on residential
real estate as well as business and consumer loans. Glendale Federal derives
its income primarily from the interest it charges on real estate, consumer and
business loans and, to a lesser extent, from interest on investment securities,
fees received in connection with loan servicing and deposit services, as well
as other services. Glendale Federal's major expenses are the interest it pays
on deposits and on borrowings and general operating expenses. Glendale
Federal's operations, like those of other depository institutions, are
significantly influenced by general economic conditions, by the strength of the
real estate market, by the monetary, fiscal and regulatory policies of the
federal government and by the policies of financial institution regulatory
authorities. The deposits of Glendale Federal are insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC.
CENFED Merger. On April 21, 1998, Golden State completed the acquisition
of CENFED through the merger of CENFED with and into Golden State Financial.
Following consummation of the CENFED Merger, Cenfed Bank, a Federal Savings
Bank, the federally chartered savings bank subsidiary of CENFED, was merged
with and into Glendale Federal. At March 31, 1998, CENFED had total assets of
$2.0 billion, deposits of $1.4 billion, stockholders' equity of $139 million
and operated 18 branch offices located in Los Angeles, Orange, Riverside and
San Bernardino Counties in Southern California. The CENFED Merger was accounted
for using the purchase method of acounting.
RedFed Merger. On July 13, 1998, Golden State announced that it had
completed its acquisition of RedFed through the merger of RedFed with and into
Golden State Financial. As a result of the RedFed Merger, Golden State issued
approximately 5.2 million shares of Golden State Common Stock to former
stockholders of RedFed. At March 31, 1998, RedFed had total assets of $1.0
billion, deposits of $861 million and stockholders' equity of $89 million, and
operated 15 banking offices in Southern California's Riverside and San
Bernardino Counties. The RedFed Merger was accounted for using the purchase
method of accounting under GAAP.
90
<PAGE>
The principal executive offices of Golden State are located at 414 North
Central Avenue, Glendale, California 91203 and the telephone number of such
offices is (818) 500-2000.
Distribution of Litigation Tracking Warrants (Trademark) . On May 29,
1998, Golden State distributed to the Golden State Stockholders of record as of
May 7, 1998, the Litigation Tracking Warrants (Trademark) , which entitle the
holders thereof to receive upon the exercise thereof Golden State Common Stock
with an aggregate value equal to 85% of the net after-tax proceeds, if any, of
the Glendale Goodwill Litigation. The terms of the Litigation Tracking Warrants
(Trademark) are described more fully in Amendment No. 1 to Golden State's
Registration Statement on form S-3 filed with the Commission on April 22, 1998,
which is incorporated herein by reference, and the information set forth herein
is qualified in its entirety by reference to such registration statement. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Glendale Federal brought an action against
the United States Government contending that FIRREA's treatment of supervisory
goodwill constituted a breach of the government's contract with Glendale
Federal, under which contract Glendale Federal had merged with a Florida thrift
and was permitted to include the goodwill resulting from the merger in Glendale
Federal's regulatory capital. On July 1, 1996, the United States Supreme Court
affirmed the decision of certain lower federal courts that the United States
Government had breached its contract with Glendale Federal and was liable to
Glendale Federal for damages. The damages phase of the Glendale Goodwill
Litigation is currently pending. There can be no assurance as to the occurrence
or timing of any resolution of the Glendale Goodwill Litigation or whether or
when Glendale Federal will receive payment of any damages or amounts in
settlement in connection with the Glendale Goodwill Litigation.
It is anticipated that the Litigation Tracking Warrants (Trademark) will
become exercisable after notification by Golden State of its receipt of
proceeds net of expenses from a final judgment in, or settlement of, the
Glendale Goodwill Litigation and following any requisite regulatory filings and
approvals. The Litigation Tracking Warrants (Trademark) will remain
exercisable for 60 days after such notification. The Litigation Tracking
Warrants (Trademark) will be exercisable, if at all, for Golden State Common
Stock at an exercise price of $1.00 per share thereof. The number of shares of
Golden State Common Stock for which a Litigation Tracking Warrant (Trademark)
will be exercisable would be determined by a fraction, the numerator of which
is 85% of the net after-tax proceeds to Golden State of the Glendale Goodwill
Litigation and the denominator of which is the product of the number of
Litigation Tracking Warrants (Trademark) distributed or reserved for
distribution times the average closing price of a share of Golden State Common
Stock on the NYSE during the 30 trading days ending on and including the 30th
calendar day prior to the date on which Glendale Federal receives the full
amount of any payment due it pursuant to the Glendale Goodwill Litigation.
In connection with the distribution, additional Litigation Tracking
Warrants (Trademark) were reserved for future distribution to holders of
certain securities of Golden State that are exercisable for or convertible into
Golden State Common Stock. During the period that the Litigation Tracking
Warrants (Trademark) are outstanding but not yet exercisable, holders of
Golden State's Series A Preferred Stock, Five-Year Warrants and Seven-Year
Warrants (each as defined herein) and options exercisable for Golden State
Common Stock issued by Golden State (including options issued upon conversion
of CENFED Options in the CENFED Merger) who convert or exercise such securities
would receive, in addition to the shares of Golden State Common Stock otherwise
issuable pursuant to such conversion or exercise, that number of Litigation
Tracking Warrants (Trademark) equal to the number of Litigation Tracking
Warrants (Trademark) such holders would have received had such holders
exercised or converted such securities immediately prior to the record date for
the distribution of the Litigation Tracking Warrants (Trademark) . Such holders
who convert or exercise such securities after the Litigation Tracking Warrants
(Trademark) become exercisable will not receive Litigation Tracking Warrants
(Trademark) , but will instead receive, in addition to the shares of Golden
State Common Stock otherwise issuable pursuant to such conversion or exercise,
the additional shares of Golden State Common Stock which such holders would
have received had such holders converted or exercised such securities prior to
the Litigation Tracking Warrants (Trademark) becoming exercisable and then
exercised such Litigation Tracking Warrants (Trademark) , and in such event the
exercise or conversion price of such securities would be adjusted to reflect
the exercise price of the Litigation Tracking Warrants (Trademark) . Neither
FGH nor Hunter's Glen will receive Litigation Tracking Warrants (Trademark) in
connection with the Mergers or in respect of shares of Golden State Common
Stock received pursuant to the Agreement.
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There can be no assurance as to the timing or amount, if any, of any net
damages or net settlement received by Golden State in connection with the
Glendale Goodwill Litigation. Because Golden State is expected to be the
surviving corporation in the Mergers, it is anticipated that immediately after
the Effective Time the Litigation Tracking Warrants (Trademark) will continue
to be outstanding and will continue to represent the contingent right to
receive shares of Golden State Common Stock upon exercise thereof.
The Litigation Tracking Warrants (Trademark) are quoted on the Nasdaq
National Market under the trading symbol "GSBNZ." The last reported sale price
of the Litigation Tracking Warrants (Trademark) on the Nasdaq National Market
on July 10, 1998 was $5 13/32 .
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BENEFICIAL OWNERSHIP OF GOLDEN STATE COMMON STOCK BY MANAGEMENT
The following table sets forth information, as of July 6, 1998, concerning
the shares of Golden State common stock beneficially owned by each director of
Golden State, by each executive officer of the Bank who will be named in the
stock ownership section of Golden State's proxy statement for its Special
Meeting of Stockholders to be held on August 17, 1998 and by all Directors and
Executive Officers of the Bank as a group as of July 6, 1998. The totals
include shares that could be acquired upon exercise of options on July 6, 1998
or within sixty days thereafter (i.e., through September 4, 1998). Except as
otherwise noted, each beneficial owner listed has sole investment and voting
power with respect to the common stock indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF INDIVIDUAL OR NUMBER OF PERSONS IN GROUP BENEFICIALLY OWNED CLASS
- -------------------------------------------------- ----------------------- -----------
<S> <C> <C>
William J. Birch ................................. 123,344 (1) *
Diane C. Creel ................................... 20,100 (2) *
Brian P. Dempsey ................................. 30,500 (3) *
Richard A. Fink .................................. 268,667 (4) *
John E. Haynes ................................... 83,342 (5) *
Terry D. Hess .................................... 110,051 (6) *
John F. King ..................................... 20,300 (2) *
John F. Kooken ................................... 33,404 (2)(7) *
D. Tad Lowrey .................................... 70,526 (8) *
Paul J. Orfalea .................................. 1,000 *
Thomas S. Sayles ................................. 0
Cora M. Tellez ................................... 0
Stephen J. Trafton ............................... 417,966 (9) *
Gilbert R. Vasquez ............................... 20,331 (2) *
All directors and executive officers as a group
(26 persons) .................................... 1,515,087 (10) 2.67%
</TABLE>
- ----------
* Less than one percent of the outstanding shares in each case.
(1) Includes options to acquire 123,334 shares.
(2) Includes options to acquire 20,000 shares. Mr. King's options are held by
a family trust, of which he is a trustee, for which voting authority is
shared.
(3) Includes options to acquire 30,000 shares. Voting and investment power are
shared as to 500 shares.
(4) Includes options to acquire 266,667 shares. The 2,000 shares of common
stock are held jointly with Mr. Fink's spouse, as to which voting and
investment power are shared.
(5) Includes options to acquire 83,334 shares.
(6) Includes options to acquire 110,001 shares.
(7) Includes 2,404 shares of Common Stock that Mr. Kooken has the right to
receive upon the conversion of 1,000 shares (less than 1%) of Golden
State's Noncumulative Convertible Preferred Stock, Series A.
(8) Includes 631 shares owned by trust for the benefit of Mr. Lowrey under the
Uniform Gifts to Minors Act for the benefit of his children.
(9) Includes options to acquire 416,666 shares. 1,300 shares of common stock
are held as Trustee of the Trafton Family Trust, for which voting
authority is shared.
(10) Includes 143 shares held at July 6, 1998 under the Sheltered Pay Plan,
2,404 shares that Mr. Kooken has the right to acquire upon the conversion
of his 1,000 shares of Noncumulaitve Convertible Preferred Stock, Series
A, 961 shares that another executive officer has the right to acquire
upon the conversion of his 400 shares of Noncumulative Convertible
Preferred Stock, Series A, and an aggregate of 1,419,261 shares which the
Directors and certain officers have a right to acquire pursuant to
outstanding options granted under the Golden State Amended and Restated
Stock Option and Long-Term Performance Incentive Plan. Also includes
24,731 shares as to which voting and investment power are shared.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK BY OTHERS
Except as set forth below, management knows of no person who owned more
than five percent of the outstanding Golden State Common Stock as of June 30,
1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------------------------------------------ ---------------------- ---------------
<S> <C> <C>
FMR Corp.; Fidelity Management &
Research Company; Edward C. Johnson 3d;
Abigail P. Johnson, Devonshire Street, Boston,
Massachusetts 02109 ................................. 5,087,380 (1) 9.99%(1)
Boston Partners Asset Management LP;
One Financial Center, Boston, Massachusetts ......... 2,880,100 (2) 5.5%(2)
</TABLE>
- ----------
(1) Amount and nature of beneficial ownership and percent of class are taken
from a Schedule 13G dated February 14, 1998 filed pursuant to the
Exchange Act which states that FMR Corp.'s beneficial ownership derives
from its ownership of Fidelity Management & Research Company, which acts
as an investment advisor and beneficially owns 4,944,730 shares (9.71%)
of Common Stock, and from its ownership of Fidelity Management Trust
Company. Such filing indicates that (i) of FMR Corp.'s and Fidelity
Management & Research Company's beneficially owned shares, 468,780 are
shares that may be obtained upon the conversion of 195,000 shares of the
Preferred Stock, (ii) the beneficial ownership of Edward C. Johnson 3d
and Abigail P. Johnson derives from their control of FMR Corp. and (iii)
FMR Corp. and Mr. and Ms. Johnson have sole power to vote and to dispose
of all reported shares.
(2) Amount and nature of beneficial ownership and percent of class are taken
from Amendment No. 2 dated February 14, 1998 to a Schedule 13G filed
pursuant to the Exchange Act which states that Boston Partners Asset
Management LP ("BPAM") beneficially owns 2,880,100 shares of Golden State
Common Stock. Such filing indicates that of BPAM's beneficially owned
shares, (i) 680,266 shares are Golden State Common Stock owned of record,
(ii) 1,827,040 are shares that may be obtained upon the conversion of
760,000 shares of Preferred Stock and (iii) 372,794 are shares that may
be obtained upon the exercise of 372,794 presently exercisable Warrants.
Boston Partners, Inc. ("BP") is the sole general partner of BPAM and has
beneficial ownership of the 2,880,100 shares to the extent that BP may be
deemed to have beneficial ownership of securities beneficially owned by
BPAM. Mr. Heathwood is the principal stockholder of BP and has beneficial
ownership of the 2,880,100 shares to the extent that Mr. Heathwood may be
deemed to have beneficial ownership of securities beneficially owned by
BP.
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<PAGE>
INFORMATION ABOUT PARENT HOLDINGS
The statements contained herein have been provided by Parent Holdings. Any
such statements that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including statements regarding Parent Holdings' expectations,
intentions, beliefs or strategies regarding the future. Forward-looking
statements include Parent Holdings' statements regarding liquidity, provision
for loan losses, capital resources and anticipated expense levels in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, in those and other portions of this document, the
words "anticipate," "believe," "estimate," "expect," "intend," and other
similar expressions, as they relate to Parent Holdings or Parent Holdings'
management, are intended to identify forward-looking statements. Such
statements reflect the current views of Parent Holdings with respect to future
events and are subject to certain risks, uncertainties and assumptions. It is
important to note that Parent Holdings' actual results could differ materially
from those described herein as anticipated, believed, estimated, expected or
intended. Among the factors that could cause results to differ materially are
the risks discussed in the "Risk Factors" section included in Parent Holdings'
Registration Statement on Form S-1 filed on April 25, 1996 (File No. 333-4026)
and declared effective on May 15, 1996. Parent Holdings assumes no obligation
to update any such forward-looking statement.
DESCRIPTION OF BUSINESS OF PARENT HOLDINGS
GENERAL
Parent Holdings is a holding company with no business operations of its
own. Parent Holdings' only significant asset is its 80% ownership of the common
stock of FNH, a holding company which owns all of the common stock of Cal Fed.
As such, Parent Holdings' principal business operations are conducted by Cal
Fed and its subsidiaries. Parent Holdings is a subsidiary of FGH, an indirect
subsidiary of MacAndrews Holdings.
FNH is 80% owned indirectly by MacAndrews Holdings, a corporation wholly
owned through Mafco Holdings by Ronald O. Perelman, and is 20% owned by
Hunter's Glen, a Texas limited partnership controlled by Gerald J. Ford, the
Chairman of the Board, Chief Executive Officer and a director of Cal Fed.
First Nationwide Bank, A Federal Savings Bank ("First Nationwide"),
formerly First Madison Bank, FSB ("First Madison") and successor to First
Gibraltar Bank, FSB ("First Gibraltar"), was organized and chartered as a
federal stock savings bank in December 1988 under the HOLA to acquire
substantially all of the assets and to assume deposits, secured and certain
other liabilities of five insolvent Texas savings and loan associations ("Texas
Closed Banks") from the FSLIC Resolution Fund ("FSLIC/RF"), as successor to the
Federal Savings and Loan Insurance Corporation ("FSLIC").
On January 3, 1997, First Nationwide Bank, A Federal Savings Bank merged
with and into California Federal Bank, A Federal Savings Bank, (the "Cal Fed
Acquisition"). Unless the context otherwise indicates, (i) "Old Cal Fed" and
"Old California Federal" refer to Cal Fed Bancorp Inc. and California Federal
Bank, A Federal Savings Bank, respectively, prior to the consummation of the
Cal Fed Acquisition and (ii) "Cal Fed" refers to California Federal Bank, A
Federal Savings Bank, as the surviving entity after the consummation of the Cal
Fed Acquisition, and First Nationwide and its predecessors, with respect to the
period prior to the Cal Fed Acquisition.
Parent Holdings' operations are significantly influenced by general
economic conditions in the markets and geographic areas in which Cal Fed
conducts its business, the monetary and fiscal policies of the federal
government and the regulatory policies of certain governmental agencies.
Deposit balances and the cost of borrowings are influenced by interest rates on
competing investments and general market interest rates. Parent Holdings' loan
volume and yields are also impacted by market interest rates on loans, the
supply of and demand for housing, and the availability of funds.
Parent Holdings is a diversified financial services company whose
principal business, through Cal Fed, consists of (i) operating retail deposit
branches to serve consumers in California and, to a lesser
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<PAGE>
extent, in Nevada, (ii) originating and/or purchasing, on a nationwide basis,
1-4 unit residential loans and, to a lesser extent, certain commercial real
estate and consumer loans, for investment and (iii) conducting mortgage banking
activities, including originating and servicing 1-4 unit residential loans for
others. Recently, with its entry into the non-prime automobile finance
business, Cal Fed broadened its complement of consumer lending products. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings. Refer to note 22 of Parent Holdings' consolidated financial
statements (at page F-41) for additional information about Parent Holdings'
business segments.
Cal Fed is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the SAIF, insures the deposit
accounts of Cal Fed, up to applicable limits. Cal Fed is also a member of the
Federal Home Loan Bank System ("FHLBS").
Parent Holdings' revenues are derived from interest earned on loans,
interest and dividends received on securities and mortgage-backed securities,
gains on sales of loans and other investments, fees received in connection with
loan servicing and securities brokerage and other customer service
transactions. Expenses primarily consist of interest on customer deposit
accounts, interest on short-term and long-term borrowings, general and
administrative expenses consisting of compensation and benefits, data
processing, occupancy and equipment, communications, deposit insurance
assessments, advertising and marketing, professional fees and other general and
administrative expenses.
As of March 31, 1998, Parent Holdings had assets totalling $32.2 billion,
deposits totalling $16.4 billion and operated retail branch offices at 225
locations in three states.
On February 1, 1993, First Gibraltar sold to Bank of America Texas, N.A.
and BankAmerica Corporation (collectively, "BankAmerica") certain assets,
liabilities and substantially all of the branch operations of First Gibraltar
located in Texas consisting of approximately $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A gain
of $141 million was recorded in connection with this sale. Concurrently with
the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB.
Following the BAC Sale, and through September 1994, First Madison's
principal business was the performance of its obligations under an assistance
agreement entered into with the FSLIC/RF at the time of First Gibraltar's
acquisition of the Texas Closed Branches ("Assistance Agreement") and the
funding of assets subject to the Assistance Agreement ("Covered Assets").
Subsequent to the BAC Sale, First Madison also managed four retail branches in
Texas and supplemented its retail deposit base with wholesale funds from
Brokered Deposits (as defined herein) and FHLB advances.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for $726.5 million. Effective on October 1, 1994, First Madison
changed its name from "First Madison Bank, FSB" to "First Nationwide Bank, A
Federal Savings Bank." Since October 1994, Parent Holdings has made several
acquisitions and has divested certain operations.
In December 1994, Cal Fed's wholly-owned mortgage bank operating
subsidiary, First Nationwide Mortgage Corporation ("FNMC"), entered into a
series of agreements with Standard Federal Savings Association ("StanFed"), to
acquire certain of StanFed's mortgage servicing assets and assume certain of
StanFed's mortgage servicing liabilities for approximately $178 million (the
"Maryland Acquisition"). As a result of the Maryland Acquisition, FNMC acquired
a 1-4 unit residential loan servicing portfolio of approximately $11.4 billion
(including $1.8 billion of mortgage servicing rights that are owned by third
parties who have subcontracted the servicing function to FNMC (a "sub-servicing
portfolio")) and certain other assets and liabilities. The transaction was
consummated on February 28, 1995. In connection with the Maryland Acquisition,
FNMC moved its mortgage servicing operations to Maryland from its former
location in Sacramento, California.
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<PAGE>
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a 1-4 unit residential loan servicing portfolio of approximately $11.1 billion
(including a sub-servicing portfolio of $3.1 billion), a $2.9 billion master
servicing portfolio in which FNMC monitors the performance and consolidates the
reporting and remittances of multiple servicers for various investors (a
"master servicing portfolio") and other assets for $100.9 million, and the
assumption of certain indebtedness secured by the acquired loan portfolio (the
"LMUSA 1995 Purchase"). On January 31, 1996, FNMC purchased LMUSA's remaining
$14.1 billion loan servicing portfolio (including a sub-servicing portfolio of
$2.4 billion), a master servicing portfolio of $2.7 billion, $5.9 million in
foreclosed real estate, $46.8 million in net other servicing receivables, $2.6
million in mortgage loans, and $6.2 million in net other assets (including $1.4
million in cash and cash equivalents) for a purchase price of approximately
$160.9 million (the "LMUSA 1996 Purchase" and together with the LMUSA 1995
Purchase, the "LMUSA Purchases").
During the first six months of 1996, Parent Holdings consummated the sale
of its retail branches in Ohio (the "Ohio Branch Sale"), New York and New
Jersey (the "Northeast Branch Sale") and Michigan (the "Michigan Branch Sale",
and together with the Ohio Branch Sale and the Northeast Branch Sale, the
"Branch Sales") at prices which represented an average premium of 7.96% of the
approximately $4.6 billion of deposits sold. Parent Holdings recorded a pre-tax
gain of $363.3 million in connection with the Branch Sales.
On February 1, 1996, Parent Holdings acquired SFFed Corp. ("SFFed"), a
savings and loan holding company, and its wholly owned federal savings
association, San Francisco Federal Savings and Loan Association ("San Francisco
Federal"), (the "SFFed Acquisition"), for approximately $264.2 million. San
Francisco Federal operated 35 branches in the Northern California area and at
February 1, 1996, had approximately $4.0 billion in assets and approximately
$2.7 billion in deposits.
On June 1, 1996, Parent Holdings acquired Home Federal Financial
Corporation ("HFFC") and its wholly owned federally chartered savings
association subsidiary, Home Federal Savings and Loan Association of San
Francisco ("Home Federal"), (the "Home Federal Acquisition," and together with
the SFFed Acquisition, the "1996 Acquisitions"). The aggregate consideration
paid in connection with the Home Federal Acquisition was approximately $67.8
million. At June 1, 1996, HFFC had approximately $717 million in assets and
$632 million in deposits.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the "FN
Merger Agreement") among FNH, Old Cal Fed and Old California Federal, First
Nationwide merged with and into Old California Federal and Old Cal Fed was
liquidated. The aggregate consideration paid under the Merger Agreement
consisted of approximately $1.2 billion in cash and the issuance of litigation
interests. Old California Federal, at December 31, 1996, had total assets of
approximately $14.1 billion and deposits of $8.9 billion, and operated 119
branches in California and Nevada. Effective with the merger, First
Nationwide's name changed to California Federal Bank, A Federal Savings Bank.
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FNH,
was merged with and into FNH, pursuant to a merger agreement by and between FNH
and FN Escrow (the "FN Escrow Merger"). In connection therewith, FNH acquired
the net proceeds from the issuance of FN Escrow's $575 million of Senior
Subordinated Notes due 2003 (the "10 5/8% Notes") and assumed FN Escrow's
obligations under the 10 5/8% Notes and indenture.
FNH financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of the 10 5/8% Notes, (ii) net
proceeds of $145 million from a newly formed Delaware corporation, all the
common stock of which is owned by Gerald J. Ford, the Chairman of the Board,
Chief Executive Officer and a director of Cal Fed ("Special Purpose Corp."), in
exchange for $150 million aggregate liquidation value of FNH's Cumulative
Perpetual Preferred Stock ("FNH Preferred Stock") and (iii) existing cash. In
connection with the Cal Fed Acquisition, FNH made a capital contribution to Cal
Fed on January 3, 1997 of approximately $685 million.
In November 1996, Cal Fed formed California Federal Preferred Capital
Corporation ("Preferred Capital Corp.") for the purpose of acquiring, holding
and managing real estate mortgage assets. All of
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Preferred Capital Corp.'s common stock is owned by Cal Fed. Preferred Capital
Corp. entered into a subservicing agreement with FNMC pursuant to which FNMC
services Preferred Capital Corp.'s mortgage assets. On January 31, 1997,
Preferred Capital Corp. issued to the public $500 million of its 9 1/8%
Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock").
Preferred Capital Corp. used the proceeds from such offering to acquire
mortgage assets from Cal Fed.
Effective May 31, 1997, FNMC acquired a residential mortgage loan
servicing portfolio of approximately $3.2 billion from WMC Mortgage Corporation
(the "Weyerhaeuser Purchase") for $37.1 million, of which $.7 million remains
payable at December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Mortgage Banking Operations."
On September 1, 1997, Parent Holdings acquired Auto One Acceptance
Corporation ("Auto One") in a purchase transaction (the "Auto One
Acquisition"). Auto One primarily engages in indirect sub-prime auto financing
activities, providing loan processing, funding and loan servicing for over 800
franchised automobile dealers. Auto One is a licensed lender in 47 states. Auto
One is headquartered in Dallas, Texas, and operates as a subsidiary of Cal Fed.
On September 30, 1997, FNMC sold servicing rights for 51,626 loans with an
unpaid principal balance of approximately $2.3 billion, recognizing a pre-tax
gain of $14.0 million (the "Servicing Sale").
On December 12, 1997, Parent Holdings sold its retail deposits and all
related retail banking facilities in the state of Texas (consisting of three
branches) with deposits of $57.6 million at a gross price representing a
deposit premium of 4.1% (the "Texas Branch Sale"). Parent Holdings recorded a
pre-tax gain of $2.5 million in connection with the Texas Branch Sale.
The 1996 Acquisitions, the Cal Fed Acquisition, the Branch Sales and the
Texas Branch Sale contributed to the restructuring of Parent Holdings' retail
branch network consistent with its strategy of strengthening its west coast
presence. Parent Holdings' retail deposits in California have increased from
$2.3 billion, or 25%, of total retail deposits at the time of the FN
Acquisition to $13.0 billion, or 82%, of total retail deposits, at December 31,
1997. By consolidating many of the functions in the operations acquired in the
FN Acquisition, the 1996 Acquisitions and the Cal Fed Acquisition, management
achieved economies of scale and cost savings. The efficiency of a financial
institution is often measured by its efficiency ratio, which represents the
ratio of adjusted noninterest expense to net interest income and adjusted
noninterest income. Cal Fed has improved its efficiency ratio from 63.47% for
the year ended December 31, 1995 to 51.16% for the year ended December 31,
1997. Finally, the Maryland Acquisition, the LMUSA Purchases and the
Weyerhaeuser Purchase have significantly increased Parent Holdings' mortgage
banking activities and its fee income. Since the FN Acquisition, Parent
Holdings' mortgage servicing portfolio has increased from $6.7 billion to $46.6
billion at December 31, 1997. Net loan servicing fees have increased from $70.3
million for the year ended December 31, 1995 to $143.9 million for the year
ended December 31, 1997.
On February 3, 1998, Parent Holdings entered into an agreement with Gulf
States Acceptance Company, a Delaware limited partnership ("GSAC") and its
general partner, Gulf States Financial Services, Inc., a Texas corporation,
pursuant to which Auto One acquired 100% of the partnership interests in GSAC
and GSAC was liquidated and its assets and liabilities were transferred to Auto
One (the "GSAC Acquisition"). The aggregate consideration paid in connection
with the GSAC Acquisition, which was completed on February 4, 1998, was
approximately $13.6 million plus a 20% interest in the common stock of Auto
One.
On March 29, 1998, Cal Fed entered into the Florida Branch Sale Agreement
pursuant to which it will sell its 24 branch banking offices in Florida to
Union Planters Florida. As of March 31, 1998, the 24 Florida branch offices of
Cal Fed had total deposits of $1.5 billion. Cal Fed expects to record an
after-tax gain of approximately $94 million in connection with the Florida
Branch Sale, representing a deposit premium of approximately 7.5%. It is not
expected that there will be any material impact on the financial condition or
ongoing results of operations of Cal Fed as a result of the Florida Branch
Sale. The Florida Branch Sale is subject to regulatory approval and is expected
to close in the third quarter of 1998.
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Parent Holdings' ongoing strategic plan aims at achieving increased
profitability, revenue diversity and growth while preserving credit quality.
Key elements of Parent Holdings' business strategy include:
o Internal growth through expanding the core franchise, margin
enhancement and new business initiatives by, among other things:
-- Continuing to expand and enhance Parent Holdings' retail branch network
in California with opportunities to gain customers, deposits and assets
while obtaining economies of scale.
-- Continuing to increase operating efficiency by, among other things,
further expanding its customer base, increasing transaction volumes and
reducing costs through consolidation of administrative and managerial
functions.
-- Continuing to increase noninterest income and to obtain incremental
efficiencies through Parent Holdings' mortgage banking operations.
-- Continuing to focus on risk management by seeking to protect the credit
quality of the assets of Parent Holdings.
-- Identifying new business initiatives to serve the needs of Cal Fed's
customers and the communities in which Cal Fed provides services.
o External growth and revenue diversification through selective
acquisitions and opportunistic divestitures which are consistent with
Parent Holdings' business strategy. This growth may include acquisitions
of businesses that management believes offer the potential for higher
growth and margin expansion, such as non-prime automobile and mortgage
loan origination.
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include general
and regional economic conditions, competition and changes in regulation and
interest rates. Accordingly, no assurance can be given that any of Parent
Holdings' strategies will prove to be effective or that Parent Holdings' goals
will be achieved.
LENDING ACTIVITIES
Parent Holdings' principal lending activity has been the origination of
adjustable and fixed rate mortgage loans secured by residential real estate. To
a lesser extent, Parent Holdings also originates consumer loans consisting
principally of adjustable rate home equity lines of credit. Prior to 1997, the
commercial lending activity of Parent Holdings has been limited to
restructuring and refinancing existing portfolio loans, and multi-family loans
originated under its affordable housing program. Parent Holdings commenced the
origination of commercial loans on a limited basis during 1997. Parent Holdings
also participates in a number of other affordable housing programs and
initiatives.
Parent Holdings' 1-4 unit residential loans are originated by FNMC.
Throughout this document, references to Parent Holdings and its 1-4 unit
residential loan origination or servicing activities relate to functions
performed by FNMC. In April 1995, Parent Holdings concluded that the costs of
operating retail offices outweighed the benefits and, accordingly, closed
substantially all of its retail real estate loan production offices.
Residential 1-4 unit loans continue to be originated through Parent Holdings'
wholesale origination offices (wherein loans are acquired from independent loan
brokers) and Parent Holdings' retail branches. Parent Holdings originates
adjustable rate mortgage loans ("ARMs") on 1-4 unit residential real estate
which, in the case of ARMs originated prior to September 30, 1995 and after
December 31, 1996, have generally been held for investment, and fixed rate 1-4
unit residential loans, which are generally held for sale to the secondary
mortgage market. From September 30, 1995 through December 31, 1996,
substantially all of the ARMs originated were sold in the secondary market to
provide funds for the acquisition and divestiture activity occurring during the
period. On October 2, 1995, Parent Holdings acquired the correspondent loan
purchase operation of LMUSA as well as contracts to administer various housing
bond and other private mortgage lending programs.
Parent Holdings generates consumer loan applications at its retail
branches. In addition, Parent Holdings conducts direct-mail solicitations,
principally of its existing customers, for both secured and, to a much lesser
extent, unsecured revolving loans. All consumer loan processing, servicing and
collection operations were moved from a facility in Oak Brook, Illinois to
Sacramento, California during the second quarter of 1997.
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The following table reflects, for the periods indicated, activity related
to loans receivable, excluding loans held for sale:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
(IN MILLIONS)
<S> <C> <C>
Balance at beginning of period ......... $ 10,605 $ 9,174
Originations ........................... 1,024 284
Purchases - 1996 Acquisitions .......... -- 3,235
Cal Fed Acquisition .................... 10,060 --
Sales .................................. (21) (123)
Foreclosures ........................... (178) (109)
Payments, payoffs and other ............ (1,548) (1,856)
-------- --------
Balance at end of period ............... $ 19,942 $ 10,605
======== ========
</TABLE>
Interest Rates, Terms and Fees
Parent Holdings offers a variety of ARM products, generally with the
objectives of (i) matching, as closely as possible, the interest rate
sensitivity of its interest-earning assets with the interest rate sensitivity
of its interest-bearing liabilities and (ii) maintaining a relatively stable
net interest margin in varied interest rate environments. In response to
consumer demand, and in order to diversify its loan portfolio and help to
control its future interest rate risk, Parent Holdings' loan portfolio includes
several ARM products which vary as to (i) the frequency and amount of periodic
interest rate changes and (ii) the minimum and maximum rates applied to a
particular loan. ARMs have the advantage of reducing the lending institution's
sensitivity to interest rate fluctuations. However, they also present certain
risks not associated with traditional fixed rate mortgages, such as adjustments
in interest rates which could cause payment increases that some borrowers might
be unable to service.
Parent Holdings attempts to mitigate the credit risks associated with
mortgage lending activities by the use of carefully developed underwriting
standards. Substantially all 1-4 unit residential loans originated are
underwritten to conform with standards adopted by Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), or other
secondary market investors. Accordingly, Parent Holdings' underwriting
standards include loan-to-value ("LTV") ratios and maximum loan amounts for
both fixed rate loans and ARMs that closely mirror secondary market
requirements. Generally, where these standards differ, specific strong
compensating factors are required. With respect to ARMs, Parent Holdings
underwrites the borrower's ability to pay at the maximum second year payment
rate, consistent with secondary market requirements.
In addition to the interest earned on its loans, Parent Holdings charges
fees for loan originations, loan prepayments and modifications, late payments,
changes of property ownership and other similar services. The amount of this
fee income varies with the volume of loan originations, prepayments, the
general economic conditions affecting the portfolio and other competitive
factors affecting the mortgage market.
Generally, late charges are assessed when payments are delinquent. On
loans secured by residential real estate, these charges are generally limited
to 4% to 6% of the overdue payment of principal and interest and cannot be
imposed until the payment is more than 15 days late, in accordance with the
contractual terms of the loans and regulatory requirements in effect when the
loans were made.
100
<PAGE>
Composition of Loan Portfolio
The composition of Parent Holdings' loan portfolio, excluding loans held
for sale and Covered Assets, is set forth in the following table, at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------ --------- --------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential ................. $14,071 $6,118 $5,423 $ 5,612 $19
5+ unit residential .................. 3,035 2,164 1,854 2,178 --
Commercial real estate ............... 2,146 1,978 1,716 2,015 10
Land ................................. 5 11 9 15 --
Construction ......................... 1 6 -- 8 --
------- ------ ------ ------- ---
Total real estate loans ........... 19,258 10,277 9,002 9,828 29
------- ------ ------ ------- ---
Equity-line and consumer loans ......... 676 298 170 492 5
Commercial loans ....................... 8 30 2 1 --
------- ------ ------ ------- ---
Total loans receivable ............ 19,942 10,605 9,174 10,321 34
------- ------ ------ ------- ---
Less:
Unearned discounts and loan fees ..... (46) (5) (19) -- 3
Allowance for loan losses ............ 439 247 210 203 2
Purchase accounting adjustments,
net ................................. 125 150 153 151 --
------- -------- ------ ------- ---
Loans receivable, net ............. $19,424 $10,213 $8,830 $ 9,967 $29
======= ======== ====== ======= ===
</TABLE>
The following table presents Parent Holdings' real estate loan portfolio
(excluding loans held for sale), by collateral type, interest rate type and
state concentration at December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL REAL
---------------------- -------------------- -------------------- ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- ----------------------------- ---------- --------- ---------- ------- ---------- ------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ............... $10,299 $ 869 $2,241 $147 $1,750 $ 89 $15,395 79.94%
New York ................. 332 73 176 20 28 22 651 3.38
Florida .................. 405 79 61 10 21 8 584 3.04
Nevada ................... 182 15 86 4 19 2 308 1.60
Illinois ................. 112 56 25 3 32 5 233 1.21
Texas .................... 129 59 -- 2 1 4 195 1.01
Other states (1) ......... 1,158 303 218 42 157 14 1,892 9.82
------- ------ ------ ---- ------ ---- ------- ------
Total ................. $12,617 $1,454 $2,807 $228 $2,008 $144 $19,258 100.00%
======= ====== ====== ==== ====== ==== ======= ======
</TABLE>
- ----------
(1) Real estate loans involving property located in 44 states, Puerto Rico
and the District of Columbia; not more than 1.0% of the total amount of
such loans are located in any one state.
101
<PAGE>
The following table summarizes Parent Holdings' loan portfolio, excluding
loans held for sale, at December 31, 1997, based upon various contractually
scheduled principal payments allocated to the indicated maturity categories.
This table does not reflect expected prepayments.
<TABLE>
<CAPTION>
DUE OVER ONE
WITHIN BUT WITHIN OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------ ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential
Fixed rate ........................ $ 2 $ 1,320 $ 132 $ 1,454
Variable rate ..................... -- 12,032 585 12,617
5+ unit residential
Fixed rate ........................ 12 42 174 228
Variable rate ..................... 178 580 2,049 2,807
Commercial real estate and other
Fixed rate ........................ 9 64 71 144
Variable rate ..................... 227 841 940 2,008
---- ------- ------ -------
Total .......................... 428 14,879 3,951 19,258
---- ------- ------ -------
Commercial and consumer loans:
Fixed rate ........................ 27 248 33 308
Variable rate ..................... 35 66 275 376
---- ------- ------ -------
Total .......................... 62 314 308 684
---- ------- ------ -------
Total loans receivable ......... $490 $15,193 $4,259 $19,942
==== ======= ====== =======
</TABLE>
1-4 Unit Residential Lending
Parent Holdings currently offers three primary 1-4 unit residential ARM
programs, and a variety of 1-4 unit fixed rate programs with maturities ranging
from 15 to 30 years. Adjustable rate programs include loans which: (i) provide
for monthly interest rate adjustments, after the third or sixth month from
inception of the loan, based on the Federal Home Loan Bank ("FHLB") 11th
District Cost of Funds, (ii) provide for annual rate adjustments based upon the
weekly average yield on U.S. Treasury Securities adjusted to a constant
maturity of one year, or (iii) provide for semi-annual rate adjustments based
on the weekly average of the secondary market rates on six-month negotiable
certificates of deposit. Some ARMs offer an option to convert to a fixed rate
after the first year through the fifth year of the loan term. A variety of
features are incorporated into ARMs to protect borrowers from unlimited
adjustments in interest rates and payments. All ARMs have lifetime caps which
limit the amount of rate increases over the life of the loan. ARMs whose rates
adjust annually have rate caps which limit the amount that rates can change to
two percentage points per year. Loans which adjust monthly based upon the FHLB
11th District Cost of Funds limit payment changes to no more than 7.5% of the
payment amount per year. This may lead to monthly payments which are less than
the amount necessary to amortize the loan to maturity at the interest rate in
effect for any particular month. In the event that the monthly payment is not
sufficient to pay interest accruing on the loan during the month, this
deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding principal balance for a particular loan is
generally not allowed to exceed 125% of the original loan amount as a result of
negative amortization. If the loan reaches its maximum amount, the loan payment
is recalculated to the payment sufficient to repay the unpaid principal balance
in full at the maturity date. As of December 31, 1997, Parent Holdings'
capitalized interest relative to such 1-4 unit residential loans was
approximately $20.3 million. This amount represents approximately .42% of the
approximately $4.8 billion of 1-4 unit residential ARMs that have the potential
to experience negative amortization. Parent Holdings also originates 15 and 30
year fully amortizing 1-4 unit fixed rate residential loans under a variety of
fixed rate programs, primarily for resale in the secondary mortgage market.
When 1-4 unit residential loans are sold, FNMC normally retains the servicing
of the loan. See " --Mortgage Banking Operations" for a further discussion of
these activities.
102
<PAGE>
Multi-family, Commercial and Other Real Estate Lending
While Parent Holdings has always originated multi-family, commercial and
other real estate loans as they relate to affordable housing programs, it began
to originate other commercial real estate loans during 1997 on a limited basis.
Parent Holdings' loan portfolio includes loans principally acquired through
acquisitions which are secured by multi-family residential, commercial,
industrial and unimproved real estate. Parent Holdings' variable rate
multi-family and commercial real estate loans have a maximum amortized loan
term of 30 years with some loans having balloon payments due in one to 15
years. ARMs primarily adjust with the FHLB 11th District Cost of Funds or the
six-month Treasury Bill indices with a monthly or semi-annual rate adjustment.
The terms and characteristics of the ARMs originated for multi-family and
commercial real estate lending purposes are similar to those for residential
lending. As such, many of the same risks and protections related to residential
borrowers are present in the multi-family and commercial real estate
portfolios, including the potential for negative amortization. Negative
amortization for multi-family and commercial real estate loans is allowed to
increase the outstanding principal balance to 110% of the original loan amount.
If the loan reaches 110% of the original loan amount, all future interest rate
increases will increase the monthly payment to amortize the loan over the
remaining life of the loan. At December 31, 1997, Parent Holdings' capitalized
interest relative to such loans was approximately $1.5 million, which
represents approximately .06% of the $2.7 billion of multi-family and
commercial real estate loans that have the potential to experience negative
amortization.
Real estate loans secured by multi-family and commercial property
represent a significant portion of Parent Holdings' portfolio. Management
periodically reviews the multi-family and commercial real estate loan
portfolio. At December 31, 1997 and 1996, the multi-family and commercial real
estate loan portfolio totalled $5.2 billion and $4.1 billion, respectively.
Included in the multi-family and commercial real estate loan portfolio at
December 31, 1997 are $28.9 million of loans with credit enhancement wherein
the lead participant subordinated its minority interest in a pool of loans to
Parent Holdings' interest in the corresponding pool of loans. No loans are
subject to be repurchased by the seller in the event such loans become 90 days
delinquent.
Parent Holdings' potential for loss on the multi-family and commercial
loan portfolio acquired from Old FNB and, to a lesser extent, the 1-4 unit
residential loan portfolio acquired from Old FNB, was mitigated by the terms of
the Non-Performing Asset Sale Agreement (the "Put Agreement") entered into by
Cal Fed with Granite Management and Disposition, Inc. ("Granite"), an affiliate
of Old FNB, in connection with the FN Acquisition. The Put Agreement expired on
November 30, 1996, at which time it had been fully utilized by Cal Fed. The
aggregate purchase price of assets which were put to Granite, representing the
outstanding principal balance, accrued interest and certain other expenses, was
$500 million, including assets put to Granite by Old FNB from January 1 through
October 1, 1994.
A portion of Parent Holdings' mortgage servicing rights ("MSRs"), which
are rights to service mortgages held by others, were acquired from Old FNB and
Old California Federal which had sold multi-family and commercial real estate
loans subject to certain recourse provisions. These recourse liabilities were
assumed by Parent Holdings in the FN and Cal Fed Acquisitions and at December
31, 1997, the balance of such loans sold with recourse totalled $653 million.
Consumer Lending
Parent Holdings' consumer loan originations are primarily concentrated in
home equity lending. The portfolio correlates closely to retail deposit branch
distribution. At December 31, 1997, the home equity portfolio totalled $355
million, or 52.5%, of the total consumer loan portfolio of $676 million. At
December 31, 1996, the home equity portfolio totalled $243 million, or 81.5%,
of the total consumer loan portfolio of $298 million.
Parent Holdings offers an adjustable, prime interest rate-based home
equity line of credit on owner-occupied residential properties. In determining
the amount of credit to be extended, all loans secured by the collateral
properties are aggregated and compared to the appraised value of the
properties. Parent Holdings' policy is to extend credit up to a maximum
combined LTV ratio of 80%.
103
<PAGE>
Other consumer loan products include: fixed rate home equity installment
loans; adjustable prime rate-based home equity loans which, while secured, are
based on repayment ability and credit history; auto and boat loans; unsecured
lines of credit; overdraft protection; and loans secured by certificates of
deposit.
Parent Holdings has recently commenced sub-prime auto lending in
connection with the Auto One Acquisition. At December 31, 1997, Parent
Holdings' sub-prime auto loan portfolio totalled $190 million, which loans were
purchased in bulk from a third party or from independent automobile dealers
after the consummation of the Auto One Acquisition. Underwriting on loans
purchased from dealers is performed by Auto One personnel prior to the
purchase.
Loans Held for Sale
Activity related to loans held for sale for the years ended December 31,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Balance at beginning of period ......... $ 825 $ 1,203
Purchases and originations ............. 7,871 4,985
Sales .................................. (5,511) (5,157)
Other .................................. (1,702) (206)
-------- --------
Balance at end of period ............... $ 1,483 $ 825
======== ========
</TABLE>
Loans held for sale are carried at the lower of aggregate amortized cost
or market value.
Origination of 1-4 Unit Residential Loans
Parent Holdings originates 1-4 unit residential loans principally through
the efforts of wholesale origination offices through which loans are purchased
from independent loan brokers and, to a lesser degree, staff loan agents. To
promote continuity of customer service, help meet credit needs and to increase
opportunities to sell customer deposit and other financial services offered by
Parent Holdings and its subsidiaries, loan inquiries from retail branch
customers and "walk-in" applicants are encouraged. These inquiries are
initially processed by retail branch office personnel, with support provided by
regional lending offices. The 1-4 unit residential loan agents are compensated
principally on a commission basis. Closed 1-4 unit residential loans are also
acquired by FNMC through a correspondent lending operation acquired from LMUSA
in October 1995.
The majority of 1-4 unit residential loans originated by Parent Holdings
have LTV ratios of 80% or less at the time of origination. Parent Holdings has
originated such loans with LTV ratios of up to 95%, with the portion of the
loan exceeding 80% guaranteed by private mortgage insurance, the premiums of
which are paid monthly by the borrower. Certain exceptions to this guideline
have been made for low and moderate income borrowers. However, the amount of
1-4 unit residential loans subject to such exceptions is not significant in
terms of Parent Holdings' total loan originations. The value of the property
offered as security for a 1-4 unit residential loan is determined by a
professionally qualified appraiser approved by Parent Holdings, who may or may
not be an employee of Cal Fed. As further security for its loan, Parent
Holdings requires title insurance and fire and casualty insurance on all loans
secured by liens on real property. Parent Holdings also requires flood
insurance on any loan secured by real property if the property lies within a
U.S. Housing and Urban Development Department ("HUD") designated flood hazard
area.
104
<PAGE>
The following table summarizes 1-4 unit residential loan originations for
the years ended December 31, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
1997 1996
------------------------------------- ------------------------------------
ARM FIXED TOTAL ARM FIXED TOTAL
PRODUCTION CHANNEL ----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Retail and portfolio retention ..... $ 74.4 $ 580.3 $ 654.7 $ 7.3 $ 265.3 $ 272.6
Wholesale .......................... 635.3 3,438.8 4,074.1 699.2 1,451.0 2,150.2
Correspondent lending .............. 1,420.0 1,321.0 2,741.0 -- 1,692.2 1,692.2
Other .............................. -- 1,040.3 1,040.3 -- 892.9 892.9
--------- --------- --------- ------- --------- ---------
Total 1-4 unit residential
loan originations ............. $ 2,129.7 $ 6,380.4 $ 8,510.1 $ 706.5 $ 4,301.4 $ 5,007.9
========= ========= ========= ======= ========= =========
</TABLE>
Mortgage Banking Operations
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, Parent Holdings originates fixed rate 1-4
unit residential loans for sale in the secondary mortgage market. ARMs
originated prior to September 30, 1995 and after December 31, 1996 have
generally been held by Parent Holdings for investment. From September 30, 1995
through December 31, 1996, however, substantially all of the fixed and variable
rate 1-4 unit residential loans originated were sold in the secondary market to
provide funds for the acquisition and divestiture activity occurring during the
period. Parent Holdings employs forward sale hedging techniques to minimize the
interest rate and pricing risks associated with the origination and sale of
fixed rate 1-4 unit residential loans.
At the time of origination, management identifies 1-4 unit residential
loans that are expected to be sold in the foreseeable future. At December 31,
1997, management had identified $1.5 billion of 1-4 unit residential loans as
held for sale. These loans have been classified as assets held for sale in the
consolidated balance sheet at December 31, 1997 and are recorded at the lower
of aggregate amortized cost or market value. At December 31, 1997, Parent
Holdings had forward commitments to sell loans totalling $1.4 billion. In
addition, Parent Holdings had entered into commitments to originate and
purchase fixed and variable rate loans (mortgage loan pipeline) of $1.7
billion.
The servicing portfolio of FNMC (including loans subserviced for others
and excluding loans serviced for Cal Fed) approximates $46.6 billion and
695,237 loans as of December 31, 1997. The servicing portfolio of FNMC,
including loans serviced for Cal Fed, approximates $61.8 billion and 811,036
loans as of December 31, 1997. Substantially all of FNMC's loans are serviced
in a 230,000 square-foot facility in Frederick, Maryland.
Since the FN Acquisition, Parent Holdings has sold fixed rate and
adjustable rate loans secured by 1-4 unit residential real estate to FNMA,
FHLMC, and private investors. Mortgage loan sales totalled $5.5 billion and
$4.9 billion in 1997 and 1996, respectively.
Old FNB and Old California Federal occasionally sold 1-4 unit residential
loans under recourse provisions; such liabilities were assumed by Parent
Holdings in the FN and Cal Fed Acquisitions. As of December 31, 1997, the
balance of 1-4 unit residential loans sold with certain recourse provisions was
$355.8 million.
Parent Holdings, through FNMC, has generally retained the right to service
the loans it has sold. FNMC collects from the borrower payments of principal
and interest and, after retaining a servicing fee, remits the balance to the
investors.
In accounting for its mortgage loan sales prior to April 1, 1995, a gain
or loss was recognized based on the sum of three components: (i) the difference
between the cash proceeds of the loan sales and Parent Holdings' book value of
the loans; plus (ii) the "excess servicing," if any; less (iii) provisions for
estimated losses to be incurred from limited recourse obligations, if any.
Excess servicing resulted in a capitalized asset that reflects the discounted
present value of any difference between the interest rate received from the
borrower and the interest rate passed through to the purchaser of the loan,
less a "normal servicing
105
<PAGE>
fee" (dependent upon loan type), which is retained as compensation for future
servicing costs. The amount of excess servicing recognized in any particular
loan sale depended significantly upon three factors for which estimates or
assumptions were employed: (i) the estimated life of the loans, (ii) the
discount rate used in calculating discounted present value and (iii) the
"normal servicing fee."
Effective April 1, 1995, Parent Holdings adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122") which requires that, when a mortgage loan is sold and
MSRs are retained, a portion of the cost of originating a mortgage loan be
allocated to the MSR based on its fair market value. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Mortgage Banking Operations" for a description of SFAS No. 122.
The servicing asset is amortized in proportion to, and over the period of,
estimated net servicing income. Parent Holdings monitors the prepayments on the
loans serviced for investors and reduces the balance of the asset if the actual
prepayments are in excess of the estimated prepayment trends used to record the
original asset. Parent Holdings' assumptions relative to the prepayment speed,
discount and servicing fee rates are revised periodically to reflect current
market conditions and regulatory requirements.
At December 31, 1997, FNMC owned rights to service approximately $42.4
billion of whole loans, participation interests and mortgage-backed securities
for others. These loans had an average balance of $64,700, a weighted average
coupon rate of 8.10%, a weighted average maturity of 272 months and a service
fee spread of .43%. The greater than 30 day delinquency rate on these loans at
December 31, 1997 was 2.94%. Parent Holdings subserviced for others
approximately $4.2 billion of whole loans, participation interests and
mortgage-backed securities. These loans had an average balance of $90,616, a
weighted average coupon rate of 8.09% and a weighted average remaining maturity
of 270 months. The servicing fee collected on these loans is passed through to
the primary servicer with Parent Holdings retaining a flat subservice fee that
is netted out of the monthly remittance. The greater than 30 day delinquency
rate on these loans is 5.22%. For the year ended December 31, 1997, gross
revenue for servicing activities (residential loan servicing and ancillary
fees) totalled $235.7 million.
Changes in long-term interest rates generally cause an acceleration or
deceleration of mortgage loan prepayments and, consequently, in the
amortization of MSRs, resulting in a change in the market value of MSRs and in
Parent Holdings' servicing fee income. In order to reduce the sensitivity of
its earnings to interest rate and market value fluctuations, Parent Holdings
initiated a program to hedge the change in value of its MSRs based on changes
in interest rates. At December 31, 1997, Parent Holdings, through FNMC, was a
party to several interest rate floor contracts maturing from October 2001
through June 2002. Parent Holdings paid counterparties a premium in exchange
for cash payments in the event that the 10-year Constant Maturity Treasury rate
falls below the negotiated strike prices. At December 31, 1997, the notional
amount of the interest rate floors was $970 million and the negotiated strike
prices were between 5.0% and 6.5%. In addition, Parent Holdings, through FNMC,
entered into principal-only swap agreements with a notional amount of $99
million. The estimated market values of the interest rate floor contracts and
swaps designated as hedges against MSRs at December 31, 1997 were $18.0 million
and $13.5 million, respectively.
On October 2, 1995, in the LMUSA 1995 Purchase, FNMC purchased the stock
of Lomas Mortgage Services Inc. (now known as FNMC Mortgage Services, Inc.),
which was a 33% owner of Lomas Mortgage Partnership L.P. (now known as First
Nationwide Mortgage Partnership LP ("FNMP")) and its managing general partner.
FNMP owned the MSRs to approximately $2.3 billion of loans serviced for FNMA,
GNMA, FHLMC and private investors. FNMP's investment in such MSRs and its other
assets were partially funded by independent bank lines of credit totalling
approximately $24.8 million and its servicing duties were performed by FNMC
under a subservicing contract. As of January 1, 1998, FNMC purchased the other
67% of FNMP.
NON-PERFORMING ASSETS
Non-performing assets consist of non-performing loans, foreclosed real
estate and repossessed assets. Parent Holdings' exposure to losses relative to
certain assets acquired in the FN Acquisition that became
106
<PAGE>
non-performing or otherwise problematic prior to November 30, 1996 was
mitigated to the extent Cal Fed was able to put such loans to Granite under the
Put Agreement. See "-- Other Activities -- The Put Agreement."
Classification of Assets
Savings associations are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly reports
of troubled asset classification to the OTS. Assets must be classified as
"pass," "special mention," "substandard," "doubtful" or "loss." An asset is
generally designated as "special mention" if potential weaknesses are
identified that, if left uncorrected, would result in deterioration of the
repayment prospects for the asset. An asset, or a portion thereof, is generally
classified as "substandard" if it possesses a well-defined weakness which could
jeopardize the timely liquidation of the asset or realization of the collateral
at the asset's book value. Thus, these assets are characterized by the
possibility that the association will sustain some loss if the deficiencies are
not corrected. An asset, or portion thereof, is classified as "doubtful" if
identified weaknesses make collectibility or liquidation in full highly
questionable and improbable. An asset, or a portion thereof, that is considered
to be uncollectible is classified "loss." It should be noted that Cal Fed does
not maintain assets in a loss classification category; rather, the carrying
value of all troubled assets is reduced by any amount considered to be
uncollectible. The OTS has the authority to approve, disapprove or modify any
asset classification or any amount established as an allowance pursuant to such
classification. Savings associations must maintain adequate general valuation
allowances in accordance with generally accepted accounting principles and
federal regulations for assets classified as "substandard" or "doubtful" and
either immediately write off assets classified as "loss" or establish specific
valuation allowances equal to the amounts classified as "loss."
Cal Fed has a comprehensive process for classifying assets, and asset
reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral
type and/or location, and potential loan performance problems. The objective of
the review process is to identify significant trends and determine the levels
of loss exposure to Parent Holdings that would require increases to specific
and general valuation allowances.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are cured
promptly; however, foreclosure proceedings, and in some cases workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which Parent Holdings originates loans, the value of the underlying
collateral property is usually the principal source of recovery available to
satisfy the loan balance.
In general, loans are placed on nonaccrual status after being
contractually delinquent for more than 90 days. When a loan is placed on
nonaccrual status, all interest previously accrued but not received is reversed
and the loan is considered non-performing. Parent Holdings may modify or
restructure a loan as a result of a borrower's inability to service the
obligation under the original terms of the loan agreement.
107
<PAGE>
The following table indicates the carrying value of Parent Holdings'
loans, excluding Covered Assets, which have been placed on nonaccrual status,
as well as the carrying value of foreclosed real estate and repossessed assets,
at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ---------- ---------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Real estate:
1-4 unit residential .......................... $ 165 $ 146 $ 136 $ 133 $ 2
5+ unit residential ........................... 12 13 23 24 9
Commercial and other .......................... 6 9 9 11 --
Land .......................................... -- -- -- 7 --
Construction .................................. 2 1 -- 2 --
------ ------ ------- ------- --------
Total real estate ............................ 185 169 168 177 11
Equity-line and consumer ........................ 7 3 3 4 --
------ ------ ------- ------- --------
Total non-performing loans .................... 192 172 171 181 11
Foreclosed real estate, net ...................... 77 52 49 37 --
Repossessed assets ............................... 3 -- -- -- --
------ ------ ------- ------- --------
Total non-performing assets ................... $ 272(a) $ 224(b) $ 220 $ 218 $ 11
====== ====== ======= ======= ========
Non-performing loans as a percentage of Cal Fed's
loans receivable ................................ 0.99% 1.69% 1.94% 1.81% 37.61%(c)
====== ====== ======= ======= ========
Non-performing assets as a percentage of Cal Fed's
total assets .................................... 0.87% 1.36% 1.50% 1.49% 0.98%
====== ====== ======= ======= ========
</TABLE>
- ----------
(a) Includes $70.2 million of assets acquired in the Cal Fed
Acquisition.
(b) Includes $74.5 million of non-performing assets acquired in the 1996
Acquisitions and in the LMUSA 1996 Purchase.
(c) The significant percentage of non-performing loans to loans
receivable at December 31, 1993 reflects the small balance of loans
receivable of $29 million at December 31, 1993.
Interest income of $6.8 million was received and recognized by Parent
Holdings for nonaccrual loans during the year ended December 31, 1997, instead
of $15.9 million which would have been recognized had the loans performed in
accordance with their original terms. Parent Holdings has had no loans
contractually past due 90 days or more on accrual status in the past five
years.
The following table indicates loans classified by Parent Holdings as
troubled debt restructurings, net of purchase accounting adjustments, and
excluding Covered Assets, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential ............... $ 2 $ 3 $ 8 $ 19 $--
5+ unit residential ................ 7 55 147 204 --
Commercial and other ............... 26 29 79 110 --
--- --- ---- ---- ---
Total restructured loans ......... $35 $87 $234 $333 $--
=== === ==== ==== ===
</TABLE>
For the year ended December 31, 1997, interest income of $3.5 million was
recognized on restructured loans instead of the $3.6 million which would have
been recognized had the loans been performing in accordance with their original
terms. There were no non-real estate restructured loans in any of the past five
years.
108
<PAGE>
Allowance for Loan Losses
Parent Holdings charges current earnings with a provision for estimated
credit losses on loans receivable to bring the total allowance to a level
deemed appropriate by management. The provision considers both specifically
identified problem loans and credit risks not specifically identified in the
loan portfolio. The allowance for loan losses is based on such factors as the
financial condition of the borrowers, the fair value of the loan collateral,
recourse to guarantors, analysis of delinquency trends, geographic and
collateral-type concentrations, past loss experience, regulatory policies, and
other factors related to the collectibility of Parent Holdings' loan portfolio.
The following table summarizes activity in Parent Holdings' allowance for
loan losses during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------- ----------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ....................... $247 $ 210 $ 203 $ 2 $ 15
Purchases -- SFFed Acquisition ...................... -- 40 -- -- --
Purchases -- Home Federal Acquisition ............... -- 5 -- -- --
Purchases -- FN Acquisition ......................... -- -- -- 202 --
Purchases -- Cal Fed Acquisition .................... 144 -- -- -- --
Allowance on purchased indirect auto loans .......... 20 -- -- -- --
Provision for loan losses ........................... 80 40 37 6 1
Charge-offs:
1-4 unit residential .............................. (38) (35) (28) (4) --
5+ unit residential and commercial real estate (8) (4)(a) --(a) (4)(a) --
Consumer and other ................................ (10) (6) (5) (1) (1)
Non-real estate commercial ........................ -- -- -- -- (1)
------ ------- ------- ------- -------
Total charge offs ................................ (56) (45) (33) (9) (2)
Recoveries .......................................... 4 3 3 2 1
------ ------- ------- ------- ------
Net charge-offs ................................... (52) (42) (30) (7) (1)
Allowance for losses assigned to loans sold ......... -- (6) -- -- (13)
------ -------- ------- ------- ------
Balance at end of period ............................. $439 $ 247 $ 210 $ 203 $ 2
</TABLE>
- ----------
(a) Lack of activity reflects the utilization of the Put Agreement,
which expired in November 1996.
109
<PAGE>
Although the general loan loss allowance has been allocated by type of
loan for internal valuation purposes, all such allowance, with the exception of
the $20 million applicable to Auto One loans (which are accounted for on a
static pool method), is available to support any losses which may occur,
regardless of type, in Parent Holdings' loan portfolio.
The following table sets forth the allocation of Parent Holdings'
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Specific allowance:
Real estate loans:
1-4 unit residential ..................... $ -- $ -- $ 1 $ 4 $--
5+ unit residential and commercial real
estate .................................. 8 6 -- -- --
---- ---- ---- ---- ---
Total specific allowance ................ 8 6 1 4 --
---- ---- ---- ---- ---
General allowance:
Real estate loans:
1-4 unit residential ..................... 202 123 115 105 2
5+ unit residential and commercial real
estate .................................. 190 109 85 85 --
---- ---- ---- ---- ---
Total real estate loans ................. 392 232 200 190 2
Equity-line and consumer loans ............. 39 9 9 9 --
---- ---- ---- ---- ---
Total general allowance ................. 431 241 209 199 2
---- ---- ---- ---- ---
Total allowance for loan losses ......... $439 $247 $210 $203 $ 2
==== ==== ==== ==== ===
</TABLE>
The table below provides Parent Holdings' ratios of net charge-offs on
loans during the period indicated to average outstanding loan balances for the
years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential .............................. 0.25% 0.55% 0.47% 0.06% 1.26%
5+ unit residential and commercial real estate..... 0.15 0.09 -- 0.10 0.19
Consumer and other ................................. 1.72 1.86 1.00 0.23 0.24
Non-real estate commercial ......................... -- -- -- -- 1.29
</TABLE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Problem and Potential Problem Assets" for a discussion
of Parent Holdings' impaired loans as of December 31, 1997 and 1996.
INVESTMENT ACTIVITIES
Cal Fed is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. Cal Fed
is also permitted to invest in certain other types of securities. Securities
balances (including cash equivalent securities) exceeding minimum federal
requirements are subject to change over time based on Cal Fed's asset/liability
funding needs and interest rate risk management objectives. Cal Fed's liquidity
levels take into consideration anticipated future cash flows and all available
sources of credit. Liquidity is maintained at levels management believes are
appropriate to assure future flexibility in meeting anticipated funding needs
including deposit withdrawal requests, loan funding commitments, and other
investment or restructuring requirements.
110
<PAGE>
Cash Equivalents
Parent Holdings sells federal funds, purchases securities under agreements
to resell, and invests in interest-bearing deposits in other banks from time to
time to help meet Cal Fed's regulatory liquidity requirements and as temporary
holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
Parent Holdings adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS No. 115") effective January 1, 1994. On
November 15, 1995, the Financial Accounting Standards Board ("FASB") issued "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" (the "Special Report"). The Special Report
provided all entities an opportunity to reassess their ability and intent to
hold securities to maturity and allowed a one-time reclassification of
securities from held-to-maturity to available-for-sale without "tainting" the
remaining held-to-maturity securities. On December 29, 1995, Parent Holdings
reclassified $231.8 million in carrying value of U.S. government and agency
securities from held-to-maturity to securities available for sale, and recorded
an increase of $1.9 million and $.5 million in stockholder's equity and
minority interest--Hunter's Glen, respectively, for the net unrealized gain on
such securities.
111
<PAGE>
The following summarizes the amortized cost and estimated fair value of
Parent Holdings' securities available for sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities .................... $ -- $ -- $ -- $ -- $ --
U.S. government and agency obligations .......... 812,716 957 (588) 369 813,085
-------- ---- ------ ----- --------
Total .......................................... $812,716 $957 $ (588) 369 $813,085
======== ==== ====== ========
Minority interest -- Hunter's Glen .............. (65)
Estimated tax effect ............................ (47)
-----
Net unrealized holding gain in stockholder's
equity ....................................... $ 257
=====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities .................... $ 27,034 $34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency obligations .......... 480,317 936 (1,222) (286) 480,031
-------- ------- -------- -------- --------
Total .......................................... $507,351 $35,890 $ (1,222) 34,668 $542,019
======== ======= ======== ========
Minority interest -- Hunter's Glen .............. (6,240)
Estimated tax effect ............................ (3,466)
--------
Net unrealized holding gain in stockholder's
equity ....................................... $ 24,962
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities .................... $ 34,000 $80,068 $ -- $ 80,068 $114,068
U.S. government and agency obligations .......... 231,794 2,768 (69) 2,699 234,493
-------- ------- ----- --------- --------
Total .......................................... $265,794 $82,836 $ (69) 82,767 $348,561
======== ======= ===== ========
FDIC portion of unrealized gain on marketable
equity securities .............................. (34,534)
Minority interest -- Hunter's Glen .............. (8,682)
Estimated tax effect ............................ (4,822)
---------
Net unrealized holding gain in stockholder's
equity ....................................... $ 34,729
=========
</TABLE>
112
<PAGE>
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of Affiliated Computer
Services ("ACS"), with a cost basis of $27 million. The ACS stock represents
the only marketable equity security classified as available for sale at
December 31, 1996 and 1995. Pursuant to the terms of a settlement agreement
dated June 17, 1991, between Cal Fed, ACS, and the FDIC, the FDIC was entitled
to share in a defined portion of the proceeds from the sale of the stock,
which, at December 31, 1995, approximated $34.5 million and which was recorded
in other liabilities. On June 28, 1996, Cal Fed sold 2,000,000 shares of its
investment in common stock of ACS for gross proceeds totalling $92.3 million
from which it satisfied its full obligation to the FDIC and recognized a
pre-tax gain of $40.4 million. Cal Fed's remaining shares of ACS stock were
sold in October 1997, resulting in a pre-tax gain of approximately $25.0
million.
Securities Held to Maturity
The following summarizes the amortized cost and estimated fair value of
Parent Holdings' securities held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U. S. government and agency
obligations ....................... $-- $-- $ 4 $ 4 $-- $--
Municipal and other securities ..... -- -- -- -- 1 1
Commercial paper ................... 58 58 -- -- -- --
--- --- --- --- --- ---
Total ............................. $58 $58 $ 4 $ 4 $ 1 $ 1
=== === === === === ===
</TABLE>
The weighted average stated interest rate on Parent Holdings' securities
held to maturity was 5.32%, 6.85% and 8.25% at December 31, 1997, 1996 and
1995, respectively.
113
<PAGE>
Mortgage-Backed Securities Available for Sale
The following summarizes the amortized cost and estimated fair value of
Parent Holdings' mortgage-backed securities ("MBS") available for sale at the
dates indicated (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA ........................................ $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA ........................................ 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC ....................................... 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS ................................... 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage obligations ......... 606,965 2,698 (1,868) 830 607,795
---------- ------- -------- -------- ----------
Total ..................................... $5,036,653 $48,395 $ (8,450) 39,945 $5,076,598
========== ======= ======== ==========
Minority interest -- Hunter's Glen ........... (6,968)
Estimated tax effect ......................... (5,105)
--------
Net unrealized holding gain in stockholder's
equity ...................................... $ 27,872
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA ........................................ $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA ........................................ 523,894 5,113 (5,042) 71 523,965
FHLMC ....................................... 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage obligations ......... 364,675 497 (1,244) (747) 363,928
---------- ------- -------- -------- ----------
Total ..................................... $1,581,966 $23,377 $ (6,691) 16,686 $1,598,652
========== ======= ======== ==========
Minority interest -- Hunter's Glen ........... (3,004)
Estimated tax effect ......................... (1,669)
--------
Net unrealized holding gain in stockholder's
equity .................................... $ 12,013
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA ........................................ $ 14,018 $ 906 $ -- $ 906 $ 14,924
FNMA ........................................ 294,070 5,643 -- 5,643 299,713
FHLMC ....................................... 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations ......... 345,699 793 (4,678) (3,885) 341,814
---------- ------- --------- -------- ----------
Total ..................................... $1,455,180 $27,013 $(4,679) 22,334 $1,477,514
========== ======= ========= ==========
Minority interest -- Hunter's Glen ........... (4,020)
Estimated tax effect ......................... (2,233)
--------
Net unrealized holding gain in stockholder's
equity .................................... $ 16,081
========
</TABLE>
On December 29, 1995, Parent Holdings reclassified $1.5 billion in
carrying value of mortgage-backed securities from held-to-maturity to
mortgage-backed securities available for sale. This reclassification resulted
in a net after-tax increase in the unrealized gain account in stockholder's
equity and minority interest-Hunter's Glen of $16.1 million and $4.0 million,
respectively.
114
<PAGE>
At December 31, 1997, 1996 and 1995, mortgage-backed securities available
for sale included securities totalling $1.4 billion, $53.0 million and $63.4
million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from Cal Fed's, Old California Federal's and San
Francisco Federal's loan portfolios.
Mortgage-backed securities available for sale included $4.6 billion, $1.1
billion and $979.0 million of variable-rate securities as of December 31, 1997,
1996 and 1995, respectively.
Parent Holdings maintains a significant portfolio of mortgage-backed
securities as a means of investing in housing-related mortgage instruments
without the costs associated with originating mortgage loans for portfolio
retention and the credit risk of default which arises in holding a portfolio of
loans to maturity. By investing in mortgage-backed securities, management seeks
to achieve a positive spread over the cost of funds used to purchase these
securities. Mortgage-backed securities available for sale are carried at fair
value, with unrealized gains and losses excluded from earnings and reported in
a separate component of stockholder's equity. Premiums and discounts on the
purchase of mortgage-backed securities are amortized or accreted as a yield
adjustment over the life of the securities using the interest method, with the
amortization or accretion effect of prepayments being adjusted based on revised
estimates of future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings. Mortgage-backed securities issued or guaranteed by GNMA are
generally weighted at 0% for risk-based capital purposes. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations
("CMOs")) are generally weighted at 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans.
Parent Holdings held privately issued CMOs with an aggregate carrying
value of $316.1 million at December 31, 1997. The largest such investment held
by Parent Holdings at December 31, 1997 is a CMO issued by Salomon Brothers
Inc., with an aggregate carrying value and market value of $54 million and $55
million, respectively.
At December 31, 1997, all of the mortgage-backed securities held by Parent
Holdings had one of the two highest credit ratings from one or more of the
national securities rating agencies except for $76 million, of which $74
million are non-rated CMO residual class securities formed by Old California
Federal from its own originations of residential mortgages. Such credit rating,
however, may be subject to revision or withdrawal at any time by such rating
agencies. The mortgage-backed securities which Parent Holdings purchases and
maintains in its portfolio include certain CMOs. A CMO is a special type of
pay-through debt obligation in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities and, in some cases, amortization
schedules and a residual class of the CMO security being sold, with each such
class possessing different risk characteristics. The residual interest sold
represents any residual cash flows which result from the excess of the monthly
receipts generated by principal and interest payments on the underlying
mortgage collateral and any reinvestment earnings thereon, less the cash
payments to the CMO holders and any administrative expenses. As a matter of
policy, due to the risk associated with residual interests, Parent Holdings
does not invest in the residual interests of CMOs.
115
<PAGE>
Mortgage-backed Securities Held to Maturity
A summary of Parent Holdings' mortgage-backed securities held to maturity
at the dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FNMA ........... $1,018 $1,038 $1,214 $1,232 $ 533 $ 548
FHLMC .......... 318 333 406 420 988 1,016
Other .......... 2 2 2 2 3 3
------ ------ ------ ------ ------ ------
Total ......... $1,338 $1,373 $1,622 $1,654 $1,524 $1,567
====== ====== ====== ====== ====== ======
</TABLE>
The weighted average stated interest rate on Parent Holdings'
mortgage-backed securities held to maturity was 7.33%, 7.27% and 7.46% at
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, 1996 and
1995, mortgage-backed securities held to maturity included variable rate
securities totalling $1.3 billion, $1.6 billion and $1.5 billion, respectively,
which resulted from the securitization with FNMA and FHLMC of certain
qualifying mortgage loans from Cal Fed's, Old California Federal's and San
Francisco Federal's loan portfolios with full recourse to Cal Fed.
For the years ended December 31, 1997, 1996 and 1995, Parent Holdings did
not sell any of its mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a decline
other than a temporary decline in value. Permanent declines in value are
charged to income in the periods in which the declines are determined. Premiums
and discounts on the purchase of mortgage-backed securities are amortized or
accreted as a yield adjustment over the life of the securities using the
interest method, with the amortization or accretion effect of prepayments being
adjusted based on revised estimates of future repayments.
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances
from the FHLB of San Francisco, sales, maturities and principal repayments on
loans and mortgage-backed securities and issuances of preferred stock have been
the major sources of funds for use in Parent Holdings' lending and investment
activities and other general business purposes. Management closely monitors
rates and terms of competing sources of funds on a daily basis and utilizes the
source which is most cost-effective. The availability of funds from sales of
loans and securities is influenced by the levels of general interest rates and
other market conditions. For additional information regarding Parent Holdings'
sources of funds, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity" and Parent Holdings'
Consolidated Statements of Cash Flows set forth in its Consolidated Financial
Statements. Parent Holdings and FNH intend, through the Refinancing, to
refinance all of the existing long-term debt of Parent Holdings and FNH and to
offer to purchase all of the outstanding preferred stock of Cal Fed with the
net proceeds of a proposed private offering of fixed and floating rate notes
(which notes will become obligations of New FNH upon consummation of the
Refinancing), and to the extent necessary, with a dividend from Cal Fed and
short-term borrowings by New FNH under a senior unsecured credit facility. It
is expected that the proposed Refinancing will be completed simultaneously with
or subsequent to the consummation of the Mergers. For a description of the
Refinancing, see "--Proposed Refinancing" below.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest
rates and money market conditions, and may fluctuate widely. Borrowings may be
used to compensate for reductions in normal sources of funds such as customer
deposits.
116
<PAGE>
Deposits
Parent Holdings, through Cal Fed, offers a variety of deposit accounts
designed to attract both short-term and long-term deposits. There are no rate
limitations on any type of deposit account presently offered by Cal Fed. The
ability of Cal Fed to retain and attract new deposits is dependent upon the
variety and effectiveness of its customer account products, customer service
and convenience, and prevailing market conditions. The following table shows
the distribution of deposits by type of account at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS
---------- ------------- -------- ------------- ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ...................... $ 2,162 13.4% $ 841 10.0% $ 664 6.5%
Demand deposits:
Interest-bearing ..................... 1,149 7.1 510 6.0 684 6.7
Noninterest-bearing .................. 1,179 7.3 729 8.6 697 6.8
Money market deposit accounts .......... 1,270 7.9 881 10.4 1,443 14.2
------- ----- ------ ----- ------- -----
Total transaction accounts ........... 5,760 35.7 2,961 35.0 3,488 34.2
Term accounts ........................... 10,390 64.3 5,503 65.0 6,696 65.8
------- ----- ------ ----- ------- -----
16,150 100.0% 8,464 100.0% 10,184 100.0%
===== ===== =====
Accrued interest payable ................ 52 32 51
Purchase accounting adjustments, net..... 1 6 7
------- ------ -------
Total ................................ $16,203 $8,502 $10,242
======= ====== =======
</TABLE>
Total deposits at December 31, 1997, 1996 and 1995 include escrow balances
for loans serviced for others of $702 million, $550 million and $348 million,
respectively. Deposit balances, excluding purchase accounting adjustments,
averaged $16.7 billion, $9.2 billion and $9.9 billion during 1997, 1996 and
1995, respectively, with average interest rates of 4.55%, 4.66% and 4.67%,
respectively. The weighted average stated interest rates on deposits at
December 31, 1997, 1996 and 1995 were 4.52%, 4.53% and 4.67%, respectively.
The following table presents the average balance and weighted average rate
paid on each deposit type of Cal Fed for the periods indicated, excluding the
impact of purchase accounting adjustments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
----------------------- --------------------- ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE BALANCE RATE PAID BALANCE
--------- ----------- --------- --------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ..................... $ 1,874 3.65% $1,154 2.72% $ 666 2.20%
Demand deposits:
Interest-bearing .................... 1,150 1.07 289 1.87 699 1.00
Noninterest-bearing ................. 1,280 -- 825 -- 583 --
Money market deposit accounts ......... 1,408 3.56 946 3.39 1,581 3.22
Term accounts .......................... 11,008 5.73 6,032 6.00 6,398 6.10
------- ---- ------ ---- ------ ----
Total ................................. $16,720 4.55% $9,246 4.66% $9,927 4.67%
======= ==== ====== ==== ====== ====
</TABLE>
117
<PAGE>
The following table sets forth the scheduled maturities of Cal Fed's term
accounts by stated interest rate at December 31, 1997:
<TABLE>
<CAPTION>
2001 AND
1998 1999 2000 THEREAFTER TOTAL
-------- -------- -------------- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less .................. $ 1 $ -- $ -- $ -- $ 1
3.01 -- 4.00% .................. -- -- -- -- --
4.01 -- 5.00% .................. 229 13 -- 1 243
5.01 -- 6.00% .................. 6,753 1,776 80 119 8,728
6.01 -- 7.00% .................. 754 249 102 145 1,250
7.01 -- 8.00% .................. 50 23 37 44 154
8.01 -- 9.00% .................. 6 5 -- -- 11
9.01 -- 10.00% ................. 2 -- -- -- 2
Over 10.00% .................... -- -- 1 -- 1
------ ------ ---- ---- -------
Total term accounts ......... $7,795 $2,066 $220 $309 $10,390
====== ====== ==== ==== =======
</TABLE>
The following table sets forth remaining maturities for Cal Fed's term
deposits in amounts of $100,000 or more at December 31, 1997 (in millions):
<TABLE>
<S> <C>
3 months or less ........................... $ 501
Over 3 months but within 6 months .......... 242
Over 6 months but within 12 months ......... 729
Over 12 months ............................. 508
------
$1,980
======
</TABLE>
At December 31, 1997, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger at Parent Holdings was $1.98 billion, compared
with $871 million and $690 million at December 31, 1996 and 1995, respectively.
Deposits held by foreign investors at Cal Fed totalled $93 million, $58 million
and $63 million at December 31, 1997, 1996 and 1995, respectively.
Cal Fed's deposit accounts are held primarily by individuals residing in
the vicinity of its retail branch offices located in California, Florida and
Nevada. Cal Fed has emphasized, and will continue to emphasize, a retail branch
network for attracting deposits. Key market areas, particularly the West Coast
region, will continue to be targeted for expansion of retail deposits and the
cross-selling of additional consumer products.
When cost-effective relative to other sources of funding, Cal Fed issues
certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base. While
these funds are generally more costly than traditional passbook and money
market deposits and more volatile as a source of funds because of their
sensitivity to the rates offered, they supplement retail customer deposits in
raising funds for financing and liquidity purposes. At December 31, 1997, Cal
Fed had $363 million of Brokered Deposits outstanding, representing 2.25% of
total deposits.
Borrowings
Parent Holdings and Cal Fed utilize various borrowings as alternative
sources of funds for its business needs. These sources have included securities
sold under agreements to repurchase, FHLB advances, subordinated debentures and
the purchase of federal funds.
Short-term Borrowings
Short-term borrowings consist of (i) securities sold under agreements to
repurchase, (ii) federal funds purchased and (iii) short-term FHLB advances.
These instruments are discussed more fully in the subsequent sections.
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The following table sets forth for Parent Holdings each category of
borrowings due within one year: (i) for the periods presented, the average
amount outstanding, the maximum amount outstanding at any month end and the
average interest rate paid, and (ii) at period end, the amount outstanding and
average interest rate paid. Amounts and rates reflected in the table exclude
accrued interest payable and purchase accounting adjustments.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding ...................... $ 2,275 $ 1,931 $ 1,351
Maximum amount outstanding at any month end during
the period ..................................... 2,870 2,424 1,965
Balance outstanding at end of period ............. 1,829 1,510 698
Average interest rate during the period .......... 5.68% 5.70% 6.53%
Average interest rate at end of period ........... 5.78% 5.88% 6.06%
Federal Funds Purchased:
Average balance outstanding ...................... $ 95 $ 65 $ 37
Maximum amount outstanding at any month end during
the period ..................................... 153 135 75
Balance outstanding at end of period ............. 130 25 55
Average interest rate during the period .......... 5.59% 5.41% 6.09%
Average interest rate at end of period ........... 6.50% 7.50% 6.00%
FHLB advances:
Average balance outstanding ...................... $ 5,561 $ 2,455 $ 862
Maximum amount outstanding at any month end during
the period ..................................... 6,606 3,141 1,487
Balance outstanding at end of period ............. 5,263 2,741 1,487
Average interest rate during the period .......... 5.76% 5.83% 7.19%
Average interest rate at end of period ........... 5.88% 5.78% 6.12%
</TABLE>
At December 31, 1997, Parent Holdings had an estimated additional secured
borrowing capacity of $4.9 billion with the FHLB and other sources.
Securities Sold Under Agreements to Repurchase
Parent Holdings enters into reverse repurchase agreements whereby it sells
marketable U.S. government and mortgage-backed securities and CMOs with a
commitment to repurchase the securities at a specified price and on a specified
date. These agreements are recorded as financings, and the obligation to
repurchase assets sold is reflected as a liability on the consolidated balance
sheet. The dollar amount of assets underlying the agreements remains in the
asset accounts. The securities underlying the agreements are delivered to the
dealers who arranged the transactions. The counterparty to the repurchase
agreement may have loaned the securities to other parties in the normal course
of their operations; however, all agreements require that the identical
securities be resold to Parent Holdings at the maturity of the agreements. In
order to reduce possible risks associated with these borrowing transactions,
the reverse repurchase agreements are generally entered into with national
investment banking firms and major commercial banks which are primary dealers
in these securities.
Federal Funds Purchased
Cal Fed must meet legal reserve requirements on a daily basis by (i)
maintaining a specified total amount of deposits at the Federal Reserve Bank
and (ii) vault cash. Occasionally, Cal Fed may borrow funds from another bank
with excess reserves to meet its requirements for the day. These borrowings are
repaid with interest at maturity based on the federal funds rate. Cal Fed
places U.S. government securities in a custody account for the seller until the
funds are repaid and records a liability on its books.
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FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A savings association may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A savings association is required to hold
a minimum amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal activity and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
The following table presents the carrying value and weighted average rate
paid on FHLB advances for the periods indicated, excluding accrued interest
payable and the impact of purchase accounting adjustments (dollars in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- -----------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE VALUE RATE
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed-rate borrowings ............ $5,447 5.88% $3,565 5.93% $1,790 6.68%
Variable-rate borrowings ......... 4,074 5.95 854 5.67 250 6.02
------ ---- ------ ---- ------ ----
Total FHLB advances ........... $9,521 5.91% $4,419 5.88% $2,040 6.60%
====== ==== ====== ==== ====== ====
</TABLE>
The following table sets forth remaining maturities and weighted average
stated interest rates of FHLB advances at December 31, 1997, not including
accrued interest payable or purchase accounting adjustments (dollars in
millions):
<TABLE>
<CAPTION>
BALANCE WEIGHTED
MATURING AVERAGE RATE
---------- -------------
<S> <C> <C>
1998 ........................ $5,263 5.88%
1999 ........................ 3,090 5.94
2000 ........................ 1,150 5.93
2001 ........................ 11 6.50
2002 ........................ 5 6.94
2003 and thereafter ......... 2 7.83
------ ----
$9,521 5.91%
====== ====
</TABLE>
During 1995, Parent Holdings prepaid $250 million in FHLB advances
resulting in a $2 million extraordinary gain on the early extinguishment of
debt, net of tax.
Interest Rate Swap Agreements
Parent Holdings has used interest rate swap agreements to adjust its
interest rate risk exposure on fixed rate FHLB advances. Parent Holdings had
interest rate swap agreements with a notional principal amount of $400 million
outstanding at December 31, 1997. The notional amount does not represent
amounts exchanged by the parties and thus, is not a measure of Parent Holdings'
exposure. Parent Holdings pays the variable rate and receives the fixed rate
based on LIBOR under these agreements. The differential between these two
amounts may change significantly in the future due to fluctuations in market
interest rates.
In order to reduce possible counterparty nonperformance risk, Parent
Holdings has entered into interest rate swap agreements only with national
investment banking firms and the FHLB of San Francisco.
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12 1/2% Senior Notes Due 2003
On April 17, 1996, Parent Holdings issued $455 million of its 12 1/2%
Senior Notes ("12 1/2% Senior Notes"). The notes will mature on April 15, 2003,
with interest payable semiannually on April 15 and October 15 of each year.
Deferred issuance costs associated with the issuance of the 12 1/2% Senior
Notes totalling $18.1 million were recorded in other assets and are being
amortized over the term of the 12 1/2% Senior Notes. Discount associated with
the issuance of the 12 1/2% Senior Notes totalling $5.2 million is included in
the carrying value of the liability and is being accreted over the term of the
12 1/2% Senior Notes.
The 12 1/2% Senior Notes are redeemable at the option of Parent Holdings,
in whole or in part at the following redemption prices: (i) on or after April
15, 2000, at 106.25% of the principal amount thereof, plus accrued interest and
unpaid interest to the date of redemption, (ii) on or after April 15, 2001, at
103.125% of the principal amount thereof, plus accrued interest and unpaid
interest to the date of redemption, and (iii) thereafter, at 100% of the
principal amount thereof, plus accrued interest and unpaid interest to the date
of redemption.
The 12 1/2% Senior Notes are senior unsecured obligations of Parent
Holdings and rank pari passu in right of payment with all future senior debt of
Parent Holdings, if any is issued, and senior to all future subordinated debt
of Parent Holdings, if any is issued. The 12 1/2% Senior Notes are subordinated
to (i) all existing and future liabilities, including deposits, indebtedness
and trade payables of its subsidiaries, including FNH and Cal Fed, and (ii) all
preferred stock issued by its subsidiaries, including Cal Fed Preferred Stock
(as defined herein), the REIT Preferred Stock and the FNH Preferred Stock (of
which $25 million was outstanding at December 31, 1997). The 12 1/2% Senior
Notes are also subordinated to the obligations of FNH under the Tax Sharing
Agreement (as defined herein) between and among Cal Fed, FNH and Mafco
Holdings. The terms and conditions of the indenture governing the 12 1/2%
Senior Notes (the "12 1/2% Senior Notes Indenture") and the FNH indentures
described below impose restrictions that affect, among other things, the
ability of Parent Holdings or FNH, as the case may be, to incur debt, pay
dividends or make distributions, engage in a business other than holding the
common stock of FNH, in the case of Parent Holdings, or of Cal Fed and similar
banking institutions, in the case of FNH, make acquisitions, create liens, sell
assets and make certain investments. See "--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity."
In connection with the consummation of the Mergers, the 12 1/2% Senior
Notes will become obligations of Golden State Financial.
12 1/4% Senior Notes Due 2001
In connection with the FN Acquisition, FNH issued $200 million principal
amount of 12 1/4% Senior Notes ("12 1/4% Senior Notes"), including $5.5 million
principal amount of 12 1/4% Senior Notes to certain directors and officers of
Cal Fed. The notes will mature on May 15, 2001 with interest payable
semiannually on May 15 and November 15. Deferred issuance costs associated with
the 12 1/4% Senior Notes' issuance totalling $9.9 million were recorded in
other assets and are being amortized over the term of the 12 1/4% Senior Notes.
The notes are redeemable at the option of FNH, in whole or in part, during
the 12-month period beginning May 15, 1999, at a redemption price of 106.125%
plus accrued interest to the date of redemption, and thereafter at 100% plus
accrued interest. The notes are subordinated to all existing and future
liabilities, including deposits and other borrowings of Cal Fed, Cal Fed
Preferred Stock and the REIT Preferred Stock.
The terms and conditions of the 12 1/4% Senior Notes indenture impose
restrictions that affect, among other things, the ability of FNH to incur debt,
pay dividends, make acquisitions, create liens, sell assets and make certain
investments. See "--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity."
In connection with the consummation of the Mergers, the 12 1/4% Senior
Notes will become obligations of New FNH.
9 1/8% Senior Subordinated Notes Due 2003
On January 31, 1996, FNH issued $140 million principal amount of the 9
1/8% Senior Subordinated Notes ("9 1/8% Senior Subordinated Notes" and together
with the 12 1/4% Senior Notes and the 10 5/8%
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Notes, the "FNH Notes"). The 9 1/8% Senior Subordinated Notes will mature on
January 15, 2003 with interest payable semiannually on January 15 and July 15.
Deferred issuance costs associated with the issuance of the 9 1/8% Senior
Subordinated Notes totalling $7.0 million were recorded in other assets and are
being amortized over the term of the 9 1/8% Senior Subordinated Notes.
The 9 1/8% Senior Subordinated Notes are redeemable at the option of FNH,
in whole or in part, during the 12-month period beginning January 1, 2001, at a
redemption price of 104.5625% of the principal amount thereof, plus accrued
interest and unpaid interest to the date of redemption, and thereafter at 100%
of the principal amount thereof, plus accrued and unpaid interest.
The 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of FNH and are subordinated in right of payment to all existing and
future senior indebtedness of FNH and to all future subordinated debt, if any
is issued. The 9 1/8% Senior Subordinated Notes are subordinated to all
existing and future liabilities, including deposits, indebtedness and trade
payables of FNH's subsidiaries, including Cal Fed, and to the Cal Fed Preferred
Stock (as defined herein) and the REIT Preferred Stock.
The terms and conditions of the 9 1/8% Senior Subordinated Notes indenture
impose restrictions that affect, among other things, the ability of FNH to
incur debt, pay dividends or make distributions, engage in a business other
than holding the common stock of Cal Fed and similar banking institutions, make
acquisitions, create liens, sell assets and make certain investments.
In connection with the consummation of the Mergers, the 9 1/8% Senior
Subordinated Notes will become obligations of New FNH.
10 5/8% Senior Subordinated Notes Due 2003
In connection with the Cal Fed Acquisition, FNH acquired the net proceeds
from the issuance of FN Escrow's 10 5/8% Notes and assumed FN Escrow's
obligations under the 10 5/8% Notes and indenture. Deferred issuance costs
associated with the 10 5/8% Notes of $19 million, recorded in other assets, are
being amortized over the term of the 10 5/8% Notes.
The 10 5/8% Notes are redeemable at the option of FNH, in whole or in
part, during the 12-month period beginning January 1, 2001, at a redemption
price of 105.313% plus accrued and unpaid interest to the date of redemption,
during the 12-month period beginning January 1, 2002 at a redemption price of
102.656% plus accrued and unpaid interest to the date of redemption, and
thereafter at 100% plus accrued and unpaid interest to the date of redemption.
The 10 5/8% Notes are subordinate in right of payment to all existing and
future subordinated debt, if any is issued, of FNH. The 10 5/8% Notes are
subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of FNH, including Cal Fed
Preferred Stock and REIT Preferred Stock.
The terms and conditions of the 10 5/8% Notes indenture impose
restrictions that affect, among other things, the ability of FNH to incur debt,
pay dividends, make acquisitions, create liens, sell assets and make certain
investments.
In connection with the consummation of the Mergers, the 10 5/8% Notes will
become obligations of New FNH.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, Parent Holdings assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006"). At December 31, 1997, the
aggregate principal amount of the 10% Subordinated Debentures Due 2006
outstanding was $92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i)
a default in the payment of interest when due and such default continues for 30
days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25%
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in principal amount of the outstanding 10% Subordinated Debentures Due 2006
notify Cal Fed of the default and Cal Fed does not cure the default within 60
days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of Cal Fed, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other legal
custodian for Cal Fed and (vi) a default under other indebtedness of Cal Fed in
excess of $10 million resulting in such indebtedness becoming due and payable,
and such default or acceleration has not been rescinded or annulled within 60
days after the date on which written notice of such failure has been given by
the trustee to Cal Fed or by holders of at least 25% in principal amount of the
outstanding 10% Subordinated Debentures Due 2006 to Cal Fed and the trustee.
11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, Parent Holdings assumed $50 million of
SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). In
connection with the assumption of the 11.20% Senior Notes, Cal Fed and all of
the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, Cal Fed repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal
amount, plus the accrued interest thereon. Cal Fed recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase. At
December 31, 1997, the aggregate principal amount of the 11.20% Senior Notes
outstanding was $6.0 million.
Events of Default under the note purchase agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within 15
days after the date such payment was due; (iii) failure to comply with certain
covenants in the Note Purchase Agreement, provided that such failure continues
for more than 60 days; (iv) failure to deliver to holders a notice of default,
notice of event of default, or notice of claimed default as provided in the
Note Purchase Agreement; (v) failure to comply with any provision of the Note
Purchase Agreement, provided that such failure continues for more than 60 days
after notice is delivered to Cal Fed; (vi) a default under other indebtedness
provided that the aggregate amount of all obligations in respect of such
indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against Cal Fed or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by Cal Fed or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of Cal Fed or its subsidiaries.
As a result of the Cal Fed Acquisition, Cal Fed is obligated with respect
to the following three debt securities of Old California Federal:
10.668% Subordinated Notes Due 1998
Parent Holdings assumed 10.668% unsecured senior subordinated notes which
mature on December 22, 1998 (the "10.668% Subordinated Notes"). At December 31,
1997, the aggregate principal amount of the notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when
due and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to Cal Fed; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of Cal Fed and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of Cal Fed.
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6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February
20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures are redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. At December
31, 1997, $2.6 million of the 6 1/2% Convertible Subordinated Debentures were
outstanding. Due to the purchase of all of the Old Cal Fed stock by FNH in the
Cal Fed Acquisition on January 3, 1997, the common stock conversion feature has
been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make
any payment of interest when due and such payment is not made within 30 days
after the date such payment was due; (ii) failure to make any payment of
principal when due; (iii) default in the performance, or breach, of any
covenant or warranty in the indenture, provided that such default or breach
continues for more than 60 days after notice is delivered to Cal Fed; or (iv)
certain events of bankruptcy, insolvency or reorganization of Cal Fed or its
subsidiaries.
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures
Due 2003"). During 1996 and 1995, Old California Federal repurchased $0.6
million and $8.7 million, respectively, of the debentures, leaving $4.3 million
outstanding at December 31, 1997.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2003 include, among other things: (i) failure to make any
payment of principal when due; (ii) any failure to make any payment of interest
when due and such payment is not made within 30 days after the date such
payment was due; (iii) failure to comply with certain covenants in the
indenture; (iv) failure to comply with certain covenants in the indenture
provided that such failure continues for more than 60 days after notice is
delivered to Cal Fed; (v) certain events of bankruptcy, insolvency or
reorganization of Cal Fed; or (vi) the default or any event which, with the
giving of notice or lapse of time or both, would constitute a default under any
indebtedness of Cal Fed and cause such indebtedness with an aggregate principal
amount exceeding $15 million to accelerate.
FNH Preferred Stock--Minority Interest
On September 19, 1996, FNH issued 10,000 shares of the FNH Preferred
Stock. The FNH Preferred Stock has a stated liquidation value of $15,000 per
share, plus accrued and unpaid dividends, if any. Dividends on the FNH
Preferred Stock are cumulative and are payable (i) in cash at an annual
floating rate of the cost of funds to an affiliate of FNH under such
affiliate's bank credit facility (without taking into account any default
interest that may be payable under such bank credit facility) (such rate, the
"Cost of Funds Rate") and (ii) in newly issued shares of another series of
Cumulative Perpetual Preferred Stock of FNH (the "Additional FNH Preferred
Stock") at an annual rate of 2% of the stated liquidation value of the FNH
Preferred Stock, in each case, if, when and as declared by the Board of
Directors of FNH. Dividends on the Additional FNH Preferred Stock are
cumulative and accrue and are payable in shares of Additional FNH Preferred
Stock at an annual rate equal to the Cost of Funds Rate plus 2% of the stated
liquidation value of the Additional FNH Preferred Stock if, when and as
declared by the Board of Directors of FNH. Additional FNH Preferred Stock has
substantially the same relative rights, terms and preferences as the FNH
Preferred Stock except as set forth above with respect to the payment of
dividends. If all of the outstanding shares of the FNH Preferred Stock are not
redeemed by FNH before January 1, 2000, all dividends on the FNH Preferred
Stock and the Additional FNH Preferred Stock accruing thereafter will be
payable in cash. Dividends on the FNH Preferred Stock are payable quarterly on
January 1, April 1, July 1 and October 1 of each year, commencing January 1,
1997, out of funds legally available therefor. The FNH Preferred Stock ranks
prior to the common stock of FNH and to all other classes and series of equity
securities subsequently issued.
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Except as required by law, the holders of the FNH Preferred Stock and the
Additional FNH Preferred Stock are not entitled to any voting rights unless the
equivalent of four quarterly dividends are in arrears or certain
bankruptcy-related events occur, in which case the number of directors of FNH
will be increased by two and the holders of the FNH Preferred Stock and the
Additional FNH Preferred Stock, voting together as a class, separately from any
other class, will be entitled to elect two directors, who shall serve until all
dividends in arrears have been paid or declared and set apart for payment or
such bankruptcy-related event has been cured.
The FNH Preferred Stock and the Additional FNH Preferred Stock will be
redeemable so long as Special Purpose Corp. is the sole holder thereof, at any
time, and, if Special Purpose Corp. is not the sole holder thereof, at any time
after the fifth anniversary of the issuance of the FNH Preferred Stock, in each
case, upon prior written notice, at the option of FNH, in whole or in part, at
a redemption price equal to the stated liquidation value of $15,000 per share
plus any accrued and unpaid dividends. Upon any redemption of the FNH Preferred
Stock by FNH, a pro rata portion of the outstanding Additional FNH Preferred
Stock will be contributed to the capital of FNH, without any payment therefor,
and such shares will be retired and canceled. If all of the shares of the FNH
Preferred Stock are redeemed on or before December 31, 1999, all outstanding
shares of the Additional FNH Preferred Stock will be contributed to the capital
of FNH, without any payment therefor, and such shares will be retired and
canceled. If all of the shares of the FNH Preferred Stock are redeemed on or
before December 31, 1999, all outstanding shares of the Additional FNH
Preferred Stock will be contributed to the capital of FNH, without any payment
therefor, and such shares will be retired and canceled.
The outstanding shares of FNH Preferred Stock were redeemed in full on
March 31, 1998.
11 1/2% Preferred Stock--Minority Interest
In connection with the FN Acquisition, Cal Fed issued 3,007,300 shares of
its 11 1/2% Noncumulative Perpetual Preferred Stock ("11 1/2% Preferred
Stock"). The 11 1/2% Preferred Stock has a stated liquidation value of $100 per
share, plus declared and unpaid dividends, if any. Cash dividends are
noncumulative and are payable at an annual rate of 11 1/2% per share if, when
and as declared by the Board of Directors of Cal Fed.
The 11 1/2% Preferred Stock ranks prior to the common stock of Cal Fed and
to all other classes and series of equity securities subsequently issued, other
than any class or series expressly designated as being on a parity with or
senior to the 11 1/2% Preferred Stock as to dividends and liquidating
distributions. The 10 5/8% Preferred Stock (as defined herein) ranks on a
parity with the 11 1/2% Preferred Stock as to dividends and liquidating
distributions.
The terms of the 11 1/2% Preferred Stock provide that Cal Fed may not
declare or pay any dividends or other distributions (other than in shares of
common stock of Cal Fed or other classes of equity securities of Cal Fed
ranking junior to the 11 1/2% Preferred Stock (collectively, "Junior Stock"))
with respect to any Junior Stock or redeem or otherwise acquire, or set apart
funds for the repurchase, redemption or other acquisition of any Junior Stock
(including the common stock held by FNH), through a sinking fund or otherwise,
unless and until: (i) Cal Fed has paid full dividends on the 11 1/2% Preferred
Stock for the four most recent dividend periods, or funds have been paid over
to the dividend disbursing agent of Cal Fed for payment of such dividends, and
(ii) Cal Fed has declared a cash dividend on the 11 1/2% Preferred Stock at the
annual dividend rate for the current dividend period, and sufficient funds have
been paid over to the dividend disbursing agent of Cal Fed for the payment of a
cash dividend for such current dividend period. Cal Fed is currently in
compliance with both of such requirements.
Holders of the 11 1/2% Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control, the 11 1/2% Preferred Stock is
not redeemable prior to September 1, 1999. The 11 1/2% Preferred Stock is
redeemable solely at the option of Cal Fed or its successor or any acquiring or
resulting entity with respect to Cal Fed (including by any parent or subsidiary
of Cal Fed, any such successor, or any such acquiring or resulting entity), as
applicable, at any time on and after September 1, 1999, in whole or in part, at
$105.75 per share on or after September 1,
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<PAGE>
1999 and prior to September 1, 2000, and at prices decreasing pro rata annually
thereafter to the stated liquidation value of $100 per share on or after
September 1, 2004, plus declared and unpaid dividends, if any, without
interest. Upon a change of control, the 11 1/2% Preferred Stock is redeemable
on or prior to September 1, 1999 at the option of Cal Fed or its successor or
any acquiring or resulting entity with respect to Cal Fed (including by any
parent or subsidiary of Cal Fed, any such successor, or any such acquiring or
resulting entity), as applicable, in whole, but not in part, at a price per
share equal to: (i) $100, plus (ii) an amount equal to declared and unpaid
dividends, if any, to the date fixed for redemption, without interest, and
without duplication, an additional amount equal to the amount of dividends that
would be payable on the 11 1/2% Preferred Stock in respect of the period from
the first day of the dividend period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such dividends were to be
declared), plus (iii) a specified make whole premium.
10 5/8% Preferred Stock--Minority Interest
In connection with the Cal Fed Acquisition, Cal Fed assumed Old California
Federal's 10 5/8% Noncumulative Perpetual Preferred Stock with a liquidation
value of $172.5 million (the "10 5/8% Preferred Stock" and together with the
11 1/2% Preferred Stock, the "Cal Fed Preferred Stock"). The 10 5/8% Preferred
Stock has a stated liquidation value of $100 per share, plus declared and
unpaid dividends, if any, without interest. Cash dividends are noncumulative
and are payable at an annual rate of 10 5/8% per share if, when and as declared
by the Board of Directors of Cal Fed.
The 10 5/8% Preferred Stock ranks prior to the common stock of Cal Fed and
to all other classes and series of equity securities subsequently issued, other
than any class or series expressly designated as being on a parity with or
senior to the 10 5/8% Preferred Stock as to dividends and liquidating
distributions. The 11 1/2% Preferred Stock ranks on a parity with the 10 5/8%
Preferred Stock as to dividends and liquidating distributions.
The terms of the 10 5/8% Preferred Stock provide that Cal Fed may not
declare or pay any full dividends with respect to any parity stock, such as the
11 1/2% Preferred Stock, unless and until Cal Fed has paid full dividends on
the 10 5/8% Preferred Stock for the most recent dividend period.
The terms of the 10 5/8% Preferred Stock provide that Cal Fed may not
declare or pay any dividends or other distributions (other than in shares of
common stock of Cal Fed or other Junior Stock) with respect to any Junior Stock
or repurchase, redeem or otherwise acquire, or set apart funds for the
repurchase, redemption or other acquisition of, any Junior Stock through a
sinking fund or otherwise, unless and until: (i) Cal Fed has paid full
dividends on the 10 5/8% Preferred Stock for the four most recent dividend
periods, or funds have been paid over to the dividend disbursing agent of Cal
Fed for payment of such dividends, and (ii) Cal Fed has declared a cash
dividend on the 10 5/8% Preferred Stock at the annual dividend rate for the
current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent of Cal Fed for the payment of a cash dividend for
such current period. Cal Fed is currently in compliance with both of such
requirements.
Holders of the 10 5/8% Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control, the 10 5/8% Preferred Stock is
not redeemable prior to April 1, 1999. The 10 5/8% Preferred Stock is
redeemable solely at the option of Cal Fed or its successor or any acquiring or
resulting entity with respect to Cal Fed (including by any parent or subsidiary
of Cal Fed, any such successor or any such acquiring or resulting entity), as
applicable, at any time on or after April 1, 1999, in whole or in part, at
$105.313 per share on or after April 1, 1999 and prior to April 1, 2000, and at
prices decreasing pro rata annually thereafter to a stated liquidation value of
$100 per share on or after April 1, 2003, plus declared and unpaid dividends,
if any, without interest. Upon a change in control, the 10 5/8% Preferred Stock
is redeemable on or prior to April 1, 1999 at the option of Cal Fed or its
successor or any acquiring or resulting entity with respect to Cal Fed
(including by any parent or subsidiary of Cal Fed, any such successor, or any
such acquiring or resulting entity), as applicable, in whole, but not in part,
at a price per share equal to $114.50, plus an amount equal to declared and
unpaid dividends (whether or not declared) from the date of consummation of the
change of control to the date fixed for redemption, without interest.
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REIT Preferred Stock--Minority Interest
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
REIT Preferred Stock. The REIT Preferred Stock has a stated liquidation value
of $25 per share, plus declared and unpaid dividends, if any. Cash dividends
are noncumulative and are payable at an annual rate of 9 1/8% per share if,
when and as declared by the Board of Directors of Preferred Capital Corp.
The REIT Preferred Stock ranks prior to the common stock of Preferred
Capital Corp. and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the REIT Preferred Stock as to dividends
and liquidating distributions.
The terms of the REIT Preferred Stock provide that Preferred Capital Corp.
may not declare or pay any dividends or other distributions (other than in
shares of common stock of Preferred Capital Corp. or other classes of equity
securities of Preferred Capital Corp. ranking junior to the REIT Preferred
Stock) with respect to any Preferred Capital Corp. junior stock or repurchase,
redeem or otherwise acquire, or set apart funds for the repurchase, redemption
or other acquisition of any Preferred Capital Corp. junior stock (including the
common stock held by Cal Fed) through a sinking fund or otherwise, unless and
until: (i) Preferred Capital Corp. has paid in full dividends on the REIT
Preferred Stock for the four most recent dividend periods (or such lesser
number of dividend periods during which shares of REIT Preferred Stock have
been outstanding), or funds have been paid over to the dividend disbursing
agent of Preferred Capital Corp. for payment of such dividends, and (ii)
Preferred Capital Corp. has declared a cash dividend on the REIT Preferred
Stock at the annual dividend rate for the current dividend period, and
sufficient funds have been paid over to the dividend disbursing agent of
Preferred Capital Corp. for the payment of a cash dividend for such current
dividend period. The initial dividend payment date was March 31, 1997.
Preferred Capital Corp. is currently in compliance with both such requirements.
Holders of the REIT Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control or upon certain tax events, the
REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT
Preferred Stock is redeemable solely at the option of Preferred Capital Corp.
or its successor or any acquiring or resulting entity with respect to Preferred
Capital Corp. (including by any parent or subsidiary of Preferred Capital
Corp., any such successor or any such acquiring or resulting entity), as
applicable, at any time on and after January 31, 2002 in whole or in part, at
$26.14 per share on or after January 31, 2002 and prior to January 31, 2003,
and at prices decreasing pro rata annually thereafter to the stated liquidation
value of $25 per share on or after January 31, 2007, plus declared and unpaid
dividends, if any, without interest. Upon a change of control, the REIT
Preferred Stock is redeemable on or prior to January 31, 2002 at the option of
Preferred Capital Corp. or its successor or any acquiring or resulting entity
with respect to Cal Fed (including by any parent or subsidiary of Preferred
Capital Corp., any such successor or any such acquiring or resulting entity),
as applicable, in whole, but not in part, at a price per share equal to: (i)
$25, plus (ii) an amount equal to declared and unpaid dividends, if any, to the
date fixed for redemption, without interest, and without duplication, an
additional amount equal to the amount of dividends that would be payable on the
REIT Preferred Stock in respect of the period from the first day of the
dividend period in which the date fixed for redemption occurs to the date fixed
for redemption (assuming all such dividends were to be declared), plus (iii) a
specified make whole premium.
Each share of REIT Preferred Stock will be exchanged automatically for one
newly issued share of preferred stock of Cal Fed having substantially the same
terms as the REIT Preferred Stock (the "9 1/8% Preferred Stock") if the
appropriate federal regulatory agency directs in writing such exchange because
(i) Cal Fed becomes "undercapitalized" under prompt corrective action
regulations, (ii) Cal Fed is placed into conservatorship or receivership or
(iii) the appropriate federal regulatory agency, in its sole discretion,
anticipates Cal Fed becoming "undercapitalized" in the near term. If issued,
the 9 1/8% Preferred Stock will rank on a parity with Cal Fed Preferred Stock.
PROPOSED REFINANCING
Parent Holdings and FNH intend, through the Refinancing, to refinance all
of the existing long-term debt of Parent Holdings and FNH, and to offer to
purchase all of the outstanding preferred stock of Cal
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Fed with the net proceeds of a proposed private offering of fixed and floating
rate notes (which notes will become obligations of New FNH upon consummation of
the Refinancing), and to the extent necessary, with a dividend from Cal Fed and
short-term borrowings by New FNH under a new senior unsecured credit facility.
While no assurances can be given that the Refinancing will be completed in the
time frame or on the terms currently anticipated, it is expected that if 100%
of the outstanding principal amount of the FNH Notes and all of the Cal Fed
Preferred Stock is purchased in the Refinancing or is subsequently redeemed by
Cal Fed, the Refinancing will result in (i) after-tax savings of approximately
$60.6 million annually through reductions in interest and dividend payments and
amortization of deferred debt issuance costs, (ii) the elimination of certain
restrictive covenants contained in existing indebtedness of Parent Holdings and
FNH and (iii) a simpler capital structure of the combined company after the
Mergers.
The Refinancing will be accomplished in several steps. Initially, it is
expected that, prior to consummation of the Mergers, GS Escrow Corp. ("GS
Escrow"), a wholly-owned subsidiary of FGH (the sole stockholder of Parent
Holdings), through a private placement that complies with Rule 144A and
Regulation S under the Securities Act, will complete an offering (the
"Offering") of an aggregate principal amount of $1.85 billion in fixed and
floating rate notes (the "New Notes"), in a multiple tranche transaction
expected to bear interest at an aggregate rate of 7.40%. It is expected that
purchasers of the New Notes will have certain registration rights. Upon
consummation of the Refinancing, GS Escrow will merge with and into New FNH
(the "GS Escrow Merger"), whereupon the indebtedness of GS Escrow will become
indebtedness of New FNH. Prior to the completion of the GS Escrow Merger and
the Refinancing described below, the proceeds of the Offering (the "Escrowed
Funds") will be held in escrow. It is expected that the proceeds of the
Offering will be used to fund the transactions described below. See Note I to
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
After the Offering and prior to the consummation of the Mergers, FNH (or
an affiliate of FNH other than GS Escrow) is expected to commence offers to
purchase and consent solicitations (collectively, the "FNH Debt Offers") for
all of its $200 million aggregate principal amount of 12 1/4% Senior Notes, its
$140 million aggregate principal amount of 9 1/8% Senior Subordinated Notes and
its $575 million aggregate principal amount of 10 5/8% Notes. In connection
with the FNH Debt Offers, FNH (or such affiliate) expects to solicit the
consent of the tendering holders of each series of the FNH Notes to certain
proposed amendments (the "Proposed Amendments") to the applicable indentures
governing the FNH Notes (collectively, the "FNH Indentures"). The Proposed
Amendments would eliminate certain restrictive covenants contained in the FNH
Indentures. The obligations of FNH (or such affiliate) to purchase the FNH
Notes from the holders thereof will be subject to the satisfaction of certain
conditions, including the approval of the Proposed Amendments by the holders of
the requisite principal amount of FNH Notes, with each issue voting separately.
Consummation of the FNH Debt Offers is a condition to release of the Escrowed
Funds and is expected to occur subsequent to consummation of the Mergers. There
can be no assurance that all of the outstanding FNH Notes will be purchased by
FNH in the FNH Debt Offers. To the extent that any FNH Notes remain outstanding
after the consummation of the FNH Debt Offers, the indebtedness represented
thereby will be in addition to the indebtedness incurred through the Offering.
See Note I to the Notes to Unaudited Pro Forma Condensed Combined Financial
Statements. For a description of the current terms of the FNH Notes, see
"--Sources of Funds."
In addition, after the Offering and prior to the consummation of the
Mergers, FNH (or an affiliate of FNH other than GS Escrow) is expected to
commence offers to purchase for cash (the "Bank Preferred Stock Offers") all of
Cal Fed's 11 1/2% Preferred Stock, having an aggregate liquidation preference
of approximately $300.7 million, and all of Cal Fed's 10 5/8% Preferred Stock,
having an aggregate liquidation preference of approximately $172.5 million. FNH
expects the Bank Preferred Stock Offers to be subject to customary conditions
and to close contemporaneously with or subsequent to the Mergers. There can be
no assurance that all of the outstanding Cal Fed Preferred Stock will be
purchased by FNH in the Bank Preferred Stock Offers. To the extent that any
shares of Cal Fed Preferred Stock remain outstanding after the consummation of
the Bank Preferred Stock Offers, Cal Fed's payment obligations thereunder will
be in addition to New FNH's obligations under the notes issued pursuant to the
Offering. New FNH expects that all of the shares Cal Fed Preferred Stock not
purchased by Cal Fed in the Bank Preferred Stock Offers will be purchased by GS
Escrow once they become redeemable (April 1, 1999 in the case of the 10 5/8%
Preferred Stock and September 1, 1999 in the case of the 11 1/2% Preferred
Stock).
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Subsequent to the Mergers and concurrently with the closings of the FNH
Debt Offers, Parent Holdings expects to give a 30-day notice of redemption for
all its outstanding $455 million aggregate principal amount of 12 1/2% Senior
Notes and irrevocably to deposit in trust money or governmental obligations in
an amount sufficient to pay the redemption price therefor, together with any
accrued and unpaid interest to the date of redemption for the purpose of
defeasing the 12 1/2% Senior Notes (the "Parent Holdings Defeasance"). The
Parent Holdings Defeasance will constitute "covenant defeasance" for purposes
of the indenture governing the 12 1/2% Senior Notes (the "12 1/2% Notes
Indenture"). As a result, upon consummation of the Parent Holdings Defeasance,
Parent Holdings and its subsidiaries, including FNH and New FNH, will not be
required to comply with substantially all of the covenants and other
obligations under the 12 1/2% Notes Indenture.
On May 29, 1998, Trans Network Insurance Services Inc. ("TNIS"), an
indirect parent company of Parent Holdings, and Salomon Brothers Holding
Company Inc. ("SBHC"), entered into two interest rate lock letter agreements
(the "Rate Lock Agreements"). TNIS entered into the Rate Lock Agreements for
the benefit of GS Escrow in order to hedge against an increase in interest
rates. Pursuant to the Rate Lock Agreements, if the applicable interest rates
payable on certain U.S. treasury securities are higher at the time that the
fixed rate New Notes are priced than the interest rates payable on such U.S.
Treasury securities on May 29, 1998 by a certain amount, then SBHC will be
required to make a payment to TNIS. On the other hand, if the actual interest
rates payable on such U.S. Treasury securities at the time the fixed rate New
Notes are priced are less than the interest rates payable on such U.S. Treasury
securities on May 29, 1998 by a certain amount, then TNIS would be required to
make a comparable payment to SBHC.
Pursuant to the Rate Lock Agreements, any payments between TNIS and SBHC
would be made on or about the date of pricing of the fixed rate New Notes. Upon
consummation of the Mergers and the Refinancing, GS Escrow will (i) reimburse
TNIS for any payments made by TNIS to SBHC pursuant to the Rate Lock Agreements
or (ii) receive from TNIS an amount equal to any payments made by SBHC to TNIS,
net of expenses incurred by TNIS in connection with the Rate Lock Agreements,
in either case, plus TNIS' cost of capital applied to the payment made or
received. Management of Parent Holdings, FNH and Cal Fed believe that the terms
and conditions of this arrangement are as least as favorable to GS Escrow as
might have been obtained in a similar transaction with an unaffiliated party.
For more information concerning the anticipated effect of the Refinancing
on the combined company resulting from the Mergers on a pro forma basis, see
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
OTHER ACTIVITIES
Cal Fed Contingent Litigation Recovery Participation Interests. In July
1995, Old California Federal distributed to its common shareholders the CALGZs,
each entitling the holder thereof to receive an amount (the aggregate of such
payments being referred to as the "Recovery Payment") equal to five millionths
of one percent (0.000005%) of the Cal Fed Cash Payment, if any, actually
received by Cal Fed pursuant to a final, nonappealable judgment in or final
settlement of its claim against the United States in the Cal Fed Goodwill
Litigation, after deduction of (i) the aggregate expenses incurred by Cal Fed
in prosecuting the Cal Fed Goodwill Litigation and obtaining the Cal Fed Cash
Payment (including, but not limited to, a portion of the salaries, Incentive
Fee, Pension Benefit, Medical Benefits and expenses for Messrs. Trafton and
Fink under the Litigation Management Agreement, See "THE MERGERS--Interests of
Certain Persons in the Mergers--Litigation Management Agreement"), (ii) any
income tax liability of Cal Fed, computed on a pro forma basis, as a result of
Cal Fed's receipt of the Cal Fed Cash Payment (net of any income tax benefit to
Cal Fed from making the Recovery Payment, and disregarding for purposes of this
clause (ii) the effect of any net operating loss carryforwards or other tax
attributes held by Cal Fed or any of its subsidiaries or affiliated entities)
and (iii) the expenses incurred by Cal Fed in connection with the creation,
issuance and trading of the CALGZs, including without limitation, legal and
accounting fees and the fees and expenses of the interest agent.
Pursuant to the FN Merger Agreement, Old Cal Fed distributed to common
shareholders entitled to receive the merger consideration in the Cal Fed
Acquisition the CALGLs, each of which entitles the holder thereof to receive an
amount equal to twenty millionths of one percent (0.000020%) of the
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"Secondary Recovery Payment," if any. "Secondary Recovery Payment" means sixty
percent (60%) of the amount obtained from the following equation: (A) the Cal
Fed Cash Payment, if any, minus (B) the sum of the following: (i) the aggregate
expenses incurred by Cal Fed in prosecuting the Cal Fed Goodwill Litigation and
obtaining the Cal Fed Cash Payment (including, but not limited to, a portion of
the salaries, Incentive Fee, Pension Benefit, Medical Benefits and expenses for
Messrs. Trafton and Fink under the Litigation Management Agreement, See "THE
MERGERS--Interests of Certain Persons in the Mergers--Litigation Management
Agreement"), (ii) any income tax liability of Cal Fed, computed on a pro forma
basis, as a result of Cal Fed's receipt of the Cal Fed Cash Payment (net of any
income tax benefit to Cal Fed, computed on a pro forma basis, from the payment
of a portion of the Secondary Recovery Payment to the holders of the CALGLs),
(iii) the expenses incurred by Cal Fed in connection with the creation,
issuance and trading of the CALGZs and the CALGLs, including without
limitation, legal and accounting fees and the fees and expenses of the interest
agent, (iv) the payment due to the holders of the CALGZs and (v) one hundred
twenty-five million dollars ($125,000,000). "Income tax liability of Cal Fed
computed on a pro forma basis" means the aggregate amount of any and all
relevant items of income, gain, loss, or deduction associated with the receipt
by Cal Fed of the Cal Fed Cash Payment multiplied by the highest, combined
marginal rate of federal, state and local income taxes in the relevant year and
disregarding for purposes of such computation the effect of any net operating
loss carryforwards or other tax attributes of Cal Fed or any of its
subsidiaries or affiliated entities. "Income tax benefit to Cal Fed computed on
a pro forma basis" means the aggregate amount of any and all relevant items of
income, gain, loss, or deduction associated with the payment by Cal Fed of the
Secondary Recovery Payment multiplied by the highest, combined marginal rate of
federal, state and local income taxes in the relevant year and disregarding for
purposes of such computation the effect of any net operating loss carryforwards
or other tax attributes of Cal Fed or any of its subsidiaries or affiliated
entities. Any distribution with respect to the CALGZs and the CALGLs will be
subject to the OTS capital distribution regulations.
The CALGZs are quoted on the Nasdaq National Market under the symbol
"CALGZ." As of July 10, 1998, there were 5,075,549 CALGZs outstanding. The
CALGLs are quoted on the Nasdaq National Market under the symbol "CALGL." As of
July 10, 1998, there were 5,080,061 CALGLs outstanding. The last reported sales
prices for the CALGZs and the CALGLs on the Nasdaq National Market on July 9
and 10, 1998, respectively, were $20 and $22 3/4, respectively.
In the Cal Fed Goodwill Litigation, Cal Fed alleges, among other things,
that the United States breached certain contractual commitments regarding the
computation of its regulatory capital for which Cal Fed seeks damages and
restitution. Cal Fed's claims arose from changes, mandated by FIRREA, with
respect to the rules for computing Old California Federal's regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings
for a determination of the appropriate measure and amount of damages, which to
date have not been awarded.
On October 30, 1996, Old California Federal filed a motion for partial
summary judgment as to the Federal government's liability to Cal Fed for breach
of contract, which has been opposed by the Federal government in briefs filed
on December 30, 1996 and February 27, 1997. In addition, the government filed a
cross-motion for partial summary judgment as to certain liability issues on
December 30, 1996. A hearing on the motions for partial summary judgment on
liability was held on August 7, 1997. On December 22, 1997, a U.S. Claims Court
Judge ruled in favor of this motion to establish the government's liability.
The trial of the damages phase of Cal Fed's case is expected to begin in early
1999.
In connection with the Cal Fed Acquisition, Cal Fed recorded as an asset
part of the estimated after-tax cash recovery from the Cal Fed Litigation that
will inure to Cal Fed, net of amounts payable to
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holders of the CALGZs and the CALGLs in any such recovery (the "Goodwill
Litigation Asset"). The Goodwill Litigation Asset was recorded at its estimated
fair value of $100 million, net of estimated tax liabilities, as of January 3,
1997, and is included in the audited consolidated balance sheet as of December
31, 1997.
The Put Agreement
In connection with the FN Acquisition, Granite and Cal Fed entered into
the Put Agreement. Pursuant to the Put Agreement, Cal Fed had the right, on a
quarterly basis (the "Put Option"), to require Granite to purchase certain
commercial real estate loans, commercial real estate loans serviced by others
and 1-4 unit residential loans with an original principal balance greater than
$250,000, and to take certain actions to protect Cal Fed from losses with
respect to certain Letters of Credit ("LOC") transactions, in each case, only
if such asset was purchased by Cal Fed from Old FNB pursuant to the Asset
Purchase Agreement. The Put Option expired on November 30, 1996. The balance
available under the Put Agreement ($500 million) was fully utilized by Cal Fed
prior to the expiration of the Put Option.
The Assistance Agreement
The Texas Closed Banks were purchased effective December 28, 1988 pursuant
to five acquisition agreements and the Assistance Agreement among the FSLIC/RF,
Cal Fed, and certain affiliates of Cal Fed. The Assistance Agreement generally
provided for guaranteed yield amounts to be paid on the book value of the
Covered Assets, and paid for 90% of the losses incurred upon disposition of the
Covered Assets. The remaining 10% not reimbursed, net of 10% of all asset
recoveries and certain agreed-upon Covered Asset disposition fees ("Shared
Gain"), was remitted quarterly to the FSLIC/RF.
In 1995, the FDIC, acting as manager for the FSLIC/RF, exercised its right
under the Assistance Agreement to purchase substantially all of the remaining
Covered Assets at the fair market value of such assets (the "FDIC Purchase").
Under the terms of the Assistance Agreement, losses sustained by Cal Fed from
the FDIC Purchase were reimbursed by the FSLIC/RF. There was no material impact
on the consolidated financial statements of Cal Fed as a result of the FDIC
Purchase.
On August 19, 1996, Cal Fed and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid Cal Fed the remaining Covered Asset balance of $39
million and, among other things, assumed the responsibility for the disposition
of several litigation matters involving Covered Assets which had been retained
by Cal Fed following the FDIC Purchase. Cal Fed recorded a gain of $25.6
million as a result of this settlement.
FNMA Letters of Credit
On September 28, 1994, Cal Fed entered into an agreement with FNMA
pursuant to which FNMA provided credit enhancements for certain bond-financed
real estate projects originated by Old FNB. The agreement requires that Cal Fed
pledge to FNMA collateral in the form of certain eligible securities which are
held by a third party trustee. The collateral requirement varies based on the
balance of the bonds outstanding, losses incurred (if any), as well as other
factors. At December 31, 1997, Cal Fed had pledged as collateral certain
securities available for sale and short-term investment securities with a
carrying value of $78.2 million.
FGB Realty Advisors, Inc.
FGB Realty Advisors, Inc. ("FGB Realty"), a wholly owned subsidiary of Cal
Fed, previously provided asset management, disposition and advisory services to
institutional owners of real estate. Fee revenues from unaffiliated parties
were $1.7 million, $10.1 million, and $14.0 million for the years ended
December 31, 1997, 1996, and 1995, respectively. These revenues are included in
management fees in Parent Holdings' respective consolidated statements of
income. During 1997, substantially all the asset management and disposition
contracts held by FGB Realty have expired, and operations of this subsidiary
have substantially ceased.
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FN Investment Center
FN Investment Center ("FNIC"), a wholly owned subsidiary of Cal Fed which
was acquired as part of the FN Acquisition, offers securities and insurance
products to both existing and prospective customers of Cal Fed. FNIC is subject
to the guidelines established by the OTS for broker-dealer subsidiaries of
savings associations, and is a member of the National Association of Securities
Dealers. In addition, FNIC is registered as a broker-dealer with the Securities
and Exchange Commission and the Securities Investor Protection Corporation.
FNIC receives commission revenue for acting as a broker-dealer on behalf of its
customers, but FNIC does not maintain customer accounts or take possession of
customer securities. Commission revenues of $27.5 million, $10.0 million and
$8.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively, are included in fees and service charges in Parent Holdings'
consolidated statements of income for such years.
DIVIDEND POLICY OF CAL FED
The dividend policy of Cal Fed complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of Cal
Fed consider the following factors: (i) the quality and stability of Cal Fed's
net income, (ii) the availability of liquid assets to make dividend payments,
(iii) the level of earnings retention as it impacts Cal Fed's capital needs and
projected growth and funding levels, both internal and external, and (iv) the
adequacy of capital after the payment of a dividend. Under Cal Fed's dividend
policy, a dividend will not be declared or paid which would: (i) cause the
capital level of Cal Fed to be reduced below "adequately capitalized" levels,
or (ii), together with any other dividends declared during the same calendar
year, exceed 100% of the net income to date for that calendar year plus 50% of
Cal Fed's surplus capital at the beginning of that calendar year, so long as
Cal Fed is a Tier 1 association (as defined herein).
EMPLOYEES
Parent Holdings and FNH have no employees.
At December 31, 1997, Cal Fed and its subsidiaries had 5,235 employees,
compared to 3,547 employees at December 31, 1996. None of Cal Fed's employees
is represented by any collective bargaining group and management considers its
relations with its employees to be good. Cal Fed maintains a comprehensive
employee benefits program providing, among other benefits, health and welfare
benefits, long and short-term disability insurance, and life insurance.
Additionally, Cal Fed offers employees a defined contribution investment plan
which is a qualified plan under Section 401(a) of the Internal Revenue Code.
COMPETITION
Parent Holdings experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
Parent Holdings, through Cal Fed, competes with other savings
associations, commercial banks, insurance companies, credit unions, savings and
loan associations, money market mutual funds and brokerage firms in attracting
and retaining deposits. Competition for deposits from large commercial banks is
particularly strong. Many of the nation's savings associations and commercial
banks have a significant number of branch offices in the areas in which Cal Fed
operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities, LTV
ratios, loan fees, and the amount of time it takes to process a loan from
receipt of the loan application to date of funding. Parent Holdings' future
performance will depend on its ability to originate a sufficient volume of
mortgage loans in its local market areas and through its wholesale network and,
if it is unable to originate a sufficient volume of mortgage loans, to purchase
a sufficient quantity of high-quality mortgage-backed securities with adequate
yields.
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REGULATION
General
Parent Holdings is a savings and loan holding company within the meaning
of the HOLA and, as such, is registered with the OTS and is subject to
comprehensive OTS regulation. Cal Fed is a federally chartered and insured
stock savings bank subject to extensive regulation and supervision by the OTS,
as the primary federal regulator of savings associations, and the FDIC, as the
administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on Parent Holdings or Cal Fed, is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals. The primary purpose of the statutory and regulatory
scheme is to protect deposits, the financial institutions and the financial
system as a whole.
REGULATION OF PARENT HOLDINGS
Holding Company Acquisitions
Parent Holdings is a registered savings and loan holding company. The HOLA
and OTS regulations thereunder generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring, directly or indirectly,
the ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
Holding Company Activities
Parent Holdings currently operates as a unitary savings and loan holding
company. Generally, there are limited restrictions on the activities of a
unitary savings and loan holding company and its non-savings association
subsidiaries. If Parent Holdings ceases to be a unitary savings and loan
holding company, by, for example, acquiring another savings association in a
non-supervisory transaction, the activities of Parent Holdings and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions. In addition, proposed legislation that would eliminate the
savings association charter could also remove protections from activity
restrictions currently accorded a unitary savings and loan holding company in
the absence of appropriate "grandfather" provisions. See "--Regulation of Cal
Fed--Savings Association Charter."
Dividends
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least a 30 day advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock. Dividends declared in violation of such notice
requirement are invalid. See "--Regulation of Cal Fed--Capital Distribution
Regulation."
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and 23B
of the Federal Reserve Act. Affiliates of a savings association include, among
other entities, the savings association's holding company and non-banking
companies that are under common control with the savings association. In
general, the restrictions of Sections 23A and 23B do not apply to transactions
between a savings association and its parent, subsidiary or sister
organizations that themselves are banks or savings associations.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with
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affiliates to an amount equal to 10% of the association's capital and surplus,
in the case of covered transactions with any one affiliate, and to an amount
equal to 20% of such capital and surplus, in the case of covered transactions
with all affiliates. In addition, a savings association and its subsidiaries
may engage in covered transactions and certain other transactions only on terms
and under circumstances that are substantially the same, or at least as
favorable to the savings association or its subsidiary, as those prevailing at
the time for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate; with
certain exceptions, a purchase of assets from an affiliate; the acceptance of
securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate.
In addition, a savings association may not make a loan or extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies; a savings association may not purchase
or invest in securities of an affiliate other than shares of a subsidiary; a
savings association and its subsidiaries may not purchase a low-quality asset
from an affiliate; and covered transactions and certain other transactions
between a savings association or its subsidiaries and an affiliate must be on
terms and conditions that are consistent with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings
association to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount
of the loan or extension of credit.
REGULATION OF CAL FED
Regulatory System
As a federal savings bank, lending activities and other investments of Cal
Fed must comply with various statutory and regulatory requirements. Cal Fed is
regularly examined by the OTS and must file periodic reports concerning its
activities and financial condition.
Although the OTS is Cal Fed's primary regulator, the FDIC has "backup
enforcement authority" over Cal Fed. Cal Fed's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
Cal Fed is a member of the FHLBS. Among other benefits, FHLB membership
provides Cal Fed with a central credit facility, from which it may borrow
generally on a secured basis in amounts determined by reference to available
collateral. Cal Fed is required to own capital stock in the FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) 0.3% of total assets,
or (iii) 5% of its FHLB advances (borrowings).
Liquid Assets
Under OTS regulations, for each calendar quarter, a savings bank is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable accounts plus
short-term borrowings (its liquidity base) during the preceding calendar month.
This liquidity requirement, which currently equals 4% (having been lowered from
5% on November 24, 1997), may be changed from time to time by the OTS to any
amount between 4% and 10%, depending upon certain factors. Cal Fed has
maintained liquid assets in compliance with the regulations in effect
throughout 1998, 1997, 1996 and 1995.
Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy minimum capital
standards: risk-based capital requirements, a leverage requirement and a
tangible capital requirement. Savings banks must meet each of these standards
in order to be deemed in compliance with OTS capital requirements. In addition,
the OTS may require a savings association to maintain capital above the minimum
capital levels.
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All savings associations are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings association is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. The
OTS and the other banking agencies recently proposed to amend the minimum
capital requirements to establish a minimum leverage requirement of 4% for all
but the strongest savings associations, which is consistent with the
requirements for an "adequately capitalized" institution, under the prompt
corrective action provisions of the OTS regulations. See "--Prompt Corrective
Action." A savings association is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value
that would result from a 200 basis point increase or decrease in market
interest rates (whichever would result in lower net portfolio value), divided
by the estimated economic value of the savings association's assets. The IRR
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation; however, based on internal measures of
IRR at December 31, 1997, Cal Fed would not have been required to deduct an IRR
component in calculating total risk-based capital had the IRR component of the
capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to IRR, prepayment risk,
credit risk, concentration of credit risk, certain risks arising from
nontraditional activities, or similar risks or a high proportion of off-balance
sheet risk; (2) a savings association is growing, either internally or through
acquisitions, at such a rate that supervisory problems are presented that are
not dealt with adequately by OTS regulations; and (3) a savings association may
be adversely affected by activities or conditions of its holding company,
affiliates, subsidiaries or other persons or savings associations with which it
has significant business relationships. Cal Fed is not subject to any such
individual minimum regulatory capital requirement.
Cal Fed's total capital to risk-based assets ratio was 11.70%, its core
capital to risk-based assets ratio was 9.92%, its leverage capital ratio was
5.53% and its tangible capital ratio was 5.53% at March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital Requirements
A savings association's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings association to enforcement actions and other
proceedings. Any savings association not in compliance with all of its capital
requirements is required to submit a capital plan that addresses the
association's need for additional capital and meets certain additional
requirements. While the capital plan is being reviewed by the OTS, the savings
association must certify, among other things, that it will not, without the
approval of its appropriate OTS Regional Director, grow beyond net interest
credited or make capital distributions. If a savings association's capital plan
is not approved, the association will become subject to additional growth and
other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the
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ability of a savings association not in compliance with the capital
requirements to pay dividends and compensation, and may require such
association to take one or more of certain corrective actions, including,
without limitation: (i) increasing its capital to specified levels, (ii)
reducing the rate of interest that may be paid on savings accounts, (iii)
limiting receipt of deposits to those made to existing accounts, (iv) ceasing
issuance of new accounts of any or all classes or categories except in exchange
for existing accounts, (v) ceasing or limiting the purchase of loans or the
making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
The HOLA permits savings associations not in compliance with the OTS
capital standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings association still may be subject
to enforcement actions for other violations of law or unsafe or unsound
practices or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings association that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under the
regulation, the ratio of total capital to risk-weighted assets, core capital to
risk-weighted assets and the leverage capital ratio are used to determine an
association's capital classification. Cal Fed met the capital requirements of a
"well capitalized" institution under the FDICIA prompt corrective action
standards as of December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources."
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject
to restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over Brokered
Deposits.
Savings associations that are classified as undercapitalized are subject
to certain mandatory supervisory actions, including: (i) increased monitoring
by the appropriate federal banking agency for the association and periodic
review of the association's efforts to restore its capital, (ii) a requirement
that the association submit a capital restoration plan acceptable to the
appropriate federal banking agency and implement that plan, and that each
company having control of the association guarantee compliance with the capital
restoration plan in an amount not exceeding the lesser of 5% of the
association's total assets at the time it received notice of being
undercapitalized, or the amount necessary to bring the association into
compliance with applicable capital standards at the time it fails to comply
with the plan, and (iii) a limitation on the association's ability to make any
acquisition, open any new branch offices, or engage in any new line of business
without the prior approval of the appropriate federal banking agency for the
institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized association if the
agency determines that such actions are necessary to resolve the problems of
the association at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the association to raise
additional capital or be acquired by another association or holding company if
certain grounds exist, (ii) restricting transactions between the association
and its affiliates, (iii) restricting interest rates paid by the association on
deposits, (iv) restricting the association's asset growth or requiring the
association to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the association to alter or terminate
any activity deemed to pose excessive risk to the association, (vii)
prohibiting capital distributions by bank
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holding companies without prior approval by the Board of Governors of the
Federal Reserve Board (the "FRB"), (viii) requiring the association to divest
certain subsidiaries, or requiring the association's holding company to divest
the association or certain affiliates of the association, and (ix) taking any
other supervisory action that the agency believes would better carry out the
purposes of the prompt corrective action provisions of FDICIA.
Savings associations classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan
are subject to the same supervisory actions as significantly undercapitalized
associations. Significantly undercapitalized associations are subject to the
mandatory provisions applicable to undercapitalized associations. The
regulation also makes mandatory for significantly undercapitalized associations
certain of the supervisory actions that are discretionary for associations
classified as undercapitalized, creates a presumption in favor of certain
discretionary supervisory actions, and subjects significantly undercapitalized
associations to additional restrictions, including a prohibition on paying
bonuses or raises to senior executive officers without the prior written
approval of the appropriate federal bank regulatory agency. In addition,
significantly undercapitalized associations may be subjected to certain of the
restrictions applicable to critically undercapitalized associations.
The regulation requires that an association be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with the concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions of
FDICIA. Any such determination must be renewed every 90 days. A savings
association also must be placed into receivership if the association continues
to be critically undercapitalized, on average, during the fourth quarter after
the association initially became critically undercapitalized, unless the
association's federal bank regulatory agency, with the concurrence of the FDIC,
makes certain positive determinations with respect to the association.
Critically undercapitalized associations are also subject to the
restrictions generally applicable to significantly undercapitalized
associations and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such associations
may not pay principal or interest on subordinated debt without the prior
approval of the FDIC. (However, the regulation does not prevent unpaid interest
from accruing on subordinated debt under the terms of the debt instrument, to
the extent otherwise permitted by law.) In addition, critically
undercapitalized associations may be prohibited from engaging in a number of
activities, including entering into certain transactions or paying interest
above a certain rate on new or renewed liabilities.
If the OTS determines that an association is in an unsafe or unsound
condition, or if the association is deemed to be engaging in an unsafe or
unsound practice, the OTS may, if the association is well-capitalized,
reclassify it as adequately capitalized; if the association is adequately
capitalized, require it to comply with restrictions applicable to
undercapitalized associations; and, if the association is undercapitalized,
require it to comply with certain restrictions applicable to significantly
undercapitalized associations.
Conservatorship/Receivership
In addition to the grounds discussed under "--Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a conservator
or receiver for a savings association if any one or more of a number of
circumstances exist, including, without limitation, the following: (i) the
association's assets are less than its obligations to creditors and others,
(ii) a substantial dissipation of assets or earnings due to any violation of
law or any unsafe or unsound practice, (iii) an unsafe or unsound condition to
transact business, (iv) a willful violation of a final cease-and-desist order,
(v) the concealment of the association's books, papers, records or assets or
refusal to submit such items for inspection to any examiner or lawful agent of
the OTS or FDIC, (vi) the association is likely to be unable to pay its
obligations or meet its depositors' demands in the normal course of business,
(vii) the association has incurred, or is likely to incur, losses that will
deplete all or substantially all of its capital, and there is no reasonable
prospect for the association to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial
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dissipation of assets or earnings, weaken the association's condition, or
otherwise seriously prejudice the interests of the association's depositors or
the federal deposit insurance fund, (ix) the association consents to the
appointment of the conservator or receiver, (x) the association ceases to be an
insured association, (xi) the association is undercapitalized and the
association has no reasonable prospect of becoming adequately capitalized,
fails to become adequately capitalized when required to do so, fails to submit
a timely and acceptable capital restoration plan, or materially fails to
implement an accepted capital restoration plan, (xii) the association is
critically undercapitalized or otherwise has substantially insufficient
capital, or (xiii) the association is found guilty of certain criminal offenses
related to money laundering.
Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly controlled
depository institution or any assistance provided by the FDIC to a commonly
controlled institution in danger of default. A depository institution is
required to pay the amount of such liability upon receipt of written notice
from the FDIC unless such written notice is received more than two years from
the date the FDIC incurred the loss. Liability for the losses of commonly
controlled institutions can lead to the failure of all depository institutions
in a holding company structure if the remaining institutions are unable to pay
the liability assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default" of
a depository institution occurs when there is an official determination
pursuant to which a conservator, receiver or other legal custodian is appointed
for the institution; and a depository institution is deemed to be "in danger of
default" when its federal or state supervisory agency determines that the
institution is not likely to be able to meet the demands of its depositors or
pay its obligations in the normal course of business and there is no reasonable
prospect that it will be able to do so, or determines that the institution has
incurred or is likely to incur losses that will deplete substantially all of
its capital and there is no reasonable prospect that the institution's capital
can be replenished without federal assistance. Cal Fed is not currently under
common control with any other depository institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including authority
to bring various enforcement actions against a savings association and any of
its "institution-affiliated parties" (a term defined to include, among other
persons, directors, officers, employees, controlling stockholders, agents and
shareholders who participate in the conduct of the affairs of the institution).
This enforcement authority includes, without limitation: (i) the ability to
terminate a savings association's deposit insurance, (ii) institute
cease-and-desist proceedings, (iii) bring suspension, removal, prohibition and
criminal proceedings against institution-affiliated parties, and (iv) assess
substantial civil money penalties. As part of a cease-and-desist order, the
agencies may require a savings association or an institution-affiliated party
to take affirmative action to correct conditions resulting from that party's
actions, including to make restitution or provide reimbursement,
indemnification or guarantee against loss; restrict the growth of the
institution; and rescind agreements and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying
dividends described above, OTS regulations limit certain "capital
distributions" by savings associations. Capital distributions are defined to
include, in part, dividends and payments for stock repurchases and cash-out
mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than
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normal supervision (a "Tier 1 association") may, after prior notice to but
without the approval of the OTS, make capital distributions during a calendar
year up to the higher of: (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its surplus capital
ratio at the beginning of the calendar year, or (ii) 75% of its net income over
the most recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a "Tier
2 association") is authorized, after prior notice to the OTS but without OTS
approval, to make capital distributions in an amount up to 75% of its net
income over the most recent four-quarter period, taking into account all prior
distributions during the same period. Any distribution in excess of this amount
must be approved in advance by the OTS. A savings association that does not
meet its current regulatory capital requirements (a "Tier 3 association")
cannot make any capital distribution without prior approval from the OTS,
unless the capital distribution is consistent with the terms of a capital plan
approved by the OTS.
At December 31, 1997, Cal Fed qualified as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice. The
requirements of the capital distribution regulation supersede less stringent
capital distribution restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an association that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a
holding company, would be required to provide notice to the OTS prior to making
a capital distribution. "Troubled" associations and undercapitalized
associations would be allowed to make capital distributions only by filing an
application and receiving OTS approval, and such applications would be approved
under certain limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate and
certain other assets). A savings association that fails the qualified thrift
lender test is subject to substantial restrictions on activities and to other
significant penalties.
Legislation permits a savings association to qualify as a qualified thrift
lender ("QTL") not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by meeting
the asset composition test under the Internal Revenue Code for a "domestic
building and loan association." Cal Fed currently is a domestic building and
loan association as defined in the Internal Revenue Code and, consequently is a
QTL for purposes of HOLA.
Legislation enacted in 1996 also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family, and
household purposes (other than credit card, small business, and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At December 31, 1997 under the
expanded QTL test, approximately 94.01% of Cal Fed's portfolio assets were
qualified thrift investments.
FDIC Assessments
The deposits of Cal Fed are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the SAIF.
Under the FDIC's risk-based insurance system, SAIF-assessed deposits are
currently subject to insurance premiums of between 0 and 27 basis points,
depending upon the institution's capital position and other supervisory
factors. The rate applicable to Cal Fed at December 31, 1997 was 0 basis
points.
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Since January 1997, institutions with Bank Insurance Fund ("BIF") deposits
have been required to share the cost of funding debt obligations issued by the
Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of FSLIC. However, until the
earlier of December 31, 1999 or the date of elimination of the thrift charter
(see "--Savings Association Charter"), the FICO assessment rate for BIF
deposits is only one-fifth of the rate applicable to SAIF deposits.
Consequently, the annual FICO assessments to be added to deposit insurance
premiums, which may be periodically adjusted, are expected to equal
approximately 6.4 basis points for SAIF deposits and 1.3 basis points for BIF
deposits from January 1, 1997 through December 31, 1999, and an equal amount
for both BIF and SAIF deposits thereafter. Since January 1, 1997, FICO payments
have been paid directly by SAIF and BIF institutions in addition to deposit
insurance assessments.
Savings Association Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as Cal Fed, to convert their charters to national
bank charters. In the absence of appropriate "grandfather" provisions,
legislation eliminating the savings association charter could have a material
adverse effect on Cal Fed and its parent holding companies because, among other
things, these holding companies engage in activities that are not permissible
for bank holding companies and the regulatory capital and accounting treatment
for banks and savings associations differs in certain significant respects. Cal
Fed cannot determine whether, or in what form, such legislation may eventually
be enacted and there can be no assurance that any legislation that is enacted
would contain adequate grandfather rights for Cal Fed and its parent holding
companies.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from investing
in any corporate debt security that, at the time of acquisition, is not rated
in one of the four highest rating categories by at least one nationally
recognized statistical rating organization. Cal Fed does not own any
non-investment grade debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under the Community
Reinvestment Act ("CRA") and related regulations of the OTS to help meet the
credit needs of their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An association's failure to comply with the
provisions of CRA could, as a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies
and the Department of Justice.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual
may acquire control of a savings association if the OTS objects. Any company
that acquires control of a savings association becomes a savings and loan
holding company subject to extensive registration, examination and regulation
by the OTS. Conclusive control exists, among other ways, when an acquiring
party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of voting stock of the savings association
or savings and loan holding company (or 25% of any class of stock, whether or
not voting) and, in either case, any of certain additional control factors
specified in OTS regulations exist.
Under 1996 legislation, companies subject to the Bank Holding Company Act
that acquire or own savings associations are no longer defined as savings and
loan holding companies under the HOLA and,
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therefore, are not generally subject to supervision and regulation by the OTS.
OTS approval is no longer required for a bank holding company to acquire
control of an existing savings association, although the OTS has a consultative
role with the FRB in examination, enforcement and acquisition matters.
PROPERTIES
Parent Holdings neither owns nor leases any properties directly. The
executive offices of Cal Fed are located at 135 Main Street, San Francisco,
California, 94105, and its telephone number is (415) 904-0100. Cal Fed leases
approximately 92,000 square feet in the building in which its executive offices
are located, under a ten-year lease expiring in 2001. In addition, Cal Fed
leases approximately 216,000 square feet in a multiple-building administrative
facility in West Sacramento, California under a ten-year lease expiring in
2001. Cal Fed leases additional administrative office space in Dallas which
includes approximately 46,000 square feet of space under a lease expiring in
1999.
As part of the Cal Fed Acquisition, Cal Fed assumed the lease on executive
offices and an office building of approximately 513,000 square feet. Cal Fed
vacated all but approximately 44,000 square feet of this facility during the
first half of 1997. The office lease was to expire in 2007, however, Cal Fed
terminated its remaining liability on all space other than approximately 44,000
square feet by payment of approximately $28 million. The lease on the remaining
44,000 square feet terminates in 2003. In addition, Old California Federal had
certain operating and administrative departments in a leased facility
containing approximately 225,000 square feet located in Rosemead, California.
Cal Fed vacated the Rosemead facility during the first half of 1997. The
Rosemead lease expires in 2008.
At December 31, 1997, Cal Fed operated a total of 225 retail branches and
maintained 22 vacant branch facilities which were consolidated as a result of
the Branch Purchases (as defined herein), the 1996 Acquisitions, the Cal Fed
Acquisition and various consolidations of operations to West Sacramento. Of the
225 total operating retail branches, 62 were owned and 163 were leased. Some of
these retail branches are multi-purpose facilities, housing loan production and
administrative facilities in addition to retail space. Of the 22 vacant
facilities (one owned and 21 leased, all in California), 14 locations have been
subleased.
At December 31, 1997, there were 16 separate loan production offices, all
of which were leased, and which include three offices housing operations
acquired in the LMUSA Purchases and 13 offices housing wholesale lending
operations. There are no vacant loan production facilities at December 31,
1997.
In addition, Cal Fed operated 11 separate administrative facilities (two
owned and nine leased) and maintained 13 vacant administrative facilities (five
owned and eight leased). Of the 13 vacant administrative facilities, eight were
subleased. The administrative facilities include a 230,000 square foot owned
building in Frederick, Maryland, which houses FNMC's operations and
approximately 39,000 square feet of leased space in Dallas, which houses Auto
One. A state-by-state breakdown of all retail branches, administrative
facilities and loan production offices operated by Cal Fed at December 31, 1997
is shown in the following table:
<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
------------------------- ------------------------- ------------------------
OWNED LEASED VACANT OWNED LEASED VACANT OWNED LEASED VACANT
------- -------- -------- ------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona .............. -- -- -- -- 1 -- -- 2 --
California ........... 55 139 22 1 4 10 -- 4 --
Florida .............. 6 18 -- -- 1 1 -- 1 --
Georgia .............. -- -- -- -- -- -- -- 1 --
Illinois ............. -- -- -- -- -- 1 -- 1 --
Maryland ............. -- -- -- 1 -- -- -- 1 --
Minnesota ............ -- -- -- -- -- -- -- 1 --
Montana .............. -- -- -- -- 1 -- -- -- --
Nevada ............... 1 6 -- -- -- -- -- 1 --
Pennsylvania ......... -- -- -- -- -- -- -- 1 --
Texas ................ -- -- -- -- 2 1 -- 1 --
Washington ........... -- -- -- -- -- -- -- 2 --
-- --- -- -- -- -- -- -- --
Total ............... 62 163 22 2 9 13 -- 16 --
== === == == == == == == ==
</TABLE>
141
<PAGE>
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2 million
and are included in noninterest expense in Parent Holdings' 1995 consolidated
statement of income. On a continuing basis, Cal Fed evaluates the adequacy of
its office premises. As a result, surplus office facilities may be sold or
subleased to maintain cost-effective operations and minimize vacant facilities.
LEGAL PROCEEDINGS
Parent Holdings is involved in legal proceedings on claims incidental to
the normal conduct of its business. See also "--Other Activities--Cal Fed
Contingent Litigation Recovery Participation Interests." Although it is
impossible to predict the outcome of any outstanding legal proceedings,
management believes that such legal proceedings and claims, individually or in
the aggregate, will not have a material effect on Parent Holdings or Cal Fed.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ronald O. Perelman, a director of Cal Fed and Chairman of the Board, Chief
Executive Officer and a director of Parent Holdings, 35 East 62nd Street, New
York, New York 10021, through MacAndrews Holdings, beneficially owns all of the
outstanding common stock of Parent Holdings. No other director, executive
officer or other person beneficially owns any shares of common stock of Parent
Holdings.
MacAndrews & Forbes beneficially owns all shares of the common stock of
Parent Holdings. As a result, MacAndrews & Forbes is able to direct and control
the policies of Parent Holdings, Cal Fed and its subsidiaries, including
mergers, sales of assets and similar transactions.
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, Inc., ("Revlon"),
MacAndrews & Forbes is engaged in the cosmetics and skin care, fragrance and
personal care products business. MacAndrews & Forbes also owns 71% of
Panavision Inc., a supplier of film camera systems to the motion picture and
television industries, and 65% of Meridian Sports Incorporated ("Meridian
Sports"), a manufacturer and marketer of ski boats. Through its 64% ownership
of Consolidated Cigar Holdings Inc. ("Cigar Holdings"), MacAndrews & Forbes is
engaged in the manufacture and distribution of cigars and pipe tobacco. Through
its 39% ownership of M&F Worldwide Corp. ("MFW") (assuming conversions of
certain preferred stock), MacAndrews & Forbes is in the business of processing
licorice and other flavors. MacAndrews & Forbes is also in the financial
services business through Parent Holdings and Cal Fed. The principal executive
offices of MacAndrews & Forbes are located at 35 East 62nd Street, New York,
New York 10021.
Dividends
During 1997, 1996 and 1995, dividends on Parent Holdings' common stock
totalled $8.5 million, $322.7 million and $90.0 million, respectively. See
further discussion of dividend restrictions in Note 24 (at page F-43) of Parent
Holdings' 1997 audited consolidated financial statements.
142
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998
Parent Holdings is a holding company whose only significant asset is its
80% ownership of FNH, which owns 100% of the common stock of Cal Fed. As such,
Parent Holdings' principal business operations are conducted by Cal Fed and its
subsidiaries.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Parent Holdings and the notes thereto
beginning at page F-1. The following discussion includes historical information
relating to Parent Holdings, including the effect of the Cal Fed Acquisition
for the period since consummation on January 3, 1997.
GENERAL
Parent Holdings is a diversified financial services company whose
principal business, through Cal Fed, consists of (i) operating retail deposit
branches to serve consumers in California and, to a lesser extent, in Florida
and Nevada, (ii) originating and/or purchasing, on a nationwide basis, 1-4 unit
residential loans and, to a lesser extent, certain commercial real estate and
consumer loans, for investment and (iii) mortgage banking activities, including
originating and servicing 1-4 unit residential loans for others. Revenues are
derived primarily from interest earned on loans, interest received on
government and agency securities and mortgage-backed securities, gains on sales
of loans and other investments, and fees received in connection with loan
servicing, securities brokerage and other customer service transactions.
Expenses primarily consist of interest on customer deposit accounts, interest
on short-term and long-term borrowings, provisions for losses, general and
administrative expenses consisting of compensation and benefits, occupancy and
equipment, advertising and marketing, loan expenses, professional fees, data
processing and other general and administrative expenses.
The following is a description of the significant acquisitions and
dispositions which have occurred since the FN Acquisition. Each of the
acquisitions was recorded using the purchase method of accounting. Under this
method of accounting, the purchase price of the acquisition is allocated to the
assets and liabilities acquired based on their fair market values as of the
date of the acquisition.
The Cal Fed Acquisition
On January 3, 1997, FNH acquired Old Cal Fed and Old California Federal
for approximately $1.2 billion in cash and the issuance of the CALGLs. At
December 31, 1996, Old California Federal had approximately $14.1 billion in
assets, $8.9 billion in deposits and operated 119 branches in California and
Nevada. Upon consummation of the Cal Fed Acquisition, Cal Fed merged with Old
California Federal.
As a result of the Cal Fed Acquisition, Parent Holdings gained a
substantial presence in Southern California. In order to realize economies of
scale and cost reduction opportunities presented by the Cal Fed Acquisition,
Parent Holdings began to consolidate or eliminate duplicative back office
operations and administrative and management functions. Parent Holdings
presently estimates that, as a result of these measures, it saved approximately
$68 million in noninterest expense during the first twelve months of operations
following the Cal Fed Acquisition as compared to operating Old California
Federal on a stand-alone basis.
As a result of the Cal Fed Acquisition, Parent Holdings became obligated
with respect to the following outstanding debt securities of Old California
Federal: (i) $50 million of the 10.668% Subordinated Notes, (ii) $2.6 million
of the 6 1/2% Convertible Subordinated Debentures and (iii) $4.3 million of the
10% Subordinated Debentures Due 2003. See "--Description of Business of Parent
Holdings--Sources of Funds."
Impact of Other Acquisitions and Dispositions
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a 1-4 unit residential loan servicing portfolio of approximately $11.4
billion, including a subservicing portfolio of $1.8 billion, and certain assets
and liabilities for approximately $178 million. Parent Holdings' consolidated
statement of income for the year ended December 31, 1995 includes the results
of operations of the acquired mortgage servicing operation for the period from
March 1, 1995 through December 31, 1995.
143
<PAGE>
In April, August and December 1995, Parent Holdings acquired seven retail
branches with approximately $513 million in deposits located in California (the
"Branch Purchases"). The weighted average deposit premium paid in connection
with the Branch Purchases was 3.78%. The results of operations of the acquired
retail deposit operations are included in Parent Holdings' consolidated
statement of income for the year ended December 31, 1995 from the date each of
the transactions was consummated.
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase, acquiring a
loan servicing portfolio of approximately $11.1 billion (including a
subservicing portfolio of $3.1 billion), a master servicing portfolio of $2.9
billion and other assets, principally existing loans and loan production
operations for approximately $100 million and the assumption of certain
indebtedness secured by the acquired loan portfolio totalling approximately
$274 million. Parent Holdings' consolidated statement of income for the year
ended December 31, 1995 includes the results of operations of the acquired
mortgage servicing operations for the period from October 3, 1995 through
December 31, 1995.
On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
loan servicing portfolio of approximately $14.1 billion (including a
subservicing portfolio of $2.4 billion), a master servicing portfolio of $2.7
billion, LMUSA's real estate acquired through loan foreclosures in connection
with its servicing operations and LMUSA's trade names for approximately $160.0
million, subject to certain adjustments, and the assumption of certain of
LMUSA's obligations secured by its mortgage servicing operations. Parent
Holdings' consolidated statement of income for the year ended December 31, 1996
includes the results of operations of the acquired mortgage servicing
operations for the period from February 1, 1996 through December 31, 1996.
On February 1, 1996, Parent Holdings consummated the SFFed Acquisition
involving assets totalling $4.0 billion and retail deposits totalling $2.7
billion. Parent Holdings' consolidated statement of income for the year ended
December 31, 1996 includes the results of operations of the acquired operations
of SFFed for the period from February 1, 1996 through December 31, 1996.
On June 1, 1996, Parent Holdings consummated the Home Federal Acquisition,
involving approximately $717 million in assets and $632 million in deposits.
Parent Holdings' consolidated statement of income for the year ended December
31, 1996 includes the results of operations of the acquired operations of HFFC
for the period from June 1, 1996 through December 31, 1996.
During the first half of 1996, Parent Holdings closed the Branch Sales
with associated deposit accounts totalling $4.6 billion, resulting in pre-tax
gains totalling $363.3 million, which represented an average premium of 7.96%
of the approximately $4.6 billion of deposits sold. Parent Holdings'
consolidated statement of income for the year ended December 31, 1996 includes
the results of operations of those branches sold in the Branch Sales for the
period prior to sale.
On May 31, 1997, FNMC consummated the Weyerhaeuser Purchase, acquiring a
residential mortgage loan servicing portfolio of approximately $3.2 billion for
$37.1 million. Parent Holdings' consolidated statement of income for the year
ended December 31, 1997 includes the results of operations of the acquired 1-4
unit residential loan servicing operations for the period from June 1, 1997
through December 31, 1997.
On September 30, 1997, Parent Holdings sold MSRs for approximately 52,000
loans with an unpaid principal balance of approximately $2.3 billion in the
Servicing Sale. A pre-tax gain of $14.0 million was recorded in connection with
this transaction.
On December 12, 1997, Parent Holdings closed the Texas Branch Sale, which
included the sale of retail deposits totalling $57.6 million at a gross price
representing a deposit premium of 4.1%. The Texas Branch Sale resulted in a net
pre-tax gain on sale of $2.5 million.
On February 4, 1998, Parent Holdings consummated the GSAC Acquisition. The
aggregate consideration paid in connection with the GSAC Acquisition was
approximately $22.5 million and a 20% interest in the common stock of Auto One.
144
<PAGE>
Accounting Changes
On June 28, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
No. 125"). SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. Under that approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" ("SFAS No. 127"). SFAS
No. 127 defers for one year the effective date (i) of paragraph 15 of SFAS No.
125 and (ii) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase
agreement, dollar-roll, securities lending and similar transactions. SFAS No.
127 provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if it
is not possible to determine whether a transaction occurring during
calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities
lending, or similar transaction, then paragraphs 9-12 of SFAS No. 125 should be
applied to that transfer. Parent Holdings adopted SFAS No. 125, as amended by
SFAS No. 127, on January 1, 1997. Such adoption did not have a material impact
on Parent Holdings' consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement has no impact on the financial
condition or results of operations of Parent Holdings, but does impact Parent
Holdings' disclosure requirements. Parent Holdings has adopted this statement
effective October 1, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries," to remove the special
disclosure requirements for previously unconsolidated subsidiaries. This
statement is effective for fiscal years beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is
to be restated. This statement need not be applied to interim financial
statements in the initial year of application, but comparative information for
interim periods in the initial year of application is to be reported in
financial statements for interim periods in the second year of application.
This statement has no impact on the financial condition or results of
operations of Parent Holdings, but will require changes in Parent Holdings'
disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No.
87, 88 and 106. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of
145
<PAGE>
those plans. It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as they were when FASB Statements No. 87,
Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, were issued. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of disclosures
for earlier periods provided for comparative purposes, if available. It is not
expected that Parent Holdings will experience any material revision in its
disclosures when SFAS No. 132 is adopted.
Net Income
Parent Holdings reported net income for the three months ended March 31,
1998 of $35.4 million compared with net income of $16.5 million for the
corresponding period in 1997.
Net interest income was $150.6 million for the three months ended March
31, 1998, compared to $153.4 million in the same period in 1997. The decrease
in 1998 over 1997 is primarily due to a reduction in the net interest margin
resulting from prepayments of higher rate interest-earning assets being
replaced with interest-earning assets having comparatively lower rates,
primarily reflecting the flattening of the yield curve which occurred in 1997
and management's steps to limit interest rate risk.
Year 2000
During the year ended December 31, 1997, Parent Holdings finalized its
plan to address issues related to required changes in computer systems for the
year 2000 ("Year 2000"). Issues arise because computer systems and related
software have been designed to recognize only dates that relate to the 20th
century. Accordingly, if no changes are implemented, computer systems would
interpret "1/1/00" as January 1, 1900 instead of January 1, 2000. Additionally,
some equipment, being controlled by microprocessor chips, may not deal
appropriately with a year "00."
Parent Holdings has formed an internal task force to determine what
changes are needed in its custom software and what changes are required to be
made in software purchased from third party vendors as well as what steps will
be necessary to ensure continued operations of Parent Holdings' equipment.
It is expected that, by December 31, 1998, all issues related to Year 2000
will be addressed, either by programming changes to Parent Holdings' custom
software, by programming changes implemented by third party vendors to
purchased systems, or through the upgrading or purchase of Year 2000-compliant
hardware and equipment. Extensive testing is expected to occur during 1999.
Year 2000 is the highest priority project within the Information and Technology
Services unit of Parent Holdings. Management believes there is no material risk
that Parent Holdings will fail to address Year 2000 issues in a timely manner.
It is currently expected that costs related to Year 2000, not including Year
2000 costs associated with the Merger, will total approximately $14 million
over the years 1997 to 1999, of which $1.9 million and $3.3 million have been
incurred during the three months ended March 31, 1998 and since the inception
of the Year 2000 project, respectively.
Financial Condition
During the three months ended March 31, 1998, consolidated total assets
increased $.8 billion, to $32.2 billion, from December 31, 1997, and total
liabilities increased from $30.0 billion to $30.8 billion.
During the three months ended March 31, 1998, minority interest decreased
by $13.7 million. This decrease is the result of a $25.7 million redemption of
the FNH Preferred Stock, partially offset by $11.6 million representing that
portion of the results of operations and equity of FNH attributable to its
class B common stock, which is owned by Hunter's Glen and $.4 million from the
issuance of Auto One common stock as part of the GSAC Acquisition.
146
<PAGE>
Parent Holdings' non-performing assets, consisting of non-performing
loans, net of purchase accounting adjustments and specific allowances for loan
losses, foreclosed real estate, net, and repossessed assets, decreased to $261
million at March 31, 1998 compared with $272 million at December 31, 1997.
Total non-performing assets as a percentage of Cal Fed's total assets decreased
to .81% at March 31, 1998 from .87% at December 31, 1997.
RESULTS OF OPERATIONS
Three Months ended March 31, 1998 versus Three Months ended March 31, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding Parent Holdings' consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of Parent Holdings.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
-----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
--------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) ................... $ 955 $ 15 6.29%
Mortgage-backed securities available for sale ........................... 5,087 81 6.41
Mortgage-backed securities held to maturity ............................. 1,292 25 7.69
Loans held for sale, net ................................................ 1,485 27 7.36
Loans receivable, net ................................................... 19,744 385 7.79
------- ---- ----
Total interest-earning assets ......................................... 28,563 533 7.47%
---- ----
Noninterest-earning assets ............................................... 2,947
-------
Total assets .......................................................... $31,510
=======
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits ................................................................ $16,133 178 4.48%
Securities sold under agreements to repurchase .......................... 1,864 26 5.69
Borrowings (3) .......................................................... 11,110 178 6.50
------- ---- ----
Total interest-bearing liabilities .................................... 29,107 382 5.33%
---- ----
Noninterest-bearing liabilities .......................................... 1,015
Minority interest ........................................................ 1,166
Stockholder's equity ..................................................... 222
-------
Total liabilities, minority interest and stockholder's equity ......... $31,510
=======
Net interest income ...................................................... $151
====
Interest rate spread ..................................................... 2.14%
====
Net interest margin ...................................................... 2.04%
====
Average equity to average assets ......................................... 0.70%
====
</TABLE>
147
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
----------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) ................... $ 950 $ 14 5.86%
Mortgage-backed securities available for sale ........................... 3,552 61 6.87
Mortgage-backed securities held to maturity ............................. 1,577 30 7.59
Loans held for sale, net ................................................ 995 17 6.93
Loans receivable, net ................................................... 20,050 391 7.79
-------- ---- ----
Total interest-earning assets ......................................... 27,124 513 7.56%
---- ----
Noninterest-earning assets ............................................... 3,114
--------
Total assets .......................................................... $ 30,238
========
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits ................................................................ $ 16,845 187 4.50%
Securities sold under agreements to repurchase .......................... 2,457 34 5.60
Borrowings (3) .......................................................... 8,246 138 6.79
-------- ---- ----
Total interest-bearing liabilities .................................... 27,548 359 5.29%
---- ----
Noninterest-bearing liabilities .......................................... 1,428
Minority interest ........................................................ 1,100
Stockholder's equity ..................................................... 162
--------
Total liabilities, minority interest and stockholder's equity ......... $ 30,238
========
Net interest income ...................................................... $154
====
Interest rate spread ..................................................... 2.27%
====
Net interest margin ...................................................... 2.19%
====
Average equity to average assets ......................................... 0.54%
====
</TABLE>
- ----------
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
148
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of Parent Holdings during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of Parent Holdings' interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 VS. 1997
INCREASE (DECREASE) DUE TO
-------------------------------
VOLUME RATE NET
---------- ---------- ---------
INTEREST INCOME: (IN MILLIONS)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks ......... $ -- $ 1 $ 1
Mortgage-backed securities available for sale ............. 24 (4) 20
Mortgage-backed securities held to maturity ............... (5) -- (5)
Loans held for sale ....................................... 9 1 10
Loans receivable, net ..................................... (6) -- (6)
------- ----- ------
Total ................................................... 22 (2) 20
------ ------ -----
INTEREST EXPENSE:
Deposits .................................................. (8) (1) (9)
Securities sold under agreements to repurchase ............ (9) 1 (8)
Borrowings ................................................ 46 (6) 40
------ ------ -----
Total ................................................... 29 (6) 23
------ ------ -----
Change in net interest income .......................... $ (7) $ 4 $(3)
====== ===== =====
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended March 31, 1998 compared to the corresponding period
in 1997 are largely due to increased purchases of mortgage-backed securities
funded with FHLB advances. The positive total rate variance of $4 million is
primarily attributed to the increase in FHLB advances, partially offset by the
comparatively lower market rates on mortgage-backed securities purchased in
1998 and 1997 and prepayments of higher rate interest-earning assets as a
result of the flattening of the yield curve.
Interest Income. Total interest income was $533.4 million for the three
months ended March 31, 1998, an increase of $20.7 million from the three months
ended March 31, 1997. Total interest-earning assets for the three months ended
March 31, 1998 averaged $28.6 billion, compared to $27.1 billion for the
corresponding period in 1997. The yield on total interest-earning assets during
the three months ended March 31, 1998 decreased to 7.47% from 7.56% for the
three months ended March 31, 1997, primarily due to the lower market rates on
new mortgage-backed securities purchased in 1998 and 1997 and prepayments of
higher rate interest-earning assets.
Parent Holdings earned $27.3 million of interest income on loans held for
sale for the three months ended March 31, 1998, an increase of $10.1 million
from the three months ended March 31, 1997. The average balance of loans held
for sale was $1.5 billion for the three months ended March 31, 1998, an
increase of $490 million from the comparable period in 1997, due to increased
originations. The weighted average yield on loans held for sale increased to
7.36% for the three months ended March 31, 1998 from 6.93% for the three months
ended March 31, 1997, primarily due to a higher percentage of comparatively
higher fixed-rate portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was $81.5
million for the three months ended March 31, 1998, an increase of $20.5 million
from the three months ended March 31, 1997.
149
<PAGE>
The average portfolio balances increased $1.5 billion, to $5.1 billion, during
the three months ended March 31, 1998 compared to the same period in 1997. The
weighted average yield on these assets decreased from 6.87% for the three
months ended March 31, 1997 to 6.41% for the three months ended March 31, 1998.
The increase in the volume and decrease in the weighted average yield is
primarily due to the purchases of $1.0 billion in other mortgage-backed
securities during the three months ended March 31, 1998 and $2.0 billion during
the last nine months of 1997 at comparatively lower market rates.
There were no material variances between the three months ended March 31,
1998 and the three months ended March 31, 1997 with respect to interest income
from loans receivable, mortgage-backed securities held to maturity, and
securities and interest-bearing deposits in banks.
Interest Expense. Total interest expense was $382.9 million for the three
months ended March 31, 1998, an increase of $23.5 million from the three months
ended March 31, 1997. The increase is primarily the result of increased
borrowings on FHLB advances, partially offset by a decline in the average
balance of deposits resulting from net deposit run-off.
Interest expense on customer deposits, including Brokered Deposits, was
$178.2 million for the three months ended March 31, 1998, a decrease of $8.8
million from the three months ended March 31, 1997. The average balance of
customer deposits outstanding decreased from $16.8 billion to $16.1 billion for
the three months ended March 31, 1997 and 1998, respectively. The decrease in
the average balance is primarily due to net deposit run-off, anticipated
following the Cal Fed Acquisition. The overall weighted average cost of
deposits was 4.48% for the three months ended March 31, 1998 and 4.50% for the
three months ended March 31, 1997.
Interest expense on securities sold under agreements to repurchase
totalled $26.5 million for the three months ended March 31, 1998, a decrease of
$7.9 million from the three months ended March 31, 1997. The average balance of
such borrowings for the three months ended March 31, 1998 and 1997 was $1.9
billion and $2.5 billion, respectively. The decrease in the average balance is
primarily attributed to maturities and payoffs refinanced with FHLB advances at
more favorable rates. The weighted average interest rate on these instruments
increased to 5.69% during the three months ended March 31, 1998 from 5.60% for
the three months ended March 31, 1997, primarily due to an increase in rates on
new borrowings compared to such borrowings during 1997.
Interest expense on borrowings totalled $178.2 million for the three
months ended March 31, 1998, an increase of $40.2 million from the three months
ended March 31, 1997. The increase is primarily attributed to the increase in
FHLB advances used to fund the purchases of mortgage-backed securities and
replace reverse repurchase agreements which matured. The average balance
outstanding for the three months ended March 31, 1998 and 1997 was $11.1
billion and $8.2 billion, respectively. The weighted average interest rate on
these instruments decreased to 6.50% during the three months ended March 31,
1998 from 6.79% for the three months ended March 31, 1997, primarily due to the
shorter average maturity of the portfolio at March 31, 1998 compared to March
31, 1997.
Net Interest Income. Net interest income was $150.6 million for the three
months ended March 31, 1998, a decrease of $2.8 million from the three months
ended March 31, 1997. The interest rate spread decreased to 2.14% for the three
months ended March 31, 1998 from 2.27% for the three months ended March 31,
1997.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and dividends on
FHLB stock, was $89.8 million for the three months ended March 31, 1998, an
increase of $10.9 million from the three months ended March 31, 1997. Income
for the three months ended March 31, 1998 reflects an $11.6 million increase in
gain on sales of loans attributed to an increase in early payoffs of commercial
loans with unamortized discounts and an increase in gains from the sales of 1-4
unit residential loans.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $37.0 million for the three months ended March 31, 1998, compared to $39.7
million for the three months ended March 31, 1997. The single-family
residential loan servicing portfolio, excluding loans serviced for Cal Fed,
decreased from
150
<PAGE>
$47.5 billion at March 31, 1997 to $46.7 billion at March 31, 1998. During the
three months ended March 31, 1998, Parent Holdings sold $1.8 billion in
single-family mortgage loans originated for sale as part of its ongoing
mortgage banking operations compared to $1.2 billion of such sales for the
corresponding period in 1997.
Gain on sales of loans was $14.5 million for the three months ended March
31, 1998, compared to a gain of $2.9 million for the three months ended March
31, 1997. The increase is primarily attributed to early pay-offs of commercial
loans with unamortized discounts.
Dividends on FHLB stock were $7.0 million for the three months ended March
31, 1998, an increase of $1.0 million from the three months ended March 31,
1997, representing an increase in the amount of such stock owned by Parent
Holdings, primarily as a result of an increase in borrowings on FHLB advances.
There were no material variances between the three months ended March 31,
1998 and the comparable period in 1997 with respect to customer banking fees,
gain (loss) on sales of assets and other noninterest income.
Noninterest Expense. Total noninterest expense was $145.3 million for the
three months ended March 31, 1998, a decrease of $8.5 million from the three
months ended March 31, 1997. The variance between the two periods is primarily
attributed to transitional expenses (primarily reflected in compensation
expense and other noninterest expense) incurred during the three months ended
March 31, 1997 related to the Cal Fed Acquisition.
Provision for Income Tax. During the three months ended March 31, 1998 and
1997, Parent Holdings recorded income tax expense of $13.9 million and $10.2
million, respectively. Parent Holdings' effective Federal tax rate was 2%
during the three months ended March 31, 1998 and 1997, while its statutory
Federal tax rate was 35% during both periods. The difference between the
effective and statutory rates was primarily the result of the utilization of
net operating loss carryforwards for both periods. Parent Holdings' effective
state tax rate was 14% and 15% during the three months ended March 31, 1998 and
1997, respectively.
Minority Interest. Dividends on the REIT Preferred Stock totalling $11.4
million and $7.7 million were declared and paid during the three months ended
March 31, 1998 and 1997, respectively. Minority interest relative to the REIT
Preferred Stock is reflected on the consolidated statements of income net of
the income tax benefit of $1.5 million and $1.0 million for the three months
ended March 31, 1998 and 1997, respectively, which will inure to Parent
Holdings as a result of the deductibility of such dividends for income tax
purposes. Dividends on the preferred stock of FNH of $.6 million and $4.5
million were recorded during the three months ended March 31, 1998 and 1997,
respectively. Dividends on the preferred stock of Cal Fed of $13.2 million and
$13.1 million were also recorded during the three months ended March 31, 1998
and 1997, respectively. Minority interest for the three months ended March 31,
1998 also includes $12.2 million representing that portion of FNH's income
attributable to its class B common stock, which is owned by Hunter's Glen, and
$.2 million representing that portion of Auto One's loss attributable to the
20% interest in the common stock of Auto One that was issued as part of the
GSAC Acquisition. Minority interest for the three months ended March 31, 1997
includes $7.5 million representing that portion of FNH's income attributable to
its class B common stock.
151
<PAGE>
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. Parent Holdings charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. Parent Holdings established
provisions for loan losses of $10.0 million and $20.0 million during the three
months ended March 31, 1998 and 1997, respectively. The decrease in the
provision for loan losses during the three months ended March 31, 1998 compared
to the same period in 1997 is the result of management's evaluation of the
adequacy of the allowance based on, among other things, past loan loss
experience and known and inherent risks in the portfolio, evidenced in part by
the continued decline in Parent Holdings' level of non-performing assets. In
addition, management's periodic evaluation of the adequacy of the allowance for
loan losses considers potential adverse situations that may affect the
borrower's ability to repay, the estimated value of underlying collateral, and
current and prospective economic conditions. The allowance for loan losses is
increased by provisions for loan losses and allowances on acquired loans, while
it is decreased by charge-offs (net of recoveries).
Activity in the allowance for loan losses during the three months ended
March 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance -- January 1 ..................... $ 418,674 $ 246,556
Purchase -- Cal Fed Acquisition .......... -- 143,820
Provision for loan losses ................ 10,000 19,950
Charge-offs .............................. (11,399) (10,773)
Recoveries ............................... 1,855 866
--------- ---------
Balance -- March 31 ...................... $ 419,130 $ 400,419
========= =========
</TABLE>
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread is
referred to as asset and liability management. The objective of Parent
Holdings' asset and liability management is to maximize its net interest income
over changing interest rate cycles within the constraints imposed by prudent
lending and investing practices, liquidity needs and capital planning.
Parent Holdings, through Cal Fed, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest
rate fluctuations while maintaining the flexibility required to execute its
business strategies. Parent Holdings measures the interest rate sensitivity of
the balance sheet through gap and duration analysis, as well as net interest
income and market value simulation, and, after taking into consideration both
the variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate
and market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets
which best match relative to interest rate changes. In order to reduce interest
rate risk by increasing the percentage of interest sensitive assets, Parent
Holdings has continued its emphasis on the origination of ARM products for its
portfolio. Where possible, Parent Holdings seeks to purchase assets or
originate real estate loans that reprice frequently and that on the whole
adjust in accordance with the repricing of its liabilities. At March 31, 1998,
approximately 91% of Parent Holdings' real estate loan portfolio consisted of
ARMs.
152
<PAGE>
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, Parent Holdings' net interest margin would most likely be
negatively impacted in this situation. Certain ARMs now offered by Parent
Holdings have a fixed monthly payment for a given period, with any changes as a
result of market interest rates reflected in the unpaid principal balance
through negative amortization. From the lender's perspective, these loans
respond most quickly to rate changes because interest accruals immediately
reflect the loans as though they were fully indexed.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined interest
earned on interest-earning assets and the combined interest paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
given periods. A gap is considered positive when the interest rate sensitive
assets exceed interest rate sensitive liabilities, while the opposite results
in a negative gap. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
153
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of March 31,
1998. Prepayment rates are assumed in each period on substantially all of
Parent Holdings' loan portfolio based upon expected loan prepayments. Repricing
mechanisms on Parent Holdings' assets are subject to limitations such as caps
on the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as Parent Holdings' liabilities. In
addition, the interest rate sensitivity of Parent Holdings' assets and
liabilities illustrated in the table would vary substantially if different
assumptions were used or if actual experience differed from the assumptions set
forth. Parent Holdings' estimated interest rate sensitivity gap at March 31,
1998 is as follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
--------------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
------------ ------------ ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing deposits in
other banks and short-term investment securities(1)(2) ......... $ 84 $ -- $ 58 $ -- $ 142
Securities available for sale (3) ............................... 988 -- -- -- 988
Mortgage-backed securities available for sale (3) ............... 5,695 -- -- -- 5,695
Mortgage-backed securities held to maturity (1)(4) .............. 1,243 -- 2 -- 1,245
Loans held for sale, net (3)(5) ................................. 1,887 -- -- -- 1,887
Loans receivable, net (1)(6) .................................... 16,873 1,723 628 -- 19,224
Investment in FHLB .............................................. 486 -- -- -- 486
-------- ------- ------ ------ ------
Total interest-earning assets ................................... 27,256 1,723 688 -- 29,667
Noninterest-earning assets ...................................... -- -- -- 2,536 2,536
-------- ------- ------ ------ ------
$ 27,256 $ 1,723 $ 688 $2,536 $32,203
======== ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) .................................................... $ 14,442 $ 1,955 $ 6 $ -- $16,403
Securities sold under agreements to repurchase (1) .............. 1,866 100 -- -- 1,966
FHLB advances (1) ............................................... 7,085 2,831 2 -- 9,918
Other borrowings (1) ............................................ 276 836 704 -- 1,816
-------- ------- ------ ------ -------
Total interest-bearing liabilities .............................. 23,669 5,722 712 -- 30,103
Noninterest-bearing liabilities ................................. -- -- -- 700 700
Minority interest ............................................... -- -- -- 1,162 1,162
Stockholder's equity ............................................ -- -- -- 238 238
-------- ------- ------ ------ -------
$ 23,669 $ 5,722 $ 712 $2,100 $32,203
======== ======= ====== ====== =======
Gap before interest rate swap agreements ........................ $ 3,587 $(3,999) $ (24) $ (436)
Interest rate swap agreements (8) ............................... -- -- -- --
-------- ------- ------ -------
Gap adjusted for interest rate swap agreements .................. $ 3,587 $(3,999) $ (24) $ (436)
======== ======= ====== =======
Cumulative gap .................................................. $ 3,587 $ (412) $ (436) $ (436)
======== ======= ====== =======
Gap as a percentage of total assets ............................. 11.1% (12.4)% (0.1)% (1.4)%
======== ======= ====== =======
Cumulative gap as a percentage of total assets .................. 11.1% ( 1.3)% (1.4)% (1.4)%
======== ======= ====== =======
</TABLE>
<PAGE>
- ----------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of March 31, 1998. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from Parent Holdings'
prepayment estimates.
(2) Consists of $58 million of securities held to maturity, $.1 million of
interest-bearing deposits in other banks and $84 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $6 million.
(5) Excludes non-performing loans of $1 million.
(6) Excludes allowance for loan losses of $419 million and non-performing
loans of $173 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
(8) Agreements with notional amounts of $400 million maturing in April 1998
have no impact within the time periods presented.
154
<PAGE>
At March 31, 1998, interest-bearing liabilities of Parent Holdings
exceeded interest-earning assets by approximately $436 million. At December 31,
1997, interest-bearing liabilities of Parent Holdings exceeded interest-earning
assets by approximately $309 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of Parent Holdings' sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between product
features and pricing, market rates and future management of the balance sheet
mix. Parent Holdings utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income.
Parent Holdings' risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of Cal Fed. ALCO meets monthly to
formulate Cal Fed's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate funding,
and the establishment of asset product priorities by formulating performance
evaluation criteria, risk evaluation techniques and a system to standardize the
analysis and reporting of originations, competitive trends, profitability and
risk. On a quarterly basis, the Board of Directors of Cal Fed is apprised of
ALCO strategies adopted and their impact on operations, and, at least annually,
the Board of Directors of Cal Fed reviews Cal Fed's interest rate risk
management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government securities and other specified securities
to deposits and borrowings due within one year. Effective November 24, 1997,
the OTS established a minimum liquidity requirement for Cal Fed of 4.00%, a
reduction from 5.00%, which had been in effect prior to that date in 1997 and
1996. Cal Fed has been in compliance with the liquidity regulations during 1998
and 1997.
Parent Holdings' funds are obtained from the repayment and maturities of
loans and mortgage-backed securities, customer and Brokered Deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances and other
secured and unsecured borrowings.
A major source of Parent Holdings' funding is expected to be Cal Fed's
retail deposit branch network, which management believes will be sufficient to
meet its long-term liquidity needs. The ability of Parent Holdings to retain
and attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. Parent Holdings also obtains funds from the repayment and maturities
of loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
Parent Holdings' primary uses of funds are the origination or purchase of
loans, the purchase of mortgage-backed securities, the funding of maturing
certificates of deposit, demand deposit withdrawals, the repayment of
borrowings, and the payment of dividends with respect to the REIT Preferred
Stock and Cal Fed Preferred Stock. Certificates of deposit scheduled to mature
during the twelve months ending March 31, 1999 aggregate $8.2 billion. Parent
Holdings may renew these certificates, attract new replacement deposits,
replace such funds with other borrowings, or it may elect to reduce the size of
the balance sheet. In addition, at March 31, 1998, Parent Holdings had
securities sold under agreements to repurchase, FHLB advances and other
borrowings aggregating $8.0 billion maturing within twelve months. Parent
Holdings may elect to pay off such debt or to replace such borrowings with
additional FHLB advances or other borrowings at prevailing rates.
Parent Holdings' primary source of cash to pay the interest on and
principal of its long-term debt is expected to be distributions from FNH. The
annual interest on Parent Holdings' long-term debt is
155
<PAGE>
$56.9 million. Although Parent Holdings expects that distributions from FNH
will be sufficient to pay interest when due and the principal amount of its
long-term debt at maturity, there can be no assurance that earnings from Cal
Fed will be sufficient to make such distributions to FNH, or that FNH will make
distributions to Parent Holdings in amounts sufficient to enable Parent
Holdings to pay interest on its long-term debt. In addition, there can be no
assurance that such distributions will be permitted by the terms of any debt
instruments of Parent Holdings' subsidiaries then in effect, including FNH's
long-term debt, by the terms of any class of preferred stock issued by Cal Fed,
including the REIT Preferred Stock and Cal Fed Preferred Stock, or under
applicable federal thrift laws.
FNH's primary source of cash to pay the interest on and principal of its
long-term debt is expected to be distributions from Cal Fed. The annual
interest on FNH's long-term debt is $98.4 million. Although FNH expects that
distributions from Cal Fed will be sufficient to pay interest when due and the
principal amount of its long-term debt at maturity, there can be no assurance
that earnings from Cal Fed will be sufficient to make such distributions to
FNH. In addition, there can be no assurance that such distributions will be
permitted by the terms of any debt instruments of FNH's subsidiaries then in
effect, by the terms of any class of preferred stock issued by Cal Fed,
including the REIT Preferred Stock and Cal Fed Preferred Stock, or under
applicable federal thrift laws.
Parent Holdings anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and Cal Fed's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $464.3 million at March 31, 1998, Parent Holdings
has substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the three months ended March 31, 1998 were net loan repayments of
$521.8 million, proceeds from sales of loans of $1.8 billion, $4.8 billion in
additional borrowings, a $123.4 million net increase in securities sold under
agreements to repurchase, $734.4 million in proceeds from principal payments
and maturities of securities and mortgage-backed securities available for sale
and $201.0 million from a net increase in deposits. The primary uses of funds
were $4.4 billion in principal payments on borrowings, $1.5 billion in
purchases of securities and mortgage-backed securities available for sale, $2.3
billion in originations of loans and $123.7 million in net cash paid for the
GSAC Acquisition.
156
<PAGE>
PROBLEM AND POTENTIAL PROBLEM ASSETS
Parent Holdings considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Parent Holdings will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, Parent Holdings considers large
non-homogeneous loans including non-performing loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other indications
that the borrowers are experiencing increased levels of financial difficulty.
Parent Holdings bases the measurement of collateral-dependent impaired loans on
the fair value of the loan's collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
At March 31, 1998, the carrying value of loans that are considered to be
impaired totalled $102.2 million (of which $26.1 million were on non-performing
status). The average recorded investment in impaired loans during the three
months ended March 31, 1998 was approximately $103.4 million. For the three
months ended March 31, 1998, Parent Holdings recognized interest income on
those impaired loans of $2.0 million, which included less than $.1 million of
interest income recognized using the cash basis method of income recognition.
The following table presents the amounts, net of specific allowances for
loan losses and purchase accounting adjustments, of Parent Holdings'
non-performing loans, foreclosed real estate, repossessed assets, troubled debt
restructurings and impaired loans as of the dates indicated. These categories
are not mutually exclusive; certain loans are included in more than one
classification.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------------
NON-PERFORMING IMPAIRED RESTRUCTURED
---------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential .................. $ 148 $ -- $ 2
5+ unit residential ................... 12 41 7
Commercial and other .................. 13 60 34
Land .................................. -- -- --
Construction .......................... 1 1 --
------ ------- ------
Total real estate ................... 174 102 43
Non-real estate ........................ 6 -- --
------ ------- ------
Total loans, net .................... 180 $ 102 (b) $ 43 (c)
======= ======
Foreclosed real estate, net ............ 76
Repossessed assets ..................... 5
------
Total non-performing assets ......... $ 261(a)
======
</TABLE>
157
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
NON-PERFORMING IMPAIRED RESTRUCTURED
---------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential .................. $ 165 $ -- $ 2
5+ unit residential ................... 12 43 7
Commercial and other .................. 6 67 26
Land .................................. -- -- --
Construction .......................... 2 -- --
------ ------ -----
Total real estate ................... 185 110 35
Non-real estate ........................ 7 -- --
------ ------ -----
Total loans ......................... 192 $ 110(b) $ 35(c)
====== =====
Foreclosed real estate, net ............ 77
Repossessed assets ..................... 3
------
Total non-performing assets ......... $ 272(a)
======
</TABLE>
- ----------
(a) Includes loans securitized with recourse on non-performing status of
$5.5 million and $5.2 million at March 31, 1998 and December 31,
1997, respectively, and loans held for sale on non-performing status
of $1.1 million and $1.2 million at March 31, 1998 and December 31,
1997.
(b) Includes $26.1 million and $18.6 million of loans on non-performing
status at March 31, 1998 and December 31, 1997, respectively. Also
includes $21.3 million and $17.5 million of loans classified as
troubled debt restructurings at March 31, 1998 and December 31,
1997, respectively.
(c) Includes non-performing loans of $2.1 million at March 31, 1998 and
December 31, 1997. At March 31, 1998 and December 31, 1997, $2.1
million and $1.7 million, respectively, of these non-performing
troubled debt restructurings were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
March 31, 1998 or December 31, 1997.
Parent Holdings' non-performing assets, consisting of non-performing
loans, net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, decreased to $261 million at March 31, 1998, from $272
million at December 31, 1997. Non-performing assets as a percentage of Cal
Fed's total assets decreased to .81% at March 31, 1998, from .87% at December
31, 1997.
Parent Holdings, through Cal Fed, manages its credit risk by regularly
assessing the current and estimated future performance of the real estate
markets in which it operates. Parent Holdings continues to place a high degree
of emphasis on the management of its asset portfolio. Parent Holdings has three
distinct asset management functions: performing loan asset management, problem
loan asset management and credit review. These three functions are charged with
the responsibility of reducing the risk profile within the residential,
commercial and multi-family asset portfolios by applying asset management and
risk evaluation techniques that are consistent with Parent Holdings' portfolio
management strategy and regulatory requirements. In addition to these asset
management functions, Parent Holdings has a specialized credit risk management
group that is charged with the development of credit policies and performing
credit risk analyses for all asset portfolios.
158
<PAGE>
The following table presents non-performing real estate assets by
geographic region of the country as of March 31, 1998:
<TABLE>
<CAPTION>
TOTAL
NON-PERFORMING FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
LOANS, NET (2) NET (2) ASSETS CONCENTRATION
---------------- -------------- --------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Region:
California ............ $108 $49 $157 62.81%
Northeast (1) ......... 30 13 43 17.19
Other regions ......... 36 14 50 20.00
---- --- ---- ------
Total ............... $174 $76 $250 100.00%
==== === ==== ======
</TABLE>
- ----------
(1) Includes Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
At March 31, 1998, Parent Holdings' largest non-performing asset was
approximately $5.4 million, and it had three non-performing assets over $2
million in size with balances averaging approximately $4.4 million. Parent
Holdings has 2,116 non-performing assets below $2 million in size, including
2,017 non-performing 1-4 unit residential assets.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- ---------------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance -- December 31, 1997 ......... $202 $198 $ 19 $ 419
Provision for loan losses ........... 6 3 1 10
Charge-offs ......................... (8) (1) (3) (12)
Recoveries .......................... 1 -- 1 2
----- ----- ----- -----
Balance -- March 31, 1998 ............ $201 $200 $18 $ 419
===== ===== ===== =====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at March
31, 1998 and December 31, 1997 was 232.9% and 217.8%, respectively.
MORTGAGE BANKING OPERATIONS
Since 1994, Parent Holdings, through FNMC, has significantly expanded its
mortgage banking operations. During May 1997 and January 1998, FNMC acquired
mortgage servicing assets of $3.2 billion and $3.6 billion, respectively, as a
result of four bulk servicing acquisitions. With the consummation of the 1997
and 1998 bulk acquisitions, a 1997 servicing sale of loans with an unpaid
principal balance of $2.3 billion, the acquisition of additional 1-4 unit
residential loan servicing portfolios in the Cal Fed Acquisition and the
originated servicing, the 1-4 unit residential loans serviced for others
totalled $46.7 billion at March 31, 1998, an increase of $.1 billion and a
decrease of $.8 billion from December 31, 1997 and March 31, 1997,
respectively. During the three months ended March 31, 1998, Parent Holdings,
through FNMC, originated $2.3 billion and sold (generally with servicing
retained) $1.8 billion 1-4 unit residential loans. Gross revenues from mortgage
loan servicing activities for the three months ended March 31, 1998 totalled
$59.6 million, a decrease of $.9 million from the three months ended March 31,
1997.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization
159
<PAGE>
of MSRs, and generally will result in a reduction in the market value of MSRs
and in Parent Holdings' servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, Parent Holdings hedged
the change in value of its MSRs based on changes in interest rates ("MSR
Hedge").
At March 31, 1998, Parent Holdings, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002.
Parent Holdings paid counterparties a premium in exchange for cash payments in
the event that the 10-year Constant Maturity Treasury rate falls below
negotiated strike prices. At March 31, 1998, the notional amount of the
interest rate floors was $1.4 billion and the strike prices were between 5.5%
and 6.5%. In addition, Parent Holdings, through FNMC, was a party to
principal-only swap agreements related to principal-only securities and
prepayment-linked swap agreements with a remaining notional amount of $113.1
million and $1.3 billion, respectively. The estimated market values of interest
rate floor contracts and swaps designated as hedges against MSRs at March 31,
1998 were $24.1 million and $16.9 million, respectively.
The following is a summary of activity in MSRs and the MSR Hedge for the
three months ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
TOTAL MSR
MSRS MSR HEDGE BALANCE
----------- ----------- ------------
<S> <C> <C> <C>
Balance at December 31, 1997 ....................... $ 531,269 $ 5,434 $ 536,703
Additions -- bulk purchases ....................... 57,495 -- 57,495
Originated servicing .............................. 38,978 -- 38,978
Additions -- other ................................ 7,633 -- 7,633
Additions to MSR Hedge ............................ -- 13,478 13,478
Payments received under interest rate floor
contracts ....................................... -- (3,550) (3,550)
Net payments made under principal-only
swap agreements ................................. -- 381 381
Net payments made under futures contracts ......... -- 1,654 1,654
Amortization ...................................... (25,750) (1,468) (27,218)
--------- -------- ---------
Balance at March 31, 1998 .......................... $ 609,625 $ 15,929 $ 625,554
========= ======== =========
</TABLE>
Capitalized mortgage servicing rights are amortized in proportion to, and
over the period of, estimated future net servicing income. SFAS No. 125
requires enterprises to measure the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their
current fair value. At March 31, 1998 and December 31, 1997, no allowance for
impairment of the mortgage servicing rights was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 4%, recently amended
from 3% which had been in effect prior to March 1998. Core capital generally is
the sum of tangible capital plus certain qualifying intangibles. Under the
risk-based capital requirement, a savings association must have total capital
(core capital plus supplementary capital) equal to at least 8% of risk-weighted
assets (which equals assets plus the credit risk equivalent of certain
off-balance sheet items, each multiplied by the appropriate risk weight).
Supplementary capital, which may not exceed 100% of core capital for purposes
of the risk-based requirements, includes, among other things, certain permanent
capital instruments such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. The capital requirements are viewed as minimum standards by the OTS,
160
<PAGE>
and most associations are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, depending upon their particular circumstances.
Cal Fed is not subject to any such individual minimum regulatory capital
requirement. These capital requirements are applicable to Cal Fed but not to
Parent Holdings.
At March 31, 1998, Cal Fed's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.53%, 5.53% and 11.70%, respectively. The following is a
reconciliation of Cal Fed's stockholders' equity to regulatory capital as of
March 31, 1998:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of Cal Fed at
March 31, 1998 ................................... $2,261 $2,261 $2,261
Minority interest -- REIT Preferred Stock ......... 500 500 500
Unrealized holding gain on securities available
for sale, net .................................... (31) (31) (31)
Non-qualifying MSRs ............................... (62) (62) (62)
Non-allowable capital:
REIT Preferred Stock in excess of 25% of
Tier 1 capital ................................. (70) (70) (70)
Intangible assets ................................ (670) (670) (670)
Goodwill Litigation Asset ........................ (100) (100) (100)
Investment in subsidiaries ....................... (53) (53) (53)
Excess deferred tax asset ........................ (53) (53) (53)
Supplemental capital:
Qualifying subordinated debt debentures .......... -- -- 94
General loan loss allowance ...................... -- -- 219
Assets required to be deducted:
Low level recourse deduction ..................... -- -- (2)
Land loans with more than 80% LTV ratio .......... -- -- (3)
------ ------ --------
Regulatory capital of Cal Fed ..................... 1,722 1,722 2,030
Minimum regulatory capital requirement ............ 467 1,246 1,388
------ ------ -------
Excess above minimum capital requirement .......... $1,255 $ 476 $ 642
====== ====== =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Regulatory capital of Cal Fed .................... 5.53% 5.53% 11.70%
Minimum regulatory capital requirement ........... 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement ......... 4.03% 1.53% 3.70%
==== ==== =====
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $31.1 billion. Risk-weighted assets used for the risk-based capital
ratio amounted to $17.4 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other
things, define specific capital categories based on an association's capital
ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." Associations categorized as
"undercapitalized" or worse are subject to certain restrictions, including the
requirement to file a capital plan with the OTS, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the association either by the OTS or by the FDIC,
161
<PAGE>
including requirements to raise additional capital, sell assets, or sell the
entire association. Once an association becomes "critically undercapitalized"
it is generally placed in receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital
ratio of at least 10.00%. An association is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2.00% or less. At March
31, 1998, Cal Fed's capital levels were sufficient for it to be considered
"well capitalized:"
<TABLE>
<CAPTION>
RISK-BASED
LEVERAGE ---------------------------
CAPITAL TIER 1 TOTAL CAPITAL
--------- ---------- --------------
<S> <C> <C> <C>
Regulatory capital of Cal Fed ............... 5.53% 9.92% 11.70
Well capitalized ratio ...................... 5.00 6.00 10.00
---- ---- -----
Excess above well capitalized ratio ......... 0.53% 3.92% 1.70%
==== ==== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To
the extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At March 31, 1998, $53 million
of the net tax benefit was determined to be attributable to the amount of
taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from regulatory capital at March 31, 1998.
DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by
Parent Holdings since Parent Holdings' report in ITEM 7A of its Form 10-K for
the year ended December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year Ended December 31,
1997--Quantitative and Qualitative Disclosures About Market Risk."
162
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
The year-to-year comparisons set forth below, including the changes in
magnitude of the various items between periods, have been affected by the
acquisitions and dispositions described above and consummated during the
periods involved.
The following table sets forth, for the periods and at the dates
indicated, information regarding Parent Holdings' consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of Parent Holdings.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- --------- --------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and
interest-bearing deposits
in banks (2) .................. $ 1,015 $ 62 6.11% $ 566 $ 35 6.15% $ 435 $ 28 6.42%
Mortgage-backed securities
available for sale (3) ........ 4,485 298 6.64 1,697 116 6.83 -- -- --
Mortgage-backed securities
held to maturity (3) .......... 1,482 113 7.65 1,766 135 7.65 2,985 213 7.14
Loans held for sale ............ 1,068 77 7.15 855 62 7.20 290 24 8.35
Loans receivable, net .......... 19,859 1,553 7.82 10,994 885 8.05 10,072 800 7.94
Covered Assets, net ............ -- -- -- 26 1 5.41 165 11 6.67
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 27,909 2,103 7.53% 15,904 1,234 7.76% 13,947 1,076 7.71%
------ ---- ------ ---- ------ ----
Noninterest-earning assets ....... 2,865 1,223 751
------- ------- -------
Total assets .................. $30,774 $17,127 $14,698
======= ======= =======
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits ....................... $16,728 $ 747 4.47% $ 9,360 $ 419 4.48 $ 9,959 $ 447 4.49%
Securities sold under
agreements to repurchase....... 2,512 141 5.52 2,109 120 5.70 1,577 105 6.66
Borrowings (4) ................. 9,153 611 6.67 4,558 309 6.77 2,210 183 8.26
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities ................... 28,393 1,499 5.28% 16,027 848 5.29% 13,746 735 5.35%
------ ---- ------ ---- ------ ----
Noninterest-bearing liabilities .. 1,030 298 277
Minority interest ................ 1,164 528 334
Stockholder's equity ............. 187 274 341
------- ------- -------
Total liabilities, minority
interest and stockholder's
equity ........................ $30,774 $17,127 $14,698
======= ======= =======
Net interest income .............. $ 604 $ 386 $ 341
====== ====== ======
Interest rate spread ............. 2.25% 2.47% 2.36%
==== ==== ====
Net interest margin .............. 2.16% 2.44% 2.44%
==== ==== ====
Average equity to average
assets ......................... 0.61% 1.60% 2.32%
==== ==== ====
</TABLE>
163
<PAGE>
- ----------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities
purchased under agreements to resell.
(3) Substantially all securities held to maturity (except for mortgage-backed
securities resulting from the securitization with recourse of certain of
Cal Fed's loans) were reclassified to securities available for sale on
December 29, 1995. The average balance of such securities for three days
in 1995 is not material and is therefore not presented. Average balances
presented for 1996 and 1997 represent the original amortized cost of the
securities without the effect of unrealized gains and losses recorded as
a result of the available for sale classification.
(4) Interest and average rate include the impact of interest rate swaps.
The following table presents certain information regarding changes in
interest income and interest expense of Parent Holdings during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of Parent Holdings' interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior year's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior year's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------------------- -----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------- -----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ----------- ---------- ---------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing
deposits in banks .................... $ 28 $ (1) $ 27 $ 8 $ (1) $ 7
Mortgage-backed securities available
for sale ............................. 185 (3) 182 116 -- 116
Mortgage-backed securities held to
maturity ............................. (22) -- (22) (94) 16 (78)
Loans held for sale ................... 15 -- 15 41 (3) 38
Loans receivable, net ................. 692 (24) 668 74 11 85
Covered assets, net ................... (1) -- (1) (8) (2) (10)
------- ------ ------- ------- ------- -----
Total ............................... 897 (28) 869 137 21 158
------ ------ ------ ------ ------ -----
INTEREST EXPENSE:
Deposits .............................. 329 (1) 328 (27) (1) (28)
Securities sold under agreements to
repurchase ........................... 24 (3) 21 26 (11) 15
Borrowings ............................ 306 (4) 302 151 (25) 126
------ ------- ------ ------ ------ -----
Total ............................... 659 (8) 651 150 (37) 113
------ ------- ------ ------ ------ -----
Change in net interest income ......... $238 $(20) $218 $(13) $ 58 $ 45
====== ====== ====== ====== ====== =====
</TABLE>
The volume variances in total interest income and total interest expense
for the year ended December 31, 1997 compared to the corresponding period in
1996 were largely due to the additional $17.0 billion in interest-earning
assets acquired and $16.9 billion in interest-bearing liabilities assumed in
the Cal Fed Acquisition and the 1996 Acquisitions, as well as the assumption of
the 10 5/8% Notes. The negative total rate variance of $20 million was
primarily attributable to assets from the Cal Fed Acquisition generally having
a lower yield than the rest of the portfolio, the assumption of the 10 5/8%
Notes, the
164
<PAGE>
issuances of the 9 1/8% Senior Subordinated Notes and the 12 1/2% Senior Notes
and the impact of the additional wholesale borrowings used to finance the
Branch Sales.
The volume variances in total interest income and total interest expense
between the year ended December 31, 1995 to the corresponding period in 1996
were largely due to the issuance of the 12 1/2% Senior Notes and additional
$4.2 billion in interest-earning assets acquired and $4.4 billion in interest-
bearing liabilities assumed in the 1996 Acquisitions. The positive total rate
variance of $58 million was primarily attributable to increasing rates on
adjustable-rate assets and the decrease in overall market rates on
interest-bearing liabilities between the two periods, offset slightly by the
impact of the additional wholesale borrowings used to finance the Branch Sales.
During the year ended December 31, 1996, deposits totalling $4.6 billion with a
weighted average rate of 4.59% were sold and replaced with $4.1 billion of FHLB
advance borrowings and securities sold under agreements to repurchase with a
weighted average rate of 5.45%.
Year Ended December 31, 1997 versus Year Ended December 31, 1996
Net Income. Parent Holdings reported net income for the year ended
December 31, 1997 of $65.2 million compared with net income of $420.6 million
in 1996. Net income for the year ended December 31, 1997 included pre-tax gains
of $25.0 million from the sale of the remaining ACS stock, $14.0 million on the
sale of mortgage servicing rights and $3.6 million on the sales of branches,
partially offset by a $29.0 million provision for professional fees and
additional unreimbursable costs related to the foreclosure of 1-4 unit
residential mortgage loans serviced for others. Net income for the year ended
December 31, 1996 included $363.3 million in pre-tax gains on sales of
branches, $40.4 million in pre-tax gains from the sale of ACS stock, $25.6
million in pre-tax income recognized in connection with the termination of the
Assistance Agreement and the recognition of a $125.0 million deferred tax
benefit, partially offset by a $60.1 million charge for the Special SAIF
Assessment. Excluding non-recurring and expected non-recurring items, net
income for the years ended December 31, 1997 and 1996 totalled $64.5 million
and $75.9 million, respectively.
Interest Income. Total interest income was $2.1 billion for the year ended
December 31, 1997, an increase of $869 million from the year ended December 31,
1996. The interest-earning assets acquired in the Cal Fed Acquisition and the
1996 Acquisitions resulted in total interest-earning assets for the year of
1997 averaging $27.9 billion, compared to $15.9 billion for the corresponding
period in 1996. The weighted average yield on total interest-earning assets
during the year ended December 31, 1997 decreased to 7.53% compared to 7.76%
for the year ended December 31, 1996, primarily due to assets from the Cal Fed
Acquisition generally having a lower yield than the rest of the portfolio.
Parent Holdings earned $1.6 billion of interest income on loans receivable
for the year ended December 31, 1997, an increase of $668 million from the year
ended December 31, 1996. The loans acquired in the Cal Fed Acquisition and the
1996 Acquisitions contributed most of the additional interest income in 1997
and resulted in an increase in the average balance of loans receivable to $19.9
billion for the year ended December 31, 1997 from $11.0 billion for the year
ended December 31, 1996. The weighted average yield on loans receivable
decreased to 7.82% for the year ended December 31, 1997 from 8.05% for the
comparable period in 1996, due primarily to the addition of $10.1 billion in
loans from the Cal Fed Acquisition generally having a lower yield than the rest
of the portfolio.
In addition, Parent Holdings earned $77 million of interest income on
loans held for sale for the year ended December 31, 1997, an increase of $15
million from the year ended December 31, 1996. The average balance of loans
held for sale was $1.1 billion for the year ended December 31, 1997, an
increase of $213 million from the comparable period in 1996, due primarily to
increased originations. The weighted average yield on loans held for sale
decreased slightly to 7.15% for the year ended December 31, 1997 from 7.20% for
the year ended December 31, 1996, primarily due to the portfolio consisting of
a higher percentage of lower-rate adjustable rate loans in 1997 compared to a
predominantly fixed-rate portfolio in 1996.
Interest income on mortgage-backed securities available for sale was $298
million for the year ended December 31, 1997, an increase of $182 million from
the year ended December 31, 1996. The average
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<PAGE>
portfolio balances increased $2.8 billion, to $4.5 billion, during the year
ended December 31, 1997 compared to the same period in 1996. The weighted
average yield on these assets decreased from 6.83% for the year ended December
31, 1996 to 6.64% for the year ended December 31, 1997. The increase in the
volume and decrease in the weighted average yield was primarily due to the
acquisition of $2.0 billion in mortgage-backed securities from the Cal Fed
Acquisition and the purchase of $2.6 billion in other mortgage-backed
securities during 1997.
Interest income on mortgage-backed securities held to maturity was $113
million for the year ended December 31, 1997, a decrease of $22 million from
the year ended December 31, 1996. The average portfolio balance decreased $284
million, to $1.5 billion, during the year ended December 31, 1997 compared to
the same period in 1996.
There was no interest income from Covered Assets for the year ended
December 31, 1997, as a result of the disposal of all remaining Covered Assets
in August 1996.
Interest income from securities and interest-bearing deposits in banks was
$62 million for the year ended December 31, 1997, an increase of $27 million
from the year ended December 31, 1996. The average portfolio balance increased
to $1.0 billion, an increase of $449 million from the year ended December 31,
1996, primarily due to the assets acquired in the Cal Fed Acquisition and
purchases of short-term investment securities made by Parent Holdings during
1997 to meet liquidity needs. The weighted average yield on these assets
decreased to 6.11% for the year ended December 31, 1997 from 6.15% for the year
ended December 31, 1996, primarily due to a shift in the mix to lower-rate
interest-bearing deposits acquired in the Cal Fed Acquisition, along with a
decline in yields earned on interest-bearing deposits in other banks.
Interest Expense. Total interest expense was $1.5 billion for the year
ended December 31, 1997, an increase of $651 million from the year ended
December 31, 1996. The increase was the result of additional interest-bearing
liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the
assumption of the 10 5/8% Notes, the issuances of the 9 1/8% Senior
Subordinated Notes and the 12 1/2% Senior Notes and incrementally higher rates
paid on the additional borrowings used to replace the retail deposits sold in
the Branch Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$747 million for the year ended December 31, 1997, an increase of $328 million
from the year ended December 31, 1996. The average balance of customer deposits
outstanding increased from $9.4 billion to $16.7 billion for the years ended
December 31, 1996 and 1997, respectively, primarily due to $9.0 billion in
deposits assumed in the Cal Fed Acquisition. The overall weighted average cost
of deposits was 4.47% for the year ended December 31, 1997 and 4.48% for the
year ended December 31, 1996.
Interest expense on securities sold under agreements to repurchase
totalled $141 million for the year ended December 31, 1997, an increase of $21
million from the year ended December 31, 1996. The average balance of such
borrowings for the years ended December 31, 1997 and 1996 was $2.5 billion and
$2.1 billion, respectively. The increase in the average balance was primarily
attributable to $1.1 billion of such liabilities assumed in the Cal Fed
Acquisition and the 1996 Acquisitions, partially offset by maturities and
payoffs that were refinanced with FHLB advances and deposits acquired in the
Cal Fed and Home Federal Acquisitions. The weighted average interest rate on
these instruments decreased to 5.52% during the year ended December 31, 1997
from 5.70% for the year ended December 31, 1996, primarily due to a decrease in
rates on new borrowings compared to such borrowings during 1996.
Interest expense on borrowings totalled $611 million for the year ended
December 31, 1997, an increase of $302 million from the year ended December 31,
1996. The increase was attributable to the net effect of borrowings assumed in
the Cal Fed Acquisition and the 1996 Acquisitions, the assumption of the 10
5/8% Notes, the issuances of the 9 1/8% Senior Subordinated Notes and the 12
1/2% Senior Notes and additional borrowings to replace deposits sold in the
Branch Sales, partially offset by the impact of a slight decrease in the rates
paid on such borrowings. The average balance of borrowings outstanding for the
years ended December 31, 1997 and 1996 was $9.2 billion and $4.6 billion,
respectively. The weighted average interest rate on these borrowings decreased
to 6.67% during the year ended December 31, 1997
166
<PAGE>
from 6.77% for the year ended December 31, 1996, primarily due to the shorter
average maturity of the portfolio during the year ended December 31, 1997
compared to the corresponding period in 1996, partially offset by the higher
rates paid on the 10 5/8% Notes, the 9 1/8% Senior Subordinated Notes and the
12 1/2% Senior Notes.
Net Interest Income. Net interest income was $604 million for the year
ended December 31, 1997, an increase of $218 million from the year ended
December 31, 1996. The interest rate spread decreased to 2.25% for the year
ended December 31, 1997 from 2.47% for the year ended December 31, 1996.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the sales
of branches and on sales of residential mortgage loans and MSRs, was $364
million for the year ended December 31, 1997, a decrease of $289 million from
the year ended December 31, 1996. Income for the year ended December 31, 1997
included a $14.0 million gain from the Servicing Sale, a $25.0 million gain
from the sale of the remaining ACS stock and a $3.6 million gain on the sales
of branches. The activities in 1996 included (i) gains on the Branch Sales of
$363.3 million, (ii) gain from the sale of ACS stock of $40.4 million, (iii)
income recognized in connection with the termination of the Assistance
Agreement of $25.6 million, and (iv) gain from the sale of consumer loans of
$7.5 million.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $144 million for the year ended December 31, 1997, compared to $124
million for the year ended December 31, 1996. This increase was primarily due
to the addition of the mortgage servicing portfolios acquired in the Cal Fed
Acquisition, the 1996 Acquisitions, the LMUSA 1996 Purchase and the
Weyerhaeuser Purchase, as well as MSRs originated through the increased
origination capacity provided by the Cal Fed Acquisition, partially offset by
portfolio paydowns. The single-family residential loan servicing portfolio,
excluding loans serviced for Cal Fed, increased from $43.1 billion at December
31, 1996 to $46.6 billion at December 31, 1997. During the year ended December
31, 1997, Parent Holdings sold $5.5 billion in single-family mortgage loans
originated for sale as part of its ongoing mortgage banking operations compared
to $4.9 billion of such sales for the corresponding period in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $100 million for the year ended December 31,
1997, compared to $45 million for the year ended December 31, 1996. The
increase was primarily attributable to the impact of increased revenues from
the retail banking operations acquired in the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by the impact of the Branch Sales.
Management fees totalled $6 million for the year ended December 31, 1997,
compared to $10 million for the year ended December 31, 1996. The decrease was
attributable principally to the reduced number of commercial real estate assets
under management for others as a result of an increase in dispositions of
assets and contracts which have expired.
Gain on sales of loans was $25 million for the year ended December 31,
1997, compared to a gain of $18 million for the year ended December 31, 1996.
The increase was primarily attributed to early pay-offs of commercial loans
with unamortized discounts, partially offset by a $7.5 million gain from the
sale of $298.0 million of consumer loans during 1996.
Gain on sales of assets was $38 million for the years ended December 31,
1997 and 1996. The gain in 1997 was primarily attributable to a $14.0 million
gain related to the Servicing Sale and a $25.0 million gain on the sale of Cal
Fed's remaining shares of ACS stock. The gain in 1996 was primarily the result
of a $40.4 million gain from the sale of ACS stock, partially offset by a
permanent impairment in the mortgage-backed securities available-for-sale
portfolio.
Gain on sale of branches was $4 million for the year ended December 31,
1997, attributable primarily to the Texas Branch Sales. For information on the
1996 gain on Branch Sales, see "--Description of Business of Parent
Holdings--General."
Gain from the termination of the Assistance Agreement was $25.6 million
for the year ended December 31, 1996.
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Dividends on FHLB stock were $25 million for the year ended December 31,
1997, an increase of $13 million from the year ended December 31, 1996,
representing an increase in the amount of such stock owned by Cal Fed,
primarily as a consequence of the Cal Fed Acquisition.
Other noninterest income was $23 million for the year ended December 31,
1997, an increase of $5 million from the year ended December 31, 1996. The
increase was primarily attributable to a settlement received related to the
condemnation of a building, an increase in disbursement float interest income
and the recognition of a previously deferred gain on sale of certain retail
operations, partially offset by the favorable outcome of an arbitration hearing
during the year ended December 31, 1996, related to the FN Acquisition.
Noninterest Expense. Total noninterest expense was $651 million for the
year ended December 31, 1997, an increase of $159 million from the year ended
December 31, 1996. The increase was principally due to the growth of Parent
Holdings through the Cal Fed Acquisition and the 1996 Acquisitions and a $29.0
million provision recorded in 1997 for professional fees and unreimbursable
costs related to the foreclosure of single-family loans serviced for others,
partially offset by a $60.1 million charge recorded in 1996 for the Special
SAIF Assessment.
Total compensation and employee benefits expense was $256 million for the
year ended December 31, 1997, an increase of $52 million from the year ended
December 31, 1996. The increase in expense was primarily attributable to the
presence of 1,688 additional employees at December 31, 1997 compared to
December 31, 1996 as a result of the Cal Fed Acquisition, partially offset by a
reduction in expense from December 31, 1996 to December 31, 1997 of $23.3
million related to the Incentive Plan. Parent Holdings and FNH have no
employees of their own.
Occupancy and equipment expense was $82 million for the year ended
December 31, 1997, an increase of $30 million from the year ended December 31,
1996, attributable primarily to the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by operations sold in the Branch Sales.
SAIF deposit insurance premiums decreased $70 million, to $11 million, for
the year ended December 31, 1997 compared to the corresponding period in 1996,
due to a decrease in the quarterly assessment rate from 23 cents to 6.42 cents
per $100 of deposits, partially offset by an increase in the deposit assessment
base as a result of the net impact of the Cal Fed Acquisition, the 1996
Acquisitions and the Branch Sales. In addition, the year ended December 31,
1996 included a $60.1 million charge for the Special SAIF Assessment.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Reduction Act") was enacted. The Reduction Act
provided for a special assessment (the "Special SAIF Assessment"), which was
levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic deposits
held as of March 31, 1995. As a result of the Reduction Act, SAIF deposit
insurance premiums included a $60.1 million pre-tax charge for the Special SAIF
Assessment for the year ended December 31, 1996. The portion of the assessment
related to deposits sold in Ohio, New York, New Jersey and Michigan was borne,
pursuant to each sales contract, by the respective purchasers and, accordingly,
such amounts were not included in the expense recorded by Parent Holdings.
Loan expense, including foreclosure costs and loan servicing expenses, was
$60 million for the year ended December 31, 1997, an increase of $29 million
from the year ended December 31, 1996. The increase includes a $25.0 million
provision for unreimbursable costs related to the foreclosure of single family
loans serviced for others. The increase was also attributed to additional
expenses associated with the higher volume of loans serviced, and higher
outside appraisal fees, inspection fees and provision for loss on FHA and VA
loans serviced.
Marketing expense was $20 million for the year ended December 31, 1997, an
increase of $9 million from the year ended December 31, 1996, attributed
primarily to the Cal Fed Acquisition and the 1996 Acquisitions, partially
offset by reduced nationwide marketing efforts as a result of the Branch Sales.
Professional fees increased $30 million, to $49 million, for the year
ended December 31, 1997 compared to the corresponding period in 1996. This
increase included additional legal, consulting and audit expenses related to
the Cal Fed Acquisition and the 1996 Acquisitions, as well as $4.0 million in
higher fees paid to professional firms in connection with the foreclosure of
loans serviced for others.
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Data processing expense was $12 million for the year ended December 31,
1997, an increase of $2 million from the year ended December 31, 1996,
attributed primarily to the Cal Fed Acquisition.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $3 million for the year ended December 31, 1997 compared to a net
gain of $7 million for the same period in 1996. The change was primarily
attributable to an increase in post-foreclosure write-downs of residential and
commercial foreclosed real estate.
Amortization of intangible assets increased to $49 million for the year
ended December 31, 1997 from $9 million for the corresponding period in 1996,
primarily due to the amortization of additional intangible assets recorded in
connection with the Cal Fed Acquisition and the 1996 Acquisitions.
Other noninterest expense was $114 million for the year ended December 31,
1997, an increase of $34 million from the year ended December 31, 1996,
primarily due to amortization of deferred issuance costs related to the 10 5/8%
Notes and an increase in provisions for telecommunications, postage, office
supplies, insurance, retail branch and subservicing losses, OTS assessments and
travel expenses, all of which are attributable primarily to the Cal Fed
Acquisition and the 1996 Acquisitions.
Provision for Income Tax. During the year ended December 31, 1997 and
1996, Parent Holdings recorded income tax expense of $41.3 million and income
tax benefit of $75.8 million, respectively. Parent Holdings' effective federal
income tax rate was 2% and (22)% during the year ended December 31, 1997 and
1996, respectively, while its statutory federal income tax rate was 35% during
both periods. The difference between the effective and statutory rates was
primarily the result of the utilization of net operating loss carryforwards for
both periods and the recognition of a $125 million deferred tax benefit in the
second quarter of 1996. Parent Holdings' effective state income tax rate,
before extraordinary item and minority interest, increased to 15% from 8%
during the year ended December 31, 1997 compared to the corresponding period in
1996, primarily as a result of Parent Holdings' increased presence in
California where the state tax rate is generally higher than in other states
and nondeductible goodwill amortization from the Cal Fed Acquisition and the
1996 Acquisitions.
Extraordinary Item. During the year ended December 31, 1996, Parent
Holdings repurchased $44 million aggregate principal amount of the 11.20%
Senior Notes, resulting in a loss of $1.6 million, net of income taxes.
Minority Interest. Minority interest in income includes dividends on Cal
Fed Preferred Stock, the FNH Preferred Stock and the REIT Preferred Stock
totalling $52.8 million, $12.8 million and $36.6 million, respectively, during
the year ended December 31, 1997. Minority interest relative to the REIT
Preferred Stock is reflected on the consolidated statement of income net of the
income tax benefit of $5.3 million which will inure to Parent Holdings as a
result of the deductibility of such dividends for income tax purposes. Minority
interest in income also includes $29.7 million representing that portion of
FNH's income attributable to its class B common stock which is owned by
Hunter's Glen.
Year Ended December 31, 1996 versus Year Ended December 31, 1995
Net Income. Parent Holdings reported net income of $421 million for the
year ended December 31, 1996, compared with net income of $122 million in 1995.
Net income for the year ended December 31, 1996 included $363.3 million in
pre-tax gains on sales of branches, $40.4 million in pre-tax gains from the
sale of ACS stock, $25.6 million in pre-tax gain recognized in connection with
the termination of the Assistance Agreement and the recognition of a $125.0
million deferred tax benefit, partially offset by a $60.1 million charge for
the Special SAIF Assessment. Net income, excluding the aforementioned items,
Incentive Plan (as defined herein) charges and extraordinary loss on early
extinguishment of debt, totalled $75.9 million for the year ended December 31,
1996.
Interest Income. Total interest income was $1.2 billion for the year ended
December 31, 1996, an increase of $158 million from the year ended December 31,
1995. The interest-earning assets acquired in the 1996 Acquisitions resulted in
total interest-earning assets for 1996 averaging $15.9 billion, compared to
$13.9 billion for 1995. In addition, the weighted average yields on total
interest-earning assets during 1996 increased to 7.76% from the 7.71% weighted
average yield on total interest-earning assets during 1995.
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Parent Holdings earned $885 million of interest income on loans receivable
for the year ended December 31, 1996, an increase of $85 million from the year
ended December 31, 1995. The loans acquired in the 1996 Acquisitions
contributed most of the increased interest income in 1996, and resulted in an
increase in the average balance of loans receivable to $11.0 billion from $10.1
billion for the year ended December 31, 1995. The weighted average yield on
loans receivable increased to 8.05% for the year ended December 31, 1996 from
7.94% for 1995 due to upward rate adjustments on adjustable rate 1-4 unit
residential loans.
Parent Holdings earned $62 million of interest income on loans held for
sale for the year ended December 31, 1996, an increase of $38 million from the
year ended December 31, 1995. The increased income was the net effect of a
higher average volume of loans held for sale due to increased originations from
the operations acquired in the Maryland Acquisition and the LMUSA Purchases,
partially offset by a decrease in the weighted average rate of such loans. The
average balance of loans held for sale was $855 million for the year ended
December 31, 1996, an increase of $565 million from 1995. The weighted average
yield on loans held for sale decreased to 7.20% for the year ended December 31,
1996 from 8.35% during 1995 due to generally decreasing market rates during the
period and the portfolio consisting of a higher percentage of comparatively
lower-rate adjustable rate loans in 1996 compared to a higher fixed rate
portfolio in 1995.
Interest income on mortgage-backed securities available for sale was $116
million for the year ended December 31, 1996. The average balance of
mortgage-backed securities available for sale was $1.7 billion with a weighted
average yield of 6.83% for the year ended December 31, 1996.
Interest income on mortgage-backed securities held to maturity was $135
million for the year ended December 31, 1996, a decrease of $78 million from
the year ended December 31, 1995. The average balance of mortgage-backed
securities held to maturity decreased to $1.8 billion during the year ended
December 31, 1996, compared to $3.0 billion during 1995. The weighted average
yield on mortgage-backed securities held to maturity increased to 7.65% during
1996 from 7.14% during 1995, primarily due to the upward rate adjustments of
adjustable rate mortgage-backed securities.
Interest income from Covered Assets declined $10 million, to $1 million,
for the year ended December 31, 1996. The decline is due to a reduction in the
average volume of Covered Assets (which were acquired by the FDIC as part of
the FDIC Purchase in June 1995) and the termination of the related Assistance
Agreement in August 1996.
Interest income from securities (other than those discussed above),
including the available-for-sale portfolio and securities held to maturity, and
interest-bearing deposits in other banks was $35 million for the year ended
December 31, 1996, an increase of $7 million from the year ended December 31,
1995. The average portfolio balances during the years ended December 31, 1996
and 1995 increased to $566 million from $435 million, respectively, primarily
due to assets acquired in the 1996 Acquisitions. The weighted average yield on
these assets decreased to 6.15% during 1996 from 6.42% during 1995, primarily
due to an overall decline in market interest rates.
Interest Expense. Total interest expense was $848 million for the year
ended December 31, 1996, an increase of $113 million from the year ended
December 31, 1995. The increase was the result of additional interest-bearing
liabilities assumed in the 1996 Acquisitions, the issuances of the 9 1/8%
Senior Subordinated Notes and the 12 1/2% Senior Notes and incrementally higher
rates paid on the additional borrowings incurred to replace the retail deposits
sold in the Branch Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$419 million for the year ended December 31, 1996, a decrease of $28 million
from the year ended December 31, 1995. The average balance of customer deposits
outstanding decreased from $10.0 billion to $9.4 billion for the years ended
December 31, 1995 and 1996, respectively. The overall weighted average cost of
deposits decreased from 4.49% for the year ended December 31, 1995 to 4.48% for
the year ended December 31, 1996, due principally to the impact of higher
average balances of lower rate custodial transaction accounts related to the
additional MSRs acquired in the Maryland Acquisition and the LMUSA Purchases,
partially offset by slight increases in the market rates of interest paid for
Brokered Deposits.
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Interest expense on securities sold under agreements to repurchase
totalled $120 million for the year ended December 31, 1996, an increase of $15
million from the year ended December 31, 1995. The average balance of such
borrowings for the year ended December 31, 1996 and 1995 was $2.1 billion and
$1.6 billion, respectively. The increase was attributable to $.8 billion of
such liabilities acquired in the 1996 Acquisitions together with $1.5 billion
in additional short-term borrowings to fund the Branch Sales during 1996,
partially offset by maturities and payoffs that were refinanced with deposits
acquired from the Home Federal Acquisition and FHLB advances. The weighted
average interest rate on these borrowings decreased to 5.70% in 1996 from 6.66%
for 1995, primarily due to the impact of decreases in overall market interest
rates.
Interest expense on borrowings totalled $309 million for the year ended
December 31, 1996, an increase of $126 million from the year ended December 31,
1995. The increase was attributable to the net effect of a volume increase for
borrowings assumed in the 1996 Acquisitions, the issuances of the 9 1/8% Senior
Subordinated Notes and the 12 1/2% Senior Notes, and additional borrowings to
replace the deposits sold in the Branch Sales, partially offset by the impact
of decreases in the rates paid on such borrowings largely due to the shorter
weighted average maturity of the borrowings at December 31, 1996 compared to
December 31, 1995. The average balance outstanding for the year ended December
31, 1996 and 1995 was $4.6 billion and $2.2 billion, respectively. The weighted
average interest rate on these borrowings decreased to 6.77% during the year
ended December 31, 1996 from 8.26% for the year ended December 31, 1995,
primarily due to the impact of decreases in overall market interest rates and
the shorter average maturity of the portfolio.
Net Interest Income. Net interest income was $386 million for the year
ended December 31, 1996, an increase of $45 million from the year ended
December 31, 1995. The interest rate spread increased to 2.47% for the year
ended December 31, 1996 from 2.36% for the year ended December 31, 1995.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the Branch
Sales and on sales of loans and loan servicing rights, was $653 million for the
year ended December 31, 1996, an increase of $502 million from the year ended
December 31, 1995. This increase included (i) gains on sales of branches of
$363.3 million, (ii) gain from the sale of ACS stock of $40.4 million and (iii)
gains recognized in connection with the termination of the Assistance Agreement
of $25.6 million.
Loan servicing fees, net of amortization of MSRs, were $124 million for
the year ended December 31, 1996, compared to $70 million for the year ended
December 31, 1995. This increase was due to the addition of the mortgage
servicing portfolios acquired in the Maryland Acquisition, the LMUSA Purchases
and the 1996 Acquisitions, as well as MSRs originated through the increased
origination capacity provided by these acquisitions. The 1-4 unit residential
loan servicing portfolio, excluding loans serviced for Cal Fed, increased from
$7.4 billion at January 1, 1995 to $27.0 billion at January 1, 1996 and to
$43.1 billion at December 31, 1996. During the year ended December 31, 1996,
Parent Holdings sold $4.9 billion in 1-4 unit residential loans originated for
sale as part of its ongoing mortgage banking operations compared to $1.2
billion of such sales for 1995.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $45 million for the year ended December 31,
1996, compared to $47 million for the year ended December 31, 1995. The
decrease was attributable to the impact of decreased revenues associated with
the Branch Sales, partially offset by the increased revenues from the retail
banking operations acquired in the Branch Purchases and the 1996 Acquisitions.
Management fees totaled $10 million for the year ended December 31, 1996
compared to $15 million for the year ended December 31, 1995. The decrease was
attributable principally to a reduction in the amount of assets under
management as a result of the expiration of contracts with the Resolution Trust
Corporation and other third parties.
Gain on sales of branches was $363.3 million for the year ended December
31, 1996. See Note 3 to the accompanying financial statements of Parent
Holdings for additional information regarding the Branch Sales.
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Gain on sales of loans was $18 million for the year ended December 31,
1996. The increase was attributable in part to a gain of $7.5 million on the
sale of $298.0 million of consumer loans during the first quarter of 1996. In
addition, Parent Holdings experienced increased gains on sales of 1-4 unit
residential loans due to the adoption of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment to
Statement No. 65" ("SFAS No. 122") on April 1, 1995. See "--Mortgage Banking
Operations."
Gain on sales of assets was $38 million for the year ended December 31,
1996. The gain was primarily the result of a $40.4 million gain from the sale
of ACS stock, partially offset by a writedown recorded on certain CMOs in the
mortgage-backed securities available-for-sale portfolio determined to have a
permanent impairment in value.
Dividends on FHLB stock were $12 million for the year ended December 31,
1996, an increase of $5 million from the year ended December 31, 1995. The
increase was primarily attributable to the 1996 Acquisitions and an increase in
FHLB advances as a result of the Branch Sales.
Gain from the termination of the Assistance Agreement was $26 million for
the year ended December 31, 1996.
Other noninterest income was $18 million for the year ended December 31,
1996, an increase of $7 million from the year ended December 31, 1995. The
increase was primarily attributable to a $3 million increase in disbursement
float interest income and $2 million of interest received related to the
favorable outcome of an arbitration hearing.
Noninterest Expense. Total noninterest expense was $492 million for the
year ended December 31, 1996, an increase of $159 million from the year ended
December 31, 1995. The increase was principally due to additional compensation,
loan expense, deposit insurance premiums and other noninterest expenses which
were primarily related to the growth of Parent Holdings through the various
acquisitions in 1995 and the first half of 1996 and the Special SAIF
Assessment.
Total compensation and employee benefits expense was $205 million for the
year ended December 31, 1996, an increase of $51 million from the year ended
December 31, 1995, primarily attributable to $35.6 million of Incentive Plan
accruals. The number of full time employees decreased to 3,547 for the year
ended December 31, 1996, compared to 3,619 for the year ended December 31,
1995. This decrease was primarily due to the net impact of a reduction in
employees as a result of the Branch Sales and Parent Holdings' cost reduction
program, partially offset by employee additions in the mortgage banking
operations related to the servicing portfolios acquired in the LMUSA Purchases
and an increase in retail banking employees attributed to the 1996
Acquisitions.
Occupancy and equipment expense was $52 million for the year ended
December 31, 1996, an increase of $2 million from the year ended December 31,
1995, attributed primarily to increased expenses resulting from the Maryland
and 1996 Acquisitions and the LMUSA Purchases, partially offset by the net
effect of operations sold in the Branch Sales.
SAIF deposit insurance premiums increased $59 million, to $81 million, for
the year ended December 31, 1996. The increase was primarily due to the $60
million Special SAIF Assessment.
Loan expense was $31 million for the year ended December 31, 1996, an
increase of $19 million from the year ended December 31, 1995. The increase
related to additional expenses associated with the higher volume of loans
serviced due to the LMUSA Purchases, the Maryland Acquisition and increased
loan production. Such expenses included subservicing fees paid on acquired
servicing portfolios prior to conversion to FNMC's systems and increased
pass-through interest expense for loan payoffs in serviced loan pools. In
addition, such expenses also included outside appraisal fees, inspection fees,
and provision for losses on loans insured by the Federal Housing Administration
or guaranteed by the Veterans Administration.
Professional fees increased $8 million, to $19 million, for the year ended
December 31, 1996. This increase included additional expenses related to the
loan servicing portfolios acquired in the LMUSA Purchases, as well as
additional accruals for various legal and litigation expenses.
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Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $7 million for the year ended December 31, 1996 compared to a net
gain of $1 million for the same period in 1995. The change was attributable to
a higher volume of sales in 1996 at comparatively higher prices to carrying
values.
Amortization of intangible assets increased to $9 million for the year
ended December 31, 1996 from $1 million for 1995, primarily due to the
amortization of $132.1 million in goodwill recorded in connection with the 1996
Acquisitions.
Other noninterest expense was $80 million for the year ended December 31,
1996, an increase of $19 million from the year ended December 31, 1995,
principally due to increased telecommunications, postage, office supplies,
insurance, OTS assessments and travel expenses, all of which are attributed
primarily to the increased loan servicing activity that resulted from the
Maryland Acquisition and the LMUSA Purchases.
Provision for Income Taxes. During the years ended December 31, 1996 and
1995, Parent Holdings recorded income tax benefit of $75.8 million and $57.2
million, respectively. Based on a favorable earnings trend since the
consummation of the FN Acquisition and future earnings expectations, management
changed its judgment of Parent Holdings' ability to realize its deferred tax
assets and recognized a deferred tax benefit (i.e., a reduction in the
valuation allowance) of $69 million in the fourth quarter of 1995 and an
additional $125 million in the second quarter of 1996. Management believes that
the realization of such asset is more likely than not, based on the expectation
that Parent Holdings will generate the necessary amount of taxable income in
future periods. Included in tax expense for the year ended December 31, 1995 is
the reversal of 1993 and 1994 over-accruals of federal taxes totalling $1.7
million. Parent Holdings' effective federal income tax rates before
extraordinary items and minority interest were (22%) and (56%) during the years
ended December 31, 1996 and 1995, respectively, while its statutory federal
income tax rate was 35% during both periods. The difference between the
effective and statutory rates was primarily the result of the utilization of
net operating loss carryforwards for both periods, the reversal of 1993 and
1994 over accruals for the year ended December 31, 1995 and the recognition of
a $125 million and $69 million deferred tax benefit in 1996 and 1995,
respectively. Parent Holdings' effective state income tax rates before
extraordinary items and minority interest were approximately 7% and 9% during
the years ended December 31, 1996 and 1995, respectively.
Extraordinary Item. During the year ended December 31, 1996, Parent
Holdings repurchased $44 million aggregate principal amount of the $50 million
in 11.20% Senior Notes assumed in the SFFed Acquisition, resulting in a loss of
$1.6 million, net of income taxes. During the year ended December 31, 1995,
Parent Holdings recorded a gain of $2.0 million on the early extinguishment of
$250 million in FHLB advances, net of income taxes.
Minority Interest. During the year ended December 31, 1996, minority
interest included dividends of $43.2 million on Cal Fed Preferred Stock, $4.8
million on the FNH Preferred Stock and $113.1 million representing that portion
of FNH's income attributable to its class B common stock which is owned by
Hunter's Glen.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years ended December 31, 1997, 1996 and 1995, Parent Holdings
recorded income tax expense (benefit), excluding the tax effects associated
with extraordinary items and minority interest in 1997, 1996 and 1995, of $41.3
million, $(75.8) million, and $(57.2) million, respectively. Parent Holdings'
effective income tax rates were 17%, (15)%, and (47)%, in 1997, 1996 and 1995,
respectively. Parent Holdings' federal statutory income tax rate was 35% in
each of 1997, 1996, and 1995. The difference between effective and statutory
rates was primarily the result of offsetting certain deductions and losses with
the receipt of non-taxable FSLIC/RF assistance payments and, in 1996 and 1995,
the recognition of a deferred tax benefit totalling $125 million and $69
million, respectively.
For federal income tax purposes, Parent Holdings is included in the Mafco
Group and accordingly, its federal taxable income and loss will be included in
the consolidated federal income tax return filed by Mafco Holdings.
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Cal Fed, FNH and Mafco Holdings are parties to the Tax Sharing Agreement,
pursuant to which (i) Cal Fed will pay to FNH amounts equal to the income taxes
that Cal Fed would be required to pay if it were to file a return separately
from the affiliated group of which Mafco Holdings is the common parent (the
"Mafco Group") and (ii) FNH will pay to Mafco Holdings amounts equal to the
income taxes that FNH would be required to pay if it were to file a
consolidated return on behalf of itself and Cal Fed separately from the Mafco
Group. The Tax Sharing Agreement allows Cal Fed to take into account, in
determining its liability to FNH, any net operating loss carryovers that it
would have been entitled to utilize if it had filed separate returns for each
year since the formation of Cal Fed. The Tax Sharing Agreement also allows FNH
to take into account, in determining its liability to Mafco Holdings, any net
operating losses that it would have been entitled to utilize if it had filed a
consolidated return on behalf of itself and Cal Fed for each year since the
formation of Cal Fed. Accordingly, pursuant to the Tax Sharing Agreement, the
benefits of any net operating losses generated by Cal Fed since its formation
are retained by Cal Fed and FNH. Parent Holdings has not entered into any tax
sharing agreements.
Cal Fed had generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact
that, under applicable federal income tax law, certain financial assistance
received by Cal Fed pursuant to the Assistance Agreement was excluded from the
taxable income of Cal Fed. In addition to such tax-free financial assistance,
Cal Fed had been entitled to its normal operating deductions, including
interest expense and certain losses relating to its loan portfolio. As a
result, Cal Fed generated significant net operating losses for federal income
tax purposes even though its operations were profitable. Furthermore, under the
reorganization provisions of the Code, Cal Fed succeeded to certain net
operating loss carryovers of the Texas Closed Banks.
At December 31, 1997, if Parent Holdings had filed a consolidated tax
return on behalf of itself and its subsidiaries for each year since the
formation of Cal Fed, it would have had approximately $2.0 billion of regular
net operating losses and approximately $789 million of alternative minimum tax
("AMT") net operating losses, both of which Parent Holdings would have been
entitled to utilize. A portion of such losses, to the extent not previously
used to offset income, would expire in the year 2004 and in each year
thereafter, and would fully expire in 2010. Under applicable tax law, only 90%
of a corporation's alternative minimum taxable income may be offset by
carryovers from other years. Thus, 10% of the alternative minimum taxable
income earned by Cal Fed in the current period will be subject to federal
income tax at an effective rate of 20%. Under the Tax Sharing Agreement, Parent
Holdings has eliminated a significant portion of the amounts that it otherwise
would be required to pay to Mafco in respect of federal income tax. Payments
made by FNH under the Tax Sharing Agreement with the Mafco Group during the
years ended December 31, 1997, 1996 and 1995 totalled $18.6 million, $14.1
million and $3.1 million, respectively. Such payments may increase
significantly at the time that the net operating losses described above are
either used in full to offset income or expire. During 1998 or 1999, Parent
Holdings anticipates that the AMT net operating losses will be fully utilized
and Parent Holdings will begin providing federal income tax expense at a rate
of 20%. Prior to Parent Holdings utilizing all of its AMT net operating losses,
it will provide federal income tax expense at a 2% rate because 90% of AMT net
operating losses are available to offset AMT income.
Under federal tax law, Parent Holdings and Cal Fed will be subject to
several liability with respect to the consolidated federal income tax
liabilities of the Mafco Group for any taxable period during which Parent
Holdings or Cal Fed is, as the case may be, a member of such group. Therefore,
Parent Holdings or Cal Fed may be required to pay the Mafco Group's
consolidated federal tax liability notwithstanding prior payments made under
the Tax Sharing Agreement by FNH or Cal Fed to Mafco Holdings. Mafco Holdings
has agreed, however, under the Tax Sharing Agreement, to indemnify Parent
Holdings and Cal Fed for any such federal income tax liability (and certain
state and local tax liabilities) of Mafco Holdings or any of its subsidiaries
(other than FNH and Cal Fed) that FNH or Cal Fed is actually required to pay.
If for any reason Parent Holdings were to deconsolidate from the Mafco
Group, only the amount of the net operating loss carryovers of Parent Holdings
not already utilized by the Mafco Group would be available to offset the
taxable income of Parent Holdings subsequent to the date of deconsolidation. If
Parent Holdings had deconsolidated as of December 31, 1997, Parent Holdings
would have had
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approximately $970 million of regular net operating loss carryforwards. It
cannot be predicted to what extent the Mafco Group will utilize the net
operating losses of Parent Holdings in the future or the amount, if any, of net
operating loss carryforwards that Parent Holdings may have upon
deconsolidation. Additionally, the net operating loss carryovers are subject to
review and potential disallowance, in whole or in part, by the Internal Revenue
Service. Upon consummation of the Mergers, Parent Holdings and its
subsidiaries, including Cal Fed, will deconsolidate from the Mafco Group. The
amount of net operating loss carryovers available to offset the taxable income
of Parent Holdings and its subsidiaries will be reduced.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act"), was enacted into law generally effective for years beginning after
1995. One provision of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions which are treated as large
banks. Another provision of the Act requires Parent Holdings to take into
income the balance of its post-1987 bad debt reserves over a six year period
beginning in 1996 subject to a two-year deferral if certain residential loan
tests are satisfied. As of December 31, 1995, Parent Holdings had approximately
$279 million of post-1987 bad debts reserves that are subject to recapture.
Parent Holdings had fully provided for the tax related to this recapture.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of Parent
Holdings. The base year reserves are generally the balance of the tax bad debt
reserve as of December 31, 1987 reduced proportionately for reductions in
Parent Holdings' loan portfolio since that date. At December 31, 1997, the
amount of those reserves was approximately $152 million. The amount of the
unrecognized deferred tax liability at December 31, 1997 was approximately $53
million. Pursuant to the Act, circumstances that may require an accrual of this
unrecorded tax liability are a failure to meet the definition of a "bank" for
federal income tax purposes, dividend payments in excess of tax earnings and
profits, and other distributions, dissolution, liquidation or redemption of
stock, excluding preferred stock meeting certain conditions.
Parent Holdings is subject to taxation in certain states in which it
operates, including California. For California franchise tax purposes, savings
institutions are taxed as "financial corporations." Financial corporations are
taxed at the general corporate franchise tax rate plus an "in lieu" rate based
on their statutory exemption from local business and personal property taxes.
California has not adopted conforming federal tax law changes to the
computation of the bad debt deduction.
TAX EFFECTS OF DIVIDEND PAYMENTS BY CAL FED
Dividend distributions made to FNH, as the sole owner of Cal Fed's common
stock, and to holders of Cal Fed Preferred Stock, in each case in excess of Cal
Fed's accumulated earnings and profits, as well as any distributions in
dissolution or in redemption or liquidation of stock, may cause Cal Fed to
recognize a portion of its tax bad debt reserves as income, and accordingly,
could cause Cal Fed to make payments to FNH under the Tax Sharing Agreement. As
a result, FNH may be required to make payments to Mafco Holdings under the Tax
Sharing Agreement if FNH has insufficient expenses and losses to offset such
income. Cal Fed does not expect to generate substantial amounts of federal
taxable income (after taking into account its net operating loss carryovers)
from any recapture of its bad debt reserve. Accordingly, the recapture of its
bad debt reserve as a result of distributions to stockholders, or of the
redemption of stock, would not be expected to have a material adverse effect on
Cal Fed.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. Parent Holdings charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. Parent Holdings established
provisions for loan losses of $80 million, $40 million and $37 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The allowance for
loan losses is increased by provisions for loan losses and decreased by
charge-offs (net of recoveries). The increase in
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the provision for losses from 1995 through 1997 is due to the increased loan
production activity (primarily 1-4 unit residential) and loans acquired through
acquisitions in 1996 and 1997.
The ultimate collectibility of the loans is susceptible to changes in the
economic conditions in such regions. A significant portion of Parent Holdings'
loans are secured by real estate located in Southern California, where real
estate prices, although improved during the past year, have not increased as
rapidly as real estate prices in Parent Holdings' other primary lending areas.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on past loan loss experience, known and inherent risks in the
portfolio, potential adverse situations that may affect the borrower's ability
to repay, estimated value of any underlying collateral, and current and
prospective economic conditions.
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the
monitoring and management of liquidity risk and interest rate risk. The process
of planning and controlling asset and liability mixes, volumes and maturities
to influence the net interest spread is referred to as asset and liability
management. The objective of Parent Holdings' asset and liability management is
to maximize the net interest income over changing interest rate cycles within
the constraints imposed by prudent lending and investing practices, liquidity
needs and capital planning.
Parent Holdings, through Cal Fed, actively pursues investment and funding
strategies to minimize the sensitivity of its earnings to interest rate
fluctuations. Parent Holdings measures the interest rate sensitivity of its
balance sheet through gap and duration analysis, as well as net interest income
and market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate
and market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets
which best match relative to interest rate changes. In order to reduce interest
rate risk by increasing the percentage of interest sensitive assets, Parent
Holdings has continued its emphasis on the origination of ARM products for its
portfolio. Where possible, Parent Holdings seeks to originate real estate loans
that reprice frequently and that on the whole adjust in accordance with the
repricing of its liabilities. At December 31, 1997, approximately 92% of Parent
Holdings' real estate loan portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, Parent Holdings' net interest margin would most likely be
negatively impacted in this situation. Certain ARMs now offered by Parent
Holdings have a fixed monthly payment for a given period, with any changes as a
result of market interest rates reflected in the unpaid principal balance
through negative amortization. From the lender's perspective, these loans
respond most quickly to rate changes because interest accruals immediately
reflect the loans as though they were fully indexed.
As a result of the FN and Cal Fed Acquisitions, Parent Holdings acquired
the rights and assumed obligations related to certain interest rate swap
agreements that were entered into to hedge certain FHLB advances. Under the
terms of these agreements, Parent Holdings pays a variable rate based on LIBOR
and receives fixed rates. Parent Holdings had interest rate swap agreements
with a notional principal amount outstanding of $400 million at December 31,
1997. During 1997, 1996 and 1995, Parent Holdings' net interest margin
increased (decreased) by $.6 million, $.6 million and $(12.9) million,
respectively, as
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a result of these interest rate swap agreements, largely due to the
amortization of the premium assigned to these agreements in the FN and Cal Fed
Acquisitions.
Gains and losses on early termination of these interest rate swap
agreements would be included in the carrying amount of the FHLB advances and
amortized over the remaining terms of such advances. The requirements that must
be satisfied in order to account for the swap agreements in this manner are as
follows: (1) the FHLB advances must expose Parent Holdings to interest rate
risk, and (2) at the inception of the hedge and throughout the hedge period,
high correlation of changes in the market value of the swaps and the fair value
of the FHLB advances must be probable so that the results of the swaps will
substantially offset the effects of interest rate changes on the FHLB advances.
If these requirements are not met, the swaps would be considered speculative
and marked to market with changes in market value reflected in noninterest
income.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds interest rate sensitive liabilities, while the
opposite results in a negative gap. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, and a positive
gap would tend to result in an increase in net interest income, while the
opposite would tend to occur in a period of falling rates.
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The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of December
31, 1997. Prepayment rates are assumed in each period on substantially all of
Parent Holdings' loan portfolio based upon expected loan prepayments. Repricing
mechanisms on Parent Holdings' assets are subject to limitations such as caps
on the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as Parent Holdings' liabilities. In
addition, the interest rate sensitivity of the assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. Parent
Holdings' estimated interest rate sensitivity gap at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
--------------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
------------ ------------ ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities (1)(2) .................. $ 62 $ -- $ 58 $ -- $ 120
Securities available for sale (3) ............... 813 -- -- -- 813
Mortgage-backed securities available for
sale (3) ...................................... 5,076 -- -- -- 5,076
Mortgage-backed securities held to
maturity (1)(4) ............................... 1,327 1 3 -- 1,331
Loans held for sale, net (3)(5) ................. 1,469 -- -- -- 1,469
Loans receivable, net (1)(6) .................... 17,165 1,529 998 -- 19,692
Investment in FHLB .............................. 468 -- -- -- 468
-------- ------- ------ ------ ------
Total interest-earning assets ................... 26,380 1,530 1,059 -- 28,969
Noninterest-earning assets ...................... -- -- -- 2,393 2,393
-------- ------- ------ ------ ------
$ 26,380 $ 1,530 $1,059 $2,393 $31,362
======== ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) .................................... $ 13,578 $ 2,613 $ 12 $ -- $16,203
Securities sold under agreements to
repurchase (1) ................................ 1,829 -- 13 -- 1,842
FHLB advances (1) ............................... 5,263 4,258 22 -- 9,543
Other borrowings (1) ............................ 180 668 842 -- 1,690
-------- ------- ------ ------ -------
Total interest-bearing liabilities .............. 20,850 7,539 889 -- 29,278
Noninterest-bearing liabilities ................. -- -- -- 702 702
Minority interest ............................... -- -- -- 1,176 1,176
Stockholder's equity ............................ -- -- -- 206 206
-------- ------- ------ ------ -------
$ 20,850 $ 7,539 $ 889 $2,084 $31,362
======== ======= ====== ====== =======
Gap before interest rate swap agreements ........ $ 5,530 $(6,009) $ 170 $ (309)
Interest rate swap agreements (8) ............... -- -- -- --
-------- ------- ------ -------
Gap adjusted for interest rate swap
agreements .................................... $ 5,530 $(6,009) $ 170 $ (309)
======== ======= ====== =======
Cumulative gap .................................. $ 5,530 $ (479) $ (309) $ (309)
======== ======= ====== =======
Gap as a percentage of total assets ............. 17.6% (19.1)% 0.5% (1.0)%
======== ======= ====== =======
Cumulative gap as a percentage of total
assets ........................................ 17.6% ( 1.5)% (1.0)% (1.0)%
======== ======= ====== =======
</TABLE>
- ----------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by
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using the prepayment rates forecast by various large brokerage firms as of
December 31, 1997. The actual maturity and rate sensitivity of these assets
could vary substantially if future prepayments differ from prepayment
estimates.
(2) Consists of $36 million of interest-bearing deposits in other banks, $26
million of short-term investment securities and $58 million of securities
held to maturity.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $6 million.
(5) Excludes non-performing loans of $15 million.
(6) Excludes allowance for loan losses of $439 million and non-performing
loans of $171 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
(8) Agreements with notional amounts of $400 million maturing by April 1998
have no impact within the time periods presented.
At December 31, 1997, interest-bearing liabilities of Parent Holdings
exceeded interest-earning assets by $309 million. At December 31, 1996,
interest-bearing liabilities of Parent Holdings exceeded interest-earning
assets by $206 million. The change in the cumulative gap between the two
periods was due principally to the Cal Fed Acquisition and the assumption of
the 10 5/8% Notes.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of Parent Holdings' sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and pricing,
market rates and future management of the balance sheet mix. Parent Holdings
utilizes computer modeling, under various interest rate scenarios, to provide a
dynamic view of the effects of the changes in rates, spreads, and yield curve
shifts on net interest income.
Parent Holdings' risk management policies are established by Cal Fed's
ALCO. ALCO meets monthly to formulate Cal Fed's investment and risk management
strategies. The basic responsibilities of ALCO include management of net
interest income and market value of portfolio equity to measure the stability
of earnings, management of liquidity to provide adequate funding, and the
establishment of asset product priorities by formulating performance evaluation
criteria, risk evaluation techniques and a system to standardize the analysis
and reporting of originations, competitive trends, profitability and risk. On a
quarterly basis, the Board of Directors of Cal Fed is apprised of ALCO
strategies adopted and their impact on operations, and, at least annually, the
Board of Directors of Cal Fed reviews Cal Fed's interest rate risk management
policy statements. See --Quantitative and Qualitative Disclosures About Market
Risk."
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government and other specified securities to deposits
and borrowings due within one year. Effective November 24, 1997, the OTS
established a minimum liquidity requirement of 4.00%, a reduction from 5% which
had been in effect prior to that date in 1997 and in 1996. Cal Fed has been in
compliance with the liquidity regulations during 1997 and 1996.
Parent Holdings' funds are obtained from the repayment and maturities of
loans and mortgage-backed securities, customer and Brokered Deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances and other
secured and unsecured borrowings.
A major source of Parent Holdings' funding is expected to be its retail
deposit branch network, which management believes will be sufficient to meet
its long-term liquidity needs. The ability of Parent Holdings to retain and
attract new deposits is dependent upon the variety and effectiveness of its
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customer account products, customer service and convenience, and rates paid to
customers. Parent Holdings also obtains funds from the repayment and maturities
of loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will be secondary sources of
funding, and management expects there to be adequate collateral for such
funding requirements.
Parent Holdings' primary uses of funds are the origination or purchase of
loans, the funding of maturing certificates of deposit and demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit scheduled
to mature during the twelve months ending December 31, 1998 total $7.8 billion.
Parent Holdings may renew these certificates, attract new replacement deposits,
replace such funds with other borrowings, or it may elect to reduce the size of
the balance sheet. In addition, at December 31, 1997, Parent Holdings had FHLB
advances and other borrowings aggregating $7.3 billion maturing within twelve
months. Parent Holdings may elect to pay off such debt or to replace such
borrowings with additional FHLB advances or other borrowings at prevailing
rates.
During 1994, Cal Fed issued 3,007,300 shares of the 11 1/2% Preferred
Stock. Cash dividends on the 11 1/2% Preferred Stock are noncumulative and are
payable at an annual rate of 11 1/2% if, when, and as declared by the Board of
Directors of Cal Fed. The payment of dividends by Cal Fed is subject to certain
federal laws applicable to savings associations. Dividends on the 11 1/2%
Preferred Stock totalling $34.6 million were declared and paid during 1997.
In the FN Acquisition, Parent Holdings assumed $92.1 million of Old FNB's
10% Subordinated Debentures Due 2006 which have an annual interest cost of $9.2
million. In the SFFed Acquisition, Parent Holdings assumed $50 million of the
11.20% Senior Notes. On September 12, 1996, Parent Holdings repurchased $44
million aggregate principal amount of the 11.20% Senior Notes at a price of
approximately 116.45% of the principal amount, plus the accrued interest
thereon. The $6.0 million of 11.20% Senior Notes that remain outstanding have
an annual interest cost of $0.7 million.
In the Cal Fed Acquisition, Parent Holdings assumed certain indebtedness
and the 10 5/8% Preferred Stock, which have an annual interest/dividend cost of
$5.9 million and $18.3 million, respectively. Cash dividends on the 10 5/8%
Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8%,
if, when, and as declared by the Board of Directors of Cal Fed. Similar to the
11 1/2% Preferred Stock, the payment of dividends by Cal Fed is subject to
certain federal laws applicable to savings associations. Dividends on the 10
5/8% Preferred Stock totalling $18.3 million were paid during the year ended
December 31, 1997.
At December 31, 1997, FNH had $25 million of FNH Preferred Stock which has
an annual dividend cost of approximately $2.5 million, not including dividends
paid in kind.
The annual dividends, net of taxes, on the REIT Preferred Stock were $36.6
million for the year ended December 31, 1997.
In the FN Escrow Merger, FNH assumed the 10 5/8% Notes which have an
annual interest cost of $61.1 million.
Parent Holdings anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and Cal Fed's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $412.3 million at December 31, 1997, Parent
Holdings has substantial additional secured borrowing capacity with the FHLB
and other sources.
Net cash used in operating activities for the year ended December 31, 1997
totalled $437.5 million, a decrease of $922.3 million from the year ended
December 31, 1996. The decrease was principally due to the increase in
purchases and originations of loans held for sale.
Net cash provided by operating activities for the year ended December 31,
1996 totalled $484.8 million, an increase of $877.0 million from the year ended
December 31, 1995. The increase was
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principally due to the increase in proceeds from the sale of loans held for
sale. Substantially all loan production in 1996 was sold in the secondary
market, whereas variable rate loans originated during the first nine months of
1995 were retained by Parent Holdings.
Net cash used in operating activities for the year ended December 31, 1995
totalled $392.2 million, an increase of $352.5 million from the year ended
December 31, 1994. The increase is principally due to the increase in loans
held for sale due to the additional production capacity from the Maryland
Acquisition and the LMUSA 1995 Purchase.
Net cash used in investing activities for the year ended December 31, 1997
totalled $1.0 billion, a decrease of $3.2 billion from the year ended December
31, 1996. Cash flows used in investing activities included $198.3 million for
acquisitions, purchases of securities of $1.4 billion and purchases of $2.6
billion in mortgage-backed securities. Cash flows provided by investing
activities included a net decrease in loans receivable of $514.4 million,
principal payments on mortgage-backed securities totalling $1.4 billion and
proceeds from maturities of securities of $1.0 billion.
Net cash provided by investing activities for the year ended December 31,
1996 totalled $2.2 billion, an increase of $.4 billion from the year ended
December 31, 1995. Cash flows provided by investing activities included a net
decrease in loans receivable of $1.5 billion, principal payments on mortgage-
backed securities totalling $863.1 million and proceeds from maturities of
securities of $243.8 million. Cash flows used in investing activities included
a net $52.4 million from acquisitions, purchases of securities of $507.3
million and purchases of $149.7 million in mortgage-backed securities.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included $272.3
million from the FDIC Purchase and other dispositions of the Covered Assets,
principal payments on mortgage-backed securities totalling $570.9 million and
proceeds from maturities of securities of $344.5 million. Proceeds from sales
of loans receivable, including loans sold to Granite pursuant to the Put
Agreement of $199.5 million, totalled $431.2 million. Proceeds from the Branch
Purchases provided $501.4 million. Cash flows used in investing activities
included $214.7 million for the Maryland Acquisition and LMUSA 1995 Purchase
and purchases of securities of $162.8 million.
Net cash provided by financing activities for the year ended December 31,
1997 totalled $1.6 billion. Cash flows provided by financing activities
included additional borrowings of $19.6 billion, proceeds of $486.0 million
from the issuance of the REIT Preferred Stock and proceeds from the FN Escrow
Merger of $605.3 million. Cash flows used in financing activities included
principal payments on borrowings totalling $17.5 billion and a decrease in
deposits of $1.2 billion. Additionally, redemption of preferred stock totalled
$142.3 million and dividends on preferred and common stock, including dividends
paid to minority stockholders, totalled $122.8 million.
Net cash used in financing activities for the year ended December 31, 1996
totalled $2.7 billion. Principal payments on borrowings totalled $8.5 billion,
funding of the Branch Sales totalled $4.6 billion and the net decrease in
securities sold under agreements to repurchase totalled $202.2 million.
Additionally, cash used in financing activities included a capital distribution
to parent of $267.1 million and dividends of $374.4 million. Cash flows
provided by financing activities included additional borrowings of $11.1
billion (including $455 million from the issuance of the 12 1/2% Senior Notes)
and proceeds from the issuance of FNH Preferred Stock of $145.4 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9 billion
and the net decrease in securities sold under agreements to repurchase totalled
$913.1 million. Additionally, dividends on Parent Holdings' common stock
totalled $90.0 million and dividends paid to minority stockholders totalled
$34.6 million. Cash flows provided by financing activities included increases
in deposits (other than the Branch Purchases) of $542.6 million and additional
borrowings of $6.2 billion.
Parent Holdings' primary source of cash to pay the interest on and
principal of the 12 1/2% Senior Notes and the FNH Notes is expected to be
distributions from Cal Fed. The annual interest on the 12 1/2% Senior Notes is
$56.9 million, the annual interest on the 12 1/4% Senior Notes is $24.5
million, the annual interest on the 9 1/8% Senior Subordinated Notes is $12.8
million, and the annual interest on the 10 5/8% Notes is $61.1 million.
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The terms of Cal Fed Preferred Stock provide that Cal Fed may not declare
or pay any dividends or other distributions (other than in shares of common
stock of Cal Fed or other Cal Fed Junior Stock), with respect to any Cal Fed
Junior Stock or repurchase, redeem or otherwise acquire, or set apart funds for
the repurchase, redemption or other acquisition of any Cal Fed Junior Stock
(including the common stock held by FNH) through a sinking fund or otherwise,
unless and until: (i) Cal Fed has paid in full dividends on Cal Fed Preferred
Stock for the four most recent dividend periods or funds have been paid over to
the dividend disbursing agent of Cal Fed for payment of such dividends, and
(ii) Cal Fed has declared a cash dividend on Cal Fed Preferred Stock at the
annual dividend rate for the current dividend period, and sufficient funds have
been paid over to the dividend disbursing agent of Cal Fed for the payment of a
cash dividend for such current dividend period. Cal Fed is currently in
compliance with such requirement.
Similarly, the terms of the REIT Preferred Stock provide that Preferred
Capital Corp. may not declare or pay any dividends or other distributions
(other than in shares of common stock of Preferred Capital Corp. or other
Preferred Capital Corp. Junior Stock), with respect to any Preferred Capital
Corp. Junior Stock or repurchase, redeem or otherwise acquire, or set apart
funds for the repurchase, redemption or other acquisition of any Preferred
Capital Corp. Junior Stock (including the common stock held by Cal Fed) through
a sinking fund or otherwise, unless and until: (i) Preferred Capital Corp. has
paid full dividends on the REIT Preferred Stock for the four most recent
dividend periods or funds have been paid over to the dividend disbursing agent
of Preferred Capital Corp. for payment of such dividends, and (ii) Preferred
Capital Corp. has declared a cash dividend on the REIT Preferred Stock at the
annual dividend rate for the current dividend period, and sufficient funds have
been paid over to the dividend disbursing agent of Preferred Capital Corp. for
the payment of a cash dividend for such current dividend period. Preferred
Capital Corp. is currently in compliance with such requirement.
Parent Holdings currently anticipates that, in order to pay the principal
amount of the 12 1/2% Senior Notes upon the occurrence of an Event of Default
(as defined in the 12 1/2% Senior Notes Indenture) or to redeem or repurchase
the 12 1/2% Senior Notes upon a Change of Control Put Event (as defined in the
12 1/2% Senior Notes Indenture) or, in the event that earnings from FNH are not
sufficient to make distributions to Parent Holdings to enable it to pay the
principal amount of the 12 1/2% Senior Notes at maturity, Parent Holdings may
be required to adopt one or more alternatives, such as borrowing funds, selling
its equity securities or equity securities or assets of Cal Fed, or seeking
capital contributions or loans from its affiliates. None of the affiliates of
Parent Holdings are required to make any capital contributions or other
payments to Parent Holdings with respect to Parent Holdings' obligations on the
12 1/2% Senior Notes. FNH may be required to adopt similar alternatives in
order to pay the principal amount of the FNH Notes. There can be no assurance
that any of the foregoing actions could be affected on satisfactory terms, that
any of the foregoing actions would enable Parent Holdings to pay the principal
amount of the 12 1/2% Senior Notes, or would enable FNH to pay the principal
amount of the FNH Notes, or that any of such actions would be permitted by the
terms of the 12 1/2% Senior Notes Indenture, the FNH Notes indentures or any
other debt instruments of Parent Holdings or its subsidiaries then in effect,
by the terms of Cal Fed Preferred Stock and the REIT Preferred Stock or under
applicable federal thrift laws or regulations. The events that constitute a
Change of Control Put Event under the 12 1/2% Senior Notes Indenture will, with
few exceptions, also permit the holders of FNH Notes to require FNH to
repurchase such indebtedness.
The terms of the FNH Notes indentures generally limit distributions (and
other Restricted Payments (as defined therein)) to 75% of the consolidated net
income of FNH and require, among other things, that, in order for FNH to
distribute any cash or otherwise make any Restricted Payment, after giving
effect to such distribution or payment Cal Fed must be "well capitalized" under
applicable OTS regulations and the Consolidated Common Shareholders' Equity (as
defined therein) of Cal Fed must be at least equal to the Minimum Common Equity
Amount (as defined therein). The FNH Indentures and the 12 1/2% Senior Notes
Indenture permit FNH to loan funds to any affiliate, including Parent Holdings,
provided that the Consolidated Common Shareholders' Equity of Cal Fed must be
at least equal to the Minimum Common Equity Amount and that the terms of any
such loan must be on terms that would be obtainable in arm's length dealings.
Subject to such restrictions, such loans may consist of any and all funds
available to FNH, whether or not such funds may be distributed (or otherwise
paid as a Restricted Payment) pursuant to the terms of the FNH Notes
indentures.
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<PAGE>
The terms of the 12 1/2% Senior Notes Indenture generally permit Parent
Holdings to make distributions (and other Restricted Payments) of up to 65% of
the consolidated net income of Parent Holdings if, after giving effect to such
distribution or payment, (i) Cal Fed is "well capitalized" under applicable OTS
regulations and (ii) the Consolidated Common Shareholders' Equity of Cal Fed is
at least equal to the Minimum Common Equity Amount. Parent Holdings is able to
loan funds to its affiliates pursuant to the 12 1/2% Senior Notes Indenture
provided that the Consolidated Common Shareholders' Equity of Cal Fed is at
least equal to the Minimum Common Equity Amount and the terms of any such loan
are on terms that would be obtainable in arm's length dealings. Subject to such
restrictions, such loans may consist of any and all funds available to Parent
Holdings, whether or not such funds may be distributed (or otherwise paid as a
Restricted Payment) pursuant to the terms of the 12 1/2% Senior Notes
Indenture. Accordingly, there can be no assurance that, notwithstanding the
receipt by Parent Holdings of sufficient funds to enable it to pay the
principal amount of the 12 1/2% Senior Notes at maturity, Parent Holdings will
have funds available to pay the principal amount of the 12 1/2% Senior Notes at
maturity or prior to maturity upon the occurrence of an Event of Default or to
redeem or repurchase the 12 1/2% Senior Notes upon a Change of Control Put
Event.
FNH is a holding company with no business operations of its own. If
indebtedness of FNH or its subsidiaries were to be accelerated, there could be
no assurance that the assets of FNH or its subsidiaries, as the case may be,
would be sufficient to repay in full borrowings under all of such debt
instruments or that Cal Fed would be able to distribute funds to permit FNH to
provide sufficient funds to Parent Holdings to permit Parent Holdings to pay
interest on the 12 1/2% Senior Notes. FNH's only significant asset is all of
the common stock of Cal Fed.
The terms and conditions of the 12 1/2% Senior Notes Indenture and the FNH
Notes indentures impose restrictions that affect, among other things, the
ability of Parent Holdings or FNH, as the case may be, to incur debt, pay
dividends or make distributions, engage in a business other than holding the
common stock of FNH, in the case of Parent Holdings, make acquisitions, create
liens, sell assets and make certain investments. The ability of Parent Holdings
and its subsidiaries to comply with the foregoing provisions can be affected by
events beyond their control. The breach of any of these covenants could result
in a default under one or more of the debt instruments of Parent Holdings or
its subsidiaries. In the event of a default under any indebtedness of Parent
Holdings or its subsidiaries, the holders of such indebtedness could elect to
declare all amounts outstanding under their respective debt instruments to be
due and payable. Any such declaration under a debt instrument of Parent
Holdings or its subsidiaries is likely to result in an event of default under
one or more of the other debt instruments of Parent Holdings or its
subsidiaries. If indebtedness of Parent Holdings or its subsidiaries were to be
accelerated, there could be no assurance that the assets of Parent Holdings or
its subsidiaries, as the case may be, would be sufficient to repay in full
borrowings under all of such debt instruments, including the 12 1/2% Senior
Notes.
IMPACT OF INFLATION AND CHANGING PRICES
Prevailing interest rates have a more significant impact on Parent
Holdings' performance than does the general level of inflation. While interest
rates may bear some relationship to the general level of inflation
(particularly in the long run), over short periods of time interest rates may
not necessarily move in the same direction or change in the same magnitude as
the general level of inflation. As a result, the business of Parent Holdings is
generally not affected by inflation in the short run, but may be affected by
inflation in the long run.
PROBLEM AND POTENTIAL PROBLEM ASSETS
Loans collectively reviewed for impairment by Parent Holdings include all
1-4 unit residential loans and performing multi-family and commercial real
estate loans under $500,000, excluding loans which have entered the workout
process.
Parent Holdings considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Parent Holdings will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant
183
<PAGE>
shortfall in amount of payments will not cause a loan to be considered
impaired. In determining impairment, Parent Holdings considers large
non-homogeneous loans including nonaccrual loans, troubled debt restructurings,
and performing loans which exhibit, among other characteristics, high LTV
ratios, low debt-coverage ratios or other indications that the borrowers are
experiencing increased levels of financial difficulty. Parent Holdings bases
the measurement of collateral-dependent impaired loans on the fair value of the
loan's collateral. The amount, if any, by which the recorded investment of the
loan exceeds the measure of the impaired loan's value is recognized by
recording a valuation allowance.
At December 31, 1997, the carrying value of loans that are considered to
be impaired totalled $110.1 million (of which $18.6 million were on nonaccrual
status). The average recorded investment in impaired loans during the year
ended December 31, 1997 was approximately $112.9 million. For the year ended
December 31, 1997, Parent Holdings recognized interest income on those impaired
loans of $10.5 million, which included $.6 million of interest income
recognized using the cash basis method of income recognition.
The following table presents the amounts, net of specific allowances for
losses and purchase accounting adjustments, of Parent Holdings' non-performing
loans, foreclosed real estate, repossessed assets, troubled debt
restructurings, and impaired loans as of the dates indicated. These categories
are not mutually exclusive; certain loans are included in more than one
classification.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------- --------------------------------------------
NON-PERFORMING IMPAIRED RESTRUCTURED NON-PERFORMING IMPAIRED RESTRUCTURED
---------------- ------------- -------------- ---------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential ........... $165 $ -- $ 2 $146 $ -- $ 3
5+ unit residential ............ 12 43 7 13 47 55
Commercial and other ........... 6 67 26 9 54 28
Land ........................... -- -- -- -- -- 1
Construction ................... 2 -- -- 1 1 --
---- ------ ----- ---- ------ -----
Total real estate ........... 185 110 35 169 102 87
Non-real estate ................. 7 -- -- 3 -- --
---- ------ ----- ---- ------ -----
Total loans ................. 192 $ 110(a) $ 35(b) 172 $ 102(a) $ 87(b)
====== ===== ====== =====
Foreclosed real estate, net ..... 77 52
Repossessed assets .............. 3 --
---- ----
Total non-performing
assets .......................... $272 $224
==== ====
</TABLE>
- ----------
(a) Includes $18.6 and $22.6 million of non-performing loans and $17.5
and $18.3 million of loans classified as troubled debt
restructurings at December 31, 1997 and 1996, respectively.
(b) Includes non-performing loans of $2.1 million and $2.4 million at
December 31, 1997 and 1996, respectively. At December 31, 1997 and
1996, $1.7 million and $2.4 million, respectively, of these
non-performing, troubled debt restructurings were also considered
impaired.
There were no accruing loans contractually past due 90 days or more at
December 31, 1997 or 1996.
Non-performing assets at December 31, 1997 included $91.3 million of
non-performing loans and $32.6 million of foreclosed real estate which were
acquired in the Cal Fed Acquisition and the 1996 Acquisitions. Parent Holdings'
non-performing assets, consisting of nonaccrual loans, net of purchase
accounting adjustments, repossessed assets and foreclosed real estate, net,
increased slightly to $272 million at December 31, 1997, compared with $224
million at December 31, 1996. On the other hand, non-performing assets as a
percentage of Cal Fed's total assets decreased to .87% at December 31, 1997,
from 1.36% of total assets at December 31, 1996. The decrease in Cal Fed's
non-performing assets as a
184
<PAGE>
percentage of total assets is due to the level of Cal Fed's non-performing
assets increasing less than the significant increase in total assets over such
time period.
Management continuously seeks to manage Parent Holdings' credit risk by
assessing the current and estimated future performance of the real estate
markets in which it operates. Parent Holdings continues to place a high degree
of emphasis on the management of its asset portfolio. Parent Holdings has three
distinct asset management functions: performing loan asset management, problem
loan asset management and credit review. Each of these three functions is
charged with the responsibility of reducing the risk profile within the
residential, commercial and multi-family asset portfolios by applying asset
management and risk evaluation techniques that are consistent with Parent
Holdings' portfolio management strategy and regulatory requirements. In
addition to these asset management functions, Cal Fed has a specialized credit
risk management group that is charged with development of credit policies and
performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of December 31, 1997:
<TABLE>
<CAPTION>
TOTAL
NON-PERFORMING FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
LOANS, NET (2) NET (2) ASSETS CONCENTRATION
---------------- -------------- --------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Region:
Northeast (1) ......... $ 33 $14 $ 47 17.9%
California ............ 116 48 164 62.6
Other regions ......... 36 15 51 19.5
---- --- ---- -----
Total .............. $185 $77 $262 100.0%
==== === ==== =====
</TABLE>
- ----------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates non-performing
real estate loans, net of purchase accounting adjustments and specific
allowances for losses, by collateral type, interest rate type and state
concentration as of December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL TOTAL
RESIDENTIAL RESIDENTIAL AND OTHER NON-PERFORMING
-------------------- -------------------- -------------------- REAL ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- ---------------------- ---------- ------- ---------- ------- ---------- ------- --------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ........... $ 91 $ 7 $ 9 $ 1 $ 7 $ 1 $116 62.7%
New York ............. 16 4 1 -- -- -- 21 11.4
Hawaii ............... 8 1 -- -- -- -- 9 4.9
Florida .............. 6 3 -- -- -- -- 9 4.9
New Jersey ........... 5 1 -- -- -- -- 6 3.2
Ohio ................. 2 1 -- -- -- -- 3 1.6
Illinois ............. 2 1 -- -- -- -- 3 1.6
Connecticut .......... 3 -- -- -- -- -- 3 1.6
Texas ................ 1 1 -- -- -- -- 2 1.1
Other states (1) ..... 8 4 1 -- -- -- 13 7.0
---- --- --- --- --- --- ---- -----
Total ............. $142 $23 $11 $ 1 $ 7 $ 1 $185 100.0%
==== === === === === === ==== =====
</TABLE>
- ----------
(1) There are 27 states, Puerto Rico and the District of Columbia, of which
no one state had non-performing loans in excess of 1% of the total.
185
<PAGE>
At December 31, 1997, Parent Holdings' largest non-performing asset was
$5.5 million, and Parent Holdings had four non-performing assets over $2
million in size with balances averaging approximately $3.9 million. At December
31, 1997, Parent Holdings has 2,190 non-performing assets below $2 million in
size, including 2,095 non-performing 1-4 unit residential assets.
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments and specific
allowances for losses, by collateral type, interest rate type and state
concentration as of December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER
-------------------- -------------------- -------------------- TOTAL
TROUBLED
DEBT % OF
VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED RESTRUCTURED TOTAL
---------- ------- ---------- ------- ---------- ------- ------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ............... $-- $ 2 $ 6 $-- $26 $-- $34 95.3%
Florida .................. -- -- 1 -- -- -- 1 3.4
Other states (1) ......... -- -- -- -- -- -- -- 1.3
--- --- --- --- --- --- --- -----
Total ................. $-- $ 2 $ 7 $-- $26 $-- $35 100.0%
=== === === === === === === =====
</TABLE>
- ----------
(1) There are five states of which no one state had troubled debt
restructured loans in excess of 1% of the total.
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments and specific allowances for losses, by
collateral type, interest rate type and state concentration as of December 31,
1997:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER
-------------------- -------------------- TOTAL % OF
VARIABLE FIXED VARIABLE FIXED IMPAIRED TOTAL
---------- ------- ---------- ------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California ............... $35 $ 2 $47 $ 6 $ 90 81.9%
New York ................. 3 1 2 -- 6 5.8
Illinois ................. -- -- 5 -- 5 4.4
Hawaii ................... -- -- 4 -- 4 3.3
Florida .................. 1 -- 2 -- 3 2.3
Arizona .................. -- -- -- 1 1 1.0
Other states (1) ......... 1 -- -- -- 1 1.3
--- --- --- --- ---- -----
Total ................. $40 $ 3 $60 $ 7 $110 100.0%
=== === === === ==== =====
</TABLE>
- ----------
(1) There are four states of which no one state had impaired loans in excess
of 1% of the total.
186
<PAGE>
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- ---------------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance -- December 31, 1994 .............. $ 111 $83 $ 9 $ 203
Provision for loan losses ............... 31 3 3 37
Charge-offs ............................. (27) (1) (5) (33)
Recoveries .............................. 1 -- 2 3
----- ----- ------ -----
Balance -- December 31, 1995 .............. 116 85 9 210
Purchases and acquisitions, net ......... 6 32 1 39
Provision for loan losses ............... 34 2 4 40
Charge-offs ............................. (35) (4) (6) (45)
Recoveries .............................. 2 -- 1 3
----- ----- ------ -----
Balance -- December 31, 1996 .............. 123 115 9 247
Purchases and acquisitions, net ......... 55 79 30 164
Provision for loan losses ............... 60 12 8 80
Charge-offs ............................. (38) (8) (10) (56)
Recoveries .............................. 2 -- 2 4
----- ----- ------ -----
Balance -- December 31, 1997 .............. $ 202 $198 $ 39 $ 439
===== ===== ====== =====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at December
31, 1997, 1996 and 1995 was 228.5%, 143.2% and 122.8%. The increase in the
ratio is primarily attributable to the Cal Fed Acquisition and the expiration
of the Put Agreement.
MORTGAGE BANKING OPERATIONS
Parent Holdings, through Cal Fed and FNMC, has significantly expanded its
mortgage banking operations. Effective May 31, 1997, FNMC consummated the
Weyerhaeuser Purchase involving the acquisition of a residential mortgage loan
servicing portfolio of approximately $3.2 billion and approximately 40,000
loans for a purchase price of $37.1 million. On September 30, 1997, FNMC sold
MSRs for approximately 52,000 loans with an unpaid principal balance of
approximately $2.3 billion for a pre-tax gain of $14.0 million. With the
consummation of the Weyerhaeuser Purchase, the acquisition of additional 1-4
unit residential loan servicing portfolios in the Cal Fed Acquisition and the
MSRs resulting from the origination and sale of loans, the 1-4 unit residential
loans serviced for others (including loans subserviced for others and excluding
loans serviced for Cal Fed) totalled $46.6 billion at December 31, 1997, an
increase of $3.5 billion from December 31, 1996. During 1997, Parent Holdings,
through FNMC, originated $6.3 billion and sold (generally with servicing
retained) $5.5 billion 1-4 unit residential loans. Gross revenues from mortgage
loan servicing activities for 1997 totalled $235.7 million, an increase of
$80.3 million from the year ended December 31, 1996.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments . Higher than anticipated levels of prepayments
generally cause the accelerated amortization of MSRs and generally will result
in a reduction of the market value of the MSRs and in Parent Holdings'
servicing fee income. To reduce the sensitivity of its earnings to interest
rate and market value fluctuations, Parent Holdings hedged the change in value
of its MSRs based on changes in interest rates.
At December 31, 1997, Parent Holdings, through FNMC, was a party to
several interest rate floor contracts maturing from October 2001 through June
2002. Parent Holdings paid counterparties a premium in exchange for cash
payments in the event that the 10-year Constant Maturity Treasury rate falls
below negotiated strike prices. At December 31, 1997, the notional amount of
the interest rate floors was $970 million and the strike prices were between
5.0% and 6.5%. In addition, Parent Holdings, through
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<PAGE>
FNMC, entered into principal-only swap agreements with a notional amount of $99
million. The estimated market values of interest rate floor contracts and swaps
designated as hedges against MSRs at December 31, 1997 were $18.0 million and
$13.5 million, respectively.
The premium paid by Parent Holdings on the interest rate floor contracts
is amortized based on the option decay rate. Amounts receivable or payable
under the principal-only swap agreements and amounts received under the
interest rate floor contracts or terminated hedges are included in the carrying
value of MSRs and are amortized as part of the MSRs basis. Gains and losses on
early termination of these hedges would be included in the carrying amount of
the related MSRs and amortized over the remaining terms of the assets. Two
requirements must be met in order to use these hedge accounting methods: (i)
MSRs must expose Parent Holdings to interest rate risk, and (ii) at the
inception of the hedge and throughout the hedge period, high correlation of
changes in the market value of the interest floor contracts and the
principal-only swaps and the fair value of the MSRs must be probable so that
the results of the interest floor contracts and the principal-only swaps will
substantially offset the effects of interest rate changes on the MSRs. If these
requirements are not met, the interest floor contracts and the principal-only
swaps would be considered speculative and marked to market with changes in
market value reflected in current earnings.
In accounting for its mortgage loan sales prior to April 1, 1995, a gain
or loss was recognized by Parent Holdings based on the sum of three components:
(i) the difference between the cash proceeds of the loan sales and Parent
Holdings' book value of the loans; plus (ii) the "excess servicing," if any;
less (iii) provisions for estimated losses to be incurred from limited recourse
obligations, if any. Excess servicing results in a capitalized asset that is
amortized as an offset to servicing fee income using the interest method over
the estimated remaining lives of the loans sold.
Effective April 1, 1995, Parent Holdings adopted SFAS No. 122 (superseded
by SFAS No. 125), which requires that, when a mortgage loan is sold and
servicing rights are retained, a portion of the cost of originating a mortgage
loan be allocated to the MSRs rights based on its fair market value. This cost
of originating the loan is capitalized and amortized over the period of
estimated future net servicing income. The net gains on sales of 1-4 unit
residential loans during the year ended December 31, 1997 totalled $24.7
million and included amounts related to the capitalization of originated and
excess MSRs of $120.5 million.
The following is a summary of activity in MSRs and the MSR Hedge for the
year ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
TOTAL MSR
MSRS MSR HEDGE BALANCE
-------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 ....................... $ 420,187 $ 3,505 $ 423,692
Additions -- Cal Fed Acquisition ................. 44,497 -- 44,497
Additions -- Weyerhaeuser Purchase ............... 41,949 -- 41,949
Originated servicing ............................. 120,465 -- 120,465
Additions -- other ............................... 27,939 -- 27,939
Sale -- Servicing Sale ........................... (16,792) -- (16,792)
Sales -- other ................................... (4) -- (4)
Premium paid on interest rate floor contracts..... -- 7,088 7,088
Payments received under interest rate floor
contracts ....................................... -- (471) (471)
Net received under principal-only swap
agreements ...................................... -- (1,378) (1,378)
Amortization ..................................... (106,972) (3,310) (110,282)
----------- -------- -----------
Balance at December 31, 1997 ....................... $ 531,269 $ 5,434 $ 536,703
=========== ======== ===========
</TABLE>
Capitalized MSRs are amortized in proportion to, and over the period of,
estimated net servicing income. SFAS No. 125 requires enterprises to measure
the impairment of MSRs based on the difference between the carrying amount of
the MSRs and their current fair value. At December 31, 1997 and 1996, no
allowance for impairment of the MSRs was necessary.
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<PAGE>
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core" capital or "leverage capital" ratio) must be at least
3%. Core capital generally is the sum of tangible capital plus certain other
qualifying intangibles. Under the risk-based capital requirement, a savings
association must have total capital (core capital plus supplementary capital)
equal to at least 8% of risk-weighted assets (which equals assets plus the
credit risk equivalent of certain off-balance sheet items, each multiplied by
the appropriate risk weight). Supplementary capital, which may not exceed 100%
of core capital for purposes of the risk-based requirement, includes, among
other things, certain permanent capital instruments such as qualifying
cumulative perpetual preferred stock, as well as some forms of term capital
instruments, such as qualifying subordinated debt. The capital requirements are
viewed as minimum standards by the OTS, and most associations are expected to
maintain capital levels well above the minimum. In addition, the OTS
regulations provide that minimum capital levels higher than those provided in
the regulations may be established by the OTS for individual savings
associations, depending upon their particular circumstances. Cal Fed currently
is not subject to any such individual minimum regulatory capital requirement.
The OTS and the other banking agencies recently proposed to amend the minimum
capital requirements to establish a minimum core capital requirement of 4% for
all but the strongest savings associations. These capital requirements are
applicable to Cal Fed but not to Parent Holdings. See "--Description of
Business of Parent Holdings--Regulation of Cal Fed--Regulatory Capital
Requirements."
At December 31, 1997, Cal Fed's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.65%, 5.65% and 11.93%, respectively. The following is a
reconciliation of Cal Fed's stockholders' equity to regulatory capital as of
December 31, 1997:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of Cal Fed ....................................... $ 2,260 $ 2,260 $ 2,260
Minority interest -- REIT Preferred Stock ............................. 500 500 500
Unrealized holding gain on securities available for sale, net ......... (35) (35) (35)
Non-qualifying MSRs ................................................... (54) (54) (54)
Non-allowable capital:
REIT Preferred Stock in excess of 25% of Tier 1 capital .............. (71) (71) (71)
Intangible assets .................................................... (676) (676) (676)
Goodwill Litigation Asset ............................................ (100) (100) (100)
Investment in subsidiaries ........................................... (53) (53) (53)
Excess deferred tax asset ............................................ (55) (55) (55)
Supplemental capital:
Qualifying subordinated debt debentures .............................. -- -- 94
General loan loss allowance .......................................... -- -- 214
Assets required to be deducted:
Land loans with more than 80% LTV ratio .............................. -- -- (6)
--------- ----------- -----------
Regulatory capital of Cal Fed ......................................... 1,716 1,716 2,018
Minimum regulatory capital requirement ................................ 456 911 1,353
Fully capitalized items ............................................... --- -- 2
--------- ----------- ----------
Excess above minimum capital requirement .............................. $ 1,260 $ 805 $ 663
========= =========== ==========
LEVERAGE RISK-BASED TANGIBLE
CAPITAL CAPITAL CAPITAL
RATO RATIO RATIO
--------- ----------- ----------
Regulatory capital of Cal Fed ......................................... 5.65% 5.65% 11.93%
Minimum regulatory capital requirement ................................ 1.50 3.00 8.00
--------- ----------- ----------
Excess above minimum capital requirement .............................. 4.15% 2.65% 3.93%
========= =========== ==========
</TABLE>
189
<PAGE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $30.4 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $16.9 billion.
Cal Fed is also subject to "prompt corrective action" standards prescribed
in the FDICIA and related OTS regulations, which, among other things, define
specific capital categories based on an institution's capital ratios.
At December 31, 1997, Cal Fed's leverage capital, Tier 1 (core capital)
risk-based and total risk-based capital ratios were sufficient for it to be
considered "well capitalized" under applicable OTS regulations:
<TABLE>
<CAPTION>
RISK-BASED
----------------------------
LEVERAGE
CAPITAL TIER 1 TOTAL CAPITAL
--------- ----------- --------------
<S> <C> <C> <C>
Regulatory capital of Cal Fed ................. 5.65% 10.14% 11.93%
"Well capitalized" ratio ...................... 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio ......... 0.65% 4.14% 1.93%
==== ===== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To
the extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At December 31, 1997, $55
million of the net tax benefit was determined to be attributable to the amount
of taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from regulatory capital at December 31, 1997.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ALCO, which includes senior management representatives, monitors and
considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in net portfolio value ("NPV") and net interest
income. A primary purpose of Parent Holdings' asset and liability management is
to manage interest rate risk to effectively invest Parent Holdings' capital and
to preserve the value created by its core business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
Parent Holdings' exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors of Cal Fed and the ALCO. Interest
rate risk exposure is measured using interest rate sensitivity analysis to
determine Parent Holdings' change in NPV and net interest income in the event
of hypothetical changes in interest rates and interest rate sensitivity gap
analysis is used to determine the repricing characteristics of Parent Holdings'
assets and liabilities. If estimated changes to NPV and net interest income are
not within the limits established by the Board, the Board may direct management
to adjust its asset and liability mix to bring interest rate risk within
Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, Parent
Holdings has developed strategies to manage its liquidity, shorten its
effective maturities of certain interest-earning assets, and increase the
interest rate sensitivity of its asset base. Management has sought to decrease
the average maturity of its assets by emphasizing the origination of
adjustable-rate residential mortgage loans and consumer loans, which are
retained by Parent Holdings for its portfolio. In addition, long-term,
fixed-rate single-family residential mortgage loans are underwritten according
to guidelines of FHLMC, GNMA and the FNMA, and are either swapped with the
FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by
such loans which are then sold or are sold directly for cash in the secondary
market.
Interest rate sensitivity analysis is used to measure Parent Holdings'
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments
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<PAGE>
made for off-balance sheet items. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained
increase or decrease in the market interest rates of one hundred to four
hundred basis points. Cal Fed's Board of Directors has adopted an interest rate
risk policy which establishes maximum decreases in the NPV of 15%, 30%, 45% and
60% in the event of a sudden and sustained increase or decrease in market
interest rates of one hundred, two hundred, three hundred and four hundred
basis points, respectively. The following table presents Parent Holdings'
projected change in NPV for the various rate shock levels at December 31, 1997.
All market risk sensitive instruments presented in this table are held to
maturity or available for sale. Parent Holdings has no trading securities.
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
CHANGE IN MARKET VALUE OF ACTUAL BOARD
INTEREST RATES PORTFOLIO EQUITY CHANGE ACTUAL LIMIT
- --------------------------------- ------------------ ---------- ------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
400 basis point rise ............ $ 705 $ (546) (43.7)% (60)%
300 basis point rise ............ 1,020 (231) (18.5) (45)
200 basis point rise ............ 1,263 12 1.0 (30)
100 basis point rise ............ 1,327 76 6.1 (15)
Base Scenario ................... 1,251 -- -- --
100 basis point decline ......... 1,084 (167) (13.4) (15)
200 basis point decline ......... 1,021 (230) (18.4) (30)
300 basis point decline ......... 1,028 (223) (17.8) (45)
400 basis point decline ......... 1,005 (246) (19.7) (60)
</TABLE>
The preceding table indicates that at December 31, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, Parent
Holdings' NPV, including minority interest, would be expected to decrease, and
that in the event of a sudden and sustained decrease in prevailing market
interest rates, Parent Holdings' NPV would be expected to experience little
change. At December 31, 1997, Parent Holdings' estimated changes in NPV were
within the targets established by the Board of Directors of Cal Fed.
The fair market value of portfolio equity decreases in a rising interest
rate environment because Parent Holdings' interest-bearing liabilities
generally reprice faster than its interest-earning assets, and certain
interest-earning assets are subject to periodic caps. The reduction in value of
the net interest-earning assets is partially offset by an increase in value of
MSRs that appreciate in value as rates rise. In a declining interest rate
environment, the reduction in value of MSRs generally outweighs the increase in
value of the rest of the portfolio resulting from the repricing differences of
interest-earning assets and interest-bearing liabilities.
NPV is calculated by Parent Holdings pursuant to guidelines established by
the OTS. The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of December 31, 1997, with adjustments made to reflect the shift in the
Treasury yield curve as appropriate.
The computation of prospective effects of hypothetical interest rate
changes is based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV. Certain assets, such as adjustable-rate loans, which
represent one of Parent Holdings' primary loan products, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable-rate loans in Parent
Holdings' portfolio could decrease in future periods if market interest rates
remain at or
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<PAGE>
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the
ability of many borrowers to repay their adjustable-rate mortgage loans may
decrease in the event of interest rate increases.
In addition, Parent Holdings uses interest rate sensitivity gap analysis
to monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread. See " --Asset/Liability Management."
192
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF PARENT HOLDINGS AND CAL FED
The following table sets forth certain information (ages as of July 1,
1998) concerning the directors and executive officers of Parent Holdings. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- ----- ------------------------------------------------------------
<S> <C> <C>
Ronald O. Perelman .......... 55 Chairman of the Board, Chief Executive Officer and Director
Gerald J. Ford .............. 53 President and Director
Howard Gittis ............... 64 Vice Chairman and Director
Irwin Engelman .............. 64 Executive Vice President and Chief Financial Officer
Barry F. Schwartz ........... 48 Executive Vice President and General Counsel
Laurence Winoker ............ 41 Vice President and Controller
</TABLE>
The following table sets forth certain information (ages as of July 1,
1998), concerning the directors and executive officers of Cal Fed. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- --------------------------------------------------------------
<S> <C> <C>
Ronald O. Perelman ................ 55 Director
Gerald J. Ford .................... 53 Chairman of the Board, Chief Executive Officer and Director
Carl B. Webb ...................... 48 President, Chief Operating Officer and Director
Edward G. Harshfield .............. 61 Vice Chairman of the Board and Director
Paul M. Bass, Jr. ................. 63 Director
George W. Bramblett, Jr. .......... 58 Director
Bob Bullock ....................... 68 Director
Irwin Engelman .................... 64 Director
Howard Gittis ..................... 64 Director
Gabrielle K. McDonald ............. 56 Director
Lynn Schenk ....................... 53 Director
Robert Setrakian .................. 74 Director
Christie S. Flanagan .............. 60 Executive Vice President and General Counsel
Kendall M. Fugate ................. 60 Executive Vice President and Information and Technology
Services Director
Richard P. Hodge .................. 43 Executive Vice President and Corporate Tax Director
Walter C. Klein, Jr. .............. 55 Executive Vice President; President, FNMC
Richard A. Leweke ................. 45 Executive Vice President and Administrative Services Director
Lacy G. Newman, Jr. ............... 48 Executive Vice President and Chief Credit Officer
James R. Staff .................... 51 Executive Vice President and Chief Financial Advisor
Richard H. Terzian ................ 61 Executive Vice President and Chief Financial Officer
Peter K. Thomsen .................. 56 Executive Vice President and Retail Banking Director
Dennis L. Verhaegen ............... 46 Executive Vice President -- Director of Corporate Finance
Michael R. Walker ................. 52 Executive Vice President -- Commercial Real Estate
Renee Nichols Tucei ............... 41 Senior Vice President and Controller
</TABLE>
Mr. Perelman has been Chairman of the Board of Parent Holdings and of FNH
since their formation in 1994 and a Director of Cal Fed since 1994. Mr.
Perelman has been Chairman of the Board and Chief Executive Officer of
MacAndrews & Forbes and various of its affiliates since 1980. Mr. Perelman also
is Chairman of the Boards of Directors of Revlon and Meridian Sports and
Chairman of the Executive Committees of the Boards of Directors of Cigar
Holdings and Panavision Inc. ("Panavision"). Mr. Perelman is a Director of the
following corporations which file reports pursuant to the Exchange Act: Cal
Fed, Cigar Holdings, FNH, Parent Holdings, MFW, Meridian, Panavision, Revlon
Consumer Products Corporation ("Products Corporation"), Revlon and REV Holdings
Inc. ("REV Holdings"). (On
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<PAGE>
December 27, 1996, Marvel Entertainment Group ("Marvel"), Marvel (Parent)
Holdings Inc. ("Marvel Parent") and Marvel Holdings Inc. ("Marvel Holdings"),
of which Mr. Perelman was a Director, Marvel III Holdings Inc. ("Marvel III"),
of which Mr. Perelman is a Director, and several subsidiaries of Marvel filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Ford has been President and a Director of Parent Holdings since its
formation in 1994 and Chairman of the Board, Chief Executive Officer and a
Director of Cal Fed since the consummation of the FN Acquisition and of
Preferred Capital Corp. since its formation in November 1996. Mr. Ford was
Chairman of the Board and a Director of First Madison from 1993 to 1994. Mr.
Ford previously served as Chairman of the Board, Chief Executive Officer and a
Director of First Gibraltar from 1988 through 1993. Mr. Ford served as the
Chairman of the Board, Chief Executive Officer and a Director of First United
Bank Group, Inc. ("First United Bank Group"), from 1993 through 1994. Mr. Ford
is Chairman of the Board and a Director of FNMC, FGB Services, Inc. and Madison
Realty Advisors, Inc. ("Madison Realty"). Mr. Ford has also served in the
following capacities over the past five years: Chairman of the Board, Chief
Executive Officer and Director, Ford Bank Group, Inc. ("Ford Bank Group"); and
Chairman of the Board, Chief Executive Officer and Director, United New Mexico
Financial Corporation. Mr. Ford is also Chairman of the Board and Chief
Executive Officer of Liberte Investors Inc., and a Director of McMoRan Oil and
Gas Co. and Aames Financial Corporation.
Mr. Gittis has been Vice Chairman and a Director of Parent Holdings and of
FNH and a Director of Cal Fed since 1994. Mr. Gittis has been Vice Chairman of
MacAndrews & Forbes and various of its affiliates since 1985. Mr. Gittis is a
Director of the following corporations which file reports pursuant to the
Exchange Act: Aames Financial Corporation, Cal Fed, Cigar Holdings, Jones
Apparel Group, Inc., Loral Space and Communications, Ltd., FNH, Parent
Holdings, MFW, Panavision, Revlon, Products Corporation, REV Holdings,
Rutherford-Moran Oil Corporation and Sunbeam Corporation.
Mr. Engelman has been Executive Vice President and Chief Financial Officer
of Parent Holdings and of FNH since its formation in 1994, and a Director of
Cal Fed since 1992. He has been Executive Vice President and Chief Financial
Officer of MacAndrews & Forbes and various other affiliates since February
1992. He was Executive Vice President and Chief Financial Officer of GAF
Corporation from 1990 to 1991; Director, President and Chief Operating Officer
of Citytrust Bancorp Inc. from 1988 to 1990; Executive Vice President of the
Blackstone Group LP from 1987 to 1988; and Director and Executive Vice
President of General Foods Corporation for more than five years prior to 1987.
Mr. Engelman is a Director of the following corporations which file reports
pursuant to the Exchange Act: Revlon Products and Cal Fed. (On December 27,
1996, Marvel Holdings and Marvel Parent, of which Mr. Engelman was an executive
officer, and Marvel III, of which Mr. Engelman is an executive officer, and
several of the subsidiaries of Marvel filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)
Mr. Schwartz has been Executive Vice President and General Counsel of
Parent Holdings since March 1996 and Executive Vice President and General
Counsel of FNH since January 1996. He has been Executive Vice President and
General Counsel of MacAndrews & Forbes and various affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
(On December 27, 1996, Marvel Holdings and Marvel Parent, of which Mr. Schwartz
was an executive officer, and Marvel III, of which Mr. Schwartz is an executive
officer, and several of the subsidiaries of Marvel filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code.)
Mr. Winoker has been Vice President and Controller of Parent Holdings and
of FNH since 1994. He has been Vice President and Controller of MacAndrews &
Forbes and various of its affiliates since September 1992. Mr. Winoker was
Assistant Vice President and Assistant Controller of MacAndrews & Forbes and
various of its affiliates for more than five years prior to September 1992. (On
December 27, 1996, Marvel Holdings and Marvel Parent, of which Mr. Winoker was
an executive officer, and Marvel III, of which Mr. Winoker is an executive
officer, and several of the subsidiaries of Marvel filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code.)
Mr. Webb has been the President, Chief Operating Officer and a Director of
Cal Fed since the consummation of the FN Acquisition and of Preferred Capital
Corp. since its formation in
194
<PAGE>
November 1996. Mr. Webb served as President, Chief Executive Officer and
Director of First Madison from 1993 through 1994. Mr. Webb previously served as
President, Chief Operating Officer and a Director of First Gibraltar from 1988
through 1993. Mr. Webb also serves as a Director of FNMC.
Mr. Harshfield has been Vice Chairman of the Board and a Director of Cal
Fed since January 1997. Mr. Harshfield was President, Chief Executive Officer
and a Director of Old Cal Fed from January 1996 to January 1997 and of Old
California Federal from October 1993 to January 1997. From October 1992 to
March 1993, Mr. Harshfield served as Chief Executive Officer and a Director of
First City Texas National Bank. From February 1991 to December 1992, he served
as President, Chief Executive Officer and a Director of Federal Capital Bank, a
private investment bank. Since 1988, Mr. Harshfield has been the principal,
Chairman and Chief Executive Officer of EH Thrift Management Inc., a special
purpose management company, and general partner of U.S. Thrift Opportunity
Partners, L.P., a Merrill Lynch sponsored limited partnership that invests in
undercapitalized thrift institutions. Prior to 1988, Mr. Harshfield served as
President and Chief Executive Officer of Household Financial Services. Mr.
Harshfield also held various senior positions with Citicorp/Citibank and
Pepsico Inc.
Mr. Bass has been a Director of Cal Fed since May , 1993. Mr. Bass is
currently the Vice Chairman and Director of First Southwest Company. Mr. Bass
is a Director and Chairman of the Audit Committee of Keystone Consolidated
Industries, and is a Director of Source Services, Inc. Mr. Bass has served in
the following capacities during the past five years: Director, Endevco, Inc.;
Director, Jayhawk Acceptance Corporation; Director, Ford Bank Group; and
Chairman of the Board and Director, Pizza Inn, Inc.
Mr. Bramblett has been a Director of Cal Fed since May , 1993. Mr.
Bramblett has been associated with the law firm of Haynes & Boone since 1973
and is currently a Partner and a member of the Executive Committee of that
firm. Mr. Bramblett has served in the following capacities during the past five
years: Member of the Texas Higher Education Coordinating Board of the Texas
College and University System of Texas and Trustee of the Baylor College of
Dentistry.
Mr. Bullock has served as a Director of Cal Fed since 1994. Mr. Bullock
has been Lieutenant Governor of the State of Texas since 1990. Mr. Bullock is
Chairman of the Board, Director and President of JFB-RDB, Inc. Mr. Bullock
served as a Director of the Ford Bank Group from 1992 to 1993, and as Director
of the First United Bank Group from 1992 to 1993. Prior to 1990, Mr. Bullock
served as the State of Texas Comptroller of Public Accounts. Mr. Bullock has
been Of Counsel to the law firm of Scott, Douglass, Luton and McConnico, L.L.P.
since 1992.
Ms. McDonald has served as a Director of Cal Fed since 1990. Ms. McDonald
also served as a Director of FGB-San Antonio in 1992. Ms. McDonald currently
serves as a Judge on the International Criminal Tribunal for the former
Yugoslavia. Ms. McDonald is also currently a Professor of Law at the Thurgood
Marshall School of Law of Texas Southern University. Ms. McDonald currently
serves as a director of Freeport McMoRan Inc., McMoRan Oil & Gas Co. and
Freeport McMoRan Copper & Gold Inc. Ms. McDonald was Of Counsel to the Walker &
Satterthwaite firm from 1991 to 1993. She was a partner in the law firm of
Matthews & Branscomb from 1988 through 1991. Prior to that time, Ms. McDonald
served as a United States District Court Judge for the Southern District of
Texas.
Ms. Schenk has been a Director of Cal Fed since November, 1996. Ms. Schenk
has been a Senior Consultant to Baker & McKenzie, San Diego, California since
1995. From January, 1993 to January, 1995, Ms. Schenk served in the U.S. House
of Representatives as Congresswoman representing the 49th Congressional
District in the State of California. During her term in the House of
Representatives, Ms. Schenk served on the Energy and Commerce Committee and the
Merchant Marine and Fisheries Committee. Ms. Schenk served as the State of
California Secretary of Business, Transportation and Housing prior to 1983.
From 1983 until her election to Congress, Ms. Schenk was in private law
practice in California and served as an independent consultant to various
public and private businesses with respect to government relations. From 1985
to 1993, Ms. Schenk served as a director of Long Beach Bank, F.S.B. She is
currently a director of IDEC Pharmaceuticals, Inc., a corporation which files
reports pursuant to the Exchange Act.
Mr. Setrakian has been a Director of Cal Fed since November 1994. Mr.
Setrakian previously served as a Director of Old FNB for more than 10 years.
Mr. Setrakian is presently the Chairman and President
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<PAGE>
of the William Saroyan Foundation and the former Chairman and President of
Mid-State Horticultural Company. He is also a former Chairman and member of the
Board of Governors of the United States Postal Service; former Commissioner of
the Federal Maritime Commission; former Chairman and Chief Executive Officer of
the California Growers Winery, Inc.; and former Chairman and founder of the
National Bank of Agriculture.
Mr. Flanagan has been the Executive Vice President and General Counsel of
Cal Fed since the consummation of the FN Acquisition. Mr. Flanagan has been the
Executive Vice President, General Counsel and a Director of Preferred Capital
Corp. since its formation in November 1996. He also serves as a Director of
FNMC. Mr. Flanagan has been associated with the law firm of Jenkens &
Gilchrist, P.C. and its predecessors since 1968 in various capacities,
including Managing Partner, and he is currently Of Counsel to that firm.
Mr. Fugate has been an Executive Vice President of Cal Fed since the
consummation of the FN Acquisition. Mr. Fugate previously served as Executive
Vice President of Old FNB from 1991 to 1994, and held various executive
positions with Citibank, N.A. and Citibank California, FSB from 1982 to 1991.
Mr. Hodge has been an Executive Vice President of Cal Fed since January
1996 and has been employed by Cal Fed since November 1995. Mr. Hodge previously
was associated with the public accounting firm of KPMG Peat Marwick LLP and its
predecessors since 1981, including most recently as a tax partner since 1986.
Mr. Klein has been an Executive Vice President of Cal Fed and the
President of FNMC since January 1996. He also serves as a Director of FNMC. Mr.
Klein previously was associated with PNC Mortgage Corp. of America and its
predecessor, Sears Mortgage Corporation, since 1986, including most recently as
Chairman and Chief Executive Officer.
Mr. Leweke has been an Executive Vice President of Cal Fed since January
1998. Mr. Leweke served as Senior Vice President--Administrative Services since
the consummation of the FN Acquisition. Prior to that time, he served in the
same capacity for Old FNB from 1992 to 1994.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
Cal Fed since the consummation of the FN Acquisition. Mr. Newman has also
served as Executive Vice President of First Madison from 1993 to 1994, and
Executive Vice President of First Gibraltar since 1992. In addition, he served
as President and a Director of Madison Realty since 1992.
Mr. Staff has been an Executive Vice President of Cal Fed since October
17, 1994. He also serves as a Director of Preferred Capital Corp. and FNMC and
as Chairman and Director of FGB Realty. Mr. Staff previously was associated
with the public accounting firm of KPMG Peat Marwick LLP and its predecessors
since 1979, including most recently as Partner-in-charge of Financial Services
for the Southwest-Dallas area.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of Cal Fed since April 1, 1995. Mr. Terzian has been the Executive Vice
President, Chief Financial Officer and a Director of Preferred Capital Corp.
since its formation in November 1996. For the five years prior to April 1,
1995, Mr. Terzian served as Chief Financial Officer of Dime Bancorp, Inc. and
its subsidiary, The Dime Savings Bank of New York, FSB.
Mr. Thomsen has been an Executive Vice President of Cal Fed since the
consummation of the FN Acquisition. Mr. Thomsen previously served as Senior
Executive Vice President of Old FNB and a Director from 1992 to 1994. Mr.
Thomsen was an Executive Vice President of Old FNB from 1991 to 1992. Mr.
Thomsen had been Executive Vice President of Michigan National Corporation from
1986 to 1991 and a Director from 1989 to 1991, and the President of Michigan
National Bank from 1988 to 1991 and a Director from 1989 to 1991. Mr. Thomsen
was Chairman of Independence One Mortgage Corporation, a subsidiary of Michigan
National Bank, from 1986 to 1990.
Mr. Verhaegen has been an Executive Vice President of Cal Fed since
February 1997. Mr. Verhaegen previously served as a Managing Director of First
Southwest Company from 1992 to 1994. Mr. Verhaegen served as a Senior Managing
Director and co-head of the Financial Institutions Group of Bear Stearns & Co.
Inc. from 1988 to 1992. From 1994 to 1996, Mr. Verhaegen operated his own
financial advisory and consulting firm.
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<PAGE>
Mr. Walker has been an Executive Vice President of Cal Fed since the
consummation of the FN Acquisition. Mr. Walker served as Senior Vice President
of First Madison from 1993 to 1994. Mr. Walker previously served as Senior Vice
President of First Gibraltar from 1988 to 1993.
Ms. Tucei has been a Senior Vice President and the Controller of Cal Fed
since the consummation of the FN Acquisition. Ms. Tucei previously served as
Senior Vice President and Controller of First Madison from 1993 to 1994, and as
Senior Vice President for First Gibraltar from 1988 to 1993.
LEGAL MATTERS
Certain legal matters in connection with the Mergers will be passed upon
for Parent Holdings by Skadden, Arps, Slate, Meagher & Flom LLP.
Certain legal matters in connection with the Mergers will be passed upon
for Golden State by Wachtell, Lipton, Rosen & Katz.
EXPERTS
The consolidated financial statements of Golden State Bancorp Inc. and
subsidiaries (formerly Glendale Federal Bank, Federal Savings Bank) as of June
30, 1997 and 1996, and for each of the years in the three year period ended
June 30, 1997, have been incorporated by reference herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as
experts in accounting and auditing. A representative of KPMG Peat Marwick LLP
will be at the Special Meeting to answer questions from Golden State
Stockholders and will be given an opportunity to make a statement, if so
desired.
The consolidated financial statements of First Nationwide (Parent)
Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and for each
of the years in the three-year period ended December 31, 1997, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
OTHER BUSINESS
Golden State's Bylaws state that the business to be transacted at any
special meeting of stockholders shall be confined to the purpose or purposes
stated in the notice of such meeting. Accordingly, no business other than the
matters described in this Proxy Statement will be considered or taken up at the
Special Meeting.
STOCKHOLDER PROPOSALS
Any stockholder wishing to have a proposal considered for inclusion in the
proxy solicitation materials for Golden State's 1998 Annual Meeting of
Stockholders must, in addition to other applicable requirements, have set forth
such proposal in writing and must have filed it with the Secretary of Golden
State on or before May 30, 1998. The Golden State Board will review any
proposals from stockholders received by that date and will determine whether
applicable requirements have been met for inclusion of any such proposals in
such 1998 proxy solicitation materials.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Golden State (File
No. 0-29654) are incorporated by reference in this Proxy Statement:
1. Golden State's Current Report on Form 8-K, dated September 26, 1997
(including, as Exhibit 99B thereto, Glendale Federal's Annual Report on Form
10-K for the year ended June 30, 1997).
2. Golden State's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998.
3. Golden State's Current Reports on Form 8-K, dated July 24, 1997, August
17, 1997, October 28, 1997 (as amended by Amendment No. 1 thereto, filed with
the Commission on February 3, 1998), November 30, 1997, February 4, 1998 (as
amended by Amendment No. 1 thereto, filed with the Commission on March 5, 1998)
and May 5, 1998.
4. Glendale Federal's Proxy Statement on Schedule 14A, dated June 24,
1997, for its Special Meeting of Stockholders held on July 23, 1997 (filed as
Exhibit 99.6 to Amendment No. 3 to Golden State's Registration Statement on
Form S-3, File No. 333-28037, filed with the Commission on July 11, 1997).
5. Golden State's Proxy Statement on Schedule 14A, dated September 29,
1997, for its Annual Meeting of Stockholders held on October 28, 1997.
6. Golden State's Proxy Statement on Schedule 14A, dated March 4, 1998,
for its Special Meeting of Stockholders convened on April 8, 1998.
7. Amendment No. 1 to Golden State's Registration Statement on Form S-3,
File No. 333-47309, filed with the Commission on April 22, 1998.
In addition, all documents and reports filed by Golden State pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement and prior to the date of the Special Meeting shall be deemed to
be incorporated by reference in this Proxy Statement and to be a part hereof
from the dates of filing of such documents or reports. Any statement contained
in a document or report incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein, or in any other
subsequently filed document or report which also is deemed to be incorporated
by reference herein, modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS RELATING TO GOLDEN STATE
OR GLENDALE FEDERAL (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS
ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, TO GOLDEN STATE BANCORP INC., 700 NORTH
BRAND BOULEVARD, GLENDALE, CALIFORNIA, 91203, ATTENTION: INVESTOR RELATIONS,
TELEPHONE NUMBER (818) 500-2723. GOLDEN STATE WILL SEND THE REQUESTED DOCUMENTS
BY FIRST-CLASS MAIL WITHIN ONE BUSINESS DAY AFTER THE RECEIPT OF THE REQUEST.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, REQUESTS SHOULD BE
RECEIVED BY AUGUST 10, 1998.
198
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<S> <C>
10% Subordinated Debentures Due 2003 ............... 124
10% Subordinated Debentures Due 2006 ............... 122
10.668% Subordinated Notes ......................... 123
10 5/8% Notes ...................................... 97
11.20% Senior Notes ................................ 123
11 1/2% Preferred Stock ............................ 125
12 1/2% Notes Indenture ............................ 129
12 1/2% Senior Notes Indenture ..................... 121
12 1/2% Senior Notes ............................... 121
12 1/4% Senior Notes ............................... 121
1996 Acquisitions .................................. 97
6 1/2% Convertible Subordinated Debentures ......... 124
9 1/8% Preferred Stock ............................. 127
9 1/8% Senior Subordinated Notes ................... 121
ACS ................................................ 113, F-32
Act ................................................ 175, F-61
Additional FN Holdings Preferred Stock ............. F-53
Additional FNH Preferred Stock ..................... 124
Adjusted Average Price ............................. 80
Agreement .......................................... 1
ALCO ............................................... 155, 179
AMT ................................................ 174
ARMs ............................................... 99
Asset Purchase Agreement ........................... 96, F-19
Assistance Agreement ............................... 96, F-39
Auto One ........................................... 98, F-8, F-23
Auto One Acquisition ............................... 98, F-23
Average Stock Price ................................ 40
BAC Sale ........................................... 96, F-19
Bank ............................................... F-19
Bank Preferred Stock ............................... F-53
Bank Preferred Stock Offers ........................ 128
BankAmerica ........................................ 96
BIF ................................................ 140
Bloomberg .......................................... 39
Bonuses ............................................ F-63
Branch Purchases ................................... 144
Branch Sales ....................................... 97, F-24
broker non-votes ................................... 26
Brokered Deposits .................................. 118
Cal Fed ............................................ Cover, F-19
Cal Fed Acquisition ................................ 95, F-8, F-19
Cal Fed Cash Payment ............................... 40
Cal Fed Committee .................................. 65
Cal Fed Goodwill Litigation ........................ 8
Cal Fed Litigation ................................. F-65
Cal Fed Preferred Stock ............................ 126
CALGLs ............................................. Cover 2
CALGZs ............................................. Cover 2
</TABLE>
199
<PAGE>
<TABLE>
<S> <C>
California Federal ..................................... F-19
Capital Loss Coverage .................................. F-39
CENFED ................................................. Cover
CENFED Merger .......................................... 3
Certificates of Merger ................................. 7
Cigar Holdings ......................................... 142
Closed Associations .................................... F-19
Closing Date ........................................... 7
CMOs ................................................... 115
Commission ............................................. 1
Company ................................................ F-8
Contingent Shares ...................................... 7
Contractual ............................................ F-37
Contribution Amount .................................... 40
Cost of Funds Rate ..................................... 124, F-53
Covered Assets ......................................... 96
Covered Executive Officers ............................. 50
CRA .................................................... 49
CSFB ................................................... 8
Deferred Compensation Plan ............................. 54
Department of Justice .................................. 10
Determination Date ..................................... 46
Effective Date ......................................... 7
Employment Agreements .................................. 50
Employment Period ...................................... 50
Escrowed Funds ......................................... 128
Estimated Litigation Recovery Retention Amount ......... 40
Exchange Act ........................................... 1
Exchange Agreement ..................................... F-54
Exercise Price ......................................... 61
Fair Lending Laws ...................................... 140
FASB ................................................... 111
FDIC ................................................... F-33
FDIC Purchase .......................................... 131, F-39
FGB Realty ............................................. 131
FGH .................................................... Cover
FHLB ................................................... 102, F-2
FHLBS .................................................. 96
FHLMC .................................................. 100, F-29
FICO ................................................... 140
Final Resolution ....................................... 53
FIRREA ................................................. 130
First Gibraltar ........................................ 95, F-19
First Gibraltar Holdings ............................... F-19
First Madison .......................................... 95, F-19
First Nationwide ....................................... 95, F-19
First United Bank Group ................................ 194
Florida Branch Sale .................................... 4
Florida Branch Sale Agreement .......................... 4
FN Acquired Business ................................... 96, F-19
FN Acquisition ......................................... 96, F-19
</TABLE>
200
<PAGE>
<TABLE>
<S> <C>
FN Escrow ..................................... 97, F-20
FN Escrow Merger .............................. 97, F-20
FN Escrow Preferred Stock ..................... F-20
FN Holdings ................................... F-19
FN Holdings Preferred Stock ................... F-53
FN Holdings/FN Escrow Preferred Stock ......... F-20
FN Merger Agreement ........................... 97
FNH ........................................... Cover, F-8
FNH Class A Common Stock ...................... 39
FNH Class B Common Stock ...................... 39
FNH Debt Offers ............................... 128
FNH Indentures ................................ 128
FNH Merger .................................... Cover
FNH Notes ..................................... 122
FNH Preferred Stock ........................... 97
FNIC .......................................... 132
FNMA .......................................... 100, F-29
FNMC .......................................... 96, F-19
FNMP .......................................... 106
Ford Bank Group ............................... 194
Ford Motor .................................... 96, F-19
FRB ........................................... 137
FSLIC ......................................... 95, F-19
FSLIC/RF ...................................... 95, F-39
GAAP .......................................... 3
Garberville Branch Sale ....................... F-24
Glendale Committee ............................ 65
Glendale Federal .............................. Cover, F-8
Glendale Federal Employees .................... 60
Glendale Federal Payment ...................... 41
Glendale Interim .............................. 90
GNMA .......................................... 100, F-29
Golden State .................................. Cover, F-8
Golden State Board ............................ 5
Golden State Common Stock ..................... Cover
Golden State Financial ........................ Cover
Golden State Merger ........................... Cover, F-8
Golden State Merger Agreement ................. F-8
Golden State Option ........................... 52
Golden State Option Plan ...................... 51
Golden State Stockholders ..................... 3
Goodwill Litigation ........................... 65
Goodwill Litigation Asset ..................... 131, F-65
Goodwill Recovery Shares Number ............... 40
Granite ....................................... 103, F-39
Gross-up Payment .............................. 51
GS Escrow ..................................... 128
GS Escrow Merger .............................. 128
GSAC .......................................... 98, F-8
GSAC Acquisition .............................. 98, F-8
GSB Directors ................................. 32, 52
</TABLE>
201
<PAGE>
<TABLE>
<S> <C>
HFFC .................................... 97, F-22
HOLA .................................... 48
Holder .................................. 63
Holders ................................. 65
Home Federal ............................ 97
Home Federal Acquisition ................ 97, F-22
HUD ..................................... 104
Hunter's Glen ........................... Cover
Incentive Fee ........................... 53
Incentive Plan .......................... 54, F-63
Injunction .............................. 47
IRR ..................................... 135
Junior Stock ............................ 125
Limitation .............................. 44
Litigation Management Agreement ......... 65
Litigation Managers ..................... 53
LMUSA ................................... 97, F-20
LMUSA 1995 Purchase ..................... 97, F-20
LMUSA 1996 Purchase ..................... 97, F-20
LMUSA Purchases ......................... 97, F-20
LOC ..................................... 131
LTV ..................................... 100
MacAndrews & Forbes ..................... 4
MacAndrews Holdings ..................... 4
Madison Realty .......................... 194
Mafco ................................... F-29
Mafco Group ............................. 174
Mafco Holdings .......................... 4
Marvel .................................. 194
Marvel Holdings ......................... 194
Marvel III .............................. 194
Marvel Parent ........................... 194
Maryland Acquisition .................... 96
MBS ..................................... 114
Medical Benefits ........................ 53
Merger Agreement ........................ F-19
Mergers ................................. Cover
M&F Holdings ............................ F-19
Michigan Branch Sale .................... 97
MSR Hedge ............................... 160, F-41
MSRs .................................... 103, F-41
New FNH ................................. Cover
Northeast Branch Sale ................... 97
Note Purchase Agreement ................. 123, F-48
Notional Share Amount ................... 45
NPV ..................................... 190
NYSE .................................... Cover 2
Offering ................................ 128
Officers ................................ 54
Ohio Branch Sale ........................ 97
Old Cal Fed ............................. 28
</TABLE>
202
<PAGE>
<TABLE>
<S> <C>
Old California Federal .......................... F-19
Old FNB ......................................... 96, F-19
Old FNB Indenture ............................... 122, F-48
Option .......................................... 11
Option Repurchase Price ......................... 63
Option Shares ................................... 61
Other Litigation ................................ 8
Other Litigation Payment ........................ 42
Other Litigation Recovery Shares Number ......... 42
Other Pro Forma Events .......................... 13
OTS ............................................. 1, F-54
Owner ........................................... 63
Pacific Exchange ................................ 1
Parent Holdings ................................. Cover, F-8
Parent Holdings Common Stock .................... 38
Parent Holdings Defeasance ...................... 129
Participants .................................... 54, F-63
Payments ........................................ 51
Pension Benefit ................................. 53
Plan of Merger .................................. Cover
Preferred Capital Corp .......................... 97, F-19
Promissory Note ................................. F-38
Proposed Amendments ............................. 128
Proxy Statement ................................. Cover
Put Agreement ................................... 103, F-38
Put Option ...................................... 131
QTL ............................................. 139
QTL test ........................................ 139
Rate Lock Agreements ............................ 129
Recent Annual Target Bonus ...................... 50
Recognized ...................................... F-37
Record Date ..................................... 5
Recovery Payment ................................ 129
RedFed .......................................... Cover
RedFed Merger ................................... 4
Reduction Act ................................... 168
Refinancing ..................................... Cover 2
Registration Rights Agreement ................... 68
REIT ............................................ F-19
REIT Preferred Stock ............................ 98, F-8, F-20
Reorganization .................................. 90
Reorganization Agreement ........................ 90
Requisite Regulatory Approvals .................. 10
Retirement Plan ................................. 51
REV Holdings .................................... 193
Revlon .......................................... 142
SAIF ............................................ 90, F-3, F-13
San Francisco Federal ........................... 97
SBHC ............................................ 129
Selected Companies .............................. 34
Selected Transactions ........................... 36
</TABLE>
203
<PAGE>
<TABLE>
<S> <C>
SERP .................................... 51
Servicing Sale .......................... 98, F-24
SFAS 128 ................................ 23
SFAS No. 115 ............................ 111
SFAS No. 122 ............................ 106
SFAS No. 125 ............................ 145
SFAS No. 127 ............................ 145
SFAS No. 130 ............................ 145
SFAS No. 131 ............................ 145
SFAS No. 132 ............................ 145
SFFed ................................... 97, F-21
SFFed Acquisition ....................... 97, F-21
Shared Gain ............................. 131
Shortfall Account ....................... 45
Special Meeting ......................... Cover
Special Purpose Corp .................... 97, F-53
Special Report .......................... 111, F-31
Special SAIF Assessment ................. 168, F-64
StanFed ................................. 96
Stock Option Agreement .................. 11, 61
Subsequent Event ........................ F-60
Subsidiary Bank Merger .................. Cover
Substitute Option ....................... 64
Tax Attribute Adjustment Amount ......... 45
Tax Attribute Adjustment Event .......... 45
Tax Attribute Adjustment Number ......... 45
Tax Opinions ............................ 60
Tax Payment ............................. 42
Tax Sharing Agreement ................... 174
Taxable Period .......................... 42
Texas Branch Sale ....................... 98, F-24
Texas Closed Banks ...................... 95
Tier 1 association ...................... 139
Tier 2 association ...................... 139
Tier 3 association ...................... 139
TNIS .................................... 129
Union Planters Florida .................. 4
Weyerhaeuser Purchase ................... 98, F-23
Winstar Cases ........................... 130
XCF ..................................... 124, F-49
Year 2000 ............................... 146
</TABLE>
204
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
At March 31, 1998 and for the three-month periods ended March
31, 1998 and 1997:
Unaudited Consolidated Balance Sheet
March 31, 1998 .......................................... F-2
Unaudited Consolidated Statements of Income
Three Months ended March 31, 1998 and 1997 .............. F-3
Unaudited Consolidated Statements of Comprehensive Income
Three Months ended March 31, 1998 and 1997 .............. F-4
Unaudited Consolidated Statement of Stockholder's Equity
Three Months ended March 31, 1998 ....................... F-5
Unaudited Consolidated Statements of Cash Flows
Three Months ended March 31, 1998 and 1997 .............. F-6
Notes to Consolidated Financial Statements .............. F-8
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
At December 31, 1997 and 1996 and for the years ended December
31, 1997, 1996 and 1995:
Independent Auditors' Report ............................ F-11
Consolidated Balance Sheets ............................. F-12
Consolidated Statements of Income ....................... F-13
Consolidated Statements of Comprehensive Income ......... F-14
Consolidated Statements of Stockholder's Equity ......... F-15
Consolidated Statements of Cash Flows ................... F-16
Notes to Consolidated Financial Statements .............. F-19
</TABLE>
F-1
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
<S> <C>
ASSETS
Cash and amounts due from banks .......................................... $ 379,831
Interest-bearing deposits in other banks ................................. 128
Short-term investment securities ......................................... 84,305
-----------
Cash and cash equivalents ............................................... 464,264
Securities available for sale, at fair value ............................. 988,235
Securities held to maturity .............................................. 58,424
Mortgage-backed securities available for sale, at fair value ............. 5,695,135
Mortgage-backed securities held to maturity .............................. 1,250,639
Loans held for sale, net ................................................. 1,887,856
Loans receivable, net .................................................... 18,977,777
Investment in Federal Home Loan Bank ("FHLB") System ..................... 485,793
Office premises and equipment, net ....................................... 161,047
Foreclosed real estate, net .............................................. 75,674
Accrued interest receivable .............................................. 196,637
Intangible assets (net of accumulated amortization of
$71,383) ................................................................ 669,831
Mortgage servicing rights ................................................ 625,554
Other assets ............................................................. 665,699
-----------
Total assets .......................................................... $32,202,565
===========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
Deposits ................................................................. $16,403,429
Securities sold under agreements to repurchase ........................... 1,965,818
Borrowings ............................................................... 11,734,406
Other liabilities ........................................................ 699,517
-----------
Total liabilities ..................................................... 30,803,170
-----------
Commitments and contingencies ............................................ --
Minority interest ........................................................ 1,161,978
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding ........................................................... 1
Additional paid-in capital .............................................. --
Net unrealized holding gain on securities available for sale ............ 24,927
Retained earnings (substantially restricted) ............................ 212,489
-----------
Total stockholder's equity ............................................ 237,417
-----------
Total liabilities, minority interest and stockholder's equity ......... $32,202,565
===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable ............................................ $384,720 $390,643
Mortgage-backed securities available for sale ............... 81,502 61,005
Mortgage-backed securities held to maturity ................. 24,857 29,940
Loans held for sale ......................................... 27,336 17,253
Securities available for sale ............................... 13,723 10,971
Securities held to maturity ................................. 874 71
Interest-bearing deposits in other banks .................... 410 2,868
-------- --------
Total interest income ..................................... 533,422 512,751
-------- --------
Interest expense:
Deposits .................................................... 178,175 187,020
Securities sold under agreements to repurchase .............. 26,528 34,383
Borrowings .................................................. 178,163 137,992
-------- --------
Total interest expense .................................... 382,866 359,395
-------- --------
Net interest income ....................................... 150,556 153,356
Provision for loan losses .................................... 10,000 19,950
-------- --------
Net interest income after provision for loan losses ......... 140,556 133,406
-------- --------
Noninterest income:
Loan servicing fees, net .................................... 36,962 39,714
Customer banking fees and service charges ................... 25,346 22,519
(Loss) gain on sale of assets, net .......................... (379) 22
Gain on sale of loans, net .................................. 14,505 2,869
Dividends on FHLB stock ..................................... 7,007 5,962
Other income ................................................ 6,337 7,753
-------- --------
Total noninterest income .................................. 89,778 78,839
-------- --------
Noninterest expense:
Compensation and employee benefits .......................... 62,981 64,480
Occupancy and equipment ..................................... 21,483 20,682
Savings Association Insurance Fund ("SAIF") deposit insurance
premium ................................................... 2,573 2,653
Loan expense ................................................ 9,595 7,824
Marketing ................................................... 3,505 4,068
Professional fees ........................................... 8,710 9,103
Data processing ............................................. 2,840 2,935
Foreclosed real estate operations, net ...................... (1,720) 1,005
Amortization of intangible assets ........................... 11,089 12,106
Other ....................................................... 24,200 28,868
-------- --------
Total noninterest expense ................................. 145,256 153,724
-------- --------
Income before income taxes and minority interest ............. 85,078 58,521
Income tax expense ........................................... 13,890 10,194
-------- --------
Income before minority interest ............................. 71,188 48,327
Minority interest ............................................ 35,774 31,839
-------- --------
Net income .................................................. $ 35,414 $ 16,488
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income ................................................................ $ 35,414 $16,488
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available for sale:
Unrealized holding (loss) gain arising during the period ............... (3,084) 20,486
Less: reclassification adjustment for gains included in net loss ....... (118) --
-------- -------
Other comprehensive (loss) income ........................................ (3,202) 20,486
-------- -------
Comprehensive income ...................................................... $ 32,212 $36,974
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAINS ON TOTAL
COMMON PAID-IN SECURITIES RETAINED STOCKHOLDER'S
STOCK CAPITAL AVAILABLE FOR SALE EARNINGS EQUITY
-------- ------------ -------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .............. $ 1 $-- $ 28,129 $177,786 $205,916
Net income ............................... -- -- -- 35,414 35,414
Redemption of Additional FNH
Preferred Stock ........................ -- -- -- 630 630
Dividends to parent ...................... -- -- -- (1,341) (1,341)
Change in net unrealized holding gains
on securities available for sale ....... -- -- (3,202) -- (3,202)
--- --- -------- -------- --------
Balance at March 31, 1998 ................. $ 1 $-- $ 24,927 $212,489 $237,417
=== === ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 35,414 $ 16,488
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of intangible assets ..................................... 11,089 12,106
Accretion of purchase accounting premiums and discounts, net .......... (2,239) (4,847)
Accretion of discount on borrowings ................................... 186 186
Amortization of mortgage servicing rights ............................. 27,218 24,285
Provision for loan losses ............................................. 10,000 19,950
Loss (gain) on sales of assets, net ................................... 379 (22)
Loss on sale of branches .............................................. 86 --
Gain on sales of foreclosed real estate, net .......................... (3,812) (3,066)
Loss on sale of loans, net ............................................ 24,473 23,024
Depreciation and amortization of office premises and equipment ........ 5,469 3,638
Amortization of deferred debt issuance costs .......................... 2,159 1,315
FHLB stock dividends .................................................. (7,007) (5,962)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable ................................. (38,978) (25,893)
Purchases and originations of loans held for sale ..................... (2,267,462) (1,502,274)
Proceeds from the sale of loans held for sale ......................... 1,835,401 1,201,502
(Increase) decrease in other assets ................................... (11,174) 78,370
Increase in accrued interest receivable ............................... (7,852) (4,854)
Increase (decrease) in other liabilities .............................. 36,000 (615)
Minority interest ..................................................... 35,774 28,026
------------ ------------
Net cash used in operating activities ................................ (314,876) (138,643)
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions:
Cal Fed Acquisition .................................................... $ -- $ (161,196)
GSAC Acquisition ....................................................... (13,577) --
Purchases of securities available for sale ............................... (481,588) (394,709)
Proceeds from maturities of securities available for sale ................ 312,262 105,810
Purchases of securities held to maturity ................................. (407) --
Proceeds from maturities of securities held to maturity .................. 282 3,800
Purchases of mortgage-backed securities available for sale ............... (1,052,098) (686,510)
Principal payments on mortgage-backed securities available for sale ...... 422,098 147,843
Proceeds from sales of mortgage-backed securities available for sale ..... 3,195 7,589
Principal payments on mortgage-backed securities held to maturity ........ 87,101 69,400
Proceeds from sales of loans ............................................. 346 2,000
Net decrease in loans receivable ......................................... 411,675 460,166
Purchases of FHLB stock, net ............................................. (17,602) --
Purchases of office premises and equipment ............................... (9,615) (12,815)
Proceeds from disposal of office premises and equipment .................. 2,501 5,282
Proceeds from sales of foreclosed real estate ............................ 33,904 34,181
Purchases of mortgage servicing rights ................................... (77,091) (11,697)
------------ ------------
Net cash flows used in investing activities ............................ (378,614) (430,856)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ...................................... 201,008 (476,129)
Proceeds from additional borrowings ...................................... 4,828,742 3,821,502
Principal payments on borrowings ......................................... (4,359,104) (4,605,063)
Net increase in securities sold under agreements to repurchase ........... 123,445 1,037,114
Proceeds from FN Escrow Merger ........................................... -- 605,347
Issuance of REIT Preferred Stock, net .................................... -- 486,120
Redemption of FN Holdings/FN Escrow Preferred Stock ...................... -- (17,250)
Redemption of FNH Preferred Stock ........................................ (25,000) (31,250)
Dividends paid to minority stockholders, net of taxes .................... (23,648) (20,959)
Capital distribution to parent ........................................... -- (440)
------------ ------------
Net cash flows provided by financing activities ........................ 745,443 798,992
------------ ------------
Net change in cash and cash equivalents ................................... 51,953 229,493
Cash and cash equivalents at beginning of period .......................... 412,311 269,869
------------ ------------
Cash and cash equivalents at end of period ................................ $ 464,264 $ 499,362
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain amounts for the three month
period in the prior year have been reclassified to conform with the current
period's presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide (Parent) Holdings Inc. ("Parent Holdings" or the "Company"),
which owns directly 80% of the voting stock of First Nationwide Holdings Inc.
("FNH"), which owns all of the common stock of California Federal Bank, A
Federal Savings Bank and its subsidiaries. On January 3, 1997, First Nationwide
Bank, A Federal Savings Bank merged with and into California Federal Bank, A
Federal Savings Bank (the "Cal Fed Acquisition"). Unless the context otherwise
indicates, (i) "Old California Federal" refers to California Federal Bank, A
Federal Savings Bank prior to the consummation of the Cal Fed Acquisition and
(ii) "California Federal" or "Bank" refers to California Federal Bank, A
Federal Savings Bank, as the surviving entity after the consummation of the Cal
Fed Acquisition, and to First Nationwide and its predecessors for periods prior
to the Cal Fed Acquisition. All significant intercompany balances and
transactions have been eliminated in consolidation. These financial statements
should be read in conjunction with the consolidated financial statements
included in Parent Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997. All terms used but not defined elsewhere herein have
meanings ascribed to them in Parent Holdings' Annual Report on Form 10-K.
Minority interest represents amounts attributable to (i) the preferred
stock of Cal Fed, (ii) the preferred stock of FNH, (iii) the preferred stock
("REIT Preferred Stock") of California Federal Preferred Capital Corporation,
whose common stock is wholly owned by Cal Fed, (iv) that portion of
stockholders' equity of Auto One Acceptance Corporation, a subsidiary of Cal
Fed ("Auto One"), attributable to 20% of its common stock, and (v) the results
of operations and equity of FNH attributable to its class B common stock, which
is owned by Hunter's Glen/Ford Ltd. ("Hunter's Glen").
Earnings per share data is not presented due to the limited ownership of
Parent Holdings. Parent Holdings is a holding company whose only significant
asset is its indirect ownership of 80% of the common stock of Cal Fed, and
therefore all activities for the consolidated entity are carried out by Cal Fed
and its operating subsidiaries.
(2) ACQUISITIONS
On February 4, 1998, Auto One acquired 100% of the partnership interests
in Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and
its general partner, Gulf States Financial Services, Inc., a Texas corporation;
GSAC was liquidated and its assets and liabilities were transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration paid in connection with
the GSAC Acquisition was approximately $13.6 million plus a 20% interest in the
common stock of Auto One.
On February 4, 1998, Parent Holdings and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange
of shares in a merger transaction (the "Golden State Merger"), to be accounted
for under the purchase method of accounting. In connection with the execution
of the Golden State Merger Agreement, Golden State,
F-8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Glendale Federal, Cal Fed, Stephen J. Trafton, Chairman of the Board, President
and Chief Executive Officer of Golden State and Richard A. Fink, Vice Chairman
of Golden State, entered into a Litigation Management Agreement ("Litigation
Management Agreement") pursuant to which, among other things, Messrs. Trafton
and Fink will oversee and manage the California Federal Litigation (hereinafter
defined) and continue to oversee and manage similar litigation being prosecuted
by Glendale Federal, following the consummation of the Golden State Merger.
Following the Golden State Merger, the combined parent company, Golden State,
will have 135 to 145 million common shares outstanding and will continue to be
a publicly traded company. As part of the Golden State Merger Agreement,
Glendale Federal will be merged with and into Cal Fed. At December 31, 1997,
Glendale Federal had total assets of approximately $16.0 billion and deposits
of $9.5 billion and operated 181 branches and 26 loan offices in California.
The Golden State Merger is subject to regulatory and stockholder approval and
is expected to close during the third quarter of 1998.
On March 29, 1998, Parent Holdings signed a definitive agreement to sell
its Florida bank franchise (consisting of 24 branches with deposits of $1.5
billion) to Union Planters Bank of Florida, a wholly owned subsidiary of Union
Planters Corp. (the "Florida Branch Sale"). Parent Holdings expects to record a
pre-tax gain of approximately $110 million in connection with the Florida
Branch Sale, representing a deposit premium of approximately 7.5%. This
transaction is subject to regulatory approval and is expected to close in the
third quarter of 1998.
(3) CASH, CASH EQUIVALENTS, AND STATEMENT OF CASH FLOWS
Parent Holdings uses the indirect method to present cash flows from
operating activities. Cash paid for interest for the three months ended March
31, 1998 and 1997 was $341.2 million and $318.9 million, respectively.
During the three months ended March 31, 1998, noncash activity consisted
of transfers of $33.9 million from loans receivable to foreclosed real estate,
$4.4 million of loans made to facilitate sales of real estate owned and
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities classified as trading securities upon the
securitization of certain of Cal Fed's single-family loans. Noncash activity
also includes the retirement of FNH Preferred Stock of $.8 million, the
issuance of Additional FNH Preferred Stock through preferred stock dividends of
$.1 million and dividends to parent of $1.3 million.
During the three months ended March 31, 1997, noncash activity consisted
of transfers of $41.2 million from loans receivable and $1.2 million from loans
held for sale (at lower of cost or market) to foreclosed real estate, the
retirement of FNH Preferred Stock of $.3 million, the issuance of Additional
FNH Preferred Stock through preferred stock dividends of $.8 million and the
forgiveness of a $19 million loan from an affiliate of FNH in exchange for the
redemption of the FNH/FN Escrow Preferred Stock.
(4) MINORITY INTEREST
In connection with the GSAC Acquisition, Auto One issued 250 shares of
common stock, par value $1.00 per share, representing a 20% interest in Auto
One.
(5) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
F-9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
statement supersedes FASB Statement No. 14, Financial Reporting for Segments of
a Business Enterprise, but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of Parent Holdings, but will
require changes in Parent Holdings' disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No.
87, 88 and 106. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as they were when FASB Statements No. 87,
Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, were issued. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of disclosures
for earlier periods provided for comparative purposes, if available. It is not
expected that Parent Holdings will experience any material revision in its
disclosures when SFAS No. 132 is adopted.
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Nationwide (Parent) Holdings Inc.:
We have audited the accompanying consolidated balance sheets of First
Nationwide (Parent) Holdings Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
comprehensive income, stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Nationwide (Parent) Holdings Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
February 23, 1998
F-11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .......................................... $ 350,214 $ 135,534
Interest-bearing deposits in other banks ................................. 36,164 20,619
Short-term investment securities ......................................... 25,933 113,716
----------- -----------
Cash and cash equivalents ................................................ 412,311 269,869
Securities available for sale, at fair value ............................. 813,085 542,019
Securities held to maturity (fair value $58,299 in 1997
and $4,287 in 1996)...................................................... 58,299 4,272
Mortgage-backed securities available for sale, at fair value ............. 5,076,598 1,598,652
Mortgage-backed securities held to maturity (fair value
$1,373,289 in 1997 and $1,653,847 in 1996)............................... 1,337,877 1,621,662
Loans held for sale, net ................................................. 1,483,466 825,316
Loans receivable, net .................................................... 19,424,410 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System ..................... 468,191 220,962
Office premises and equipment, net ....................................... 159,349 100,164
Foreclosed real estate, net .............................................. 76,997 51,987
Accrued interest receivable .............................................. 188,203 106,034
Intangible assets (net of accumulated amortization of $60,294
in 1997 and $11,141 in 1996)............................................. 675,927 140,564
Mortgage servicing rights ................................................ 536,703 423,692
Other assets ............................................................. 650,740 517,297
----------- -----------
Total assets .......................................................... $31,362,156 $16,635,073
=========== ===========
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Deposits ................................................................. $16,202,605 $ 8,501,883
Securities sold under agreements to repurchase ........................... 1,842,442 1,583,387
Borrowings ............................................................... 11,232,530 5,364,894
Other liabilities ........................................................ 702,959 399,446
----------- -----------
Total liabilities ..................................................... 29,980,536 15,849,610
----------- -----------
Commitments and contingencies ............................................ -- --
Minority interest ........................................................ 1,175,704 613,852
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding ................................................ 1 1
Additional paid-in capital .............................................. -- 161
Net unrealized holding gain on securities available for sale ............ 28,129 36,975
Retained earnings (substantially restricted) ............................ 177,786 134,474
----------- -----------
Total stockholder's equity ............................................ 205,916 171,611
----------- -----------
Total liabilities, minority interest and stockholder's equity ......... $31,362,156 $16,635,073
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans receivable ........................................... $1,553,210 $ 884,905 $ 799,607
Mortgage-backed securities available for sale .............. 297,816 115,983 --
Mortgage-backed securities held to maturity ................ 113,300 135,103 212,880
Covered assets ............................................. -- 1,413 10,705
Loans held for sale ........................................ 76,364 61,595 24,257
Securities available for sale .............................. 53,936 31,416 --
Securities held to maturity ................................ 2,436 257 26,885
Interest-bearing deposits in other banks ................... 5,638 3,127 1,511
---------- ---------- ----------
Total interest income .................................... 2,102,700 1,233,799 1,075,845
---------- ---------- ----------
Interest expense:
Deposits ................................................... 746,985 419,174 447,359
Securities sold under agreements to repurchase ............. 140,547 120,280 104,957
Borrowings ................................................. 610,885 308,840 182,499
---------- ---------- ----------
Total interest expense ................................... 1,498,417 848,294 734,815
---------- ---------- ----------
Net interest income ...................................... 604,283 385,505 341,030
Provision for loan losses ................................... 79,800 39,600 37,000
---------- ---------- ----------
Net interest income after provision for loan losses ...... 524,483 345,905 304,030
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net ................................... 143,919 123,887 70,265
Customer banking fees and service charges .................. 100,048 45,044 47,493
Management fees ............................................ 6,211 9,694 15,141
Gain on sales of assets, net ............................... 38,230 38,118 173
Gain on sales of branches .................................. 3,569 363,342 --
Gain (loss) on sales of loans, net ......................... 24,721 17,802 (26)
Gain from termination of Assistance Agreement .............. -- 25,632 --
Dividends on FHLB stock .................................... 24,790 11,670 6,546
Other income ............................................... 22,996 18,189 11,381
---------- ---------- ----------
Total noninterest income ................................. 364,484 653,378 150,973
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ......................... 256,448 204,818 154,288
Occupancy and equipment .................................... 81,914 51,936 49,897
Data processing ............................................ 12,402 10,491 9,787
Savings Association Insurance Fund ("SAIF") deposit
insurance premium ........................................ 10,680 81,149 22,262
Marketing .................................................. 20,186 10,908 10,810
Professional fees .......................................... 48,771 18,986 11,202
Loan expense ............................................... 60,437 31,282 12,431
Foreclosed real estate operations, net ..................... (3,304) (7,390) (927)
Amortization of intangible assets .......................... 49,153 9,445 1,474
Other ...................................................... 113,882 80,111 61,329
---------- ---------- ----------
Total noninterest expense ................................ 650,569 491,736 332,553
---------- ---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 238,398 507,547 122,450
Income tax expense (benefit) ............................... 41,315 (75,807) (57,185)
---------- ---------- ----------
Income before extraordinary item and minority interest ..... 197,083 583,354 179,635
Extraordinary item -- (loss) gain on early
extinguishment of debt, net .............................. -- (1,586) 1,967
---------- ---------- ----------
Income before minority interest ............................ 197,083 581,768 181,602
Minority interest .......................................... 131,851 161,191 59,138
---------- ---------- ----------
Net income ............................................... $ 65,232 $ 420,577 $ 122,464
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net income ..................................................... $ 65,232 $ 420,577 $122,464
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale:
Unrealized holding gains arising during the period .......... 8,726 14,580 43,185
Less: reclassification adjustment for gains included in net
income ..................................................... (17,572) (28,415) (1,175)
--------- --------- --------
Other comprehensive income .................................... (8,846) (13,835) 42,010
--------- --------- --------
Comprehensive income ........................................... $ 56,386 $ 406,742 $164,474
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN ON TOTAL
COMMON PAID-IN SECURITIES RETAINED STOCKHOLDER'S
STOCK CAPITAL AVAILABLE FOR SALE EARNINGS EQUITY
-------- ------------ -------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......................... $ 1 $ 267,055 $ 8,800 $ 53,811 $ 329,667
Net income ........................................... -- -- -- 122,464 122,464
Dividends and distributions to stockholder ........... -- -- -- (89,986) (89,986)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- 42,010 -- 42,010
--- ---------- --------- ---------- ----------
Balance at December 31, 1995 .......................... 1 267,055 50,810 86,289 404,155
Net income ........................................... -- -- -- 420,577 420,577
Contribution by parent ............................... -- 1,819 -- -- 1,819
Dividends and distributions to stockholder ........... -- (267,055) -- (369,449) (636,504)
Issuance costs of FN Holdings Preferred
Stock .............................................. -- (1,658) -- (2,943) (4,601)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- (13,835) -- (13,835)
--- ---------- --------- ---------- ----------
Balance at December 31, 1996 .......................... 1 161 36,975 134,474 171,611
Net income ........................................... -- -- -- 65,232 65,232
Merger of FN Escrow .................................. -- -- -- (931) (931)
Redemption of Additional FN Holdings
Preferred Stock .................................... -- -- -- 1,871 1,871
Issuance costs of subsidiary preferred stock ......... -- -- -- (14,561) (14,561)
Contribution by parent ............................... -- 49 -- -- 49
Dividends to parent .................................. -- (210) -- (8,299) (8,509)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- (8,846) -- (8,846)
--- ---------- --------- ---------- ----------
Balance at December 31, 1997 .......................... $ 1 $ -- $ 28,129 $ 177,786 $ 205,916
=== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Amortization of intangible assets ...................................... 49,153 9,445 1,474
Amortization of discount on senior notes ............................... 744 523 --
(Accretion) amortization of purchase accounting premiums and
discounts, net ....................................................... (20,650) (15,771) (946)
Amortization of mortgage servicing rights .............................. 110,282 90,981 33,892
Provision for loan losses .............................................. 79,800 39,600 37,000
Provision for accrued termination and facilities costs ................. 1,233 8,679 12,772
Gain on sales of assets, net ........................................... (38,230) (38,118) (173)
Gain on sale of branches ............................................... (3,569) (363,342) --
Gain on sales of foreclosed real estate ................................ (12,087) (12,951) (3,010)
Loss on sale of loans, net ............................................. 95,744 63,226 17,928
Gain from termination of Assistance Agreement .......................... -- (25,632) --
Extraordinary loss (gain) on early extinguishment of debt, net ......... -- 1,586 (1,967)
Depreciation and amortization of office premises and equipment 16,773 10,921 8,884
Amortization of deferred issuance costs ................................ 7,591 2,978 766
FHLB stock dividend .................................................... (24,790) (11,670) (6,546)
Capitalization of mortgage servicing rights ............................ (120,465) (81,028) (17,902)
Purchases and originations of loans held for sale ...................... (6,293,262) (4,822,753) (1,773,437)
Proceeds from the sale of loans held for sale .......................... 5,510,777 5,157,186 1,191,281
Decrease (increase) in other assets .................................... 163,945 (91,552) (97,258)
(Increase) decrease in accrued interest receivable ..................... (11,197) 20,991 (9,743)
(Decrease) increase in other liabilities ............................... (137,906) (39,118) 33,155
Minority interest ...................................................... 123,399 160,041 59,138
------------ ------------ ------------
Net cash (used in) provided by
operating activities ............................................... (437,483) 484,799 (392,228)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and divestitures:
Auto One Acquisition .......................................... $ (2,845) $ -- $ --
SFFed Acquisition ............................................. -- (83,184) --
Home Federal Acquisition ...................................... -- 79,044 --
Cal Fed Acquisition ........................................... (161,196) -- --
Mortgage loan servicing rights and operations ................. (34,260) (48,305) (214,727)
Branch Purchases .............................................. -- -- 501,351
Purchases of securities available for sale ...................... (1,340,881) (497,963) --
Proceeds from sales of securities available for sale ............ 52,014 92,320 --
Proceeds from maturities of securities available for sale ....... 1,015,410 242,514 --
Purchases of securities held to maturity ........................ (58,965) (9,303) (162,845)
Principal payments from securities held to maturity ............. -- 5 --
Proceeds from maturities of securities held to maturity ......... 4,938 1,250 344,475
Purchases of mortgage-backed securities available for sale ...... (2,589,257) (149,724) --
Principal payments on mortgage-backed securities
available for sale ............................................ 1,099,699 475,186 --
Proceeds from sales of mortgage-backed securities
available for sale ............................................ 50,772 -- --
Purchases of mortgage-backed securities held to maturity ........ (458) -- (19,825)
Principal payments on mortgage-backed securities held to
maturity ...................................................... 283,696 387,891 570,945
Proceeds from sales of loans receivable ......................... 21,179 123,026 431,247
Net decrease (increase) in loans receivable ..................... 514,377 1,498,588 (85,149)
Decrease in covered assets ...................................... -- 39,349 272,254
(Purchases) redemptions of FHLB stock, net ...................... (50,721) (65,753) 25,565
Purchases of office premises and equipment ...................... (66,131) (42,368) (15,331)
Proceeds from the disposal of office premises and equipment ..... 31,400 4,071 1,667
Proceeds from sales of foreclosed real estate ................... 200,275 170,443 71,453
Purchases of mortgage servicing rights .......................... (29,627) (65,994) (774)
Proceeds from sales of mortgage servicing rights ................ 31,051 -- --
------------ ---------- ----------
Net cash (used in) provided by investing activities .......... (1,029,530) 2,151,093 1,720,306
------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Branch Sales ................................................... (79,900) (4,585,022) --
Net (decrease) increase in deposits ............................ (1,196,360) (56,694) 542,633
Proceeds from additional borrowings ............................ 19,595,218 11,144,414 6,151,319
Principal payments on borrowings ............................... (17,495,008) (8,484,883) (6,860,569)
Net decrease in securities sold under agreements to
repurchase ................................................... (40,289) (202,169) (913,103)
Proceeds from FN Escrow Merger ................................. 605,347 -- --
Issuance of FN Holdings Preferred Stock, net ................... (520) 145,399 --
Issuance of REIT Preferred Stock, net .......................... 485,959 -- --
Redemption of FN Holdings Preferred Stock ...................... (125,000) -- --
Redemption of FN Holdings/FN Escrow Preferred Stock ............ (17,250) -- --
Dividends ...................................................... (8,509) (322,680) (89,986)
Dividends paid to minority stockholders, net of taxes .......... (114,282) (51,723) (34,584)
Capital contribution from parent ............................... 49 1,819 --
Capital distribution ........................................... -- (267,055) --
----------- ---------- ----------
Net cash provided by (used in) financing activities ......... 1,609,455 (2,678,594) (1,204,290)
----------- ---------- ----------
Net change in cash and cash equivalents ......................... 142,442 (42,702) 123,788
Cash and cash equivalents at beginning of year .................. 269,869 312,571 188,783
----------- ---------- ----------
Cash and cash equivalents at end of year ........................ $ 412,311 $ 269,869 $ 312,571
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
First Nationwide (Parent) Holdings Inc. (the "Company" or "Parent
Holdings") is a holding company with no business operations of its own. Parent
Holdings' only significant asset is its indirect ownership of 80% of the common
stock of California Federal Bank, A Federal Savings Bank ("California Federal"
or "Bank"), formerly First Nationwide Bank, A Federal Savings Bank ("First
Nationwide"), formerly First Madison Bank, FSB ("First Madison"). Parent
Holdings owns directly 80% of the common stock of First Nationwide Holdings
Inc. ("FN Holdings"), a holding company which owns all of the common stock of
California Federal. As such, Parent Holdings' principal business operations are
conducted by California Federal and its subsidiaries. Parent Holdings is a
subsidiary of First Gibraltar Holdings Inc. ("First Gibraltar Holdings"), an
indirect subsidiary of MacAndrews & Forbes Holdings Inc. ("M&F Holdings").
The Bank was organized and chartered as First Gibraltar Bank, FSB ("First
Gibraltar"), a federal stock savings bank, in December 1988 for the primary
purpose of acquiring substantially all of the assets and assuming deposit,
secured and certain other liabilities of five insolvent Texas savings and loan
associations ("Closed Associations") from the Federal Savings and Loan
Insurance Corporation ("FSLIC"), as receiver.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Concurrently
with the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for approximately $715 million based on estimates prepared by Old
FNB. On March 2, 1995, an additional $11.5 million was paid to Old FNB pursuant
to certain settlement provisions of the Asset Purchase Agreement. Effective on
October 1, 1994, First Madison changed its name to First Nationwide Bank, A
Federal Savings Bank.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal. The
aggregate consideration paid under the Merger Agreement consisted of
approximately $1.2 billion in cash and the issuance of litigation interests
(the "Cal Fed Acquisition"). Cal Fed, a savings and loan holding company, owned
100% of the common stock of Old California Federal. At December 31, 1996, Old
California Federal had total assets of approximately $14.1 billion and deposits
of $8.9 billion, and operated 119 branches in California and Nevada. Effective
on January 3, 1997, First Nationwide changed its name to California Federal
Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN
Holdings made a capital contribution to the Bank on January 3, 1997 of
approximately $685 million.
In November 1996, the Bank created California Federal Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT"), for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Pursuant to a subservicing agreement with the Bank's wholly-owned
mortgage banking subsidiary, First Nationwide Mortgage Corporation ("FNMC"),
FNMC services Preferred Capital Corp.'s mortgage assets. On January 31, 1997,
Preferred Capital Corp. issued to the public $500 million of its 9 1/8%
F-19
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which
is reflected in the Company's 1997 consolidated balance sheet as minority
interest. Preferred Capital Corp. used the proceeds from such offering to
acquire mortgage assets from the Bank.
The Bank is a diversified financial services company that primarily serves
consumers in California, and to a lesser extent, in Florida and Nevada. The
Bank's principal business consists of (i) operating retail deposit branches,
(ii) originating and/or purchasing 1-4 unit residential loans and, to a lesser
extent, certain commercial real estate and consumer loans, for investment and
(iii) mortgage banking activities, including originating and servicing 1-4 unit
residential loans for others. Recently, with its entry into the sub-prime
automobile finance business, the Bank broadened its complement of consumer
lending products. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections on
loans, asset sales and retained earnings.
2. FN ESCROW MERGER
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In
connection therewith, FN Holdings acquired the net proceeds from the issuance
of FN Escrow's $575 million of senior subordinated notes due 2003 (the "10 5/8%
Notes") and assumed FN Escrow's obligations under the 10 5/8% Notes and
indenture. Deferred issuance costs associated with the 10 5/8% Notes of $19
million were included in FN Escrow's other assets and are being amortized over
the term of the 10 5/8% Notes.
Concurrent with the issuance of the 10 5/8% Notes, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance
Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a
stated liquidation value of $10,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as the
FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the
FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million,
representing its stated liquidation value and accrued and unpaid dividends to
January 3, 1997. At the same time, a $19 million loan receivable from an
affiliate of FN Holdings was repaid.
3. ACQUISITIONS AND DIVESTITURES
LMUSA Purchases
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the reporting
and remittances of multiple servicers for various investors (a "master
servicing portfolio") and other assets for $100.9 million, and the assumption
of certain indebtedness relating to an acquired loan portfolio totalling
approximately $274 million (the "LMUSA 1995 Purchase"). On January 31, 1996,
FNMC purchased LMUSA's remaining $14.1 billion loan servicing portfolio
(including a sub-servicing portfolio of $2.4 billion), a master servicing
portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $46.8
million in net other servicing receivables, $2.6 million in mortgage loans, and
$6.2 million in net other assets (including $1.4 million in cash and cash
equivalents) for a purchase price of approximately $160.9 million (the "LMUSA
1996 Purchase" and, together with the LMUSA 1995 Purchase, the "LMUSA
Purchases").
F-20
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Acquisitions
On February 1, 1996, the Bank acquired SFFed Corp. ("SFFed") and its
wholly-owned subsidiary, San Francisco Federal Savings and Loan Association
(the "SFFed Acquisition"). The following is a summary of the assets acquired
and liabilities assumed in connection with the SFFed Acquisition at February 1,
1996.
<TABLE>
<CAPTION>
ESTIMATED
SFFED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities ............ 918,817 11,007 929,824 1-5
Loans receivable, net ................. 2,715,758 (23,245) 2,692,513 2-12
Office premises and equipment ......... 20,581 (11,672) 8,909 3-10
Investment in FHLB System ............. 31,989 -- 31,989 --
Foreclosed real estate, net ........... 30,018 -- 30,018 --
Accrued interest receivable ........... 22,740 -- 22,740 --
Mortgage servicing rights ............. 2,238 13,762 16,000 2-4
Other assets .......................... 44,938 (7,773) 37,165 2-5
Deposits .............................. (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to
repurchase ........................... (815,291) (3,640) (818,931) --
Borrowings ............................ (227,203) (8,831) (236,034) 1-9
Other liabilities ..................... (50,805) (6,075) (56,880) 1-5
------------ --------- ------------
$ 196,149 $ (47,417) 148,732
============ =========
Purchase price ........................ 264,245
------------
Excess cost over fair value of net
assets acquired ...................... $ 115,513 15
============
</TABLE>
In connection with the SFFed Acquisition, FN Holdings issued $140 million
of 9 1/8% Senior Subordinated Notes Due 2003 (the "9 1/8% Senior Subordinated
Notes") and contributed the proceeds thereof of $133 million to the Bank as
additional paid-in capital.
F-21
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million. The following is a summary
of the assets acquired and liabilities assumed in the Home Federal Acquisition
at June 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
HFFC BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities ............ 4,053 (65) 3,988 1-5
Loans receivable, net ................. 538,722 4,020 542,742 2-12
Office premises and equipment ......... 4,202 (2,125) 2,077 3-10
Investment in FHLB System ............. 6,259 -- 6,259
Foreclosed real estate, net ........... 2,421 (198) 2,223 --
Accrued interest receivable ........... 3,594 -- 3,594 --
Mortgage servicing rights ............. 817 2,243 3,060 2-4
Other assets .......................... 10,016 2,392 12,408 2-5
Deposits .............................. (632,399) (1,875) (634,274) 1-5
Borrowings ............................ (30,000) 241 (29,759) 1-6
Other liabilities ..................... (3,602) (3,293) (6,895) 1-5
---------- -------- ----------
$ 50,950 $ 1,340 52,290
========== ========
Purchase price ........................ 67,823
----------
Excess cost over fair value of net
assets acquired ...................... $ 15,533 15
==========
</TABLE>
The 1996 Acquisitions and the LMUSA Purchases were accounted for as
purchases and, accordingly, their respective purchase prices were allocated to
the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates of
purchase, the results of operations related to such assets and liabilities have
been included in the Company's consolidated statements of income.
F-22
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cal Fed Acquisition
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<TABLE>
<CAPTION>
ESTIMATED
CAL FED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 1,027,491 $ -- $ 1,027,491 --
Securities ............................. 6,013 12 6,025 1
Mortgage-backed securities ............. 1,963,869 4,532 1,968,401 6-9
Loans receivable, net .................. 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net ..... 58,900 (17,592) 41,308 3-10
Investment in FHLB System .............. 166,786 -- 166,786 --
Foreclosed real estate, net ............ 18,482 (16) 18,466 --
Accrued interest receivable ............ 71,868 -- 71,868 --
Mortgage servicing rights .............. 4,759 39,738 44,497 2-7
Other assets ........................... 87,096 142,634 229,730 2-5
Deposits ............................... (8,985,630) (9,699) (8,995,329) 1-8
Borrowings ............................. (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities ...................... (198,454) (188,892) (387,346) 1-10
Preferred stock ........................ (172,500) -- (172,500) --
------------ ---------- ------------
$ 664,846 $ (56,192) 608,654
============ ==========
Purchase price ......................... 1,188,687
------------
Excess cost over fair value of net
assets acquired ....................... $ 580,033 15
============
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
in the transaction based on estimates of fair value at the date of purchase.
Since the date of purchase, the results of operations related to such assets
and liabilities have been included in the Company's 1997 consolidated statement
of income.
Weyerhaeuser Purchase
On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC
Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The
Company's consolidated statement of income for the year ended December 31, 1997
includes the results of the acquired servicing portfolio from June 1, 1997.
Auto One Acquisition
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One
primarily engages in indirect sub-prime auto financing activities, providing
loan processing, funding and loan servicing for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered
in Dallas, Texas, and is a wholly-owned subsidiary of the Bank. The results of
operations for Auto One for the period from September 1, 1997 are included in
the Company's consolidated statement of income for the year ended December 31,
1997.
F-23
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Servicing Sale
On September 30, 1997, FNMC sold servicing rights for approximately 52,000
loans with an unpaid principal balance of approximately $2.3 billion,
recognizing a pre-tax gain of $14.0 million (the "Servicing Sale").
Branch Sales
During the first six months of 1996, the Bank consummated the sale of its
retail deposits and the related retail banking assets comprised of cash on
hand, loans on deposits, and facilities in Ohio, New York, New Jersey and
Michigan (collectively, the "Branch Sales") at gross prices which represented
an average premium of 7.96% of the approximately $4.6 billion deposits sold.
The Bank recorded a pre-tax gain of $363.3 million in connection with the
Branch Sales. The Company's consolidated statement of income for the year ended
December 31, 1996 includes the results of operations of those branches sold in
the Branch Sales for the period prior to sale.
Garberville Branch Sale
On May 9, 1997, the Bank consummated the sale of deposit accounts and
related retail banking assets comprised of cash on hand, loans on deposits and
facilities totalling $21.7 million to Humboldt Bank at a gross price
representing a deposit premium of 4.5% (the "Garberville Branch Sale"), and
resulting in a net pre-tax gain on sale of $1.1 million.
Texas Branch Sale
On December 12, 1997, the Bank sold its retail deposits and all related
retail banking facilities in the state of Texas (consisting of three branches)
totalling $57.6 million at a gross price representing a deposit premium of 4.1%
and resulting in a pre-tax net gain on sale of $2.5 million (the "Texas Branch
Sale").
Pro Forma Financial Information
The following unaudited pro forma financial information combines the
historical results of the Company as if the Cal Fed Acquisition and the
issuances of the REIT Preferred Stock, the 10 5/8% Notes and the 12 1/2% Senior
Notes (as defined herein) had occurred as of the beginning of the first year
presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net interest income ......... $605,871 $668,156
Net income .................. 63,760 147,986
</TABLE>
The gains recognized related to the Branch Sales, net of related taxes,
and certain sales of branches by Cal Fed are excluded from the above table. The
pro forma information does not include the effect of the Home Federal
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser
Purchase, the Auto One Acquisition, the Servicing Sale, the Branch Sales, the
Garberville Branch Sale, the Texas Branch Sale, the sales of certain branches
by Cal Fed or the issuance of the 9 1/8% Senior Subordinated Notes because such
effect is not significant. The pro forma results are not necessarily indicative
of the results which would have actually been obtained if the Cal Fed
Acquisition and the issuances of the REIT Preferred Stock, the 10 5/8% Notes or
the 12 1/2% Senior Notes had been consummated in the past nor do they project
the results of operations in any future period.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
F-24
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GSAC Acquisition
On September 5, 1997, the Bank entered into an agreement with Gulf States
Acceptance Company, a Delaware limited partnership ("GSAC") and its general
partner, Gulf States Financial Services, a Texas corporation, pursuant to which
Auto One will acquire 100% of the partnership interests in GSAC and GSAC will
be liquidated and its assets and liabilities will be transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration to be paid in connection
with the GSAC Acquisition is approximately $22.5 million and a 20% interest in
the common stock of Auto One. This transaction closed on February 4, 1998. See
note 35 "Subsequent Events" for further discussion.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Parent Holdings conform to
generally accepted accounting principles and general practices within the
savings and loan industry. The following summarizes the more significant of
these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Parent Holdings, FN Holdings, the Bank and the Bank's wholly-owned
subsidiaries not subject to the Assistance Agreement (as defined herein).
Earnings per share data is not presented due to the limited ownership of
the Company. All significant intercompany accounts and transactions have
been eliminated.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks, and other short-term investment securities with
original maturities of three months or less. Savings and loan associations
are required by the Federal Reserve System to maintain non-interest bearing
cash reserves equal to a percentage of certain deposits. The reserve
balance for California Federal at December 31, 1997 was $51.0 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. Parent
Holdings classifies debt and equity securities, including mortgage-backed
securities, into one of three categories: held to maturity, available for
sale or trading securities. Securities held to maturity represent
securities which management has the positive intent and ability to hold to
maturity and are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in income. All other securities are classified as available
for sale and are carried at fair value, with unrealized holding gains and
losses, net of tax, reported as a separate component of stockholder's
equity until realized. Should an other than temporary decline in the fair
value of a security classified as held to maturity or available for sale
occur, the carrying value of such security would be written down to fair
value by a charge to operations. Realized gains or losses on securities
available for sale are computed on a specific identification basis and are
accounted for on a trade-date basis.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market
value as determined by outstanding commitments
F-25
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from investors or current investor yield requirements calculated on an
aggregate basis. Net unrealized losses are recognized in a valuation
allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees and
purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method over the remaining period the
loans are expected to be outstanding. Discounts or premiums on consumer and
other loans are recognized over the lives of the loans using the interest
method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms
of these mortgages adjust on a periodic basis in accordance with various
published indices. The majority of these adjustable-rate mortgages have
terms which limit the amount of interest rate adjustment that can occur
each year and over the life of the mortgage. During periods of limited
payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See note 31.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on such factors as the
Company's past loan loss experience, delinquency trends, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is
subjective and may be adjusted in the future depending on changes in
economic conditions or other factors. Additionally, regulatory authorities,
as an integral part of their regular examination process, review the Bank's
allowance for estimated losses on a periodic basis. These authorities may
require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established, based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received.
When, in management's judgment, the borrower's ability to make periodic
interest and principal payments resumes, the loan is returned to accrual
status.
(f) Auto One Loans
Since the consummation of the Auto One Acquisition, California Federal
has purchased sub-prime auto financing contracts from an established dealer
network throughout the United States. Any premium or discount is amortized
using the interest method over the estimated lives of the loans. The
allowance for estimated losses is regularly assessed by management, and
such allowances are maintained on a static pool basis.
(g) Impaired Loans
The Company considers a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due (i.e., both principal
and interest) according to the contractual terms of the loan agreement. Any
insignificant delay (i.e., 60 days or less) or insignificant shortfall in
amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing
loans which exhibit, among other characteristics, high loan-to-value
ratios, low debt--
F-26
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Company bases the measurement
of collateral-dependent impaired loans on the fair value of the loan's
collateral. The amount, if any, by which the recorded investment of the
loan exceeds the measure of the impaired loan's value is recognized by
recording a valuation allowance.
The measurement of impairment may be based on (i) the present value of
the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price
of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all single-family loans, and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the workout process.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless
the Company believes it will recover the remaining principal balance of the
loan. Impairment losses are included in the allowance for loan losses
through a charge to provision for loan losses. Adjustments to impairment
losses due to changes in the fair value of collateral of impaired loans are
included in provision for loan losses. Upon disposition of an impaired
loan, loss of principal, if any, is recorded through a charge-off to the
allowance for loan losses.
(h) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs, are
deferred and amortized to interest income using the interest method over
the contractual term of the loans, adjusted for actual loan prepayment
experience. Unamortized fees on loans sold or paid in full are recognized
as income. Adjustable-rate loans with lower initial interest rates during
the introductory period result in the amortization of a substantial portion
of the net deferred fee during the introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Other loan fees and charges, which represent income from the prepayment
of loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(i) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization.
Premises, equipment and leasehold improvements are depreciated or amortized
on a straight-line basis over the lesser of the lease term or the estimated
useful lives of the various classes of assets. Maintenance and repairs on
premises and equipment are charged to expense in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present
value of future lease payments and holding costs and the net present value
of anticipated sublease income, if any, for the remaining term of the
lease.
F-27
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Foreclosed Real Estate
Real estate acquired through foreclosure is initially recorded at fair
value less estimated disposal costs at the time of foreclosure. Subsequent
to foreclosure, the Company charges current earnings with a provision for
estimated losses when the carrying value of the collateral property exceeds
its fair value. Gains or losses on the sale of real estate are recognized
upon disposition of the property. Carrying costs such as maintenance and
property taxes are expensed as incurred.
(k) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over
fair value of net assets acquired in business combinations accounted for as
a purchase, are amortized on a straight-line basis over the expected period
to be benefited of 15 years. The Company periodically reviews the
operations of the businesses acquired to determine that income from
operations continues to support the recoverability of its intangible assets
and the amortization periods used.
(l) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and acquires
mortgage servicing rights by purchasing or originating mortgage loans and
selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the rights
and are carried at the lower of cost, net of accumulated amortization, or
fair value. Originated mortgage servicing rights are capitalized based on
the relative fair value of the servicing right to the fair value of the
loan and the servicing right and are carried at the lower of the
capitalized amount, net of accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its fair value. To determine the fair
value of mortgage servicing rights, the Company uses market prices for
comparable mortgage servicing contracts, when available, or alternatively
uses a valuation model that calculates the present value of future net
servicing income. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect
changes in prepayment rates and other estimates. A decline in long-term
interest rates generally results in an acceleration in mortgage loan
prepayments.
The Company measures the impairment of servicing rights based on the
difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all
mortgage servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. A valuation
allowance is established for any excess of amortized cost over the current
fair value, by risk stratification, by a charge to income.
The Company employs hedging techniques through the use of interest rate
floor contracts and principal-only swap agreements to reduce the
sensitivity of its earnings and value of its servicing rights to declining
interest rates and borrower prepayments as further discussed in note 17.
The Company uses hedge accounting because mortgage servicing rights expose
the Company to interest rate risk and at the inception and throughout the
hedge period, high correlation of changes in the market value of the hedge
instruments and the fair value of the mortgage servicing rights are
probable so that the results of the hedge instruments will substantially
offset the effects of interest rate changes on the mortgage servicing
rights. If these requirements are not met, the hedge instruments are
considered speculative and are marked to market with changes in market
value reflected in current earnings.
F-28
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The premium paid by the Company on the interest rate floor contracts is
amortized based on the option decay rate. Amounts receivable or payable
under the principal-only swap agreements and amounts receivable under the
interest rate floor contracts or terminated hedges are included in the
carrying value of mortgage servicing rights and are amortized as part of
the mortgage servicing rights basis.
(m) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights.
Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold. Deferred origination fees and expenses, net of
commitment fees paid in connection with the sale of the loans, are
recognized at the time of sale in the gain or loss determination.
(n) Servicing Fee Income
Servicing fee income is recorded for the fees earned for servicing
mortgage loans under servicing agreements with Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. The amortization of mortgage servicing
rights is netted against servicing fee income.
(o) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a means
of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the hedged
liability (FHLB advances). Gains and losses on early termination of these
agreements are included in the carrying amount of the related liability and
amortized over the remaining term of the liability.
(p) Income Taxes
For federal income tax purposes, Parent Holdings and FN Holdings are
members of the Mafco Holdings Inc. ("Mafco," the indirect parent of FN
Holdings) affiliated group, and accordingly, their federal taxable income
or loss will be included in the consolidated federal income tax return
filed by Mafco. Parent Holdings may also be included in certain state and
local income tax returns of Mafco or its subsidiaries. FN Holdings' tax
sharing agreement with Mafco provides that income taxes will be based on
the separate results of FN Holdings. The agreement generally provides that
FN Holdings will pay to Mafco amounts equal to the taxes that FN Holdings
would be required to pay if it were to file a return separately from the
affiliated group. Furthermore, the agreement provides that FN Holdings
shall be entitled to take into account any net operating loss carryovers in
determining its tax liability. The agreement also provides that Mafco will
pay FN Holdings amounts equal to tax refunds FN Holdings would be entitled
to if it had always filed a separate company tax return. Parent Holdings
has not entered into any tax sharing agreements.
Income taxes are accounted for under the asset and liability method.
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 and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-29
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(q) Extraordinary Gain or Loss from Extinguishment of Debt
During 1996, California Federal repurchased $44 million aggregate
principal amount of the $50 million in 11.20% Senior Notes (as defined
herein) assumed in the SFFed Acquisition resulting in an extraordinary loss
of approximately $1.6 million, net of income taxes, on the early
extinguishment of debt. During 1995, California Federal prepaid $250
million in FHLB advances resulting in an extraordinary gain of
approximately $2.0 million, net of income taxes, on the early
extinguishment of such borrowings.
(r) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and (iii) the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(s) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(t) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year
the effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of
paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement,
dollar-roll, securities lending and similar transactions. SFAS No. 127
provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if
it is not possible to determine whether a transaction occurring during
calendar-year 1997 is part of a repurchase agreement, dollar-roll,
securities lending, or similar transaction, then paragraphs 9-12 of SFAS
No. 125 should be applied to that transfer. The Company adopted SFAS No.
125, as amended by SFAS No. 127, on January 1, 1997. Such adoption did not
have a material impact on the Company's consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does
not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement. This statement is
effective for fiscal years beginning after December 15, 1997. Reclassi-
F-30
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fication of financial statements for earlier periods provided for
comparative purposes is required. This statement has no impact on the
financial condition or results of operations of the Company, but does
impact the Company's disclosure requirements. The Company adopted this
statement effective October 1, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information
about major customers. It amends Statement of Financial Accounting
Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries," to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative
informative for earlier years is to be restated. This statement need not be
applied to interim financial statements in the initial year of application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods
in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will
require changes in the Company's disclosure.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1997, 1996 and
1995 was $1,459,676, $841,192, and $702,254, respectively.
During the year ended December 31, 1997, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $179.6 million, $19.4 million of loans made to facilitate sales of
real estate owned, and a contribution of capital through the redemption of
Additional FN Holdings Preferred Stock of $1.9 million. In addition, $50.8
million was transferred from loans held for sale to mortgage-backed securities
classified as trading securities upon the securitization of certain of the
Bank's qualifying single-family loans.
During the year ended December 31, 1996, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $109.8 million, $13.0 million of loans made to facilitate sales of
real estate owned, the reclassification of certain consumer loans from loans
held for sale (at lower of cost or market) to loans receivable totalling $27.7
million, a $46.8 million dividend paid in the form of a loan receivable from an
affiliate and the issuance of additional FN Holdings preferred stock through
preferred stock dividends to minority stockholders of $.8 million.
During the year ended December 31, 1995, the Financial Accounting
Standards Board issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (the "Special Report"). The Special Report provided all entities an
opportunity to reassess their ability and intent to hold securities to maturity
and allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale. In addition,
other noncash activity included $326.0 million of consumer loans reclassified
from loans receivable to loans held for sale, transfers from loans receivable
to foreclosed real estate of $79.6 million, and $376.3 million transferred from
loans receivable to mortgage-backed securities held to maturity representing
the securitization of certain of the Bank's qualifying single-family loans.
F-31
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ......... $ -- $ -- $ -- $ -- $ --
U.S. government and agency
obligations ......................... 812,716 957 (588) 369 813,085
-------- ---- ------ ----- --------
Total ............................ $812,716 $957 $ (588) 369 $813,085
======== ==== ====== ========
Minority interest -- Hunter's Glen (65)
Estimated tax effect ................. (47)
-----
Net unrealized holding gain in
stockholder's equity .............. $ 257
=====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ......... $ 27,034 $34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency
obligations ......................... 480,317 936 (1,222) (286) 480,031
-------- ------- -------- -------- --------
Total ............................ $507,351 $35,890 $ (1,222) 34,668 $542,019
======== ======= ======== ========
Minority interest -- Hunter's Glen (6,240)
Estimated tax effect ................. (3,466)
--------
Net unrealized holding gain in
stockholder's equity .............. $ 24,962
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of securities available for sale with related
maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
----------- ----------- ---------
<S> <C> <C> <C>
Marketable equity securities .................. $ -- $ -- --%
U.S. government and agency obligations:
Maturing within 1 year ...................... 107,771 107,680 5.92
Maturing after 1 year but within 5 years 704,945 705,405 6.52
Maturing after 5 years through 10 years ..... -- -- --
-------- -------- ----
Total ....................................... $812,716 $813,085 6.44%
======== ======== ====
</TABLE>
At December 31, 1997, U.S. government and agency obligations available for
sale of $78.2 million were pledged as collateral for various obligations.
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of Affiliated Computer
Services ("ACS"), representing 2.24% of the voting
F-32
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
power with a cost basis of $27 million. The ACS stock represents the only
marketable equity security classified as available for sale at December 31,
1996. Pursuant to the terms of a settlement agreement dated June 17, 1991
between the Bank, ACS, and the Federal Deposit Insurance Corporation ("FDIC"),
the FDIC was entitled to share in a defined portion of the proceeds from the
sale of the stock, which, at December 31, 1995, approximated $34.5 million, and
which was recorded in other liabilities. On June 28, 1996, the Bank sold
2,000,000 shares of its investment in common stock of ACS for gross proceeds
totalling $92.3 million from which it satisfied its full obligation to the
FDIC. A pre-tax gain of $40.4 million resulted from this transaction and was
recorded as a gain on sale of assets in the 1996 consolidated statement of
income. The Bank's remaining shares of ACS stock were sold in October 1997,
resulting in a pre-tax gain of approximately $25.0 million.
7. SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996 securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ......... $ 170 $-- $-- $ 170
Commercial paper ............. 58,129 -- -- 58,129
------- --- --- -------
Total ...................... $58,299 $-- $-- $58,299
======= === === =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ........................... $ 190 $-- $-- $ 190
U.S. government and agency obligations ......... 3,800 15 -- 3,815
Commercial paper ............................... 282 -- -- 282
------ --- --- ------
Total ........................................ $4,272 $15 $-- $4,287
====== === === ======
</TABLE>
The weighted average stated interest rates on securities held to maturity
were 5.32% and 6.85% at December 31, 1997 and 1996, respectively.
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held to
maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
----------- ------------ ---------
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year ........................... $ -- $ -- --%
Maturing after 1 year but within 5 years ......... -- -- --
Maturing after 10 years .......................... 170 170 8.25
Commercial paper:
Maturing within 1 year ........................... 58,129 58,129 5.31
------- ------- ----
Total ............................................ $58,299 $58,299 5.32%
======= ======= ====
</TABLE>
F-33
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................................ $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA ........................................ 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC ....................................... 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS ................................... 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage obligations ......... 606,965 2,698 (1,868) 830 607,795
---------- ------- -------- -------- ----------
Total ..................................... $5,036,653 $48,395 $ (8,450) 39,945 $5,076,598
========== ======= ======== ==========
Minority interest -- Hunter's Glen .......... (6,968)
Estimated tax effect ........................ (5,105)
--------
Net unrealized holding gain in
stockholder's equity ..................... $ 27,872
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................................ $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA ........................................ 523,894 5,113 (5,042) 71 523,965
FHLMC ....................................... 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage obligations ......... 364,675 497 (1,244) (747) 363,928
---------- ------- -------- -------- ----------
Total ..................................... $1,581,966 $23,377 $ (6,691) 16,686 $1,598,652
========== ======= ======== ==========
Minority interest -- Hunter's Glen .......... (3,004)
Estimated tax effect ........................ (1,669)
--------
Net unrealized holding gain in
stockholder's equity ..................... $ 12,013
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities available for sale
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
------------- ------------ ---------
<S> <C> <C> <C>
GNMA ........................................ $ 249,023 $ 251,733 7.09%
FNMA ........................................ 2,408,173 2,419,769 6.99
FHLMC ....................................... 1,197,867 1,217,416 7.49
Other MBS ................................... 574,625 579,885 6.93
Collateralized mortgage obligations ......... 606,965 607,795 6.80
---------- ---------- ----
Total ..................................... $5,036,653 $5,076,598 7.08%
========== ========== ====
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
available for sale were 7.16% and 7.27% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996,
F-34
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
mortgage-backed securities available for sale included securities totalling
$1.4 billion and $53.0 million, respectively, which resulted from the
securitization of certain qualifying mortgage loans from the Bank's, Old
California Federal's and San Francisco Federal's loan portfolios.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale included $4.6 billion and $1.1 billion respectively, of variable-rate
securities.
At December 31, 1997, mortgage-backed securities available for sale of
$4.1 billion were pledged as collateral for various obligations as further
discussed in notes 19, 20 and 31. Further, at December 31, 1997,
mortgage-backed securities available for sale with a carrying value of $28.8
million were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
9. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996, mortgage-backed securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 317,766 $15,364 $-- $ 333,130
FNMA ..................................... 1,017,835 20,048 -- 1,037,883
Other mortgage-backed securities ......... 2,276 -- -- 2,276
---------- ------- --- ----------
Total .................................. $1,337,877 $35,412 $-- $1,373,289
========== ======= === ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 405,488 $14,811 $ -- $ 420,299
FNMA ..................................... 1,214,002 17,444 (70) 1,231,376
Other mortgage-backed securities ......... 2,172 -- -- 2,172
---------- ------- ----- ----------
Total .................................. $1,621,662 $32,255 $ (70) $1,653,847
========== ======= ===== ==========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities held to maturity
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
------------- ------------ ---------
<S> <C> <C> <C>
FHLMC .................................... $ 317,766 $ 333,130 8.17%
FNMA ..................................... 1,017,835 1,037,883 7.03
Other mortgage-backed securities ......... 2,276 2,276 8.27
---------- ---------- ----
Total .................................. $1,337,877 $1,373,289 7.30%
========== ========== ====
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 7.33% and 7.06% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities held to
maturity included variable rate securities totalling $1.3 billion and $1.6
billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's, Old California
Federal's and San Francisco Federal's loan portfolios with full recourse to the
Bank.
F-35
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, mortgage-backed securities held to maturity of $1.3
billion were pledged as collateral for various obligations as further discussed
in notes 19, 20 and 31.
10. LOANS RECEIVABLE, NET
At December 31, 1997 and 1996 loans receivable, net, included the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Real estate loans:
1-4 unit residential ....................... $14,071,258 $ 6,117,974
5+ unit residential ........................ 3,035,195 2,163,992
Commercial ................................. 2,145,634 1,977,732
Construction ............................... 3,737 11,242
Land ....................................... 4,766 11,074
----------- -----------
19,260,590 10,282,014
Undisbursed loan funds ..................... (2,714) (4,669)
----------- -----------
Total real estate loans ................... 19,257,876 10,277,345
----------- -----------
Equity-line loans ........................... 354,966 243,011
Other consumer loans ........................ 320,599 55,016
Commercial loans ............................ 8,370 29,651
----------- -----------
Total consumer and other loans ............ 683,935 327,678
----------- -----------
Total loans receivable .................... 19,941,811 10,605,023
Deferred fees and unearned premiums ......... 47,219 4,740
Allowance for loan losses ................... (439,233) (246,556)
Purchase accounting discounts, net .......... (125,387) (150,624)
----------- -----------
Total loans receivable, net ............... $19,424,410 $10,212,583
=========== ===========
</TABLE>
The Bank's lending activities are principally conducted in California, New
York, Texas and Florida.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances as further discussed in note 20.
As a result of the FN and the Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 1997 totalled $2.8 billion. No loans
were sold with recourse during the years ended December 31, 1997, 1996 and
1995. The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (other liabilities) for estimated losses related
to these potential obligations. At December 31, 1997, such liability totalled
$52.4 million.
F-36
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the carrying value of loans which have been
placed on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
1-4 unit residential ............ $164,923 $146,283
5+ unit residential ............. 12,128 12,713
Commercial and other ............ 6,240 9,406
Construction .................... 1,560 788
-------- --------
Total real estate .............. 184,851 169,190
Non-real estate .................. 7,344 3,032
-------- --------
Total nonaccrual loans ......... $192,195 $172,222
======== ========
</TABLE>
The following table indicates the carrying value of loans classified as
troubled debt restructuring, as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
1-4 unit residential ..................... $ 2,471 $ 3,113
5+ unit residential ...................... 6,718 55,642
Commercial and other real estate ......... 26,296 28,754
------- -------
Total restructured loans ................. $35,485 $87,509
======= =======
</TABLE>
At December 31, 1997, the Company's loan portfolio totalling $19.9 billion
is concentrated in California. The financial condition of the Company is
subject to general economic conditions such as the volatility of interest rates
and real estate market conditions and, in particular, to conditions in the
California residential real estate market. Any downturn in the economy
generally, and in California in particular, could reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Company and the Bank may
find it difficult to maintain its asset quality and may require additional
allowances for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Restructured loans ......... $ 3,532 $ 3,583 $12,977 $13,430
Nonaccrual loans ........... 6,779 15,880 4,860 13,752
------- ------- ------- -------
$10,311 $19,463 $17,837 $27,182
======= ======= ======= =======
</TABLE>
At December 31, 1997 and 1996, the Bank and its wholly-owned subsidiary,
FGB Realty Advisors, Inc., managed principally non-performing loan and asset
portfolios totalling $1.2 million and $1.0 billion, respectively, for
investors. During 1997, substantially all the asset management and disposition
contracts
F-37
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
held by FGB Realty Advisors, Inc. have expired, and operations of the
subsidiary have substantially ceased. Revenues related to such activities are
included in management fees in the accompanying statements of income.
Activity in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance -- beginning of year .......... $ 246,556 $ 210,484 $ 202,780
Purchases, net ........................ 164,378 38,486 --
Provision for loan losses ............. 79,800 39,600 37,000
Charge-offs ........................... (56,124) (44,785) (32,344)
Recoveries ............................ 4,623 2,771 3,048
--------- --------- ---------
Balance -- end of year ................ $ 439,233 $ 246,556 $ 210,484
========= ========= =========
</TABLE>
FN Holdings loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bore interest at the rate of 10.5% over the prevailing yield to
maturity of the five-year United States treasury note, and was an unsecured
subordinated obligation of the borrower guaranteed by certain other affiliates
of FN Holdings, which obligation to FN Holdings was evidenced by a promissory
note (the "Promissory Note"). Management believes that the terms and conditions
of such loan were at least as favorable to FN Holdings as might have been
obtained in a similar transaction with an unaffiliated party. On May 15, 1996,
FN Holdings distributed the Promissory Note to Parent Holdings as a partial
redemption of and dividends on class C common stock. Parent Holdings
distributed the Promissory Note in the form of a dividend to an affiliate.
During 1996 FN Holdings loaned approximately $19 million to an affiliate.
Such loan accrued interest at the rate of 14%, and was an unsecured
subordinated obligation of the borrower, which obligation to FN Holdings was
evidenced by a promissory note. Management believes that the terms and
conditions of such loan were at least as favorable to FN Holdings as might have
been obtained in a similar transaction with an unaffiliated party. On January
3, 1997, such loan, together with the accrued interest thereon, was repaid.
11. IMPAIRED LOANS
At December 31, 1997 and 1996, the carrying value of loans that are
considered to be impaired totalled $110.1 million and $102.1 million
respectively (of which $18.6 million and $22.6 million, respectively, were on
nonaccrual status). The average recorded investment in impaired loans during
the years ended December 31, 1997, 1996 and 1995 was approximately $112.9
million, $103.7 million and $125.5 million, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company recognized interest income on
those impaired loans of $10.5 million, $10.7 million and $12.9 million,
respectively, which included $.6 million, $.3 million and $.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority of
impaired loans, have not been established. Generally, the carrying value of
such loans, net of purchase accounting adjustments, does not exceed the loans'
related collateral values less estimated selling costs. There have been no
significant multi-family or commercial real estate loans originated since
October 1, 1994.
12. PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FNB had with Granite Management
and Disposition, Inc.
F-38
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
("Granite"), an indirect subsidiary of Ford Motor, whereby Old FNB had the
option to sell ("put") to Granite, on a quarterly basis, up to approximately
$500 million of certain assets, primarily non-performing commercial real estate
loans and residential mortgage loans with an original principal balance greater
than $250,000. The Put Agreement expired on November 30, 1996. The aggregate
purchase price of assets "put" to Granite equals $500 million, including assets
"put" to Granite by Old FNB through October 3, 1994. Granite purchased these
assets for an amount equal to the assets' outstanding principal balance,
accrued interest and certain other expenses.
13. RECEIVABLES FROM THE FSLIC/RF -- COVERED ASSETS
As part of First Gibraltar's 1988 acquisition of the five Closed
Associations, it entered into an assistance agreement (the "Assistance
Agreement") with the FSLIC. Assets subject to the Assistance Agreement were
known as "Covered Assets." The Assistance Agreement generally provided for
guaranteed yield amounts to be paid on the book value of the Covered Assets,
and paid the Bank for 90% of the losses incurred upon disposition of the
Covered Assets ("Capital Loss Coverage").
In June 1995, the FDIC, as manager of the FSLIC Resolution Fund
("FSLIC/RF"), as successor to the FSLIC, exercised its rights under the
Assistance Agreement to purchase substantially all of the remaining Covered
Assets as of June 1, 1995 at the fair market value of such assets and further
purchased additional assets from the remaining Covered Asset portfolio in
September 1995 (the "FDIC Purchase"). Any losses sustained by the Bank as a
result of the FDIC Purchase were reimbursed under the Capital Loss Coverage
provision of the Assistance Agreement. Proceeds from this transaction were
reinvested in the normal course of business.
On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of
$39 million and, among other things, assumed the responsibility for the
disposition of several litigation matters involving Covered Assets which had
been retained by the Bank following the FDIC Purchase. In connection with the
agreement, a pre-tax gain of $25.6 million was recorded.
14. INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5%
of its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 1997 and 1996. At December 31,
1997, the Bank's investment in FHLB stock was pledged as collateral for FHLB
advances as further discussed in note 20.
F-39
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net, at December 31, 1997 and 1996 is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE LIVES AT
1997 1996 DECEMBER 31, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
Land .......................................... $ 29,942 $ 19,084 --
Buildings and leasehold improvements .......... 74,141 40,103 25
Furniture and equipment ....................... 85,519 50,559 6
Construction in progress ...................... 5,253 10,601 --
--------- ---------
194,855 120,347
Accumulated depreciation and amortization ..... (35,506) (20,183)
--------- ---------
Total office premises and equipment, net ...... $ 159,349 $ 100,164
========= =========
</TABLE>
Depreciation and amortization expense related to office premises and
equipment for the years ended December 31, 1997, 1996 and 1995 totalled $16.8
million, $10.9 million and $8.9 million, respectively.
California Federal rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2029. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1997, 1996 and 1995
totalled $29.6 million, $19.3 million and $22.6 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1997, 1996
and 1995 totalled $2.0 million, $1.6 million and $2.2 million, respectively. At
December 31, 1997, the projected minimum rental commitments, net of sublease
agreements, under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
CASH EFFECT ON
YEAR ENDED COMMITMENT NET INCOME
- ---------------------- ------------ -----------
<S> <C> <C>
1998 ............... $ 31,218 $20,973
1999 ............... 31,085 18,602
2000 ............... 30,264 15,970
2001 ............... 27,914 10,492
2002 ............... 24,471 6,714
Thereafter ......... 116,193 24,480
-------- -------
Total ............. $261,145 $97,231
======== =======
</TABLE>
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments.
16. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Cash and cash equivalents and securities .......... $ 10,832 $ 8,399
Mortgage-backed securities ........................ 43,700 24,110
Loans receivable and loans held for sale .......... 133,671 73,525
-------- --------
Total accrued interest receivable ................ $188,203 $106,034
======== ========
</TABLE>
F-40
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
MSR
MSR HEDGE TOTAL
-------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994 .............................. $ 86,840 $ -- $ 86,840
Additions from Maryland Acquisition ..................... 76,369 -- 76,369
Additions from Lomas 1995 Purchase ...................... 93,362 -- 93,362
Additions -- other ...................................... 18,676 -- 18,676
Amortization ............................................ (33,892) -- (33,892)
---------- -------- ----------
Balance at December 31, 1995 .............................. 241,355 -- 241,355
Additions from Lomas 1996 Purchase ...................... 105,029 -- 105,029
Additions from SFFed Acquisition ........................ 16,000 -- 16,000
Additions from Home Federal Acquisition ................. 3,060 -- 3,060
Originated servicing .................................... 81,028 -- 81,028
Additions -- other ...................................... 64,421 -- 64,421
Premiums paid for interest rate floor contracts ......... -- 3,509 3,509
Payments received under interest rate floor
contracts ............................................... -- (13) (13)
Net paid under principal-only swap agreements ........... -- 284 284
Amortization ............................................ (90,706) (275) (90,981)
---------- -------- ----------
Balance at December 31, 1996 .............................. 420,187 3,505 423,692
Additions from Cal Fed Acquisition ...................... 44,497 -- 44,497
Additions from Weyerhaeuser Purchase .................... 41,949 -- 41,949
Originated servicing .................................... 120,465 -- 120,465
Additions -- other ...................................... 27,939 -- 27,939
Sales -- Servicing Sale ................................. (16,792) -- (16,792)
Sales -- other .......................................... (4) -- (4)
Premiums paid for interest rate floor contracts ......... -- 7,088 7,088
Payments received under interest rate floor
contracts ............................................... -- (471) (471)
Net received under principal-only swap agreements -- (1,378) (1,378)
Amortization ............................................ (106,972) (3,310) (110,282)
----------- -------- -----------
Balance at December 31, 1997 .............................. $ 531,269 $ 5,434 $ 536,703
=========== ======== ===========
</TABLE>
At December 31, 1997, 1996 and 1995, the outstanding balances of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors by FNMC totalled $46.6 billion, $43.1
billion and $28.6 billion, respectively. In addition, FNMC had $6.2 billion,
$5.7 billion and $3.0 billion of master servicing at December 31, 1997, 1996
and 1995, respectively.
The estimated fair value of the MSRs was $647 million and $529 million at
December 31, 1997 and 1996, respectively. The estimated market value of
interest rate floor contracts and swaps designated as hedges against MSRs at
December 31, 1997 was $18.0 million and $13.5 million, respectively. At
December 31, 1997 and 1996, no allowance for impairment of the MSRs was
necessary.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization
F-41
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of MSRs and generally will result in a reduction of the market value of MSRs
and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its servicing rights based on changes in interest rates.
At December 31, 1997, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002. The
Company paid counterparties a premium in exchange for cash payments in the
event that the 10-year Constant Maturity Treasury rate falls below the strike
prices. At December 31, 1997, the notional amount of the interest rate floors
was $970 million and the strike prices were between 5.0% and 6.5%. In addition,
the Company, through FNMC, entered into principal-only swap agreements with a
notional amount of $99 million.
At December 31, 1997 and 1996, servicing advances and other receivables
related to 1-4 unit residential loan servicing, net of valuation allowances of
$43.2 million and $12.7 million in 1997 and 1996, respectively, (included in
other assets) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Servicing advances ....................... $160,266 $152,465
Checks in process of collection .......... 157 55,601
Other .................................... 6,555 23,704
-------- --------
$166,978 $231,770
======== ========
</TABLE>
18. DEPOSITS
A summary of deposits carrying values at December 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Passbook accounts ........................ $ 2,161,967 $ 840,685
Demand deposits:
Interest-bearing ........................ 1,149,294 509,788
Noninterest-bearing ..................... 1,179,344 729,648
Money market deposit accounts ............ 1,269,540 881,285
Term accounts ............................ 10,389,507 5,502,902
----------- ----------
16,149,652 8,464,308
Accrued interest payable ................. 51,538 31,901
Purchase accounting adjustments .......... 1,415 5,674
----------- ----------
Total deposits .......................... $16,202,605 $8,501,883
=========== ==========
</TABLE>
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $2 billion and $868
million at December 31, 1997 and 1996, respectively. Brokered certificates of
deposit totalling $363 million and $470 million were included in deposits at
December 31, 1997 and 1996, respectively. Total deposits at December 31, 1997
and 1996 include escrow balances for loans serviced for others of $702 million
and $550 million, respectively.
F-42
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of interest expense by deposit category for the years ended
December 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts ......................... $ 68,408 $ 31,418 $ 14,668
Interest-bearing demand deposits .......... 12,331 5,398 6,953
Money market deposit accounts ............. 50,152 32,073 50,847
Term accounts ............................. 616,094 350,285 374,891
-------- -------- --------
$746,985 $419,174 $447,359
======== ======== ========
</TABLE>
At December 31, 1997, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<S> <C>
1998 .................... $ 7,794,543
1999 .................... 2,065,788
2000 .................... 219,650
2001 .................... 131,782
2002 .................... 166,384
Thereafter .............. 11,360
-----------
$10,389,507
===========
</TABLE>
19. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1997 and 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
---------------------------- ------------------------
RECORDED MARKET INTEREST
VALUE (I) VALUE AMOUNT RATE
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ............. $ -- $ -- $ -- --%
Maturing 30 days to 90 days ......... 1,848,385 1,859,169 1,774,950 5.75
Maturing 90 days to 1 year .......... 62,909 63,532 53,920 6.59
Maturing over 1 year ................ -- -- -- --
---------- ---------- ----------
Total (ii) ........................ 1,911,294 1,922,701 1,828,870
Purchase accounting adjustment (424) -- 99
Accrued interest payable ............ -- -- 13,473
---------- ---------- ----------
$1,910,870 $1,922,701 $1,842,442
========== ========== ==========
</TABLE>
F-43
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
----------------------------- -------------------------
RECORDED MARKET INTEREST
VALUE (I) VALUE AMOUNT RATE
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ............. $ 626,260 $ 633,615 $ 609,949 5.61%
Maturing 30 days to 90 days ......... 573,904 585,767 550,409 5.48
Maturing 90 days to 1 year .......... 342,531 345,599 350,000 6.97
Maturing over 1 year ................ 67,845 68,203 53,920 6.59
---------- ---------- ----------
Total (ii) ........................ 1,610,540 1,633,184 1,564,278
Purchase accounting adjustment 2,578 -- 755
Accrued interest payable ............ -- -- 18,354
---------- ---------- ----------
$1,613,118 $1,633,184 $1,583,387
========== ========== ==========
</TABLE>
(i) Recorded value includes accrued interest at December 31, 1997 and
1996. In addition, the recorded values at December 31, 1997 and 1996
include adjustments for the unrealized gain or loss on
mortgage-backed securities available for sale.
(ii) Total mortgage-backed securities collateral at December 31, 1997 and
1996 includes $.6 billion and $1.1 billion, respectively, in
outstanding balances of loans securitized with full recourse to the
Bank. The market value of such collateral was $.6 billion and $1.1
billion at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, these agreements had weighted average
stated interest rates of 5.78% and 5.90%, respectively. The underlying
securities were delivered to, and are being held under the control of, third
party securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to California Federal the identical securities at the
maturities of the agreements. The average daily balance of securities sold
under agreements to repurchase was $2.5 billion and $2.1 billion during 1997
and 1996, respectively, and the maximum amount outstanding at any month-end
during these periods was $3.1 billion and $2.7 billion, respectively.
At December 31, 1997, securities sold under agreements to repurchase were
collateralized with $1.9 billion of mortgage-backed securities.
F-44
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BORROWINGS
Borrowings at December 31, 1997 and 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
--------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from FHLB ............... $ 5,447,168 5.88% $3,564,953 5.93%
Variable-rate borrowings from FHLB ............ 4,074,182 5.95 854,486 5.67
12 1/2% Senior notes .......................... 455,000 12.50 455,000 12.50
10% Subordinated debentures due 2006 .......... 92,100 10.00 92,100 10.00
11.20% Senior notes ........................... 6,000 11.20 6,000 11.20
12 1/4% Senior notes .......................... 200,000 12.25 200,000 12.25
9 1/8 1/8% Senior subordinated notes .......... 140,000 9.13 140,000 9.13
10 5/8 5/8% Senior subordinated notes ......... 575,000 10.63 -- --
10.668% Subordinated notes .................... 50,000 10.67 -- --
6 1/2% Convertible subordinated debentures 2,633 6.50 -- --
10% Subordinated debentures due 2003 .......... 4,299 10.00 -- --
Federal funds purchased ....................... 130,000 6.50 25,000 7.50
Other borrowings .............................. 570 8.89 885 8.54
----------- ----- ---------- -----
Total borrowings ............................ 11,176,952 6.64 5,338,424 6.85
Discount on 12 1/2% Senior notes .............. (3,907) -- (4,651) --
Accrued interest payable ...................... 58,682 -- 32,797 --
Purchase accounting adjustments, net .......... 803 -- (1,676) --
----------- ----- ---------- -----
$11,232,530 6.60% $5,364,894 6.85%
=========== ===== ========== =====
</TABLE>
Maturities and weighted average stated interest rates of borrowings at
December 31, 1997, not including accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCES MATURING AVERAGE RATES
---------------------------- -----------------------
MATURITIES DURING THE YEARS
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ----------------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
1998 ..................... $5,263,042 $ 180,148 5.88% 7.66%
1999 ..................... 3,090,430 64 5.94 8.90
2000 ..................... 1,150,000 33 5.93 9.50
2001 ..................... 10,833 202,633 6.50 12.18
2002 ..................... 5,000 8 6.94 7.00
Thereafter ............... 2,045 1,272,716 7.83 11.09
---------- ---------- ---- -----
Total .................. $9,521,350 $1,655,602 5.91% 10.85%
========== ========== ==== =====
</TABLE>
F-45
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest expense on borrowings for the years ended December 31, 1997, 1996
and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FHLB advances .................................. $ 443,966 $ 221,017 $ 139,051
Interest rate swap agreements .................. (10,743) (11,532) (15,177)
12 1/2% Senior notes ........................... 57,613 40,494 --
10% Subordinated debentures due 2006 ........... 9,210 9,210 9,210
11.20% Senior notes ............................ 672 3,641 --
12 1/4% Senior notes ........................... 24,500 24,504 24,500
9 1/8 1/8% Senior subordinated notes ........... 12,775 11,739 --
10 5/8 5/8% Senior subordinated notes .......... 60,648 -- --
10.668% Subordinated notes ..................... 5,291 -- --
6 1/2% Convertible subordinated debentures 172 -- --
10% Subordinated debentures due 2003 ........... 418 -- --
Federal funds purchased ........................ 5,300 3,529 2,268
Other borrowings ............................... 434 199 1,403
Purchase accounting adjustments ................ 629 6,039 21,244
--------- --------- ---------
Total ........................................ $ 610,885 $ 308,840 $ 182,499
========= ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Real estate loans (primarily residential) ......... $11,183,138
Mortgage-backed securities ........................ 3,544,108
FHLB stock ........................................ 468,191
-----------
Total ........................................... $15,195,437
===========
</TABLE>
12 1/2% Senior Notes Due 2003
On April 17, 1996, Parent Holdings issued $455 million of its 12 1/2%
Senior Notes ("12 1/2% Senior Notes"). The notes will mature on April 15, 2003,
with interest payable semiannually on April 15 and October 15 of each year.
Deferred issuance costs associated with the issuance of the 12 1/2% Senior
Notes totalling $18.1 million were recorded in other assets and are being
amortized using the interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes were issued with a $5.2 million discount that is
included in the carrying value of the liability and is being accreted using the
interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes are redeemable at the option of the Company, in
whole or in part at the following redemption prices: (i) on or after April 15,
2000, at 106.25% of the principal amount thereof, plus accrued interest and
unpaid interest to the date of redemption, (ii) on or after April 15, 2001, at
103.125% of the principal amount thereof, plus accrued interest and unpaid
interest to the date of redemption, and (iii) thereafter, at 100% of the
principal amount thereof, plus accrued interest and unpaid interest to the date
of redemption. In addition, at any time prior to April 15, 2000, the 12 1/2%
Senior Notes may be redeemed at the option of the Company, in whole but not in
part, at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption, plus the
applicable premium.
The 12 1/2% Senior Notes are senior unsecured obligations of the Company
and rank pari passu in right of payment with all future senior debt of the
Company, if any is issued, and senior to all future subordinated debt of the
Company, if any is issued.
F-46
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Parent Holdings is a holding company, and therefore, the 12 1/2% Senior
Notes are subordinated to (i) all existing and future liabilities, including
deposits, indebtedness and trade payables of its subsidiaries, including FN
Holdings and the Bank, and (ii) all preferred stock issued by its subsidiaries,
including the Bank Preferred Stock (as defined herein) and the FN Holdings
Preferred Stock. The 12 1/2% Senior Notes are also subordinated to the
obligations of FN Holdings under the tax-sharing agreement between and among
the Bank, FN Holdings and Mafco Holdings.
The terms and conditions of the indenture and the FN Holdings indentures
impose restrictions that affect, among other things, the ability of the Company
or FN Holdings, as the case may be, to incur debt, pay dividends or make
distributions, engage in a business other than holding the common stock of FN
Holdings, in the case of the Company, or of California Federal Bank and similar
banking institutions, in the case of FN Holdings, make acquisitions, create
liens, sell assets and make certain investments.
12 1/4% Senior Notes Due 2001
In connection with the FN Acquisition, FN Holdings issued $200 million
principal amount of 12 1/4% Senior Notes ("12 1/4% Senior Notes"), including
$5.5 million principal amount of 12 1/4% Senior Notes to certain directors and
officers of the Bank. The notes will mature on May 15, 2001 with interest
payable semiannually on May 15 and November 15. Deferred issuance costs
associated with the 12 1/4% Senior Notes' issuance totalling $9.9 million were
recorded in other assets and are being amortized over the term of the 12 1/4%
Senior Notes.
The notes are redeemable at the option of FN Holdings, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption price
of 106.125% plus accrued interest to the date of redemption, and thereafter at
100% plus accrued interest. The notes are subordinated to all existing and
future liabilities, including deposits and other borrowings of the Bank, and to
the 11 1/2% Preferred Stock (as defined herein).
The terms and conditions of the 12 1/4% Senior Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
9 1/8 1/8% Senior Subordinated Notes Due 2003
On January 31, 1996, FN Holdings issued $140 million principal amount of
the 9 1/8% Senior Subordinated Notes. The 9 1/8% Senior Subordinated Notes will
mature on January 15, 2003 with interest payable semiannually on January 15 and
July 15. Deferred issuance costs associated with the issuance of the 9 1/8%
Senior Subordinated Notes totalling $7.0 million were recorded in other assets
and are being amortized over the term of the 9 1/8 1/8% Senior Subordinated
Notes.
The 9 1/8% Senior Subordinated Notes are redeemable at the option of FN
Holdings, in whole or in part, during the 12-month period beginning January 1,
2001, at a redemption price of 104.5625% of the principal amount thereof, plus
accrued interest and unpaid interest to the date of redemption, and thereafter
at 100% of the principal amount thereof, plus accrued and unpaid interest.
The 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of FN Holdings and are subordinated in right of payment to all
existing and future senior indebtedness of FN Holdings and future to all
subordinated debt, if any is issued. The 9 1/8% Senior Subordinated Notes are
subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables of FN Holdings' subsidiaries, including the
Bank, and to preferred stock issued by the Bank.
The terms and conditions of the 9 1/8% Senior Subordinated Notes indenture
impose restrictions that affect, among other things, the ability of FN Holdings
to incur debt, pay dividends or make distributions, engage in a business other
than holding the common stock of the Bank and similar banking institutions,
make acquisitions, create liens, sell assets and make certain investments.
F-47
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 5/8% Senior Subordinated Notes Due 2003
In connection with the Cal Fed Acquisition, FN Holdings acquired the net
proceeds from the issuance of FN Escrow's 10 5/8% Notes and assumed FN Escrow's
obligations under the 10 5/8% Notes and indenture. Deferred issuance costs
associated with the 10 5/8% Notes of $19 million were included in FN Escrow's
other assets and are being amortized over the term of the 10 5/8% Notes.
The 10 5/8% Notes are redeemable at the option of FN Holdings, in whole or
in part, during the 12-month period beginning January 1, 2001, at a redemption
price of 105.313% plus accrued and unpaid interest to the date of redemption,
during the 12-month period beginning January 1, 2002 at a redemption price of
102.656% plus accrued and unpaid interest to the date of redemption, and
thereafter at 100% plus accrued and unpaid interest to the date of redemption.
The 10 5/8% Notes are subordinate in right of payment to all existing and
future subordinated debt, if any is issued, of FN Holdings. The 10 5/8% Notes
are subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of FN Holdings, including
California Federal and all preferred stock issued by the Bank, including the
Bank Preferred Stock.
The terms and conditions of the 10 5/8% Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, California Federal assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006"). At December 31, 1997 the
aggregate principal amount of the 10% Subordinated Debentures Due 2006
outstanding was $92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i)
a default in the payment of interest when due and such default continues for 30
days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 notify the Bank of the default and the Bank
does not cure the default within 60 days after receipt of such notice, (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank, (v) the
FSLIC/RF (or a comparable entity) is appointed to act as conservator,
liquidator, receiver or other legal custodian for the Bank and (vi) a default
under other indebtedness of the Bank in excess of $10 million resulting in such
indebtedness becoming due and payable, and such default or acceleration has not
been rescinded or annulled within 60 days after the date on which written
notice of such failure has been given by the trustee to the Bank or by holders
of at least 25% in principal amount of the outstanding 10% Subordinated
Debentures Due 2006 to the Bank and the trustee.
11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, California Federal assumed $50 million
of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes").
In connection with the assumption of the 11.20% Senior Notes, the Bank and all
of the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, the Bank repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal
amount, plus the accrued interest thereon. The Bank recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase. At
December 31, 1997, the aggregate principal amount of the 11.20% Senior Notes
outstanding was $6.0 million.
F-48
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within 15
days after the date such payment was due; (iii) failure to comply with certain
covenants in the Note Purchase Agreement, provided that such failure continues
for more than 60 days; (iv) failure to deliver to holders a notice of default,
notice of event of default, or notice of claimed default as provided in the
Note Purchase Agreement; (v) failure to comply with any provision of the Note
Purchase Agreement, provided that such failure continues for more than 60 days
after notice is delivered to the Bank; (vi) a default under other indebtedness
provided that the aggregate amount of all obligations in respect of such
indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against the Bank or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by the Bank or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of Old California Federal:
10.668% Subordinated Notes Due 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matures on December 22, 1998 (the "10.668%
Subordinated Notes"). At December 31, 1997, the aggregate principal amount of
10.668% Subordinated Notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when
due and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to the Bank; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of the Bank and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of the Bank.
6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February
20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures are redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. At December
31, 1997, $2.6 million of the 6 1/2% Convertible Subordinated Debentures were
outstanding. Due to the purchase of all of the Cal Fed stock by FN Holdings in
the Cal Fed Acquisition on January 3, 1997, the common stock conversion feature
has been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make
any payment of interest when due and such payment is not made within 30 days
after the date such payment was due; (ii) failure to make any payment of
principal when due; (iii) default in the performance, or breach, of any
covenant or warranty in the indenture, provided that such default or breach
continues for more than 60 days after notice is delivered to the Bank; or (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank or its
subsidiaries.
F-49
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures").
During 1996 and 1995, Old California Federal repurchased $0.6 million and $8.7
million, respectively, of the 10% Subordinated Debentures, leaving $4.3 million
outstanding at December 31, 1997.
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (iii) failure to comply with certain covenants in the indenture; (iv)
failure to comply with certain covenants in the indenture provided that such
failure continues for more than 60 days after notice is delivered to the Bank;
(v) certain events of bankruptcy, insolvency or reorganization of the Bank; or
(vi) the default or any event which, with the giving of notice or lapse of time
or both, would constitute a default under any indebtedness of the Bank and
cause such indebtedness with an aggregate principal amount exceeding $15
million to accelerate.
21. INTEREST RATE SWAP AGREEMENTS
In connection with the FN Acquisition and the Cal Fed Acquisition, the
Bank acquired the rights and assumed the obligations under certain interest
rate swap agreements. Interest rate swap agreements outstanding and their
weighted average rates at December 31, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ---------------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
- ------------------------ ----------- ---------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1997:
April 1998 ......... $400,000 5.76% 8.38% .26 3 month LIBOR
1996:
April 1998 ......... $400,000 5.64% 8.38% 1.26 3 month LIBOR
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives or
makes payments based on the differential between fixed-rate and variable-rate
interest amounts on the notional amount of the agreement. The notional amounts
of these derivatives do not represent amounts exchanged by the parties and
thus, are not a measure of the Bank's exposure through its use of derivatives.
The Bank pays the variable-rate and receives the fixed-rate under these
agreements. The variable interest rates presented in the tables above are based
on LIBOR. The current LIBOR rates have been assumed implicitly, in the
aforementioned weighted average receive rate, to remain constant throughout the
term of the respective swaps. Any changes in LIBOR interest rates would affect
the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with national
investment banking firms and the FHLB of San Francisco.
22. SEGMENT REPORTING
The Company's operations include two primary business segments: mortgage
lending and retail banking. The Company's principal business consists of
operating retail deposit branches and originating and/or purchasing residential
real estate loans. The Company's mortgage lending activities are conducted
through FNMC and include the origination and purchase of residential mortgage
loans for sale to various investors, as well as the servicing of loans for
others.
F-50
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Selected financial information by business segment for the three years
ended December 31, 1997, 1996 and 1995 is presented in the following summary
(in thousands):
<TABLE>
<CAPTION>
MORTGAGE RETAIL CONSOLIDATED
LENDING BANKING TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
1997
- -------
Total revenue (1) .......................... $ 288,360 $2,317,096 $2,467,184
Income before income taxes, extraordinary
item and minority interest ............... (27,782) 266,180 238,398
Office premises and equipment, net ......... 26,576 132,773 159,349
Identifiable assets (2) .................... 3,072,219 31,155,325 31,362,156
1996
- -------
Total revenue (3) .......................... $ 212,325 $1,751,852 $1,887,177
Income before income taxes, extraordinary
item and minority interest ............... 5,836 501,711 507,547
Office premises and equipment, net ......... 23,410 76,754 100,164
Identifiable assets (4) .................... 1,634,258 16,264,912 16,635,073
1995
- -------
Total revenue (5) .......................... $ 100,930 $1,166,180 $1,226,818
Income before income taxes, extraordinary
item and minority interest ............... (7,898) 130,348 122,450
Office premises and equipment, net ......... 17,376 76,133 93,509
Identifiable assets (6) .................... 1,383,451 14,425,200 14,666,781
</TABLE>
- ----------
(1) Excludes the elimination of $14.2 million in intercompany servicing fees
and $124.1 million in interest income on intercompany loans.
(2) Excludes the elimination of $20.2 million in deposits maintained with the
Bank and $2.8 billion in intercompany borrowings.
(3) Excludes the elimination of $6.9 million in intercompany servicing fees
and $70.1 million in interest income on intercompany loans.
(4) Excludes the elimination of $23.3 million in deposits maintained with the
Bank and $1.2 billion in intercompany borrowings.
(5) Excludes the elimination of $10.6 million in intercompany servicing fees
and $29.7 million in interest income on intercompany loans.
(6) Excludes the elimination of $13.7 million in deposits maintained with the
Bank and $1.1 billion in intercompany borrowings.
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability are that contribution for
the mortgage lending segment includes custodial earnings that are reported in
the retail banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage lending segment's contribution for the years ended
December 31, 1997, 1996 and 1995 was $35.9 million, $54.9 million and $24.5
million, respectively.
F-51
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. COMPREHENSIVE INCOME
The tax effect associated with unrealized gain on securities for the years
ended December 31, 1997, 1996 and 1995 is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
------------ --------------- -------------
<S> <C> <C> <C>
1997
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 10,004 $ (1,278) $ 8,726
Less: reclassification adjustments for gains in
net income ............................... (20,146) 2,574 (17,572)
--------- -------- ---------
Other comprehensive income ................ . $ (10,142) $ 1,296 $ (8,846)
========= ======== =========
1996
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 16,200 $ (1,620) $ 14,580
Less: reclassification adjustments for gains in
net income ............................... (31,572) 3,157 (28,415)
--------- -------- ---------
Other comprehensive income ................ . $ (15,372) $ 1,537 $ (13,835)
========= ======== =========
1995
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 47,983 $ (4,798) $ 43,185
Less: reclassification adjustments for gains in
net income ............................... (1,305) 130 (1,175)
--------- -------- ---------
Other comprehensive income ................ . $ 46,678 $ (4,668) $ 42,010
========= ======== =========
</TABLE>
Unrealized gains on securities is the only component of other
comprehensive income and accumulated other comprehensive income for the years
ended December 31, 1997, 1996 and 1995.
24. MINORITY INTEREST AND STOCKHOLDER'S EQUITY
(a) 11 1/2% Preferred Stock
In connection with the FN Acquisition, California Federal issued 3,007,300
shares of its 11 1/2% noncumulative perpetual preferred stock ("11 1/2%
Preferred Stock") with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated liquidation value of $100
per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted
from additional paid-in capital. At or after September 1, 1999, the 11 1/2%
Preferred Stock is redeemable at the option of the Bank, in whole or in part,
at $105.75 per share prior to September 1, 2000, and at prices which will
decrease annually thereafter to the stated liquidation value of $100 per share
on or after September 1, 2004, plus declared but unpaid dividends. Dividends
are payable quarterly at an annual rate of 11.50% per share when declared by
the Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock
for each year during 1997 and 1996 totalled $34.6 million.
(b) 10 5/8% Preferred Stock
In connection with the Cal Fed Acquisition, California Federal assumed Cal
Fed's 10 5/8% preferred stock with liquidation value of $172.5 million (the "10
5/8% Preferred Stock" and, together with the 11 1/2%
F-52
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock, "Bank Preferred Stock"). The 10 5/8% Preferred Stock resulted
in a $172.5 million increase in the Bank's stockholders' equity. Cash dividends
on the 10 5/8% Preferred Stock are noncumulative and are payable at an annual
rate of 10 5/8% per share if, when, and as declared by the Board of Directors
of the Bank. The 10 5/8% Preferred Stock is generally not redeemable prior to
April 1, 1999. The 10 5/8% Preferred Stock is redeemable at the option of the
Bank, in whole or in part, at $105.313 per share on or after April 1, 1999 and
prior to April 1, 2000, and at prices decreasing annually thereafter to the
liquidation preference of $100.00 per share on or after April 1, 2003, plus
declared but unpaid dividends. In addition, in the event of a change of
control, the 10 5/8% Preferred Stock is redeemable at the option of the Bank or
its successor on or after April 1, 1996 and prior to April 1, 1999 in whole,
but not in part, at $114.50 per share. Dividends paid on the 10 5/8% Preferred
Stock during 1997 were $18.3 million.
(c) REIT Preferred Stock
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
the REIT Preferred Stock for $500 million. The REIT Preferred Stock has a
stated liquidation value of $25 per share, plus declared and unpaid dividends,
if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends are declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, distributions on the REIT
Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp.
for tax purposes. Dividends paid on the REIT Preferred Stock during 1997 were
$36.6 million, net of the income tax benefit.
(d) Hunter's Glen
Minority interest -- Hunter's Glen represents that portion of
stockholders' equity of FN Holdings attributable to its class B common stock,
which is owned by a limited partnership controlled by the Bank's Chairman of
the Board and Chief Executive Officer.
(e) FN Holdings Preferred Stock
On September 19, 1996, FN Holdings issued 10,000 shares of preferred stock
("FN Holdings Preferred Stock") with a liquidation value of $150 million to a
corporation owned by the Chairman of the Board of the Bank, ("Special Purpose
Corp."). Cash dividends on the FN Holdings Preferred Stock are cumulative and
are payable: (i) in cash at an annual rate of the cost of funds to an affiliate
of FN Holdings under such affiliate's bank credit facility (the "Cost of Funds
Rate") and (ii) in newly issued shares of another series of cumulative
perpetual preferred stock of FN Holdings ("Additional FN Holdings Preferred
Stock") at an annual rate of 2% of the stated liquidation value of the FN
Holdings Preferred Stock, if, when, and as declared by the Board of Directors
of FN Holdings. Dividends on the Additional FN Holdings Preferred Stock are
cumulative and accrue and are payable in shares of Additional FN Holdings
Preferred Stock at an annual rate equal to the Cost of Funds Rate plus 2% of
the stated liquidation value of the Additional FN Holdings Preferred Stock if,
when and as declared by the Board of Directors of FN Holdings. Additional FN
Holdings Preferred Stock will have substantially the same relative rights,
terms and preferences as the FN Holdings Preferred Stock except as set forth
above with respect to the payment of dividends. Dividends on the FN Holdings
Preferred Stock are payable quarterly each year, commencing January 1, 1997,
out of funds legally available therefor. In addition, the payment of dividends
by FN Holdings is subject to certain federal laws applicable to savings and
loan holding companies. The FN Holdings Preferred Stock ranks prior to the
common stock of FN Holdings and to all other classes and series of equity
securities subsequently issued.
The FN Holdings Preferred Stock and the Additional FN Holdings Preferred
Stock are redeemable so long as Special Purpose Corp. is the sole holder
thereof, at any time, and, if Special Purpose Corp. is not the sole holder
thereof, at any time after the fifth anniversary of the issuance of the FN
Holdings
F-53
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock, in each case, upon prior written notice, at the option of FN
Holdings, in whole or in part, at a redemption price equal to the stated
liquidation value of $15,000 per share plus any accrued and unpaid dividends.
Upon the redemption of the FN Holdings Preferred Stock by FN Holdings, all
outstanding shares of the Additional FN Holdings Preferred Stock will be
contributed to the capital of FN Holdings, without any payment therefor, and
such shares will be retired and canceled.
(f) Common Stock
In connection with the FN Acquisition and the offering of the 12 1/4%
Senior Notes, First Gibraltar Holdings incorporated Parent Holdings and FN
Holdings to hold 100% of the common stock of First Nationwide. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create
800 shares of class A common stock having one vote per share, 200 shares of
class B common stock having .75 votes per share, and 230.3 shares of nonvoting
class C common stock. Parent Holdings exchanged its 1,000 shares of common
stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued 100%
of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owns 100% of the class B common stock
of FN Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock), and Parent Holdings
owns (i) 100% of the class A common stock of FN Holdings, representing 80% of
its voting common stock (representing approximately 85% of the voting power of
its common stock) and (ii) 100% of the class C common stock of FN Holdings. The
class C common stock was redeemed out of distributions from the Bank for $230.3
million plus accrued interest during 1995 and 1996. On December 29, 1995, the
Bank's Chairman transferred his shares of class B common stock to a limited
partnership, Hunter's Glen/Ford Ltd. ("Hunter's Glen"), over which he maintains
control.
There were no dividends or distributions on common stock in 1997.
Dividends and distributions on the Company's common stock during 1996 and 1995
totalled $636,504 and $89,986, respectively.
(g) Payment of Dividends
The terms of the 12 1/2% Senior Notes indenture generally will permit the
Company to make distributions of up to 65% of the consolidated net income of
the Company if, after giving effect to such distribution, (i) the Bank is "well
capitalized" under applicable OTS regulations and (ii) the Consolidated Common
Shareholders' Equity (as defined therein) of the Bank is at least equal to the
Minimum Common Equity Amount (as defined therein). The terms of the 9 1/8%
Senior Subordinated Notes indenture and the 12 1/4% Senior Notes indenture
apply similar restrictions except FN Holdings can make distributions of up to
75% of the consolidated net income of FN Holdings. The Federal thrift laws and
regulations of the Office of Thrift Supervision (the "OTS") limit the Bank's
ability to pay dividends on its preferred or common stock. The Bank generally
may not pay dividends without the consent of the OTS if, after the payment of
the dividends, it would not be deemed "adequately capitalized" under the prompt
corrective action standards of the Federal Deposit Insurance Corporation
Improvement Act of 1991.
As of December 31, 1997, the Bank could pay dividends of $502.4 million
without the consent of the OTS and it could pay dividends of $153.8 million and
still be "well capitalized." As of December 31, 1997,
F-54
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FN Holdings and the Company could pay dividends of $254.0 million and $168.2
million, respectively, without violating the most restrictive terms of their
respective indentures.
25. REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as
of December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table. There are no conditions or events since the most recent
notification that management believes have changed the institution's category.
F-55
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Bank's actual capital amounts and ratios as of December 31, 1997 and
1996 are also presented in the table (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- -------------------------- --------------------------
AS A % AS A % AS A %
1997 AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
- -------------------------------------- ------------- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the
Bank per financial statements $2,260,044
Minority interest in Preferred
Capital Corp. ....................... 500,000
Net unrealized holding gains ......... (35,162)
----------
2,724,882
Adjustments for tangible and
leverage capital:
Goodwill litigation asset ........... (100,000)
Intangible assets ................... (675,927)
Non-allowable minority
interest in Preferred
Capital Corp. ...................... (71,099)
Non-qualifying MSRs ................. (53,670)
Non-includable subsidiaries ......... (53,582)
Excess deferred tax asset ........... (55,000)
----------
Total tangible capital ............... $1,715,604 5.65% $ 455,457 1.50% N/A N/A
========== ==========
Total leverage capital ............... $1,715,604 5.65% $ 910,915 3.00% $1,518,191 5.00%
========== ========== ===========
Tier 1 risk-based capital ............ $1,715,604 10.14% N/A N/A $1,015,036 6.00%
========== ===========
Adjustments for risk-based
capital:
Qualifying subordinated debt
debentures ......................... 93,847
General loan loss allowance ......... 214,217
Assets required to be
deducted ........................... (5,648)
----------
Total risk-based capital ............ $2,018,020 11.93% $1,353,382 8.00% $1,691,727 10.00%
========== ========== ===========
</TABLE>
F-56
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- ------------------------- -------------------------
AS A AS A AS A
1996 AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT % OF ASSETS
- ---------------------------------------- ------------- ------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the Bank
per financial statements .............. $1,463,862
Net unrealized holding gains ........... (46,219)
----------
1,417,643
Adjustments for tangible and
leverage capital:
Intangible assets ..................... (140,564)
Non-qualifying MSRs ................... (42,369)
Non-includable subsidiaries ........... (6,001)
Excess deferred tax asset ............. (68,000)
----------
Total tangible capital ................. $1,160,709 7.17% $242,828 1.50% N/A N/A
========== ========
Total leverage capital ................. $1,160,709 7.17% $485,655 3.00% $ 809,426 5.00%
========== ======== ==========
Tier 1 risk-based capital .............. $1,160,709 11.50% N/A N/A $ 605,843 6.00%
========== ==========
Adjustments for risk-based capital:
Qualifying subordinated debt
debentures ............................ 89,907
General loan loss allowance ............ 127,708
Assets required to be deducted ......... (2,882)
----------
Total risk-based capital ............... $1,375,442 13.62% $807,791 8.00% $1,009,738 10.00%
========== ========= ==========
</TABLE>
26. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Other noninterest income:
Disbursement float ............................ $ 8,169 $ 5,369 $ 2,622
Other ......................................... 14,827 12,820 8,759
-------- ------- -------
$ 22,996 $18,189 $11,381
======== ======= =======
Other noninterest expense:
Telephone ..................................... $ 15,932 $11,727 $ 7,652
Insurance and surety bonds .................... 5,642 3,811 4,005
Postage ....................................... 8,070 7,141 6,856
Printing, copying and office supplies ......... 9,230 6,549 6,096
Employee travel ............................... 8,745 6,112 5,244
Clerical and other losses ..................... 11,410 2,636 4,345
Other ......................................... 54,853 42,135 27,131
-------- ------- -------
$113,882 $80,111 $61,329
======== ======= =======
</TABLE>
F-57
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and
minority interest ............................... $41,315 $ (75,807) $ (57,185)
Extraordinary item ............................... -- (176) 221
Net unrealized holding (loss) gain on securities
available for sale .............................. 17 (1,921) 7,055
------- --------- ---------
$41,332 $ (77,904) $ (49,909)
======= ========= =========
</TABLE>
Income tax expense (benefit) attributable to income before income taxes,
extraordinary item and minority interest for the years ended December 31, 1997,
1996 and 1995 consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- ------------
<S> <C> <C> <C>
Federal
Current .......... $ 4,687 $ 10,900 $ 285
Deferred ......... -- (125,000) (69,000)
------- ---------- ---------
4,687 (114,100) (68,715)
------- ---------- ---------
State and local
Current .......... 36,628 38,293 11,530
Deferred ......... -- -- --
------- ---------- ---------
36,628 38,293 11,530
------- ---------- ---------
$41,315 $ (75,807) $ (57,185)
======= ========== =========
</TABLE>
F-58
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated income tax expense (benefit) for the years ended December
31, 1997, 1996 and 1995 differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% for 1997, 1996 and 1995 to income
before income taxes, extraordinary item and minority interest (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" income tax expense ..................... $ 83,439 $ 177,642 $ 42,858
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax
benefit ................................................. 23,808 24,890 7,495
Tax exempt income ......................................... (5) (584) (2,636)
Amortization of excess cost over fair value of net
assets acquired ......................................... 16,959 33 --
Adjustment to prior year's tax expense .................... -- 595 (1,675)
Unrealized holding (loss) gain on securities
available for sale recognized for tax purposes .......... (12,234) (3,703) 15,937
REIT preferred dividend ................................... (14,682) -- --
Other ..................................................... 2,762 1,214 (1,747)
Adjustment to deferred tax asset fully offset by
valuation allowance:
Temporary differences from acquisitions ................ (115,633) 6,196 --
Adjustment to deferred tax asset ....................... (17,130) 2,821 7,644
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ......................... 74,031 (284,911) (125,061)
----------- ---------- ----------
$ 41,315 $ (75,807) $ (57,185)
=========== ========== ==========
</TABLE>
The significant components of deferred income tax (benefit) expense
attributable to income before income taxes, extraordinary item and minority
interest for the years ended December 31, 1997, 1996 and 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) ............................. $ 58,732 $ 150,894 $ 56,061
Adjustments to deferred tax asset fully offset by
valuation allowance ........................................ (132,763) 9,017 --
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets ......... 74,031 (284,911) (125,061)
---------- ---------- ----------
$ -- $ (125,000) $ (69,000)
========== ========== ==========
</TABLE>
F-59
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......................... $ 750,193 $ 737,815
Foreclosed real estate .................................... 6 312
Loans receivable .......................................... 60,835 4,774
Securities ................................................ -- 95
Miscellaneous accruals .................................... 31,520 11,851
Accrued liabilities ....................................... 86,617 30,017
Deferred interest ......................................... 5,369 6,440
State taxes ............................................... 38,704 15,429
Other intangible assets ................................... 39,848 35,476
Alternative minimum tax credit and investment tax
credit carryforwards .................................... 14,911 13,324
Other ..................................................... 5,732 3,165
---------- ----------
Total gross deferred tax assets ......................... 1,033,735 858,698
Less valuation allowance ................................ (600,161) (526,130)
---------- ----------
Net deferred tax assets ................................. 433,574 332,568
---------- ----------
Deferred tax liabilities:
Change in accounting method ............................... 30,000 23,362
Securities ................................................ 8,166 --
Other intangible assets ................................... 73,872 48,280
Purchase accounting adjustments ........................... 18,137 29,881
FHLB stock ................................................ 52,337 12,688
Unrealized gains on securities available for sale ......... 5,152 1,640
Goodwill litigation ....................................... 58,450
Other ..................................................... 65,279 24,357
---------- ----------
Net deferred tax liabilities ............................. 311,393 140,208
---------- ----------
Net deferred tax assets and liabilities .................. $ 122,181 $ 192,360
========== ==========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was an increase of $74.0 million which is attributable to
income before income taxes and minority interest.
Based on a historical earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Company's net deferred tax assets and recognized
a deferred tax benefit (i.e., reduced valuation allowance) of $125.0 million in
the second quarter of 1996 and $69.0 million in the fourth quarter of 1995.
Management believes that the realization of the resulting deferred tax asset is
more likely than not, based upon the expectation that the Company will generate
the necessary amount of taxable income in future periods.
At December 31, 1997, if the Company had filed a consolidated federal
income tax return on behalf of itself (as common parent), and its subsidiaries
for each year since the formation of the Company, it would have had regular and
alternative minimum tax net operating losses for federal income tax purposes of
approximately $2.1 billion and $878 million, respectively, which expire in 2004
through 2010.
If for any reason the Company was to deconsolidate from the Mafco Group
(see note 33, "Subsequent Event"), only the amount of the net operating loss
carryovers of the Company not already
F-60
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilized by the Mafco Group would be available to offset the taxable income
subsequent to the date of deconsolidation. If the Company had deconsolidated as
of December 31, 1997, the Company would have had approximately $970 million of
regular net operating loss carryforwards. It cannot be predicted to what extent
the Mafco Group will utilize the net operating losses of the Company in the
future or the amount, if any, of net operating loss carryforwards that the
Company may have upon deconsolidation. Additionally, the net operating loss
carryovers are subject to review and potential disallowance, in whole or in
part, by the Internal Revenue Service.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act") was enacted into law generally effective for tax years beginning after
1995. One provision of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions which are treated as large
banks. Another provision of the Act requires the Company to take into income
the balance of its post-1987 bad debt reserves over a six year period beginning
in 1996 subject to a two-year deferral if certain residential loan tests are
satisfied. As of December 31, 1995, the Company had approximately $279 million
of post-1987 bad debt reserves that are subject to recapture. The Company has
fully provided for the tax related to this recapture.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of the
Company. The base year reserves are generally the balance of the tax bad debt
reserve as of December 31, 1987 reduced proportionately for reductions in the
Company's loan portfolio since that date. At December 31, 1997, the amount of
those reserves was approximately $152 million. The amount of the unrecognized
deferred tax liability at December 31, 1997 was approximately $53 million.
Pursuant to the Act, circumstances that may require an accrual of this
unrecorded tax liability are a failure to meet the definition of a "bank" for
federal income tax purposes, dividend payments in excess of tax earnings and
profits, and other distributions, dissolution, liquidation or redemption of
stock, excluding preferred stock meeting certain conditions.
28. EMPLOYEE BENEFIT PLANS
Post-retirement Benefits Plan
The Bank provides certain post-retirement medical benefits to certain
eligible employees and their dependents through age 65. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate.
The estimated cost for post-retirement health care benefits has been
accrued on an actuarial net present value basis.
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated balance sheet at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees ................................................................. $2,228 $2,212
Eligible active plan participants ........................................ 554 471
Ineligible active plan participants ...................................... 1,343 733
------ ------
Accuulated post-retirement benefit obligation (other liabilities) ....... $4,125 $3,416
====== ======
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996 was
determined using a discount rate of 7.5%. At December 31, 1997, an increase of
1% in the health care cost trend rate would cause the accumulated
post-retirement benefit obligation to increase by $.4 million, and the service
and interest costs to increase by less than $.1 million.
F-61
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic post-retirement benefits cost for the years ended December
31, 1997 and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Service cost -- benefits attributable to service during the current
period ................................................................. $364 $301
Interest cost on accumulated post-retirement benefit obligation ......... 498 231
Amortization of loss .................................................... -- 19
---- ----
Periodic post-retirement benefit cost ................................... $862 $551
==== ====
</TABLE>
The initial health care cost trend rate for medical benefits in 1997 was
9%, the average trend rate was 7.25% and the ultimate trend rate was 5.5%,
which will be reached in eight years. Similar trend rates were utilized for the
1996 valuation.
In connection with the SFFed Acquisition, the Bank assumed SFFed's defined
benefit pension plan which covered substantially all employees of San Francisco
Federal. The SFFed benefit plan was frozen effective September 30, 1995 and no
additional benefits accrued after such time.
The following table sets forth the funded status and amounts recognized in
the Bank's consolidated balance sheet for its defined benefit pension plan (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$40,995 in 1997 and $21,720 in 1996 .................................. $40,995 $21,720
======= =======
Projected benefit obligations ......................................... $40,995 $21,720
Plan assets at fair value ............................................. 42,292 23,085
------- -------
Excess (deficiency) of plan assets over projected benefit obligations 1,297 1,365
Unrecognized net gain (loss) .......................................... 5,506 5,414
------- -------
Accrued (prepaid) pension liability .................................. $ 4,209 $ 4,049
======= =======
</TABLE>
F-62
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic expense for 1997, 1996 and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----
<S> <C> <C> <C>
Service cost benefit earned during the period ........... $ -- $ -- $--
Interest cost on projected benefit obligations .......... 2,796 2,143 --
Expected return on plan assets .......................... (3,306) (2,349) --
Net amortization and deferral ........................... (91) 1,278 --
Curtailment gain ........................................ (404) -- --
-------- -------- ---
Total net periodic pension expense ..................... $ (1,005) $ 1,072 $--
======== ======== ===
</TABLE>
Assumptions used in computing the funded status were:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----
<S> <C> <C> <C>
Discount rate ........................................... 7.75% 8.50% --%
Rate of increase in future compensation levels .......... -- -- --
Long-term rate of return on assets ...................... 9.00% 8.50% --
</TABLE>
In the Cal Fed Acquisition, the Bank assumed sponsorship of the Old
California Federal defined benefit plan which was frozen effective May 31, 1993
and at which time, all accrued benefits became 100% vested. Effective April 30,
1997, the SFFed benefit plan was merged with and into the Old California
Federal benefit plan. The fair value of assets transferred was $23.6 million.
Investment Plan
The Bank offers a defined contribution plan which is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching contribution
was a maximum of 100% of up to the first 3% of employee deferrals. The annual
discretionary employer profit sharing contribution is a maximum of 3% of
eligible compensation. It can be declared at any level in the range from 0% to
3%. Employees vest immediately in their own deferrals and any employer profit
sharing contributions and vest in employer matching contributions based on
completed years of service. The Bank's contributions to such plan totalled $3.8
million, $2.3 million, and $2.8 million for the years ended December 31, 1997,
1996 and 1995, respectively.
During 1996, defined contribution plans assumed in the SFFed and Home
Federal Acquisitions were merged with and into Old FNB's defined contribution
plan. The fair value of assets transferred was $14.4 million.
In the Cal Fed Acquisition, contributions made to Old California Federal's
defined contribution plan became 100% vested at the date of acquisition.
Effective December 31, 1997, the Old California Federal contribution plan was
merged with and into the Bank's plan. The fair value of assets transferred was
$33.6 million.
29. INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Incentive Plan") with certain executive officers of the Bank
("Participants"). Awards under the Incentive Plan will be made in the form of
performance units. Each performance unit entitles Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provides for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vest at 20% per year beginning October 1,
1995 and are subject to a cap of $50 million.
F-63
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bonuses are recorded by a charge to compensation and employee benefits and
an increase to other liabilities. During 1997 and 1996, accruals relative to
the Incentive Plan totalled $12.4 million and $35.6 million, respectively.
30. SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special
assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, the
Company recorded a pre-tax charge of $60.1 million on September 30, 1996. The
1997 SAIF deposit premiums declined to 6.42 cents per $100 of SAIF-insured
deposits per year from the prior rate of 23 cents.
31. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company, through FNMC, enters into financial
instruments with off-balance sheet risk through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include commitments
to extend credit and purchase loans (mortgage loan pipeline) and mandatory and
optional forward commitments to sell loans.
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Commitments to originate and purchase loans ......... $1,718,729
Mandatory commitments to sell loans ................. 1,368,123
</TABLE>
The Company's pipeline of loans in process include loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore, the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $691.7 million at December 31, 1997. On a daily basis, the
Company determines what percentage of the portfolio of loans in process for
which rate commitments have been extended to a borrower to hedge. Both the
anticipated percentage of the pipeline that is expected to fund and the
inherent risk position of the portfolio are considered in making this
determination.
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. Unrealized gain and
losses on mandatory and optional-delivery forward commitments are included in
the lower of cost or market valuation adjustment to mortgage loans held for
sale.
On September 28, 1994, the Company entered into an agreement with FNMA
pursuant to which FNMA provided credit enhancements for certain bond-financed
real estate projects originated by Old
F-64
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FNB. The agreement requires that the Company pledge to FNMA collateral in the
form of certain eligible securities which are held by a third party trustee.
The collateral requirement varies based on the balance of the bonds
outstanding, losses incurred (if any), as well as other factors. At December
31, 1997 and 1996, the Company had pledged as collateral certain securities
available for sale with a carrying value of $78.2 million and $91.6 million.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale with a carrying value of $28.8 million and $33.4 million, respectively,
were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
At December 31, 1997, mortgage-backed securities available for sale and
mortgage-backed securities held to maturity of $4.1 billion and $1.3 billion,
respectively, were pledged as collateral for various obligations as discussed
in notes 8, 9, 19 and 20. At December 31, 1996, mortgage-backed securities
available for sale and mortgage-backed securities held to maturity of $936.2
million and $1.4 billion, respectively, were pledged as collateral for various
obligations.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances.
At December 31, 1997 and 1996, loans receivable included approximately
$7.5 billion and $2.3 billion, respectively, of loans that had the potential to
experience negative amortization.
The Bank is the plaintiff in a claim against the United States in the
lawsuit, California Federal Bank v. United States (the "Cal Fed Litigation"),
which it assumed in the Cal Fed Acquisition. In connection with this lawsuit,
the Company recorded as an asset the estimated after-tax cash recovery from the
Cal Fed Litigation that will inure to the Company, net of amounts payable to
holders of certain publicly-traded rights in any such recovery (the "Goodwill
Litigation Asset"). In connection with the Cal Fed Acquisition, the Goodwill
Litigation Asset was recorded at its estimated fair value of $100 million, net
of estimated tax liabilities, as of January 3, 1997, and is included in the
Company's consolidated balance sheet as of December 31, 1997.
In addition, the Company is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Company.
F-65
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents .............. $ 412,311 $ 412,311 $ 269,869 $ 269,869
Securities available for sale .......... 813,085 813,085 542,019 542,019
Securities held to maturity ............ 58,299 58,299 4,272 4,287
Mortgage-backed securities
available for sale ................... 5,076,598 5,076,598 1,598,652 1,598,652
Mortgage-backed securities held to
maturity ............................. 1,337,877 1,373,289 1,621,662 1,653,847
Loans held for sale .................... 1,483,466 1,493,867 825,316 825,316
Loans receivable, net .................. 19,424,410 19,786,805 10,212,583 10,428,934
Investment in FHLB ..................... 468,191 468,191 220,962 220,962
Accrued interest receivable ............ 188,203 188,203 106,034 106,034
Mortgage servicing rights .............. 536,703 673,975 423,692 531,726
Financial Liabilities:
Deposits ............................... 16,202,605 16,224,399 8,501,883 8,514,099
Securities sold under agreements to
repurchase ........................... 1,842,442 1,842,737 1,583,387 1,585,964
Borrowings:
Gross ................................. 11,232,931 11,427,457 5,370,285 5,453,811
Interest rate swap
agreements (1) ...................... (401) (2,954) (5,391) (13,763)
----------- ----------- ----------- -----------
Total borrowings ..................... $11,232,530 $11,424,503 $ 5,364,894 $ 5,440,048
=========== =========== =========== ===========
Off-balance sheet net unrealized
gains (losses):
Commitments to originate loans ......... $ 1,652 $ (503)
Forward commitments to sell loans (7,099) 1,022
Principal-only swap agreements ......... 13,520 112
</TABLE>
- ----------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated balance sheet under the indicated captions, except for off-balance
sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgment was
required in estimating fair value for certain items. The subjective factors
include, among other things, the estimated timing and amount of cash flows,
risk characteristics, and interest rates, all of which are subject to changes.
F-66
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of performing
commercial and multi-family loans is calculated by discounting scheduled
principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Mortgage servicing rights: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating
future net servicing income, which include estimates of the cost of servicing,
the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental
rates for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities. Fair values of the
Company's interest rate swap agreements, which effectively hedge certain of the
Company's FHLB advances, are based on the net present value of the estimated
interest due to the Company as compared to the estimated interest due to the
counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Company's
commitments to originate loans is estimated using the fees currently charged to
enter into similar agreements, taking into account
F-67
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Fair values of forward commitments to sell loans are determined using current
estimated replacement costs. Fair values of the Company's floors are based on
quoted market prices for comparable floors. To calculate the value of the
principal-only swaps, dealer bids are obtained on the underlying principal-only
swaps. The change in the market price of a principal-only swap from the date of
inception to the termination date is applied to the remaining principal-only
swap.
33. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1997 and 1996 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1997 1997 1997 1997 1997
-------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Total interest income ................... $ 530,809 $ 531,303 $ 527,837 $ 512,751 $ 2,102,700
Total interest expense .................. (383,286) (380,268) (375,468) (359,395) (1,498,417)
---------- ---------- ---------- ---------- ------------
Net interest income ..................... 147,523 151,035 152,369 153,356 604,283
Provision for loan losses ............... (19,950) (19,950) (19,950) (19,950) (79,800)
---------- ---------- ---------- ---------- ------------
Net interest income after provision
for loan losses ........................ 127,573 131,085 132,419 133,406 524,483
Total noninterest income ................ 108,351 94,846 82,448 78,839 364,484
Total noninterest expense ............... (170,443) (154,758) (171,644) (153,724) (650,569)
---------- ---------- ---------- ---------- ------------
Income before income taxes,
extraordinary item and minority
interest ............................... 65,481 71,173 43,223 58,521 238,398
Income taxes ............................ (9,888) (12,208) (9,025) (10,194) (41,315)
---------- ---------- ---------- ---------- ------------
Income before extraordinary item
and minority interest .................. 55,593 58,965 34,198 48,327 197,083
Extraordinary item ...................... -- -- -- -- --
---------- ---------- ---------- ---------- ------------
Income before minority interest ......... 55,593 58,965 34,198 48,327 197,083
Minority interest ....................... (33,701) (35,250) (31,061) (31,839) (131,851)
---------- ---------- ---------- ---------- ------------
Net income available to
common stockholder ................... $ 21,892 $ 23,715 $ 3,137 $ 16,488 $ 65,232
========== ========== ========== ========== ============
</TABLE>
F-68
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1996 1996 1996 1996 1996
-------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income ................... $ 299,386 $ 308,137 $ 318,100 $ 308,176 $1,233,799
Total interest expense .................. (208,515) (219,453) (220,205) (200,121) (848,294)
---------- ---------- ---------- ---------- ----------
Net interest income ..................... 90,871 88,684 97,895 108,055 385,505
Provision for loan losses ............... (9,900) (9,900) (9,900) (9,900) (39,600)
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ........................ 80,971 78,784 87,995 98,155 345,905
Total noninterest income ................ 57,917 75,870 154,652 364,939 653,378
Total noninterest expense ............... (112,090) (157,443) (103,982) (118,221) (491,736)
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and minority
interest ............................... 26,798 (2,789) 138,665 344,873 507,547
Income taxes ............................ (5,641) (527) 110,978 (29,003) 75,807
---------- ---------- ---------- ---------- ----------
Income before extraordinary item
and minority interest .................. 21,157 (3,316) 249,643 315,870 583,354
Extraordinary item ...................... -- (1,586) -- -- (1,586)
---------- ---------- ---------- ---------- ----------
Income before minority interest ......... 21,157 (4,902) 249,643 315,870 581,768
Minority interest ....................... (17,656) (8,802) (58,610) (76,123) (161,191)
---------- ---------- ---------- ---------- ----------
Net income available to
common stockholder ................... $ 3,501 $ (13,704) $ 191,033 $ 239,747 $ 420,577
========== ========== ========== ========== ==========
</TABLE>
34. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets
Investment in FN Holdings .............................................. $843,507 $919,217
Other assets and deferred charges ...................................... 15,077 19,582
-------- --------
Total assets .......................................................... $858,584 $938,799
======== ========
Liabilities, Minority Interest and Stockholder's Equity
Senior notes ........................................................... $455,000 $455,000
Discount on senior notes ............................................... (3,907) (4,651)
Accrued interest payable ............................................... 11,843 11,849
Other liabilities ...................................................... 484 514
-------- --------
Total liabilities ..................................................... 463,420 462,712
Minority interest -- FN Holdings preferred stock ....................... 25,680 150,792
Minority interest -- Hunter's Glen ..................................... 163,568 153,684
Total stockholder's equity ............................................. 205,916 171,611
-------- --------
Total liabilities, minority interest and stockholder's equity ......... $858,584 $938,799
======== ========
</TABLE>
F-69
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only condensed statements of
income for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>
Dividends received from FN Holdings ........................ $ 56,876 $ 57,902 $ 29,185
-------- -------- --------
56,876 57,902 29,185
Interest expense ........................................... 57,613 40,494 --
Noninterest expense ........................................ 1,850 1,167 --
-------- -------- --------
59,463 41,661 --
Income before equity in undistributed net income of
FN Holdings ............................................... (2,587) 16,241 29,185
Equity in undistributed net income of FN Holdings .......... 104,493 519,621 117,833
-------- -------- --------
Income before income taxes and minority interest ........... 101,906 535,862 147,018
Income tax benefit ......................................... (5,833) (2,676) --
-------- -------- --------
Income before minority interest ............................ 107,739 538,538 147,018
Minority interest -- Hunter's Glen ......................... 29,716 113,146 24,554
Minority interest -- FN Holdings preferred stock
dividends ................................................. 12,791 4,815 --
-------- -------- --------
Net income ................................................ $ 65,232 $420,577 $122,464
======== ======== ========
</TABLE>
F-70
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount on senior notes ............ 744 523 --
Amortization of deferred issuance costs ............. 1,825 1,167 --
Decrease (increase) other assets and deferred
charges ............................................ 876 (2,332) --
Increase (decrease) in other liabilities ............ 1,775 (2,163) --
(Decrease) increase in accrued interest payable ..... (6) 11,849 --
Minority interest -- FN Holdings preferred stock 12,791 4,815 --
Minority interest -- Hunter's Glen .................. 29,716 113,146 24,554
Equity in undistributed net income of FN
Holdings ........................................... (104,493) (519,621) (117,833)
----------- ---------- ----------
Net cash provided by operating activities ........... 8,460 27,961 29,185
----------- ---------- ----------
Cash flows provided by investing activities:
Redemption of FN Holdings' class C common
stock ............................................... -- 124,670 60,801
----------- ---------- ----------
Net cash provided by investing activities ........... -- 124,670 60,801
----------- ---------- ----------
Cash flows used in financing activities:
Proceeds from issuance of senior notes ................ -- 434,083 --
Capital contribution .................................. 49 1,819 --
Capital distribution .................................. -- (434,083) --
Dividends ............................................. (8,509) (154,450) (89,986)
----------- ---------- ----------
Net cash used in financing activities ............... (8,460) (152,631) (89,986)
----------- ---------- ----------
Net change in cash and cash equivalents ............. -- -- --
Cash and cash equivalents at beginning of year ...... -- -- --
----------- ---------- ----------
Cash and cash equivalents at end of year ............ $ -- $ -- $ --
=========== ========== ==========
</TABLE>
Noncash investing and financing activities:
During 1996, Parent Holdings received a $46.8 million loan receivable from
FN Holdings in exchange for the redemption of and dividends on FN Holdings'
class C common stock in amounts totalling $44.8 million and $2 million,
respectively. Parent Holdings distributed such loan receivable in the form of a
dividend to an affiliate.
35. SUBSEQUENT EVENTS (UNAUDITED)
GSAC Acquisition
On February 4, 1998, Auto One completed the GSAC Acquisition in a
transaction accounted for under the purchase method of accounting. GSAC engaged
in sub-prime automobile financing activities
F-71
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and provided loan processing, funding and loan servicing primarily in the
states of Texas, Louisiana and Georgia. The purchase price paid was $22.5
million and the issuance of 250 shares of Auto One's common stock. The
estimated fair value of assets acquired was approximately $102.9 million
consisting of approximately 7,400 loans.
Golden State Merger
On February 4, 1998, Parent Holdings, and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange
of shares in a merger transaction (the "Golden State Merger"). Following the
Golden State Merger, the combined parent company, Golden State, will have 135
to 145 million common shares outstanding and will continue to be a publicly
traded company. As part of the Golden State Merger Agreement, Glendale Federal
will be merged with and into California Federal.
The terms of the Golden State Merger Agreement provide for Golden State
shareholders to retain ownership of approximately 55% to 58% of the merged
entity, based on the average trading price of Golden State shares during a
period preceding the close of the transaction, as determined after distribution
of Golden State's share of certain litigation interests. The remaining
ownership of the merged entity will be retained by the principal shareholders
of California Federal, Gerald J. Ford, chairman and chief executive officer of
the Bank, and MacAndrews & Forbes Holdings Inc. As part of the Golden State
Merger Agreement, the owners of Parent Holdings will receive, after a final
resolution of the Cal Fed Litigation, additional Golden State stock.
The Golden State Merger will be accounted for as a purchase. Golden
State's assets, liabilities and other items will be adjusted to their estimated
fair value at the closing date of the merger.
As a result of the Golden State Merger, Parent Holdings and its
subsidiaries will deconsolidate from the Mafco Group. Therefore, the amount of
net operating loss carryovers available to offset the taxable income of Parent
Holdings and its subsidiaries will be reduced. See note 27.
As of December 31, 1997, Glendale Federal had total assets of
approximately $16.0 billion and deposits of $9.5 billion, and operated 181
branches and 26 loan offices in California. During 1997, Golden State entered
into agreements to acquire RedFed Bancorp Inc. ("RedFed") and its federal
savings bank subsidiary, Redlands Federal Bank, in a tax-free stock-for-stock
merger, and CENFED Financial Corporation ("CENFED") and its federal savings
bank subsidiary, CenFed Bank, in a tax-free exchange of shares. At December 31,
1997, RedFed and CENFED had total assets of approximately $1.0 billion and $2.2
billion, respectively, and deposits of $.8 billion and $1.2 billion,
respectively. On a pro forma basis at December 31, 1997, Golden State would
have consolidated assets of $19.2 billion and deposits of $11.9 billion.
Further, on a pro forma basis, the merged entities (including RedFed and CENFED
would have consolidated assets of $51.9 billion and deposits of $28.1 billion
at December 31, 1997.
The Golden State Merger is subject to regulatory and stockholder approval
and is expected to close during the third quarter of 1998.
F-72
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF FEBRUARY 4, 1998
BY AND AMONG
GOLDEN STATE BANCORP INC.
GOLDEN STATE FINANCIAL CORPORATION
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
FIRST NATIONWIDE HOLDINGS INC.
FIRST GIBRALTAR HOLDINGS INC.
AND
HUNTER'S GLEN/FORD, LTD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
THE MERGER
1.1. The Merger ......................................................... A-1
1.2. Effective Time ..................................................... A-2
1.3. Conversion of Parent Holdings Common Stock, FNH Common Stock and FNH
Preferred Stock .................................................... A-2
1.4. Golden State Common Stock and Merger Sub Common Stock .............. A-3
1.5. Tax Consequences ................................................... A-3
1.6. Contingent Consideration ........................................... A-3
ARTICLE II
DISCLOSURE SCHEDULES; STANDARDS
FOR REPRESENTATIONS AND WARRANTIES
2.1. Disclosure Schedules ............................................... A-10
2.2. Standards .......................................................... A-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GOLDEN STATE
3.1. Corporate Organization ............................................. A-11
3.2. Capitalization ..................................................... A-11
3.3. Authority; No Violation ............................................ A-13
3.4. Consents and Approvals ............................................. A-13
3.5. Reports ............................................................ A-14
3.6. Financial Statements ............................................... A-14
3.7. Broker's Fees ...................................................... A-15
3.8. Absence of Certain Changes or Events ............................... A-15
3.9. Legal Proceedings .................................................. A-15
3.10. Taxes .............................................................. A-15
3.11. Employees .......................................................... A-16
3.12. SEC Reports. ....................................................... A-17
3.13. Golden State Information. .......................................... A-17
3.14. Compliance with Applicable Law ..................................... A-17
3.15. Certain Contracts. ................................................. A-17
3.16. Agreements with Regulatory Agencies ................................ A-18
3.17. State Takeover Laws; Charter Provision. ............................ A-18
3.18. Environmental Matters .............................................. A-18
3.19. Derivative Transactions ............................................ A-19
3.20. Opinion ............................................................ A-19
3.21. Approvals .......................................................... A-19
3.22. Loan Portfolio ..................................................... A-19
3.23. Reorganization ..................................................... A-20
3.24. Material Interests of Certain Persons .............................. A-20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT HOLDINGS
4.1. Corporate Organization .................................................... A-20
4.2. Capitalization ............................................................ A-20
4.3. Authority; No Violation ................................................... A-21
4.4. Consents and Approvals .................................................... A-22
4.5. Reports ................................................................... A-22
4.6. Financial Statements ...................................................... A-22
4.7. Broker's Fees ............................................................. A-23
4.8. Absence of Certain Changes or Events ...................................... A-23
4.9. Legal Proceedings ......................................................... A-24
4.10. Taxes ..................................................................... A-24
4.11. Employees ................................................................. A-24
4.12. SEC Reports ............................................................... A-25
4.13. Parent Holdings Information ............................................... A-26
4.14. Compliance with Applicable Law ............................................ A-26
4.15. Ownership of Golden State Common Stock; Affiliates and Associates ......... A-26
4.16. Agreements with Regulatory Agencies ....................................... A-26
4.17. Approvals ................................................................. A-26
4.18. Reorganization ............................................................ A-26
4.19. Certain Contracts ......................................................... A-27
4.20. Environmental Matters ..................................................... A-27
4.21. Derivative Transactions ................................................... A-28
4.22. Loan Portfolio ............................................................ A-28
4.23. Material Interests of Certain Persons ..................................... A-28
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1. Covenants Relating to Conduct of Business ................................. A-29
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Regulatory Matters ........................................................ A-31
6.2. Access to Information ..................................................... A-32
6.3. Stockholder Meeting ....................................................... A-33
6.4. Legal Conditions to Merger ................................................ A-33
6.5. Cash-out of Stock Options ................................................. A-33
6.6. Employee Benefit Plans; Existing Agreements ............................... A-33
6.7. Indemnification ........................................................... A-34
6.8. Additional Agreements ..................................................... A-35
6.9. Advice of Changes ......................................................... A-35
6.10. Execution and Authorization of Bank Merger Agreement ...................... A-35
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
6.11. Board of Directors ......................................................... A-35
6.12. Registration Rights Agreement .............................................. A-36
6.13. Distribution and Listing of LTWs; Amendment of Certificate of Incorporation A-36
6.14. Tax Sharing Agreement ...................................................... A-36
6.15. Transfer and Similar Taxes ................................................. A-36
6.16. Purchases of Golden State Securities ....................................... A-36
6.17. Stock Exchange Listing ..................................................... A-36
6.18. Certain Agreements of FGH, Parent Holdings and Ford ........................ A-36
6.19. Bank Charter Amendment ..................................................... A-37
ARTICLE VII
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation To Effect the Mergers ................ A-37
7.2. Conditions to Obligations of Parent Holdings and FNH ....................... A-38
7.3. Conditions to Obligations of Golden State and Merger Sub ................... A-39
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1. Termination ................................................................ A-40
8.2. Effect of Termination; Expenses ............................................ A-40
8.3. Amendment .................................................................. A-41
8.4. Extension; Waiver .......................................................... A-41
ARTICLE IX
GENERAL PROVISIONS
9.1. Closing .................................................................... A-41
9.2. Alternative Structure ...................................................... A-41
9.3. Nonsurvival of Representations, Warranties and Agreements .................. A-41
9.4. Expenses ................................................................... A-42
9.5. Notices .................................................................... A-42
9.6. Interpretation ............................................................. A-42
9.7. Counterparts ............................................................... A-42
9.8. Entire Agreement ........................................................... A-42
9.9. Governing Law .............................................................. A-43
9.10. Enforcement of Agreement ................................................... A-43
9.11. Severability ............................................................... A-43
9.12. Publicity .................................................................. A-43
9.13. Assignment; No Third Party Beneficiaries ................................... A-43
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of February 4, 1998, by and
among First Nationwide (Parent) Holdings Inc., a Delaware corporation ("Parent
Holdings"), First Nationwide Holdings Inc., a Delaware corporation and a
subsidiary of Parent Holdings ("FNH"), Golden State Bancorp Inc., a Delaware
corporation ("Golden State"), Golden State Financial Corporation, a Delaware
corporation and a wholly owned subsidiary of Golden State ("Merger Sub"), First
Gibraltar Holdings Inc., a Delaware corporation ("FGH"), and Hunter's
Glen/Ford, Ltd., a limited partnership organized under the laws of the State of
Texas ("Ford," and, together with FGH, the "Shareholders").
WHEREAS, the respective Boards of Directors of Parent Holdings, FNH,
Golden State and Merger Sub have determined that it is in the best interests of
their respective companies and their stockholders to consummate the business
combination transactions provided for herein in which, subject to the terms and
conditions set forth herein, Parent Holdings will merge with and into Golden
State (the "Parent Merger") and FNH, following the contribution of all of its
assets and liabilities (including 100% of the common stock of CFB (as defined
below)) to a newly-formed, wholly owned subsidiary of FNH ("New FNH"), will
merge with and into Merger Sub (the "FNH Merger")(the Parent Merger and the FNH
Merger together are referred to herein as the "Mergers");
WHEREAS, as soon as practicable after the execution and delivery of this
Agreement, California Federal Bank, A Federal Savings Bank, a federally
chartered stock savings bank and a wholly owned subsidiary of FNH ("CFB," and
sometimes referred to herein as the "Surviving Bank"), and Glendale Federal
Bank, Federal Savings Bank, a federally chartered stock savings bank and a
wholly owned subsidiary of Golden State ("GFB"), will enter into a Subsidiary
Agreement and Plan of Merger (the "Bank Merger Agreement") providing for the
merger (the "Subsidiary Merger") of GFB with and into CFB, and it is intended
that the Subsidiary Merger be consummated immediately following the
consummation of the Mergers;
WHEREAS, as a condition to, and immediately afer the execution of this
Agreement, Parent Holdings and Golden State are entering into a Stock Option
Agreement in the form attached hereto as Annex C;
WHEREAS, as a condition to, and contemporaneously with the execution of
this Agreement, Parent Holdings, CFB, Golden State, GFB, Stephen J. Trafton and
Richard A. Fink are entering into a Litigation Management Agreement (the
"Management Agreement");
WHEREAS, Golden State and the Shareholders have agreed, in connection with
the Mergers and upon the terms and subject to the conditions set forth herein,
to enter into a Registration Rights Agreement in substantially the form
attached hereto as Annex D (the "Registration Rights Agreement") relating to
the shares of Golden State Common Stock (as defined herein) to be issued to the
Shareholders in the Mergers; and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with the Mergers and also to prescribe certain
conditions to the consummation of the Mergers.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the Delaware General Corporation Law (the "DGCL"),
simultaneously at the Effective Time (as defined in Section 1.2 hereof), (a)
Parent Holdings shall merge with and into Golden State pursuant to an Agreement
and Plan of Merger substantially in the form attached hereto as Annex A (the
"Parent Plan of Merger"), and (b) FNH shall merge with and into Merger Sub
pursuant to an Agreement and Plan of
A-1
<PAGE>
Merger substantially in the form attached hereto as Annex B (the "FNH Plan of
Merger"). Golden State and Merger Sub shall be the surviving corporations in
the Mergers, and shall continue their respective corporate existences under the
laws of the State of Delaware. Upon consummation of the Mergers, the separate
corporate existence of each of Parent Holdings and FNH shall terminate. Golden
State is sometimes referred to herein as the "Surviving Corporation."
1.2. Effective Time. The Mergers shall become effective as set forth in
the certificates of merger (the "Certificates of Merger") which shall be filed
with the Secretary of State of the State of Delaware (the "Secretary") on the
Closing Date (as defined in Section 9.1 hereof). The term "Effective Time"
shall be the date and time when the Mergers become effective, as set forth in
the Certificates of Merger. The term "Effective Date" shall be the date on
which the Effective Time occurs.
1.3. Conversion of Parent Holdings Common Stock, FNH Common Stock and FNH
Preferred Stock. (a) At the Effective Time, the 1,000 shares of the common
stock, par value $1.00 per share, of Parent Holdings (the "Parent Holdings
Common Stock") issued and outstanding shall, by virtue of this Agreement and
the Parent Plan of Merger, and without any action on the part of the holder
thereof, be converted into and exchangeable for (i) that number of shares of
the common stock, par value $1.00 per share, of Golden State ("Golden State
Common Stock") equal to (x) the Closing Issuance Number less (y) the Ford
Shares Number, and (ii) the right to receive the contingent consideration
attributable to FGH as set forth in Section 1.6.
(b) At the Effective Time, each of the 800 shares of Class A common stock,
par value $1.00 per share, of FNH (the "FNH Class A Common Stock") issued and
outstanding shall, by virtue of this Agreement and the FNH Plan of Merger, and
without any action on the part of the holder thereof, be canceled and no
consideration shall be paid in respect thereof.
(c) At the Effective Time, the 200 shares of Class B common stock, par
value $1.00 per share, of FNH (the "FNH Class B Common Stock") issued and
outstanding shall, by virtue of this Agreement and the FNH Plan of Merger, and
without any action on the part of the holder thereof, be converted into and
exchangeable for (i) that number of shares of Golden State Common Stock equal
to (rounded up to the nearest share) the Ford Shares Number, and (ii) the right
to receive the contingent consideration attributable to Ford as set forth in
Section 1.6.
(d) For purposes of this Agreement, the following terms have the meanings
indicated:
"Adjusted Average Daily Price" means (a) the Average Daily Price less (b)
the Glendale Litigation Adjustment.
"Aggregate LTW Value" means the product of (x) the Average Daily LTW Price
and (y) the total number of LTWs outstanding plus those reserved for issuance
as of the business day immediately prior to the Closing Date.
"Average Daily LTW Price" means the daily volume weighted average price of
the LTWs on the New York Stock Exchange (the "NYSE"), or on such other stock
market or securities trading system on which the LTWs may be listed or quoted
from time to time (as reported by Bloomberg Financial Services or, if not
reported therein, in another mutually agreed upon authoritative source) for 15
randomly selected days during the 30 consecutive NYSE trading days ending on
the third business day prior to the Closing Date. The random selection shall be
made in a manner reasonably acceptable to both Golden State and Parent
Holdings.
"Average Daily Price" means the daily volume weighted average price per
share of Golden State Common Stock on the NYSE (as reported by Bloomberg
Financial Services or, if not reported therein, in another mutually agreed upon
authoritative source) for 15 randomly selected days during the 30 consecutive
NYSE trading days ending on the third business day prior to the Closing Date.
The random selection shall be made in a manner reasonably acceptable to both
Golden State and Parent Holdings.
"Closing Issuance Number" means (x) the Pro Forma Shares Number less (y)
the Outstanding Shares Number.
A-2
<PAGE>
"Ford Shares Number" means the amount obtained by (I) dividing (A) (1) the
product of the Closing Issuance Number and the Average Daily Price, plus (2)
the sum of $455 million and the amount of all interest on the outstanding
principal amount of 12 1/2% Senior Exchange Notes due 2003 of Parent Holdings
which is accrued but unpaid as of the Closing Date, less (3) the aggregate
amount of cash and cash equivalents held by Parent Holdings as of the Closing
Date, by (B) the Average Daily Price and (II) multiplying the result obtained
in clause (I) by 0.2.
"Glendale Litigation Adjustment" means the quotient obtained by dividing
(x) the product of (1) the Glendale Litigation Value and (2) the Glendale
Retention Factor, by (y) the Outstanding Shares Number.
"Glendale Litigation Value" means the quotient obtained by dividing (x)
the Aggregate LTW Value by (y) one minus the Glendale Retention Factor.
"Glendale Retention Factor" means a number, expressed as a decimal, equal
to one minus the percentage (expressed as a decimal) of the net after-tax
recovery in the Glendale Litigation to be distributed in the aggregate to the
holders of the LTWs as set forth in the final terms of the LTWs as issued
(provided that the Glendale Retention Factor shall in no event exceed 0.15).
"LTW" means the Litigation Tracking Warrants (Trademark) to be issued and
distributed by Golden State to its stockholders after the date of this
Agreement and having substantially the terms set forth in Annex E attached
hereto.
"Outstanding Shares Number" means the total number of fully-diluted shares
of Golden State Common Stock as of the Closing Date (excluding shares of Golden
State Common Stock issuable upon exercise of LTWs or upon exercise of the
option granted to Parent Holdings under the Option Agreement), with all Golden
State Options which have been surrendered for a cash payment after the date of
this Agreement pursuant to Section 6.5 treated as if they had remained
outstanding, and computed on the "treasury stock method" of calculating
earnings per share under Statement of Financial Accounting Standards No. 128 as
in effect as of the date hereof, in all cases using the Average Daily Price as
the "market price" of Golden State Common Stock.
"Pro Forma Factor" is determined as follows:
<TABLE>
<CAPTION>
IF THE ADJUSTED THE PRO FORMA
AVERAGE DAILY PRICE IS: FACTOR IS:
- ------------------------------------------------------------ --------------
<S> <C>
$32.00 or less ................................... 0.58
greater than $32.00 but less than $32.50 ......... 0.57
$32.50 or greater but less than $33.00 ........... 0.56
$33.00 or greater ................................ 0.55
</TABLE>
"Pro Forma Shares Number" means the quotient, rounded up to the nearest
whole share, obtained by dividing (x) the Outstanding Shares Number by (y) the
Pro Forma Factor.
1.4. Golden State Common Stock and Merger Sub Common Stock. The shares of
Golden State Common Stock and Merger Sub Common Stock issued and outstanding
immediately prior to the Effective Time shall be unaffected by the Mergers and
shall remain issued and outstanding following the Effective Time.
1.5. Tax Consequences. It is intended that the Mergers and the Subsidiary
Merger constitute reorganizations within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement
(together with the FNH Plan of Merger and the Parent Plan of Merger) shall
constitute a "plan of reorganization" for purposes of Section 368 of the Code.
1.6. Contingent Consideration. FGH and Ford, as holders of the Parent
Holdings Common Stock and the FNH Class B Common Stock, respectively, shall be
entitled to receive additional merger consideration in accordance with the
terms and provisions of this Section 1.6.
A-3
<PAGE>
(a) Goodwill Litigation Recovery.
(i) Not later than the tenth business day following the date on which CFB
shall have received the CFB Cash Payment (as defined below), Golden State
shall issue to FGH and Ford an aggregate number of shares of Golden State
Common Stock (the "Goodwill Recovery Shares Number") equal to the quotient
obtained by dividing (x) the CFB Litigation Distribution Amount (as defined
below) by (y) the daily volume weighted average price per share of Golden
State Common Stock on the NYSE (as reported by Bloomberg Financial Services
or, if not reported therein, in another mutually agreed upon authoritative
source) (the "Average Stock Price") for 15 randomly selected days during
the 30 consecutive trading-day period ending on the business day
immediately prior to the date of issuance of such shares. The number of
such shares to be issued to FGH shall be 80% of the Goodwill Recovery
Shares Number, and the number of such shares to be issued to Ford shall be
20% of the Goodwill Recovery Shares Number.
(ii) In the event that a final, nonappealable judgment in or final
settlement of the Goodwill Litigation does not result in a CFB Cash
Payment, or in the event that the sum of the Net Cash Payment and the CFB
Litigation Tax Benefits is less than the sum of the Litigation Recovery
Retention Amount and the Interest Factor, then FGH and Ford shall each make
a cash payment to Golden State, within twenty business days following the
date of such final judgment or settlement, which cash payments shall equal,
in the aggregate, an amount (the "Contribution Amount") equal to the
difference between (i) the sum of the Litigation Recovery Retention Amount
and the Interest Factor, and (ii) the sum of the Net Cash Payment and the
CFB Litigation Tax Benefits, with FGH being severally liable for 80% of the
Contribution Amount and Ford being severally liable for 20% of the
Contribution Amount; provided, however, that in lieu of paying such amounts
to Golden State in cash, each of FGH and Ford may elect to tender shares of
Golden State Common Stock in payment of all or a portion of such party's
percentage share of the Contribution Amount, with such shares being
accepted as payment by Golden State at a per share value equal to the
Average Stock Price for 15 randomly selected days during the 30 trading-day
period ending on the business day immediately prior to the date of payment.
(iii) In the event that CFB receives the CFB Cash Payment prior to such
time as GFB receives a GFB Payment in the Glendale Litigation, then Golden
State shall issue shares of Golden State Common Stock to FGH and Ford as
contemplated by and in accordance with the terms of paragraph (i) above,
except that for purposes of calculating the CFB Litigation Distribution
Amount, the Litigation Recovery Retention Amount shall be estimated as the
excess of (x) the quotient obtained by dividing (1) the product of the
Glendale Litigation Value and the Glendale Retention Factor, by (2) the Pro
Forma Factor, over (y) the product of the Glendale Litigation Value and the
Glendale Retention Factor (the result of such calculation being referred to
herein as the "Estimated Litigation Recovery Retention Amount") (provided
that for purposes of calculating the Glendale Litigation Value in this
clause (iii), the Average Daily LTW Price shall be calculated for 15
randomly-selected days during a 30 trading-day period ending on the
business day immediately prior to the date of issuance of the shares of
Golden State Common Stock). Within ten business days following the actual
receipt by GFB of a GFB Payment in the Glendale Litigation, the Estimated
Litigation Recovery Retention Amount shall be compared to the actual
Litigation Recovery Retention Amount calculated pursuant to this Section
1.6, and the parties shall effect a settlement as follows:
(A) If the Estimated Litigation Recovery Retention Amount exceeds the
Litigation Recovery Retention Amount, then Golden State shall issue to
FGH and Ford additional shares of Golden State Common Stock having an
aggregate value (valued at the Average Stock Price for 15 randomly
selected days during the 30 trading-day period ending on the business
day immediately prior to the date of issuance of such shares) equal to
the amount of such excess, with 80% of such shares being issued to FGH
and 20% of such shares being issued to Ford; or
(B) If the Estimated Litigation Recovery Retention Amount is less than
the Litigation Recovery Retention Amount, then each of FGH and Ford
shall contribute the difference in cash and/or stock, at its election,
in the same manner and proportion as contemplated by paragraph (ii)
above.
A-4
<PAGE>
(b) Guarini Litigation Recovery. Not later than the tenth business day
following the date on which CFB shall have actually received a cash payment or
other property (a "Guarini Payment") pursuant to a final, nonappealable
judgment in, or final settlement of, the Guarini Litigation (as defined below),
Golden State shall issue to FGH and Ford an aggregate number of shares of
Golden State Common Stock (the "Guarini Recovery Shares Number") equal to the
quotient obtained by dividing (x) the aggregate amount of any such cash payment
plus the fair market value (as determined by the Board of Directors of Golden
State in good faith) of any such other property, less the sum of (1) the
aggregate expenses incurred previously and hereafter by CFB in prosecuting the
Guarini Litigation and obtaining the Guarini Payment and (2) an amount equal to
the net amount of the taxable portion of the Guarini Payment after deducting
the expenses in clause (1), multiplied by the highest combined statutory rate
of federal, state and local income taxes in effect in the taxable year in which
the Guarini Payment is received, by (y) the Average Stock Price for 15 randomly
selected days during the 30 trading-day period ending on the business day
immediately prior to the date of issuance of the shares. The number of such
shares to be issued to FGH shall be 80% of the Guarini Recovery Shares Number,
and the number of such shares to be issued to Ford shall be 20% of the Guarini
Recovery Shares Number.
(c) Tax Benefits.
(i) For each taxable period that ends after the Effective Date (a
"Taxable Period"), without duplication of any amount payable to FGH or Ford
pursuant to Section 1.6(a) or 1.6(b), Golden State shall make a payment (a
"Tax Payment") to each of FGH and Ford within five (5) days after the
filing of the federal income tax return for such Taxable Period of any
Taxpayer or the receipt of a refund under Section 1.6(c)(ii)(C)(2), an
amount equal to 80%, in the case of FGH, and 20%, in the case of Ford, of
the Federal Net Tax Benefits of Parent Holdings, FNH, CFB or any Subsidiary
of CFB, if any, as and when realized by the Taxpayer in the Taxable Period,
as reviewed and attested to by KPMG Peat Marwick LLP. In the event that
Federal Net Tax Benefits is a negative number for any Taxable Period, FGH
and Ford shall pay Golden State 80% and 20%, respectively, of such negative
amount.
(ii) For purposes of this Agreement:
(A) With respect to Parent Holdings, FNH, CFB or any subsidiary of
CFB, the "Tax Benefits" shall be the sum of (1) the excess (if any) of
"deductible temporary differences" over "taxable temporary differences"
as those terms are defined in Statement of Financial Accounting
Standards No. 109 ("SFAS 109") (including, without limitation, net
operating loss, capital loss, credit carryovers, including alternative
minimum tax credit, and other carryovers but not including any tax
benefits taken into account in determining the aggregate amount of
payments to the holders of the CALGZs and CALGLs immediately after the
Effective Date) not including the amount of any taxable temporary
difference attributable to the Goodwill Litigation (but taking into
account the deconsolidation of Parent Holdings and FNH from the Mafco
Holdings Inc. group and the ownership change that will occur with
respect to Parent Holdings and FNH under Section 382 of the Code as a
result of the Mergers), as reviewed and attested to by KPMG Peat Marwick
LLP; provided, however, such amount shall be adjusted for any final
determination of tax liability or tax attributes for taxable periods
ending on or before the date of the Effective Time; provided further,
however, that such deductible temporary differences and taxable
temporary differences shall not be adjusted for any purchase accounting
adjustments as a result of the transactions contemplated by this
Agreement, and (2) any federal income tax benefit (other than tax
benefits taken into account in determining the aggregate amount of
payments to the holders of the CALGZs and CALGLs) actually realized by
the Taxpayer in any Taxable Period by reason of the treatment as
interest under Section 483 of the Code (or any successor provision
thereto) of any Tax Payment, payment of the Goodwill Recovery Shares
Number or payment of the Guarini Recovery Shares Number or any other
payment under Section 1.6 hereof, or any increase in Tax Payment,
payment of the Goodwill Recovery Shares Number or payment of the Guarini
Recovery Shares Number or any other payment under Section 1.6 hereof.
A-5
<PAGE>
(B) "Taxpayer" shall mean:
(1) after the Effective Date the affiliated group of corporations
within the meaning of Section 1504 of the Code of which Golden State
or its successor is the common parent and Parent Holdings, FNH, CFB
or their successors are members, or
(2) after the Effective Date each of Golden State, Parent Holdings,
FNH, New FNH, CFB or any successor.
(C) The "Federal Net Tax Benefits" shall be equal to the aggregate of:
(1) the excess, if any, of (x) the federal income tax liability for
the Taxable Period (calculated with all carryovers and carrybacks to
the Taxable Period that would have been allowable) which would have
been incurred by the Taxpayer if the Tax Benefits had not been
deducted, credited or used to offset income or tax liability in the
Taxable Period, over (y) the federal income tax liability for the
Taxable Period (calculated with all available carryovers and
carrybacks to the Taxable Period) actually incurred by the Taxpayer
(for purposes of determining the use of items of any deductible
temporary differences and taxable temporary differences for purposes
of (C)(1)(x) above, such items will be deemed deductible or taxable
to the extent of the amount of such items at the Effective Date
multiplied by a fraction the numerator of which is the actual use of
the net operating loss carryover for any Taxable Period and the
denominator of which is the total net operating loss carryover
immediately after the Effective Date), plus
(2) any federal income tax refunds with Applicable Interest
(including refunds or interest with respect to payments in lieu of
federal income taxes under the Tax Sharing Agreement (as defined in
Section 6.14)) of Parent Holdings, FNH, CFB, any subsidiary of CFB or
any predecessor of any of them for any taxable period ending on or
before the Effective Date that have not been reflected on the books
of Parent Holdings, FNH, CFB or any Subsidiary of CFB as of the
Effective Date, minus
(3) any federal income tax deficiencies with Applicable Interest
(including any tax sharing payment obligations or interest with
respect to payments in lieu of federal income taxes under the Tax
Sharing Agreement (as defined in Section 6.14)), of Parent Holdings,
FNH, CFB, any subsidiary of CFB or any predecessor of any of them for
any taxable period ending on or before the Effective Date that have
not been reflected on the books of Parent Holdings, FNH, CFB or any
Subsidiary of CFB as of the Effective Date.
(iii) All Tax Payments shall be made in shares of Golden State Common
Stock valued at the daily volume weighted average price per share of Golden
State Common Stock for the Taxable Period except that in the case of a
further Tax Payment pursuant to paragraph (iv), payment shall be made in
shares of Golden State Common Stock valued at the daily volume weighted
average price per share of Golden State Common Stock for 15 randomly
selected days during the 30 trading-day period ending on the date
immediately prior to the date of such Tax Payment; provided, however, that
no Tax Payment need be made in Golden State Common Stock to the extent that
the aggregate Tax Payments including any adjustment pursuant to paragraph
(iv) below (provided, however, that for this purpose only Federal Net Tax
Benefits shall not include any Tax Benefits used to offset any recovery
attributable to the Goodwill Litigation), exceed $100 million times the
number of years from the year of the Closing until the year of such Tax
Payment ("Limitation"). The amount of any Tax Payment that exceeds the
Limitation shall carry forward and become a Tax Payment in the succeeding
year. Notwithstanding the foregoing, any return of Tax Payment pursuant to
paragraph (iv) below shall be made in cash except that any return of Tax
Payment made within six months of a Tax Payment shall be made in shares of
Golden State Common Stock valued at the value of such stock for purposes of
such Tax Payment. Any payment by FGH or Ford pursuant to the final sentence
of Section 1.6(c)(i) shall be made in cash.
(iv) If for any reason there is any adjustment to Tax Benefits for any
Taxable Period that is reviewed and attested to by KPMG Peat Marwick LLP,
Federal Net Tax Benefits shall be
A-6
<PAGE>
recalculated and either a further Tax Payment (in the case of an increase
in Federal Net Tax Benefit) or a return of Tax Payment (in the case of a
decrease in Federal Net Tax Benefit) shall be made by Golden State or by
FGH and Ford, as the case may be, to the other party, in accordance with
paragraph (iii) above, within five (5) days of the filing of a federal
income tax return, claim for refund or final assessment or other event
finally fixing such adjustment.
(v) At any time following the Closing, if Golden State incurs any federal
or state tax liability arising out of any adjustment or adjustments (each,
a "382 Adjustment Event") to the limitation on net operating losses and
other attributes or net unrealized built-in losses of GFB and its
Subsidiaries, as defined in Section 382 of the Code, resulting from a
change of ownership of GFB and its Subsidiaries in 1993, as described in
the July 2, 1993 prospectus with respect to the Plan of Reorganization of
Glenfed, Inc. and GFB, then Golden State shall issue to FGH and Ford an
aggregate amount of shares of Golden State Common Stock equal to the
quotient obtained by dividing (A) the product of (x) one minus the Pro
Forma Factor times (y) the increase in federal and state tax liability plus
interest and penalties arising thereon on account of any 382 Adjustment
Event (such amount in this clause (y), the "382 Adjustment Amount"), by (B)
the Average Stock Price for 15 randomly selected days during the 30
trading-day period immediately preceding the date of issuance of such
shares (such quotient, the "382 Adjustment Number"). If Golden State
suffers any increase in federal or state tax liability arising out of a 382
Adjustment Event which occurs after the date of this Agreement and prior to
the Effective Date, then Golden State shall issue to FGH and Ford on the
Effective Date, in addition to the shares issuable pursuant to Section 1.3,
a number of shares of Golden State Common Stock equal to the 382 Adjustment
Number with respect to such 382 Adjustment Event. In all cases under this
subsection (v), the number of shares to be issued to FGH shall be 80% of
the 382 Adjustment Number, and the number of such shares to be issued to
Ford shall be 20% of the 382 Adjustment Number.
"Applicable Interest" means (A) for federal income tax refunds, the
interest received that has not been reflected on the books of Parent Holdings,
FNB, CFB, or any Subsidiary of CFB as of the Effective Date, less the product
of such excess interest times the highest combined statutory rates of federal,
state, and local income taxes in effect during the tax year in which the
interest is received, or (B) for federal income tax deficiencies, the interest
paid for any federal income tax that has not been reflected on the books of
Parent Holdings, FNB, CFB, or any Subsidiary of CFB as of the Effective Date,
less the product of such excess interest times the highest combined statutory
rates of federal, state, and local income taxes in effect during the tax year
in which the interest is paid.
(d) Definitions. For purposes of this Section 1.6, the following terms
have the meanings indicated:
"CFB Cash Payment" means the aggregate amount of the cash payment (or the
cash resulting from the monetization of any non-cash payment) actually received
by CFB in respect of a final, non-appealable judgment in or final settlement of
the Goodwill Litigation.
"Net Cash Payment" means (A) the CFB Cash Payment minus (B) the sum of the
following: (i) the aggregate expenses incurred previously and hereafter by CFB
in prosecuting the Goodwill Litigation and obtaining such CFB Cash Payment,
(ii) the expenses incurred by CFB in connection with the creation, issuance and
trading of the CALGZs and the CALGLs, including, without limitation, legal and
accounting fees and the fees and expenses of the interest agent, (iii) an
amount equal to the taxable portion of the net CFB Cash Payment (the taxable
portion of the CFB Cash Payment less the expenses described in the preceding
clauses (i) and (ii)) multiplied by the highest combined statutory rate of
federal, state and local income taxes in effect in the taxable year in which
the CFB Cash Payment is received, (iv) the aggregate amount of the payments due
to the holders of the CALGZs, and (v) the aggregate amount of the payments due
to the holders of the CALGLs.
"CALGZs" means the Contingent Litigation Recovery Participation Interests
of CFB.
"CALGLs" means the Secondary Contingent Litigation Recovery Participation
Interests of CFB.
"CFB Litigation Distribution Amount" means (i) the sum of (A) the amount
of the Net Cash Payment and (B) the CFB Litigation Tax Benefits, less (ii) the
sum of (A) the Litigation Recovery Retention Amount and (B) the Interest
Factor.
A-7
<PAGE>
"CFB Litigation Tax Benefits" means the tax benefits (other than tax
benefits taken into account in determining the aggregate amount of payments to
the holders of the CALGZs and the CALGLs), if any, actually realized by the
Taxpayer for a Taxable Period as a result of tax items (including items of loss
or deduction and recovery of basis but not including any exclusion from income)
derived from the receipt or paying over of the proceeds of the Goodwill
Litigation, including from the basis (if any) of the property that is the
subject of the Goodwill Litigation that are not reflected on the books of
Parent Holdings, FNH, CFB or any Subsidiary of CFB as of the Effective Date,
measured by the excess of the federal income tax liability that would have been
incurred by the Taxpayer for the Taxable Period without such items over the
federal income tax liability actually incurred by the Taxpayer for the Taxable
Period.
"Glendale Litigation Tax Benefits" means the tax benefits, if any,
actually realized by the Taxpayer for any Taxable Period as a result of tax
items (including items of loss or deduction and recovery of basis) derived from
the receipt or paying over of the proceeds of the Glendale Litigation,
including from the basis (if any) of the property that is the subject of the
Glendale Litigation that are not reflected on the books of Golden State or any
Subsidiary of Golden State as of the Effective Date or from the permanent
exclusion from income of the receipt of any payment of proceeds from the
Glendale Litigation, measured by the excess of the federal income tax liability
that would have been incurred by the Taxpayer for the Taxable Period without
such items over the federal income tax liability actually incurred by the
Taxpayer for such Taxable Period.
"Litigation Recovery Retention Amount" means the sum of (1) (x) the
quotient obtained by dividing the Glendale Litigation Retention Amount by the
Pro Forma Factor, less (y) the Glendale Litigation Retention Amount and (2) the
Glendale Litigation Tax Benefits.
"Glendale Litigation Retention Amount" means an amount equal to the
Glendale Retention Factor multiplied by the amount obtained from the following
equation: (a) the aggregate amount (the "GFB Payment") of any cash payment and
the fair market value (as determined pursuant to the Management Agreement) of
any property actually received by GFB pursuant to a final, nonappealable
judgment in or final settlement of the Glendale Litigation (including any
post-judgment interest actually received by GFB or a successor thereto on any
such payment), minus (b) the sum of the following: (i) the aggregate expenses
incurred previously and hereafter by GFB or its successor in prosecuting the
Glendale Litigation and obtaining the GFB Payment, (ii) the aggregate expenses
incurred by Golden State or its successor in connection with the creation,
issuance and trading of the LTWs, including, without limitation, legal,
financial advisory and accounting fees and the fees and expenses of the warrant
agent; and (iii) an amount equal to the net GFB Payment (the GFB Payment less
the expenses described in the preceding clauses (i) and (ii)) multiplied by the
highest, combined statutory rate of federal, state and local income taxes in
effect during the tax year in which the full GFB Payment is received.
"Interest Factor" means an amount equal to the interest deemed to be
accrued on the Litigation Recovery Retention Amount, at a rate of 10.0% per
annum, compounded semiannually, from the date on which GFB actually receives
the GFB Payment (or if the GFB Payment is received in installments, the final
installment of the GFB Payment) to and including the date on which CFB actually
receives the full amount of the CFB Cash Payment.
"Goodwill Litigation" means California Federal Bank v. United States,
Civil Action No. 92-138C, filed on February 28, 1992, in the United States
Court of Federal Claims.
"Glendale Litigation" means the case against the United States in the
Claims Court captioned Glendale Federal Bank, F.S.B. v. United States, No.
90-772C, filed on August 15, 1990.
"Guarini Litigation" means the case against the United States in the
Claims Court captioned First Nationwide Bank, et al., v. United States, Civil
Action No. 96-590C, filed on September 20, 1996.
(d) Netting of Obligations; Expenses; Limit on Payments.
(i) Notwithstanding anything to the contrary in Sections 1.6(a)-(d) and
subject to the following provisions of this Section 1.6(e), whenever FGH
and Ford are required to pay an amount to Golden State under this Section
1.6, such amount (expressed as the number of shares of Golden State
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Common Stock required assuming FGH and Ford had elected to tender payment
in such form (regardless of whether Ford and FGH had the right to make such
an election)) shall be limited to the number of shares of Golden State
Common Stock previously issued to FGH and Ford under this Section 1.6 (the
"Section 1.6 Share Amount"). The Section 1.6 Share Amount shall be adjusted
upwards from time to time to reflect the issuance of additional shares to
FGH and Ford under this Section 1.6 and downwards, but not below zero, to
reflect any amount paid or payable by FGH and Ford (expressed as the number
of shares of Golden State Common Stock required assuming FGH and Ford had
elected to tender payment in such form (regardless of whether Ford and FGH
had the right to make such an election)) under this Section 1.6. If, but
for the immediately preceding sentence, any payment to Golden State by FGH
and Ford under Section 1.6 would result in a Section 1.6 Share Amount that
is less than zero, such negative number (expressed as a positive number and
converted to a dollar amount based on the Average Stock Price for 15
randomly selected days during the 30 trading-day period ending on the date
such payment is due) shall be added to the balance of a notional account
(the "Shortfall Account"). The balance of the Shortfall Account shall be
$0.00 on the Effective Date, and any positive balance in the Shortfall
Account shall bear interest, compounded semiannually, at the rate
contemplated in the definition of "Interest Factor" from the date such
balance is established until there is an offsetting debit against such
balance as set forth in Section 1.6(e)(ii).
(ii) At any time that Golden State would otherwise be obligated to issue
shares of Golden State Common Stock to FGH and Ford pursuant to Sections
1.6(a), (b) or (c), the CFB Litigation Distribution Amount, the Guarini
Payment or the Tax Payment, as the case may be, shall be offset by the
balance of the Shortfall Account as of such time for purposes of
determining the number of shares of Golden State Common Stock to be issued.
If, as a result of such offset, the number of shares of Golden State Common
Stock to be issued to FGH and Ford would be zero or less, no such shares
shall be issued; in all other cases the number of such shares to be issued
shall be calculated as set forth in Section 1.6(a), (b) or (c), as the case
may be, after application of such offset. In either case, the balance of
the Shortfall Account shall be reduced, but not below $0.00, by the amount
of such offset.
(iii) All computations of the Section 1.6 Share Amount and the balance of
the Shortfall Account from time to time hereunder shall be performed by the
parties hereto and reviewed and attested by KPMG Peat Marwick LLP, and the
parties hereto agree to cooperate therewith in such connection (it being
understood that this paragraph (iii) shall not require review and
attestation by KPMG Peat Marwick LLP of any calculations made pursuant to
Sections 1.6(a), (b) or (c) which would not otherwise be required pursuant
to the express provisions of Sections 1.6(a), (b) and (c)).
(iv) Notwithstanding anything to the contrary contained herein, for all
purposes under this Section 1.6, (a) any payments required to be made to
FGH and Ford pursuant to this Section 1.6, and the amount of the Glendale
Litigation Tax Benefits and the CFB Litigation Tax Benefits, shall be
calculated net of all third party out-of-pocket expenses incurred by Golden
State or Parent Holdings or any of their respective Subsidiaries in
connection with the event or recovery giving rise to such payment or its
determination ((including, without limitation, all attorneys' fees incurred
in any proceedings or discussions with any tax authority, but excluding any
allocation of general management overhead or similar internal expenses) and
(b) any Section 382 Amount calculated pursuant to Section 1.6(c)(v) shall
include (and shall be increased by) the aggregate amount of all third party
out-of-pocket expenses incurred by Golden State or Parent Holdings or any
of their respective Subsidiaries, as the case may be, in connection with
the determination of such amounts (including, without limitation, all
attorneys' fees incurred in any proceedings or discussions with any tax
authority, but excluding any allocation of general management overhead or
similar internal expenses). All third party out-of-pocket expenses referred
to in this paragraph (iv) shall be computed on a tax-effected basis (taking
into account any tax benefits actually realized as a result of the payment
thereof as attested to by KPMG Peat Marwick LLP).
(v) Notwithstanding anything to the contrary in this Agreement, the
aggregate amount of the value of the shares of Golden State Common Stock
(based on the Average Stock Price calculated for the purpose of issuing
such shares in accordance with the applicable subsection of this Section
1.6)
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issued to Ford and FGH pursuant to this Section 1.6 (net of the value of
any payments, in cash or stock, made by Ford and FGH to Golden State
pursuant to this Section 1.6) shall in no event exceed the aggregate value
of the shares of Golden State Common Stock issued to FGH and Ford pursuant
to Section 1.3 (valued at the Average Daily Price).
(vi) Notwithstanding any provision of this Section 1.6 to the contrary,
in the event that there is a business combination or similar transaction
involving Golden State as a result of which Golden State Common Stock is no
longer publicly traded, all payments due any party under this Section 1.6
after the date of such transaction (the "Determination Date") shall be
payable in cash and not in shares of Golden State Common Stock; provided,
however, that, solely for the purposes of determining the Section 1.6 Share
Amount and the Shortfall Account from time to time, such subsequent
payments shall be deemed made in shares of Golden State Common Stock, as
though there continued to be a public market in such shares, and the number
of such shares represented by any such payment shall be determined using a
valuation per share equal to the Notional Market Value. The "Notional
Market Value" as of any date shall equal the Average Stock Price of Golden
State Common Stock for 15 randomly selected days during the 30 trading-day
period ending on the Determination Date, grown during the period from the
Determination Date to such date at the rate of interest (compounded
semiannually) contemplated by the definition of "Interest Factor."
(vii) The parties hereto may mutually agree to substitute another
nationally-recognized independent accounting firm in place of KPMG Peat
Marwick LLP for all purposes under this Section 1.6, and from and after
such substitution, all references herein to KPMG Peat Marwick LLP shall be
deemed to be references to such other accounting firm.
(f) Each party hereto agrees to cooperate in good faith with the other
parties to this Agreement, and to take such further actions as are reasonably
necessary, to carry out the purpose and intent of and to effect the
transactions contemplated by this Section 1.6.
ARTICLE II
DISCLOSURE SCHEDULES; STANDARDS
FOR REPRESENTATIONS AND WARRANTIES
2.1. Disclosure Schedules. Prior to the execution and delivery of this
Agreement, Golden State has delivered to Parent Holdings, and Parent Holdings
has delivered to Golden State, a schedule (in the case of Golden State, the
"Golden State Disclosure Schedule," and in the case of Parent Holdings, the
"Parent Holdings Disclosure Schedule") setting forth, among other things, items
the disclosure of which is necessary or appropriate either in response to an
express disclosure requirement contained in a provision hereof or as an
exception to one or more of such party's representations or warranties
contained in Article III, in the case of Golden State, or Article IV, in the
case of Parent Holdings, or to one or more of such party's covenants contained
in Article V; provided, however, that notwithstanding anything in this
Agreement to the contrary (a) no such item is required to be set forth in the
Disclosure Schedule as an exception to a representation or warranty if its
absence would not result in the related representation or warranty being deemed
untrue or incorrect under the standard established by Section 2.2, and (b) the
mere inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that
such item represents a material exception or material fact, event or
circumstance or that such item has had or would have a Material Adverse Effect
(as defined herein) with respect to either Golden State or Parent Holdings,
respectively.
2.2. Standards. (a) No representation or warranty of Golden State
contained in Article III or of Parent Holdings contained in Article IV shall be
deemed untrue or incorrect for any purpose under this Agreement, and no party
hereto shall be deemed to have breached a representation or warranty for any
purpose under this Agreement, in any case as a consequence of the existence or
absence of any fact, circumstance or event unless such fact, circumstance or
event, individually or when taken together with all other facts, circumstances
or events inconsistent with any representations or warranties contained in
Article III, in the case of Golden State, or Article IV, in the case of Parent
Holdings, has had a Material Adverse Effect with respect to Golden State or
Parent Holdings, respectively (but disregarding, for
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purposes of applying this test, any materiality or "Material Adverse Effect"
exceptions or qualifiers contained in any individual representation or
warranty).
(b) As used in this Agreement, the term "Material Adverse Effect" means,
with respect to Parent Holdings or Golden State, as the case may be, a material
adverse effect on (i) the business, results of operations or financial
condition of such party and its Subsidiaries (as defined below) taken as a
whole, other than any such effect attributable to or resulting from (w) any
change in banking or similar laws, rules or regulations of general
applicability or interpretations thereof by courts or governmental authorities,
(x) any change in GAAP (as defined herein) or regulatory accounting principles
applicable to banks, thrifts or their holding companies generally, (y) any
action or omission of Parent Holdings or Golden State or any Subsidiary of
either of them taken with the prior written consent of the other party hereto,
or (z) any expenses incurred by such party in connection with this Agreement or
the transactions contemplated hereby, or (ii) the ability of such party and its
Subsidiaries to consummate the transactions contemplated hereby. As used in
this Agreement, the word "Subsidiary" when used with respect to any party means
any corporation, partnership or other organization, whether incorporated or
unincorporated, which is consolidated with such party for financial reporting
purposes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GOLDEN STATE
Subject to Article II, Golden State hereby represents and warrants to
Parent Holdings and FNH as follows:
3.1. Corporate Organization. (a) Golden State is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Golden State has the corporate power and authority to own or lease
all of its properties and assets and to carry on its business as it is now
being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary. Golden State is duly registered as a
unitary savings and loan holding company under the Home Owners' Loan Act of
1933, as amended (the "HOLA"). The Certificate of Incorporation and Bylaws of
Golden State, copies of which have previously been made available to Parent
Holdings, are true, complete and correct copies of such documents as in effect
as of the date of this Agreement.
(b) As of the Effective Time, Merger Sub will be a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. GFB is a stock savings bank duly organized, validly existing and in
good standing under the laws of the United States of America. The deposit
accounts of GFB are insured by the Federal Deposit Insurance Corporation (the
"FDIC") through the Savings Association Insurance Fund (the "SAIF") to the
fullest extent permitted by law, and all premiums and assessments required to
be paid in connection therewith have been paid when due. Each of Golden State's
other Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization. Each of Golden State's Subsidiaries has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or the location of the properties and assets owned or
leased by it makes such licensing or qualification necessary. The articles of
incorporation, bylaws and similar governing documents of each Subsidiary of
Golden State, copies of which have previously been made available to Parent
Holdings, are true, complete and correct copies of such documents as in effect
as of the date of this Agreement.
(c) The minute books of Golden State and each of its Subsidiaries contain
true and correct records of all meetings and other corporate actions held or
taken since June 30, 1995 of their respective stockholders and Boards of
Directors (including committees of their respective Boards of Directors).
3.2. Capitalization. (a) As of the date of this Agreement, the authorized
capital stock of Golden State consists of 100,000,000 shares of Golden State
Common Stock and 50,000,000 shares of preferred stock, par value $1.00 per
share (the "Golden State Preferred Stock"). At the Effective Time, the
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authorized capital stock of Golden State will consist of 250,000,000 shares of
Golden State Common Stock and 50,000,000 shares of Golden State Preferred
Stock. As of January 31, 1998, there are (x) 51,085,174 shares of Golden State
Common Stock outstanding and no shares of Golden State Common Stock held in the
Golden State treasury, (y) no shares of Golden State Common Stock reserved for
issuance upon exercise of outstanding stock options or otherwise except for (i)
5,310,680 shares of Golden State Common Stock reserved for issuance pursuant to
the Golden State Option Plans (as defined in Section 6.5) and described in
Section 3.2(a) of the Golden State Disclosure Schedule, (ii) 7,800,000 shares
of Golden State Common Stock reserved for issuance in connection with the
merger of CENFED Financial Corporation with and into a wholly owned Subsidiary
of Golden State (the "CENFED Merger") pursuant to the Agreement and Plan of
Merger (the "CENFED Merger Agreement"), dated as of August 17, 1997, as
amended, by and among Golden State, Golden State Financial Corporation ("GSFC")
and CENFED, (iii) 3,500,000 to 7,500,000 shares of Golden State Common Stock,
based on a floating Exchange Ratio, reserved for issuance in connection with
the merger (the "Redfed Merger") of RedFed Bancorp Inc. ("Redfed") with and
into a wholly owned Subsidiary of Golden State pursuant to the Agreement and
Plan of Merger (the "Redfed Merger Agreement"), dated as of November 30, 1997,
by and between Golden State and Redfed, (iv) 1,522 shares of Golden State
Common Stock reserved for issuance upon the exercise of common stock purchase
warrants (the "Five-Year Warrants") issued pursuant to that certain Warrant
Agreement, dated as of February 23, 1993, between GFB and Chemical Trust
Company of California, as Warrant Agent, (v) 10,836,417 shares of Golden State
Common Stock reserved for issuance upon exercise of common stock purchase
warrants (the "Seven-Year Warrants") issued pursuant to that certain Warrant
Agreement, dated as of August 15, 1993, between GFB and Chemical Trust Company
of California, as Warrant Agent, (vi) 11,200,00 shares of Golden State Common
Stock reserved for issuance upon conversion of shares of Series A Preferred
Stock, and (vii) 10,165,950 shares of Golden State Common Stock reserved for
issuance upon exercise of the option issued by Golden State to Parent Holdings
pursuant to the Stock Option Agreement, dated February 4, 1998, between Parent
Holdings and Golden State (the "Option Agreement") and (z) 4,621,982 shares of
Golden State Preferred Stock designated "Noncumulative Convertible Preferred
Stock, Series A" (the "Series A Preferred Stock") issued and outstanding. All
of the issued and outstanding shares of Golden State Common Stock and Golden
State Preferred Stock have been duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. The shares of Golden State Common
Stock to be issued pursuant to this Agreement will be duly authorized and
validly issued and, when issued, all such shares will be fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. Except as referred to above or reflected in
Section 3.2(a) of the Golden State Disclosure Schedule, Golden State does not
have and is not bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the purchase or
issuance of any shares of Golden State Common Stock or Golden State Preferred
Stock or any other equity security of Golden State or any securities
representing the right to purchase or otherwise receive any shares of Golden
State Common Stock or Golden State Preferred Stock or any other equity security
of Golden State. The names of the optionees, the date of each option to
purchase Golden State Common Stock granted, the number of shares subject to
each such option, the expiration date of each such option, and the price at
which each such option may be exercised under the Golden State Option Plans,
are set forth in Section 3.2(a) of Golden State Disclosure Schedule.
(b) Section 3.2(b) of the Golden State Disclosure Schedule sets forth a
true and correct list of all of the Subsidiaries of Golden State. Except as set
forth in Section 3.2(b) of the Golden State Disclosure Schedule, Golden State
owns, directly or indirectly, all of the issued and outstanding shares of the
capital stock of each of such Subsidiaries, free and clear of all liens,
charges, encumbrances and security interests whatsoever, and all of such shares
are duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the
ownership thereof. No Subsidiary of Golden State has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
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3.3. Authority; No Violation. (a) Each of Golden State and Merger Sub has
full corporate power and authority to execute and deliver this Agreement (and,
in the case of Golden State, the Management Agreement and the Option Agreement
(this Agreement, the Management Agreement and the Option Agreement,
collectively, the "Golden State Documents")) and to consummate the transactions
contemplated hereby (and, in the case of Golden State, thereby). The execution
and delivery by Merger Sub of this Agreement and by Golden State of each of the
Golden State Documents, and the consummation of the transactions contemplated
hereby and thereby have been duly and validly approved by the respective Boards
of Directors of Merger Sub and Golden State. The Board of Directors of Golden
State has directed that this Agreement and the Parent Plan of Merger be
submitted to Golden State's stockholders for approval at a meeting of such
stockholders and, except for the approval and adoption of this Agreement and
the Parent Plan of Merger by the requisite vote of Golden State's stockholders,
no other corporate proceedings on the part of either Golden State or Merger Sub
are necessary to approve the Golden State Documents and to consummate the
transactions contemplated thereby. Each of the Golden State Documents has been
duly and validly executed and delivered by Golden State and, in the case of
this Agreement, will be by Merger Sub prior to the Effective Time, and
(assuming due authorization, execution and delivery by each of Parent Holdings
and FNH) this Agreement constitutes or, in the case of Merger Sub, will at the
Effective Time constitute a valid and binding obligation of each of Golden
State and Merger Sub, enforceable against Golden State and Merger Sub in
accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
(b) GFB has full corporate power and authority to execute and deliver the
Bank Merger Agreement and to consummate the transactions contemplated thereby.
The execution and delivery of the Bank Merger Agreement and the consummation of
the transactions contemplated thereby will be duly and validly approved by the
Board of Directors of GFB. Upon the due and valid approval of the Bank Merger
Agreement by Golden State or GSFC, as applicable, as the sole stockholder of
GFB and by the Board of Directors of GFB, no other corporate proceedings on the
part of GFB will be necessary to consummate the transactions contemplated
thereby. The Bank Merger Agreement, upon execution and delivery by GFB, will be
duly and validly executed and delivered by GFB and will (assuming due
authorization, execution and delivery by CFB) constitute a valid and binding
obligation of GFB, enforceable against GFB in accordance with its terms, except
as enforcement may be limited by general principles of equity whether applied
in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(c) Except as set forth in Section 3.3(c) of the Golden State Disclosure
Schedule, neither the execution and delivery of the Golden State Documents by
Golden State and Merger Sub or the Bank Merger Agreement by GFB, nor the
consummation by Golden State, Merger Sub or GFB, as applicable, of the
transactions contemplated hereby or thereby, nor compliance by Golden State,
Merger Sub or GFB, as applicable, with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Certificate of Incorporation or
Bylaws of Golden State or the certificate of incorporation, bylaws or similar
governing documents of any of its Subsidiaries, or (ii) assuming that the
consents and approvals referred to in Section 3.4 hereof are duly obtained, (x)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to Golden State or any of its Subsidiaries, or
any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Golden State or
any of its Subsidiaries under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement
or other instrument or obligation to which Golden State or any of its
Subsidiaries is a party, or by which they or any of their respective properties
or assets may be bound or affected.
3.4. Consents and Approvals. Except for (a) the filing of applications and
notices, as applicable, with the Office of Thrift Supervision (the "OTS") under
the HOLA and the Bank Merger Act, and approval
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of such applications and notices, (b) the filing with the Securities and
Exchange Commission (the "SEC") of a proxy statement in definitive form
relating to the meeting of Golden State's stockholders to be held as
contemplated by this Agreement (the "Proxy Statement"), (c) the approval and
adoption of this Agreement and the Parent Plan of Merger by the requisite votes
of the stockholders of Golden State, (d) approval of the listing of Golden
State Common Stock to be issued pursuant to this Agreement on the NYSE, (e) the
filing of the Certificates of Merger with the Secretary pursuant to the DGCL,
(f) the filings required by the Bank Merger Agreement, and (g) such filings,
authorizations or approvals as may be set forth in Section 3.4 of the Golden
State Disclosure Schedule, no consents or approvals of or filings or
registrations with any court, administrative agency or commission or other
governmental authority or instrumentality (each a "Governmental Entity") or
with any third party are necessary in connection with (1) the execution and
delivery by Golden State of the Golden State Documents and by Merger Sub of
this Agreement, (2) the consummation by Golden State and Merger Sub of the
transactions contemplated thereby, (3) the execution and delivery by GFB of the
Bank Merger Agreement, and (4) the consummation by GFB of the transactions
contemplated thereby.
3.5. Reports. Golden State and each of its Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
June 30, 1995 with (i) the OTS, (ii) the FDIC, (iii) any state banking
commissions or any other state regulatory authority (each a "State Regulator")
and (iv) any other self-regulatory organization ("SRO") (collectively with the
Board of Governors of the Federal Reserve System, the "Regulatory Agencies"),
and have paid all fees and assessments due and payable in connection therewith.
Except for normal examinations conducted by a Regulatory Agency in the regular
course of the business of Golden State and its Subsidiaries, and except as set
forth in Section 3.5 of the Golden State Disclosure Schedule, no Regulatory
Agency has initiated any proceeding or, to the knowledge of Golden State,
investigation into the business or operations of Golden State or any of its
Subsidiaries since June 30, 1995. There is no unresolved violation, criticism,
or exception by any Regulatory Agency with respect to any report or statement
relating to any examinations of Golden State or any of its Subsidiaries.
3.6. Financial Statements. Golden State has previously made available to
Parent Holdings copies of (a) the consolidated statements of financial
condition of GFB and its Subsidiaries as of June 30 for the fiscal years 1996
and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the fiscal years 1995 through 1997,
inclusive, as reported in GFB's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997 filed with the OTS under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in each case accompanied by the audit
report of KPMG Peat Marwick LLP, independent public accountants with respect to
GFB, and (b) the unaudited consolidated statements of financial condition of
Golden State and its Subsidiaries as of September 30, 1997 and the related
unaudited consolidated statements of operations and cash flows for the
three-month period then ended as reported in Golden State's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 filed with the Securities and
Exchange Commission (the "SEC") under the Exchange Act. The June 30, 1997
consolidated statement of financial condition of GFB (including the related
notes, where applicable) fairly presents the consolidated financial position of
GFB and its Subsidiaries as of the date thereof, and the other financial
statements referred to in this Section 3.6 (including the related notes, where
applicable) fairly present, and the financial statements to be filed by Golden
State with the SEC after the date hereof will fairly present (subject, in the
case of the unaudited statements, to recurring audit adjustments normal in
nature and amount), the results of the consolidated operations and consolidated
financial position of GFB and its Subsidiaries, and Golden State and its
Subsidiaries, as the case may be, for the respective fiscal periods or as of
the respective dates therein set forth; each of such statements (including the
related notes, where applicable) complies, and the financial statements to be
filed by Golden State with the SEC after the date hereof will comply, with
applicable accounting requirements and with the published rules and regulations
of the OTS and the SEC, as applicable, with respect thereto; and each of such
statements (including the related notes, where applicable) has been, and the
financial statements to be filed by Golden State with the SEC after the date
hereof will be, prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except as
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q. The books and records of Golden State and its
Subsidiaries have been, and are being, maintained in accordance with GAAP and
any other applicable legal and accounting requirements.
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3.7. Broker's Fees. Neither Golden State nor any Subsidiary of Golden
State nor any of their respective officers or directors has employed any broker
or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with any of the transactions contemplated by the
Golden State Documents or the Bank Merger Agreement, except that Golden State
has engaged, and will pay a fee or commission to, Credit Suisse First Boston
Corporation ("CS First Boston") in accordance with the terms of a letter
agreement between CS First Boston and Golden State, a true and correct copy of
which has been previously made available by Golden State to Parent Holdings.
3.8. Absence of Certain Changes or Events. (a) Except as may be set forth
in Section 3.8(a) of the Golden State Disclosure Schedule, or as disclosed in
any Golden State Report (as defined in Section 3.12) filed with the SEC or the
OTS prior to the date of this Agreement, since June 30, 1997, (i) neither
Golden State nor any of its Subsidiaries has incurred any liability, except in
the ordinary course of their business consistent with their past practices, and
(ii) no event has occurred which has caused, or is reasonably likely to cause,
individually or in the aggregate, a Material Adverse Effect on Golden State.
(b) Except as set forth in Section 3.8(b) of the Golden State Disclosure
Schedule or as disclosed in any Golden State Report filed with the SEC or the
OTS prior to the date of this Agreement, since June 30, 1997, Golden State and
its Subsidiaries have carried on their respective businesses in the ordinary
course consistent with their past practices.
(c) Except as set forth in Section 3.8(c) of the Golden State Disclosure
Schedule, since December 31, 1997, neither Golden State nor any of its
Subsidiaries has (i) increased the wages, salaries, compensation, pension, or
other fringe benefits or perquisites payable to any executive officer,
employee, or director from the amount thereof in effect as of December 31, 1997
(which amounts have been previously made available to Parent Holdings), granted
any severance or termination pay, entered into any contract to make or grant
any severance or termination pay, or paid any bonus, (ii) suffered any strike,
work stoppage, slow-down, or other labor disturbance, (iii) been a party to a
collective bargaining agreement, contract or other agreement or understanding
with a labor union or organization, or (iv) had any union organizing
activities.
3.9. Legal Proceedings. (a) Except as set forth in Section 3.9 of the
Golden State Disclosure Schedule, neither Golden State nor any of its
Subsidiaries is a party to any, and there are no pending or, to Golden State's
knowledge, threatened, legal, administrative, arbitral or other proceedings,
claims, actions or governmental or regulatory investigations of any nature
against Golden State or any of its Subsidiaries or challenging the validity or
propriety of the transactions contemplated by any of the Golden State Documents
or the Bank Merger Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Golden State, any of its Subsidiaries or the assets of
Golden State or any of its Subsidiaries.
3.10. Taxes. (a) Except as set forth in Section 3.10 of the Golden State
Disclosure Schedule, each of Golden State and its Subsidiaries has or will have
prior to the Effective Time (i) duly and timely filed (including applicable
extensions granted without penalty) or there has been filed on its behalf, all
Tax Returns (as hereinafter defined) required to be filed at or prior to the
Effective Time, and such Tax Returns are true, correct and complete, and (ii)
paid (or there has been paid on its behalf) in full or made provision in the
financial statements of Golden State (in accordance with GAAP) for all Taxes
(as hereinafter defined) due or claimed to be due from it by any taxing
authority with respect to all periods ending on or before the Effective Time.
No deficiencies for any Taxes have been proposed, asserted, assessed or
threatened in writing against or with respect to Golden State or any of its
Subsidiaries which have not been finally resolved. Except as set forth in
Section 3.10 of the Golden State Disclosure Schedule, (i) there are no liens
for Taxes upon the assets of either Golden State or any of its Subsidiaries
except for statutory liens for current Taxes not yet due or liens for Taxes
that are being contested in good faith, as to the fact or the amount of
liability, by appropriate proceedings and that have been reserved against in
accordance with GAAP, (ii) neither Golden State nor any of its Subsidiaries has
requested any extension of time within which to file any Tax Returns in respect
of any tax year which have not since been filed and no request for waivers or
extensions of the time to assess or collect any Taxes are pending or
outstanding, (iii) with respect to each taxable period of Golden State and its
Subsidiaries through and
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including December 31, 1992, the federal and state income Tax Returns of Golden
State and its Subsidiaries have been audited by the Internal Revenue Service or
appropriate state tax authorities or the time for assessing and collecting
Taxes with respect to such taxable period has closed and such taxable period is
not subject to review, (iv) neither Golden State nor any of its Subsidiaries
has filed or been included in a combined, consolidated or unitary income Tax
Return for any tax year that is open for the purpose of assessing a deficiency
other than one in which Golden State, GFB or GLENFED, INC., the former parent
of GFB, is the parent of the group filing such Tax Return, (v) neither Golden
State nor any of its Subsidiaries is a party to, is bound by or has an
obligation under, any Tax sharing agreement, Tax indemnification agreement or
similar contract or arrangement providing for the allocation or sharing of
Taxes (other than the allocation of federal income taxes as provided by
Treasury Regulation Section 1.1552-1(a)(1) under the Code), (vi) neither Golden
State nor any of its Subsidiaries has filed a consent pursuant to Section
341(f) of the Code, (vii) no power of attorney which is currently in force has
been granted by or with respect to Golden State or any Subsidiary thereof with
respect to any matter relating to Taxes, and (viii) no closing agreement
pursuant to Section 7121 of the Code (or any predecessor provision) or any
similar provision of any state, local or foreign law has been entered into by
or with respect to Golden State or its Subsidiaries.
(b) For the purposes of this Agreement, "Tax" or "Taxes" shall mean all
taxes, charges, fees, levies, penalties or other assessments imposed by any
United States federal, state, local or foreign taxing authority, including, but
not limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other taxes, including any interest, penalties
or additions attributable thereto.
(c) For purposes of this Agreement, "Tax Return" shall mean any return,
report, information return or other document (including any related or
supporting information) with respect to Taxes.
3.11. Employees. (a) Section 3.11(a) of the Golden State Disclosure
Schedule sets forth a true and correct list of each deferred compensation plan,
incentive compensation plan, equity compensation plan, "welfare" plan, fund or
program (within the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")); "pension" plan, fund or program
(within the meaning of section 3(2) of ERISA); each employment, termination or
severance agreement; and each other employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to as of the date of this
Agreement (the "Plans") by Golden State, any of its Subsidiaries or by any
trade or business, whether or not incorporated (an "ERISA Affiliate"), all of
which together with Golden State would be deemed a "single employer" within the
meaning of Section 4001 of ERISA, for the benefit of any employee or former
employee of Golden State, any Subsidiary of Golden State or any ERISA
Affiliate.
(b) Golden State has heretofore made available to Parent Holdings true and
complete copies of each of the Plans and all related documents, including but
not limited to (i) the actuarial report for such Plan (if applicable) for each
of the last two years, and (ii) the most recent determination letter from the
Internal Revenue Service (if applicable) for such Plan.
(c) Except as set forth in Section 3.11(c) of the Golden State Disclosure
Schedule, (i) each of the Plans has been operated and administered in
accordance with its terms and applicable law, including but not limited to
ERISA and the Code, (ii) each of the Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code either (1) has received a favorable
determination letter from the IRS, or (2) is or will be the subject of an
application for a favorable determination letter, and the Company is not aware
of any circumstances likely to result in the revocation or denial of any such
favorable determination letter, (iii) with respect to each Plan which is
subject to Title IV of ERISA, the present value of accrued benefits under such
Plan, based upon the actuarial assumptions used for funding purposes in the
most recent actuarial report prepared by such Plan's actuary with respect to
such Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Plan allocable to such accrued benefits, (iv) no
Plan provides welfare benefits, including without limitation death or medical
benefits (whether or not insured), with respect to current or former employees
of Golden State, its Subsidiaries beyond their retirement or other termination
of service, other than coverage mandated by applicable law or benefits
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the full cost of which is borne by the current or former employee (or his
beneficiary), (v) no liability under Title IV of ERISA has been incurred by
Golden State, its Subsidiaries or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a risk to Golden
State, its Subsidiaries or an ERISA Affiliate of incurring a material liability
thereunder, (vi) no Plan is a "multiemployer pension plan," as such term is
defined in Section 3(37) of ERISA, (vii) all contributions or other amounts
payable by Golden State, its Subsidiaries or any ERISA Affiliate as of the
Effective Time with respect to each Plan in respect of current or prior plan
years have been paid or accrued in accordance with generally accepted
accounting practices and Section 412 of the Code, (viii) neither Golden State
nor its Subsidiaries has engaged in a transaction in connection with which
Golden State or its Subsidiaries could reasonably be expected to be subject to
either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a
tax imposed pursuant to Section 4975 or 4976 of the Code, (ix) there are no
pending, or, to the best knowledge of Golden State, threatened or anticipated
claims (other than routine claims for benefits) by, on behalf of or against any
of the Plans or any trusts related thereto and (x) the consummation of the
transactions contemplated by this Agreement or the Bank Merger Agreement,
either alone or in conjunction with another event, including a termination of
employment, will not (A) entitle any current or former employee or officer of
Golden State or any ERISA Affiliate to severance pay, termination pay or any
other payment or benefit, except as expressly provided in this Agreement or (B)
accelerate the time of payment or vesting or increase the amount or value of
compensation or benefits due any such employee or officer.
3.12. SEC Reports. Golden State has previously made available (to the
extent filed prior to the date hereof) to Parent Holdings an accurate and
complete copy of each (a) final registration statement, prospectus, report,
schedule and definitive proxy statement filed since June 30, 1995 by GFB or
Golden State with the OTS or the SEC, as the case may be, pursuant to the
Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act
(the "Golden State Reports") and (b) communication mailed by GFB or Golden
State, as the case may be, to its stockholders since June 30, 1995, and no such
registration statement, prospectus, report, schedule, proxy statement or
communication contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they were
made, not misleading, except that information as of a later date shall be
deemed to modify information as of an earlier date. Each of GFB and Golden
State has timely filed all Golden State Reports and other documents required to
be filed by such party under the Securities Act and the Exchange Act, and, as
of their respective dates, all Golden State Reports complied with the published
rules and regulations of the OTS and the SEC, as applicable, with respect
thereto.
3.13. Golden State Information. The information relating to Golden State
and its Subsidiaries to be contained in the Proxy Statement, or in any other
document filed with any other regulatory agency in connection herewith, will
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances in
which they are made, not misleading. The Proxy Statement (except for such
portions thereof that relate only to Parent Holdings or any of its
Subsidiaries) will comply with the provisions of the Exchange Act and the rules
and regulations thereunder.
3.14. Compliance with Applicable Law. Golden State and each of its
Subsidiaries hold, and have at all times held, all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to all, and have complied with and are not in
default in any respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating to
Golden State or any of its Subsidiaries, and neither Golden State nor any of
its Subsidiaries knows of, or has received notice of, any violations of any of
the above.
3.15. Certain Contracts. (a) Except as set forth in Section 3.15(a) of the
Golden State Disclosure Schedule and except for this Agreement, the Stock
Option Agreement, the Bank Merger Agreement and the Management Agreement,
neither Golden State nor any of its Subsidiaries is a party to or bound by any
contract, arrangement, commitment or understanding (whether written or oral)
(i) with respect to the employment of any directors, officers, employees or
consultants, (ii) which, upon the consummation of the transactions contemplated
by this Agreement or the Bank Merger Agreement, will (either alone or upon
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the occurrence of any additional acts or events) result in any payment or
benefits (whether of severance pay or otherwise) becoming due, or the
acceleration or vesting of any rights to any payment or benefits, from Golden
State, GFB, the Surviving Bank or any of their respective Subsidiaries to any
director, officer or employee thereof, (iii) which is a material contract (as
defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after
the date of this Agreement that has not been filed or incorporated by reference
in the Golden State Reports, (iv) which is a consulting agreement (including
data processing, software programming and licensing contracts) not terminable
on 60 days or less notice involving the payment of more than $100,000 per
annum, or (v) which materially restricts the conduct of any line of business by
Golden State or any of its Subsidiaries. Each contract, arrangement, commitment
or understanding of the type described in this Section 3.15(a), whether or not
set forth in Section 3.15(a) of the Golden State Disclosure Schedule, is
referred to herein as a "Golden State Contract". Golden State has previously
delivered or made available to Parent Holdings true and correct copies of each
Golden State Contract.
(b) Except as set forth in Section 3.15(b) of the Golden State Disclosure
Schedule, (i) each Golden State Contract is valid and binding and in full force
and effect, (ii) Golden State and each of its Subsidiaries has performed all
obligations required to be performed by it to date under each Golden State
Contract, (iii) no event or condition exists which constitutes or, after notice
or lapse of time or both, would constitute, a default on the part of Golden
State or any of its Subsidiaries under any Golden State Contract, and (iv) no
other party to any Golden State Contract is, to the knowledge of Golden State,
in default in any respect thereunder.
3.16. Agreements with Regulatory Agencies. Except as set forth in Section
3.16 of the Golden State Disclosure Schedule, neither Golden State nor any of
its Subsidiaries is subject to any cease-and-desist or other order issued by,
or is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient
of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of (each, whether or not set forth on Section 3.16
of the Golden State Disclosure Schedule, a "Regulatory Agreement"), any
Regulatory Agency or other Governmental Entity that restricts the conduct of
its business or that in any manner relates to its capital adequacy, its credit
policies, its management or its business, nor has Golden State or any of its
Subsidiaries been advised by any Regulatory Agency or other Governmental Entity
that it is considering issuing or requesting any Regulatory Agreement.
3.17. State Takeover Laws; Charter Provision. The provisions of Section
203 of the DGCL and Article Seventh of Golden State's Certificate of
Incorporation will not, assuming the accuracy of the representations contained
in Section 4.15 hereof, apply to this Agreement, the Bank Merger Agreement or
the Option Agreement or any of the transactions contemplated hereby or thereby.
3.18. Environmental Matters. Except as set forth in Section 3.18 of the
Golden State Disclosure Schedule:
(a) Each of Golden State and its Subsidiaries, the Participation
Facilities and the Loan Properties (each as hereinafter defined) are, and
have been, in compliance with all applicable federal, state and local laws
including common law, regulations and ordinances and with all applicable
decrees, orders and contractual obligations relating to pollution or the
discharge of, or exposure to Hazardous Materials (as hereinafter defined)
in the environment or workplace ("Environmental Laws");
(b) There is no suit, claim, action or proceeding, pending or, to the
knowledge of Golden State, threatened, before any Governmental Entity or
other forum in which Golden State, any of its Subsidiaries, any
Participation Facility or any Loan Property, has been or, with respect to
threatened proceedings, may be, named as a defendant (x) for alleged
noncompliance (including by any predecessor), with any Environmental Laws,
or (y) relating to the release, threatened release or exposure to any
Hazardous Material whether or not occurring at or on a site owned, leased
or operated by Golden State or any of its Subsidiaries, any Participation
Facility or any Loan Property;
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(c) During the period of (x) Golden State's or any of its Subsidiaries'
ownership or operation of any of their respective current or former
properties, (y) Golden State's or any of its Subsidiaries' participation in
the management of any Participation Facility, or (z) to the knowledge of
Golden State, Golden State's or any of its Subsidiaries' holding of a
security interest in a Loan Property, there has been no release of
Hazardous Materials in, on, under or affecting any such property that has
had or would reasonably be expected to have, individually or in the
aggregate with such other events, a Material Adverse Effect on Golden
State; and
(d) The following definitions apply for purposes of this Section 3.18:
(x) "Hazardous Materials" means any chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum or other regulated
substances or materials, (y) "Loan Property" means any property in which
Golden State or any of its Subsidiaries holds a security interest, and,
where required by the context, said term means the owner or operator of
such property; and (z) "Participation Facility" means any facility in
which Golden State or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner
or operator of such property.
3.19. Derivative Transactions. Except as set forth in Section 3.19 of the
Golden State Disclosure Schedule, since June 30, 1997, neither Golden State nor
any of its Subsidiaries has engaged in transactions in or involving forwards,
futures, options on futures, swaps or other derivative instruments except (i)
as agent on the order and for the account of others, or (ii) as principal for
purposes of hedging interest rate risk on U.S. dollar-denominated securities
and other financial instruments. None of the counterparties to any contract or
agreement with respect to any such instrument is in default with respect to
such contract or agreement and no such contract or agreement, were it to be a
Loan (as defined below) held by Golden State or any of its Subsidiaries, would
be classified as "Other Loans Specially Mentioned", "Special Mention",
"Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk
Assets", "Concerned Loans" or words of similar import. The financial position
of Golden State and its Subsidiaries on a consolidated basis under or with
respect to each such instrument has been reflected in the books and records of
Golden State and such Subsidiaries in accordance with GAAP consistently
applied, and no open exposure of Golden State or any of its Subsidiaries with
respect to any such instrument (or with respect to multiple instruments with
respect to any single counterparty) exists as of the date hereof.
3.20. Opinion. Prior to the execution of this Agreement, Golden State
received an opinion from CS First Boston to the effect that, as of the date
thereof and based upon and subject to the matters set forth therein, the
consideration to be paid by Golden State pursuant to this Agreement is fair to
the stockholders of Golden State from a financial point of view. Such opinion
has not been amended or rescinded as of the date of this Agreement.
3.21. Approvals. As of the date of this Agreement, Golden State knows of
no reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby should not be obtained.
3.22. Loan Portfolio. (a) Section 3.22 of the Golden State Disclosure
Schedule sets forth the aggregate principal amount of all written or oral loan
agreements, notes or borrowing arrangements (including, without limitation,
leases, credit enhancements, commitments, guarantees and interest-bearing
assets) (collectively, "Loans"), other than Loans the unpaid principal balance
of which does not exceed $1,000,000, under the terms of which the obligor is,
as of December 31, 1997, over 90 days delinquent in payment of principal or
interest or in default of any other provision and, except as disclosed in
Section 3.22, neither Golden State nor any of its Subsidiaries is a party to
any Loan with any director, executive officer or five percent or greater
stockholder of Golden State or any of its Subsidiaries, or to the knowledge of
Golden State, any person, corporation or enterprise controlling, controlled by
or under common control with any of the foregoing. Section 3.22 of the Golden
State Disclosure Schedule sets forth as of December 31, 1997 (i) all of the
Loans in original principal amount in excess of $1,000,000 of Golden State or
any of its Subsidiaries that as of the date of this Agreement are classified by
Golden State as "Special Mention", "Substandard", "Doubtful", "Loss", or words
of similar import, together with the principal amount of and accrued and unpaid
interest on each such Loan and the identity of the borrower
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thereunder, (ii) by category of Loan (i.e., commercial, consumer, etc.), all of
the Loans of Golden State and its Subsidiaries that as of the date of this
Agreement are classified as such, together with the aggregate principal amount
of such Loans by category and (iii) each asset of Golden State that as of the
date of this Agreement is classified as "Other Real Estate Owned" and the book
value thereof.
(b) Each Loan in original principal amount in excess of $1,000,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
3.23. Reorganization. As of the date of this Agreement, Golden State has
no reason to believe that any of the Mergers or the Subsidiary Merger will fail
to qualify as a reorganization under Section 368(a) of the Code.
3.24. Material Interests of Certain Persons. Except as disclosed in the
Golden State Reports filed prior to the date of this Agreement, no officer or
director of Golden State, or any "associate" (as such term is defined in Rule
12b-2 under the Exchange Act) of any such officer or director, has any material
interest in any material contract or property (real or personal), tangible or
intangible, used in or pertaining to the business of Golden State.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT HOLDINGS
Subject to Article II, Parent Holdings hereby represents and warrants to
Golden State and Merger Sub as follows:
4.1. Corporate Organization. (a) Parent Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Parent Holdings has the corporate power and authority to own or lease
all of its properties and assets and to carry on its business as it is now
being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary. Parent Holdings is duly registered
as a savings and loan holding company under the HOLA. The Third Restated
Certificate of Incorporation and the By-laws of Parent Holdings, copies of
which have previously been made available to Golden State, are true and correct
copies of such documents as in effect as of the date of this Agreement.
(b) FNH is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. CFB is a stock savings bank
duly organized, validly existing and in good standing under the laws of the
United States of America. The deposit accounts of CFB are insured by the FDIC
through the SAIF to the fullest extent permitted by law, and all premiums and
assessments required in connection therewith have been paid when due. Each of
Parent Holdings's other Subsidiaries is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation. Each
Subsidiary of Parent Holdings has the corporate power and authority to own or
lease all of its properties and assets and to carry on its business as it is
now being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary. The articles of organization and
by-laws of CFB, copies of which have previously been made available to Golden
State, are true and correct copies of such documents as in effect as of the
date of this Agreement.
(c) The minute books of Parent Holdings and each of its Subsidiaries
contain true and correct records of all meetings and other corporate actions
held or taken since December 31, 1995 of their respective stockholders and
Boards of Directors (including committees of their respective Boards of
Directors).
4.2 Capitalization. (a) As of the date of this Agreement, (i) the
authorized capital stock of Parent Holdings consists of 1,000 shares of Parent
Holdings Common Stock and no shares of preferred stock and
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(ii) the authorized capital stock of FNH consists of 800 shares of FNH Class A
Common Stock, 200 shares of FNH Class B Common Stock and 24,000 shares of
preferred stock, par value $1.00 per share ("FNH Preferred Stock"), of which
10,000 shares have been designated as Series A Cumulative Perpetual Preferred
Stock (the "FNH Series A Preferred Stock"), and 2,000 shares have been
designated as Series B Cumulative Perpetual Preferred Stock (the "FNH Series B
Preferred Stock"). As of the date of this Agreement, there were (i) 1,000
shares of Parent Holdings Common Stock and no shares of preferred stock of
Parent Holdings issued and outstanding, and no shares of Parent Holdings Common
Stock held in its treasury and (ii) 800 shares of FNH Class A Common Stock, 200
shares of FNH Class B Common Stock, 1,666.667 shares of FNH Series A Preferred
Stock and 45.32 shares of FNH Series B Preferred Stock issued and outstanding.
As of the date of this Agreement, no shares of capital stock of Parent Holdings
or FNH were reserved for issuance. All of the issued and outstanding shares of
Parent Holdings Common Stock, FNH Class A Common Stock, FNH Class B Common
Stock and FNH Preferred Stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. As of the date of this Agreement,
except as set forth on Section 4.2(a) of the Parent Holdings Disclosure
Schedule, neither Parent Holdings nor FNH has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of capital stock
of Parent Holdings or FNH or any other equity securities of Parent Holdings or
FNH or any securities representing the right to purchase or otherwise receive
any shares of capital stock of Parent Holdings or FNH or any other equity
securities of Parent Holdings or FNH.
(b) Section 4.2(b) of the Parent Holdings Disclosure Schedule sets forth a
true and correct list of all of the Subsidiaries of Parent Holdings. Except as
set forth in Section 4.2(b) of the Parent Holdings Disclosure Schedule, Parent
Holdings owns, directly or indirectly, all of the issued and outstanding shares
of capital stock of each of the Subsidiaries of Parent Holdings, free and clear
of all liens, charges, encumbrances and security interests whatsoever, and all
of such shares are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No Subsidiary of Parent Holdings has or is
bound by any outstanding subscriptions, options, warrants, calls, commitments
or agreements of any character calling for the purchase or issuance of any
shares of capital stock or any other equity security of such Subsidiary or any
securities representing the right to purchase or otherwise receive any shares
of capital stock or any other equity security of such Subsidiary.
4.3. Authority; No Violation. (a) Each of Parent Holdings and FNH has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly approved by the Board of Directors of each of Parent
Holdings and FNH, by the sole stockholder of Parent Holdings and by Parent
Holdings and Ford as the stockholders of FNH, and no other corporate
proceedings on the part of either Parent Holdings or FNH are necessary to
approve this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Parent Holdings and FNH and (assuming due authorization, execution and delivery
by each of Golden State and Merger Sub) this Agreement constitutes a valid and
binding obligation of each of Parent Holdings and FNH, enforceable against each
of Parent Holdings and FNH in accordance with its terms, except as enforcement
may be limited by general principles of equity whether applied in a court of
law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
(b) CFB has full corporate power and authority to execute and deliver the
Bank Merger Agreement and the Management Agreement and to consummate the
transactions contemplated thereby. The execution and delivery of the Bank
Merger Agreement and the Management Agreement and the consummation of the
transactions contemplated thereby will be duly and validly approved by the
Board of Directors of CFB. Upon the due and valid approval of the Bank Merger
Agreement by FNH as the sole stockholder of CFB, and by the Board of Directors
of CFB, no other corporate proceedings on the part of CFB will be necessary to
consummate the transactions contemplated thereby. Each of the Bank Merger
Agreement and the Management Agreement, upon execution and delivery by CFB,
will be duly and
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validly executed and delivered by CFB and will (assuming due authorization,
execution and delivery by the GFB) constitute a valid and binding obligation of
CFB, enforceable against CFB in accordance with its terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally.
(c) Except as set forth in Section 4.3(c) of the Parent Holdings
Disclosure Schedule, neither the execution and delivery of this Agreement by
Parent Holdings or FNH or the Bank Merger Agreement and the Management
Agreement by CFB, nor the consummation by Parent Holdings, FNH or CFB, as
applicable, of the transactions contemplated hereby or thereby, nor compliance
by Parent Holdings, FNH or CFB with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Certificate of Incorporation or
By-Laws of Parent Holdings, or the certificate of incorporation or by-laws or
similar governing documents of any of its Subsidiaries or (ii) assuming that
the consents and approvals referred to in Section 4.4 are duly obtained, (x)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to Parent Holdings or any of its Subsidiaries
or any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Parent Holdings
or any of its Subsidiaries under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement
or other instrument or obligation to which Parent Holdings or any of its
Subsidiaries is a party, or by which they or any of their respective properties
or assets may be bound or affected.
4.4. Consents and Approvals. Except for (a) the filing of applications and
notices, as applicable, with the OTS under the HOLA and the Bank Merger Act,
and approval of such applications and notices, (b) the filing with the SEC of
the Proxy Statement, (c) the approval and adoption of this Agreement and the
Parent Plan of Merger by the requisite vote of the stockholders of Golden
State, (d) approval of the listing of the Golden State Common Stock to be
issued in the Merger on the NYSE, (e) the filing of the Certificates of Merger
with the Secretary, (f) filings required by the Bank Merger Agreement, (g) the
approval of the Bank Merger Agreement by the sole stockholder of CFB, and (h)
such filings, authorizations or approvals as may be set forth in Section 4.4 of
the Parent Holdings Disclosure Schedule, no consents or approvals of or filings
or registrations with any Governmental Entity or with any third party are
necessary in connection with (1) the execution and delivery by Parent Holdings
and FNH of this Agreement, (2) the consummation by Parent Holdings and FNH of
the Mergers and the other transactions contemplated hereby, (3) the execution
and delivery by CFB of the Bank Merger Agreement and the Management Agreement
and the consummation of the transactions contemplated by the Management
Agreement, and (4) the consummation of CFB of the transactions contemplated by
the Bank Merger Agreement.
4.5. Reports. Parent Holdings and each of its Subsidiaries have timely
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1995 with any Regulatory Agency, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency in the regular course of the
business of Parent Holdings and its Subsidiaries, and except as set forth in
Section 4.5 of Parent Holdings Disclosure Schedule, no Regulatory Agency has
initiated any proceeding or, to the knowledge of Parent Holdings, investigation
into the business or operations of Parent Holdings or any of its Subsidiaries
since December 31, 1995. There is no unresolved violation, criticism, or
exception by any Regulatory Agency with respect to any report or statement
relating to any examinations of Parent Holdings or any of its Subsidiaries.
4.6. Financial Statements. Parent Holdings has previously made available
to Golden State copies of (a) the consolidated statements of financial
condition of Parent Holdings and its Subsidiaries as of December 31 for the
fiscal years 1995 and 1996 and the related consolidated statements of
operations, stockholder's equity and cash flows for the fiscal years 1994
through 1996, inclusive, as reported in Parent
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Holdings' Annual Report on Form 10-K for the fiscal year ended December 31,
1996 filed with the SEC under the Exchange Act, in each case accompanied by the
audit report of KPMG Peat Marwick LLP, independent public accountants with
respect to Parent Holdings, and (b) the unaudited consolidated statements of
financial condition of Parent Holdings and its Subsidiaries as of September 30,
1997 and September 30, 1996 and the related unaudited consolidated statements
of operations, stockholder's equity and cash flows for the nine-month periods
then ended as reported in Parent Holdings' Quarterly Report on Form 10-Q for
the period ended September 30, 1997 filed with the SEC under the Exchange Act.
The December 31, 1996 consolidated statement of financial position of Parent
Holdings (including the related notes, where applicable) fairly presents the
consolidated financial position of Parent Holdings and its Subsidiaries as of
the date thereof, and the other financial statements referred to in this
Section 4.6 (including the related notes, where applicable) fairly present, and
the financial statements to be filed by Parent Holdings with the SEC after the
date hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in stockholder's equity and
consolidated financial position of Parent Holdings and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies,
and the financial statements to be filed by Parent Holdings with the SEC after
the date hereof will comply, with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto; and each
of such statements (including the related notes, where applicable) has been,
and the financial statements to be filed by Parent Holdings with the SEC after
the date hereof will be, prepared in accordance with GAAP consistently applied
during the periods involved, except as indicated in the notes thereto or, in
the case of unaudited statements, as permitted by Form 10-Q. The books and
records of Parent Holdings and its Subsidiaries have been, and are being,
maintained in accordance with GAAP and any other applicable legal and
accounting requirements.
4.7. Broker's Fees. Neither Parent Holdings nor any Subsidiary of Parent
Holdings, nor any of their respective officers or directors, has employed any
broker or finder or incurred any liability for any broker's fees, commissions
or finder's fees in connection with any of the transactions contemplated by
this Agreement, the Option Agreement or the Bank Merger Agreement, except that
Parent Holdings has engaged, and will pay a fee or commission to, Goldman,
Sachs & Co. ("Goldman Sachs") in accordance with the terms of a letter
agreement between Goldman Sachs and Parent Holdings, a true and correct copy of
which has been previously made available by Parent Holdings to Golden State.
4.8. Absence of Certain Changes or Events. (a) Except as may be set forth
in Section 4.8 of the Parent Holdings Disclosure Schedule, or as disclosed in
any Parent Holdings Report (as defined in Section 4.12) filed with the SEC or
the OTS prior to the date of this Agreement, since December 31, 1996, (i)
neither Parent Holdings nor any of its Subsidiaries has incurred any liability,
except in the ordinary course of their business consistent with their past
practices, and (ii) no event has occurred which has caused, or is reasonably
likely to cause, individually or in the aggregate, a Material Adverse Effect on
Parent Holdings.
(b) Except as set forth in Section 4.8(b) of the Parent Holdings
Disclosure Schedule or as disclosed in any Parent Holdings Report filed with
the SEC or the OTS prior to the date of this Agreement, since September 30,
1997, Parent Holdings and its Subsidiaries have carried on their respective
businesses in the ordinary course consistent with their past practices.
(c) Except as set forth in Section 4.8(c) of the Parent Holdings
Disclosure Schedule, since December 31, 1997, neither Parent Holdings nor any
of its Subsidiaries has (i) increased the wages, salaries, compensation,
pension, or other fringe benefits or perquisites payable to any executive
officer, employee, or director from the amount thereof in effect as of December
31, 1997 (which amounts have been previously made available to Golden State),
granted any severance or termination pay, entered into any contract to make or
grant any severance or termination pay, or paid any bonus, (ii) suffered any
strike, work stoppage, slow-down, or other labor disturbance, (iii) been a
party to a collective bargaining agreement, contract or other agreement or
understanding with a labor union or organization, or (iv) had any union
organizing activities.
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4.9. Legal Proceedings. (a) Except as set forth in Section 4.9 of the
Parent Holdings Disclosure Schedule, neither Parent Holdings nor any of its
Subsidiaries is a party to any and there are no pending or, to the knowledge of
Parent Holdings, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory investigations of
any nature against Parent Holdings or any of its Subsidiaries or challenging
the validity or propriety of the transactions contemplated by this Agreement or
the Bank Merger Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Parent Holdings, any of its Subsidiaries or the assets
of Parent Holdings or any of its Subsidiaries.
4.10. Taxes. Except as set forth in Section 4.10 of the Parent Holdings
Disclosure Schedule, each of Parent Holdings and its Subsidiaries has or will
have prior to the Effective Time (i) duly and timely filed (including
applicable extensions granted without penalty), or there has been filed on its
behalf, all Tax Returns required to be filed at or prior to the Effective Time,
and such Tax Returns are true, correct and complete, and (ii) paid, or there
has been paid on its behalf, in full or made provision in the financial
statements of Parent Holdings (in accordance with GAAP) for all Taxes due or
claimed to be due from it by any taxing authority with respect to all periods
ending on or before the Effective Time. No deficiencies for any Taxes have been
proposed, asserted, assessed or threatened in writing against or with respect
to Parent Holdings or any of its Subsidiaries. Except as set forth in Section
4.10 of the Parent Holdings Disclosure Schedule, (i) there are no liens for
Taxes upon the assets of either Parent Holdings or any of its Subsidiaries
except for statutory liens for current Taxes not yet due or liens for Taxes
that are being contested in good faith, as to the fact or the amount of
liability, by appropriate proceedings and that have been reserved against in
accordance with GAAP, (ii) neither Parent Holdings nor any of its Subsidiaries
has requested any extension of time within which to file any Tax Returns in
respect of any fiscal year which have not since been filed and no request for
waivers or extensions of the time to assess or collect any Taxes are pending or
outstanding, (iii) with respect to each taxable period of Parent Holdings and
its Subsidiaries, the federal and state income Tax Returns of Parent Holdings
and its Subsidiaries have been audited by the Internal Revenue Service or
appropriate state tax authorities or the time for assessing and collecting
Taxes with respect to such taxable period has closed and such taxable period is
not subject to review, (iv) neither Parent Holdings nor any of its Subsidiaries
has filed or been included in a combined, consolidated or unitary income Tax
Return other than one in which Parent Holdings is the parent of the group
filing such Tax Return, (v) neither Parent Holdings nor any of its Subsidiaries
is a party to, is bound by, or has an obligation under, any Tax sharing
agreement, Tax indemnification agreement or similar contract or arrangement
providing for the allocation or sharing of Taxes (other than the allocation of
federal income taxes as provided by Regulation 1.1552-1(a)(1) under the Code),
(vi) neither Parent Holdings nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code, (vii) no power of attorney which is
currently in force has been granted by or with respect to Parent Holdings or
any Subsidiary thereof with respect to any matter relating to Taxes; and (viii)
no closing agreement pursuant to Section 7121 of the Code (or any predecessor
provision) or any similar provision of any state, local or foreign Law has been
entered into by or with respect to the Parent Holdings or its Subsidiaries.
California Federal Preferred Capital Corporation ("CFPCC") (formerly First
Nationwide Preferred Capital Corporation) was formed in 1996 and included in
the 1996 consolidated federal income tax return of the affiliated group of
which Mafco Holdings Inc. is the common parent and (i) has been at all times
since January 1, 1997, and at the Effective Time will be, a "real estate
investment trust" ("REIT") as defined in Section 856(a) of the Code, (ii) has
met at all times since January 1, 1997, and at the Effective Time will meet,
the requirements of Section 857(a) of the Code, (iii) has not been at any time
since January 1, 1997, and at the Effective Time will not be, described in
Section 856(c)(7) of the Code, (iv) has not had at any time since January 1,
1997, and at the Effective Time will not have had, any "net income derived from
prohibited transactions" within the meaning of Section 857(b)(6) of the Code
and (v) has not, and at the Effective Time will not have, issued any stock or
securities as part of a multiple party financing transaction described in
Internal Revenue Service Notice 97-21, 1997-11 I.R.B. 2.
4.11. Employees. (a) Section 4.11(a) of the Parent Holdings Disclosure
Schedule sets forth a true and complete list of each deferred compensation
plan, incentive compensation plan, equity compensation plan, "welfare" plan,
fund or program (within the meaning of section 3(1) of the ERISA); "pension"
plan,
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fund or program (within the meaning of section 3(2) of ERISA); each employment,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to as of the date of this
Agreement (the "Parent Holdings Plans") by Parent Holdings, any of its
Subsidiaries or by any trade or business, whether or not incorporated, which is
owned by Parent Holdings or any of its Subsidiaries (a "Parent Holdings ERISA
Affiliate"), all of which together with Parent Holdings would be deemed a
"single employer" within the meaning of Section 4001 of ERISA, for the benefit
of any employee or former employee of Parent Holdings, any Subsidiary of Parent
Holdings or any Parent Holdings ERISA Affiliate.
(b) Parent Holdings has heretofore made available to Golden State each of
the Parent Holdings Plans and all related documents, including but not limited
to (i) the actuarial report for such Parent Holdings Plan (if applicable) for
each of the last two years and (ii) the most recent determination letter from
the Internal Revenue Service (if applicable) for such Parent Holdings Plan.
(c) Except as set forth in Section 4.11(c) of the Parent Holdings
Disclosure Schedule, (i) each of the Parent Holdings Plans has been operated
and administered in all material respects in accordance with its terms and
applicable law, including but not limited to ERISA and the Code, (ii) each of
the Parent Holdings Plans intended to be "qualified" within the meaning of
Section 401(a) of the Code either (1) has received a favorable determination
letter from the IRS, or (2) is or will be the subject of an application for a
favorable determination letter, and Parent Holdings is not aware of any
circumstances likely to result in the revocation or denial of any such
favorable determination letter, (iii) with respect to each Parent Holdings Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such Parent Holdings Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by such Parent
Holdings Plan's actuary with respect to such Parent Holdings Plan, did not, as
of its latest valuation date, exceed the then current value of the assets of
such Parent Holdings Plan allocable to such accrued benefits, (iv) no Parent
Holdings Plan provides welfare benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees of Parent Holdings or its Subsidiaries beyond their retirement or
other termination of service, other than (w) coverage mandated by applicable
law or (x) benefits the full cost of which is borne by the current or former
employee (or his beneficiary), (v) no liability under Title IV of ERISA has
been incurred (directly or indirectly) by Parent Holdings, its Subsidiaries or
any Parent Holdings ERISA Affiliate that has not been satisfied in full, and no
condition exists that presents a risk to Parent Holdings, its Subsidiaries or a
Parent Holdings ERISA Affiliate of incurring (directly or indirectly) a
material liability thereunder, (vi) no Parent Holdings Plan is a "multiemployer
pension plan," as such term is defined in Section 3(37) of ERISA, (vii) all
contributions or other amounts payable by Parent Holdings, its Subsidiaries or
any ERISA Affiliate as of the Effective Time with respect to each Parent
Holdings Plan in respect of current or prior plan years have been paid or
accrued in accordance with GAAP and Section 412 of the Code, (viii) neither
Parent Holdings nor its Subsidiaries has engaged in a transaction in connection
with which Parent Holdings or its Subsidiaries could reasonably be expected to
be subject to either a civil penalty assessed pursuant to Section 409 or 502(i)
of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code, (ix)
there are no pending, or, to the best knowledge of Parent Holdings, threatened
or anticipated claims (other than routine claims for benefits) by, on behalf of
or against any of the Parent Holdings Plans or any trusts related thereto and
(x) the consummation of the transactions contemplated by this Agreement or the
Bank Merger Agreement, either alone or in conjunction with another event,
including a termination of employment, will not (A) entitle any current or
former employee or officer of Parent Holdings, any of its Subsidiaries or any
Parent Holdings ERISA Affiliate to severance pay, termination pay or any other
payment or benefit, except as expressly provided in this Agreement or (B)
accelerate the time of payment or vesting or increase in the amount or value of
compensation or benefits due any such employee or officer.
4.12. SEC Reports. Parent Holdings has previously made available to Golden
State (to the extent filed prior to the date hereof) a true and complete copy
of each (a) final registration statement, prospectus, report, schedule and
definitive proxy statement filed since December 31, 1995 by Parent Holdings or
any of its Subsidiaries with the SEC or the OTS pursuant to the Securities Act
or the
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Exchange Act (the "Parent Holdings Reports") and (b) communication mailed by
Parent Holdings or any of its Subsidiaries to its shareholders since December
31, 1995, and no such registration statement, prospectus, report, schedule,
proxy statement or communication contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that information
as of a later date shall be deemed to modify information as of an earlier date.
Parent Holdings and each of its Subsidiaries has timely filed all Parent
Holdings Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act, and, as of their respective dates, all
Parent Holdings Reports complied with the published rules and regulations of
the OTS and SEC, as applicable, with respect thereto.
4.13. Parent Holdings Information. The information relating to Parent
Holdings and its Subsidiaries which is provided by Parent Holdings to Golden
State for inclusion in the Proxy Statement, or in any other document filed with
any other regulatory agency in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading.
4.14. Compliance with Applicable Law. Parent Holdings and each of its
Subsidiaries holds, and has at all times held, all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to all, and have complied with and are not in
default in any respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating to
Parent Holdings or any of its Subsidiaries, and neither Parent Holdings nor any
of its Subsidiaries knows of, or has received notice of violation of, any
violations of any of the above.
4.15. Ownership of Golden State Common Stock; Affiliates and Associates.
(a) Except for the Option Agreement, neither Parent Holdings nor any of its
affiliates or associates (as such terms are defined under the Exchange Act) (i)
beneficially owns, directly or indirectly, or (ii) is a party to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of, in each case, any shares of capital stock of Golden State (other
than shares held in a fiduciary capacity or in respect of a debt previously
contracted).
(b) Neither Parent Holdings nor any of its Subsidiaries is an "affiliate"
(as such term is defined in DGCL Section 203(c)(1)) or an "associate" (as
such term is defined in DGCL Section 203(c)(2)) of Golden State or a "Related
Person" (as such term is defined in Article Seventh of Golden State's
Certificate of Incorporation).
4.16. Agreements with Regulatory Agencies. Except as set forth in Section
4.16 of the Parent Holdings Disclosure Schedule, neither Parent Holdings nor
any of its Subsidiaries is subject to any cease-and-desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of (each, whether or not set forth in Section
4.16 of the Parent Holdings Disclosure Schedule, a "Parent Holdings Regulatory
Agreement"), any Regulatory Agency or other Governmental Entity that restricts
the conduct of its business or that in any manner relates to its capital
adequacy, its credit policies, its management or its business, nor has Parent
Holdings or any of its Subsidiaries been advised by any Regulatory Agency or
other Governmental Entity that it is considering issuing or requesting any
Parent Holdings Regulatory Agreement.
4.17. Approvals. As of the date of this Agreement, Parent Holdings knows
of no reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby (including, without limitation, the Mergers
and the Subsidiary Merger) should not be obtained.
4.18. Reorganization. As of the date of this Agreement, Parent Holdings
has no reason to believe that any of the Mergers or the Subsidiary Merger will
fail to qualify as a reorganization under Section 368(a) of the Code.
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4.19. Certain Contracts. (a) Except as set forth in Section 4.19(a) of the
Parent Holdings Disclosure Schedule and except for this Agreement, the Stock
Option Agreement, the Bank Merger Agreement and the Management Agreement,
neither Parent Holdings nor any of its Subsidiaries is a party to or bound by
any contract, arrangement, commitment or understanding (whether written or
oral) (i) with respect to the employment of any directors, officers, employees
or consultants, (ii) which, upon the consummation of the transactions
contemplated by this Agreement or the Bank Merger Agreement, will (either alone
or upon the occurrence of any additional acts or events) result in any payment
or benefits (whether of severance pay or otherwise) becoming due, or the
acceleration or vesting of any rights to any payment or benefits, from Golden
State, GFB, Parent Holdings, the Surviving Bank or any of their respective
Subsidiaries to any director, officer or employee thereof, (iii) which is a
material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC)
to be performed after the date of this Agreement that has not been filed or
incorporated by reference in the Parent Holdings Reports, (iv) which is a
consulting agreement (including data processing, software programming and
licensing contracts) not terminable on 60 days or less notice involving the
payment of more than $100,000 per annum, or (v) which materially restricts the
conduct of any line of business by Parent Holdings or any of its Subsidiaries.
Each contract, arrangement, commitment or understanding of the type described
in this Section 4.19(a), whether or not set forth in Section 4.19(a) of the
Parent Holdings Disclosure Schedule, is referred to herein as a "Parent
Holdings Contract". Parent Holdings has previously delivered or made available
to Golden State true and correct copies of each Parent Holdings Contract.
(b) Except as set forth in Section 4.19(b) of the Parent Holdings
Disclosure Schedule, (i) each Parent Holdings Contract is valid and binding and
in full force and effect, (ii) Parent Holdings and each of its Subsidiaries has
performed all obligations required to be performed by it to date under each
Parent Holdings Contract, (iii) no event or condition exists which constitutes
or, after notice or lapse of time or both, would constitute, a default on the
part of Parent Holdings or any of its Subsidiaries under any Parent Holdings
Contract, and (iv) no other party to any Parent Holdings Contract is, to the
knowledge of Parent Holdings, in default in any respect thereunder.
4.20. Environmental Matters. Except as set forth in Section 4.20 of the
Parent Holdings Disclosure Schedule:
(a) Each of Parent Holdings and its Subsidiaries, the Participation
Facilities and the Loan Properties (each as hereinafter defined) are, and
have been, in compliance with all Environmental Laws;
(b) There is no suit, claim, action or proceeding, pending or, to the
knowledge of Parent Holdings, threatened, before any Governmental Entity or
other forum in which Parent Holdings, any of its Subsidiaries, any
Participation Facility or any Loan Property, has been or, with respect to
threatened proceedings, may be, named as a defendant (x) for alleged
noncompliance (including by any predecessor), with any Environmental Laws,
or (y) relating to the release, threatened release or exposure to any
Hazardous Material whether or not occurring at or on a site owned, leased
or operated by Parent Holdings or any of its Subsidiaries, any
Participation Facility or any Loan Property;
(c) During the period of (x) Parent Holdings' or any of its Subsidiaries'
ownership or operation of any of their respective current or former
properties, (y) Parent Holdings' or any of its Subsidiaries' participation
in the management of any Participation Facility, or (z) to the knowledge of
Parent Holdings, Parent Holdings' or any of its Subsidiaries' holding of a
security interest in a Loan Property, there has been no release of
Hazardous Materials in, on, under or affecting any such property that has
had or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent Holdings; and
(d) The following definitions apply for purposes of this Section 4.20:
(x) "Loan Property" means any property in which Parent Holdings or any
of its Subsidiaries holds a security interest, and, where required by
the context, said term means the owner or
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operator of such property; and (y) "Participation Facility" means any
facility in which Parent Holdings or any of its Subsidiaries
participates in the management and, where required by the context, said
term means the owner or operator of such property.
4.21. Derivative Transactions. Except as set forth in Section 4.21 of the
Parent Holdings Disclosure Schedule, since December 31, 1997, neither Parent
Holdings nor any of its Subsidiaries has engaged in transactions in or
involving forwards, futures, options on futures, swaps or other derivative
instruments except (i) as agent on the order and for the account of others, or
(ii) as principal for purposes of hedging interest rate risk on U.S.
dollar-denominated securities and other financial instruments. None of the
counterparties to any contract or agreement with respect to any such instrument
is in default with respect to such contract or agreement and no such contract
or agreement, were it to be a Loan (as defined below) held by Parent Holdings
or any of its Subsidiaries, would be classified as "Other Loans Specially
Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified",
"Criticized", "Credit Risk Assets", "Concerned Loans" or words of similar
import. The financial position of Parent Holdings and its Subsidiaries on a
consolidated basis under or with respect to each such instrument has been
reflected in the books and records of Parent Holdings and such Subsidiaries in
accordance with GAAP consistently applied, and neither Parent Holdings nor any
of its Subsidiaries has any open exposure with respect to any such instrument
(or with respect to multiple instruments with respect to any single
counterparty) as of the date hereof.
4.22. Loan Portfolio. (a) Section 4.22 of the Parent Holdings Disclosure
Schedule sets forth the aggregate principal amount of all written or oral loan
agreements, notes or borrowing arrangements (including, without limitation,
leases, credit enhancements, commitments, guarantees and interest-bearing
assets) (collectively, "Loans"), other than Loans the unpaid principal balance
of which does not exceed $1,000,000, under the terms of which the obligor is,
as of December 31, 1997, over 90 days delinquent in payment of principal or
interest or in default of any other provision and, except as disclosed in
Section 4.22, neither Parent Holdings nor any of its Subsidiaries is a party to
any Loan with any director, executive officer or five percent or greater
stockholder of Parent Holdings or any of its Subsidiaries, or to the knowledge
of Parent Holdings, any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing. Section 4.22
of the Parent Holdings Disclosure Schedule sets forth as of December 31, 1997
(i) all of the Loans in original principal amount in excess of $1,000,000 of
Parent Holdings or any of its Subsidiaries that as of the date of this
Agreement are classified by Parent Holdings as "Special Mention",
"Substandard", "Doubtful", "Loss", or words of similar import, together with
the principal amount of and accrued and unpaid interest on each such Loan and
the identity of the borrower thereunder, (ii) by category of Loan (i.e.,
commercial, consumer, etc.), all of the Loans of Parent Holdings and its
Subsidiaries that as of the date of this Agreement are classified as such,
together with the aggregate principal amount of such Loans by category and
(iii) each asset of Parent Holdings that as of the date of this Agreement is
classified as "Other Real Estate Owned" and the book value thereof.
(b) Each Loan in original principal amount in excess of $1,000,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
4.23. Material Interests of Certain Persons. Except as disclosed in the
Parent Holdings Reports filed prior to the date of this Agreement, no officer
or director of Parent Holdings, or any "associate" (as such term is defined in
Rule 12b-2 under the Exchange Act) of any such officer or director, has any
material interest in any material contract or property (real or personal),
tangible or intangible, used in or pertaining to the business of Parent
Holdings.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1. Covenants Relating to Conduct of Business. During the period from the
date of this Agreement and continuing until the Effective Time, except as
expressly contemplated or permitted by this Agreement, the Bank Merger
Agreement, the Management Agreement or the Option Agreement or with the prior
written consent of the other parties hereto, each of Golden State and Parent
Holdings shall, and shall cause its Subsidiaries to, carry on their respective
businesses in the ordinary course consistent with past practice. Without
limiting the generality of the foregoing, and except as set forth on Section
5.1 of the applicable Disclosure Schedule or as otherwise contemplated by this
Agreement, the Bank Merger Agreement, the Management Agreement or the Option
Agreement or consented to in writing by the other parties hereto, neither
Golden State nor Parent Holdings shall, and neither of them shall permit any of
its Subsidiaries to:
(a) declare or pay any dividends on, or make other distributions in
respect of, any of its capital stock, other than (1) in the case of Golden
State, dividends payable on the outstanding shares of Series A Preferred
Stock in accordance with the provisions of the certificate of designations
for such preferred stock, (2) in the case of Parent Holdings and its
Subsidiaries, dividends payable on the outstanding shares of preferred
stock in accordance with the provisions of the applicable charter,
certificate of incorporation or certificate of designations for such
preferred stock, (3) in the case of any Subsidiary of Golden State or
Parent Holdings, as applicable, the payment of dividends to the extent
necessary to enable its direct and indirect parent companies to pay all
preferred stock dividends and all principal and interest payments on its
outstanding debt obligations, to enable FNH to redeem its outstanding
shares of FNH Preferred Stock as permitted by Section 5.1(b)(ii)(D), to
fund the cash settlement of Golden State Options (as defined herein)
contemplated by Section 6.5 hereof, or to enable CFPCC to maintain its
status as a REIT, and (4) any payments made to holders of the CALGZs,
CALGLs or LTWs in accordance with the terms of such securities;
(b) (i) split, combine or reclassify any shares of its capital stock or,
other than the LTWs, issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
its capital stock, except upon the exercise or fulfillment of rights or
options issued or existing pursuant to employee benefit plans, programs or
arrangements, all to the extent outstanding and in existence on the date of
this Agreement and in accordance with their present terms, or (ii)
repurchase, redeem or otherwise acquire (except for the acquisition of
shares in a fiduciary capacity or in respect of a debt previously
contracted) any shares of its capital stock or the capital stock of any of
its Subsidiaries, or any securities convertible into or exercisable for any
shares of its capital stock or the capital stock of any of its
Subsidiaries, or any CALGZs, CALHZs or LTWs, except (A) in the case of
Golden State, for repurchases by Golden State of Golden State Common Stock
made prior to the commencement of the 30 trading-day period contemplated by
the definition of "Average Daily Price" and in an amount not to exceed the
aggregate number of shares of Golden State Common Stock issued pursuant to
the Redfed Merger Agreement, (B) in addition to the repurchases
contemplated by the preceding clause (A), Golden State may use all proceeds
obtained through the exercise of outstanding Golden State Options,
Five-Year Warrants and Seven Year Warrants to repurchase shares of its
Common Stock, (C) Golden State may redeem its outstanding shares of Golden
State Preferred Stock in accordance with the terms of the Certificate of
Designations relating thereto, and (D) FNH may redeem its outstanding
shares of FNH Series A Preferred Stock and FNH Series B Preferred Stock;
(c) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any
of the foregoing, other than the issuance of the LTWs and the issuance of
Golden State Common Stock pursuant to (i) stock options or similar rights
to acquire Golden State Common Stock granted pursuant to the Golden State
Option Plans and outstanding prior to the date of this Agreement, in each
case in accordance with their present terms, (ii) the CENFED Merger
Agreement and the Redfed Merger Agreement,
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(iii) the exercise of Five-Year Warrants or Seven-Year Warrants outstanding
prior to the date of this Agreement and in each case in accordance with
their present terms, (iv) the conversion of shares of Series A Preferred
Stock in accordance with their terms, and (v) the exercise of LTWs in
accordance with their terms;
(d) amend its Certificate of Incorporation, By-laws or other similar
governing documents;
(e) authorize or permit any of its officers, directors, employees or
agents to directly or indirectly solicit, initiate or encourage any
inquiries relating to, or the making of any proposal which constitutes, a
"takeover proposal" (as defined below), or recommend or endorse any
takeover proposal, or participate in any discussions or negotiations, or
provide third parties with any nonpublic information, relating to any such
inquiry or proposal or otherwise facilitate any effort or attempt to make
or implement a takeover proposal; provided, however, that a party hereto
may communicate information about any such takeover proposal to its
stockholders if, in the judgment of such party's Board of Directors, based
upon the advice of outside counsel, such communication is required under
applicable law. Golden State and Parent Holdings shall immediately cease
and cause to be terminated any existing activities, discussions or
negotiations previously conducted with any parties other than the parties
hereto and their representatives with respect to any of the foregoing. Each
party shall take all actions necessary or advisable to inform the
appropriate individuals or entities referred to in the first sentence
hereof of the obligations undertaken in this Section 5.1(e). Golden State
will notify Parent Holdings, and Parent Holdings will notify Golden State,
immediately if any such inquiries or takeover proposals are received by,
any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, such party, and
such party will promptly inform the other in writing of all of the relevant
details with respect to the foregoing. As used in this Agreement, "takeover
proposal" shall mean any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving Golden State or
Parent Holdings or any Subsidiary thereof or any proposal or offer to
acquire in any manner a substantial equity interest in, or a substantial
portion of the assets of, Golden State or Parent Holdings or any Subsidiary
thereof other than the transactions contemplated or permitted by this
Agreement, the Bank Merger Agreement and the Option Agreement;
(f) make any capital expenditures other than those which (i) are made in
the ordinary course of business or are necessary to maintain existing
assets in good repair and (ii) in any event are in an amount of no more
than $10,000,000 in the aggregate (excluding, in the case of Parent
Holdings or any Subsidiary, capital expenditures made in connection with
the consummation of the transactions contemplated hereby);
(g) enter into any new line of business;
(h) other than as contemplated by the CENFED Merger Agreement and the
Redfed Merger Agreement, acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof or otherwise acquire any assets, which would be
material, individually or in the aggregate, to such party and its
Subsidiaries, other than in connection with foreclosures, settlements in
lieu of foreclosure or troubled loan or debt restructurings in the ordinary
course of business consistent with past practice;
(i) take any action that is intended to result in any of its
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect, or that is intended or may
reasonably be expected to result in any of the conditions to the Mergers
set forth in Article VII not being satisfied;
(j) change its methods of accounting in effect at September 30, 1997,
except as required by changes in GAAP or regulatory accounting principles
as concurred to by such party's independent auditors;
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(k) (i) except as required by applicable law or as required to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any
employee benefit plan or any agreement, arrangement, plan or policy between
such party and one or more of its current or former directors, officers or
employees or (ii) except for normal increases in the ordinary course of
business consistent with past practice or except as required by applicable
law, increase in any manner the compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any Plan
or agreement as in effect as of the date hereof (including, without
limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares);
(l) other than activities in the ordinary course of business consistent
with past practice, sell, lease, encumber, assign or otherwise dispose of,
or agree to sell, lease, encumber, assign or otherwise dispose of, any of
its material assets, properties or other rights or agreements;
(m) other than (i) as a result of the CENFED Merger or the Redfed Merger
or as required to fund the cash settlement of Golden State Options
contemplated by Section 6.5 hereof or (ii) in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money or assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or
other entity;
(n) other than in connection with the CENFED Merger and the Redfed
Merger, file any application to relocate or terminate the operations of any
banking office;
(o) create, renew, amend or terminate or give notice of a proposed
renewal, amendment or termination of, any material contract, agreement or
lease for goods, services or office space to which such party or any of its
Subsidiaries is a party or by which such party or any of its Subsidiaries
or their respective properties is bound, other than the renewal in the
ordinary course of business of any lease or contract the term of which
expires prior to the Closing Date;
(p) other than in prior consultation with the other parties hereto,
restructure or materially change its investment securities portfolio or its
gap position, through purchases, sales or otherwise, or the manner in which
the portfolio is classified or reported;
(q) take or cause to be taken any action which would disqualify the
Mergers or the Bank Merger as tax free reorganizations under Section 368(a)
of the Code;
(r) reduce, or authorize the reduction of, the exercise, conversion or
"strike" price of any of any warrants, options or other rights to acquire
any of its securities; or
(s) agree to do any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Regulatory Matters. (a) Golden State shall promptly prepare and file
with the SEC the Proxy Statement and shall thereafter mail the Proxy Statement
to its stockholders. Golden State shall also use its reasonable best efforts to
obtain all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement and the
Bank Merger Agreement, and Parent Holdings shall furnish all information
concerning Parent Holdings as may be reasonably requested in connection with
any such action.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement (including without limitation the Mergers and the Subsidiary Merger).
Each of Parent Holdings and Golden State shall have the right to review in
advance, and to the extent practicable each will consult the other on, in each
case subject to applicable laws relating to the exchange of information, all
the information relating to Parent Holdings or Golden State, as the case may
be, and
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any of their respective Subsidiaries, which appears in any filing made with, or
written materials submitted to, any third party or any Governmental Entity in
connection with the transactions contemplated by this Agreement, provided,
however, that nothing contained herein shall be deemed to provide either party
with a right to review any information (other than pro forma financial
information or financial projections) provided to any Governmental Entity on a
confidential basis in connection with the transactions contemplated hereby. In
exercising the foregoing right, each of the parties hereto shall act reasonably
and as promptly as practicable. The parties hereto agree that they will consult
with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other appraised of the status of matters
relating to completion of the transactions contemplated herein.
(c) Each of Parent Holdings and Golden State shall, upon request, furnish
the other with all information concerning itself, its Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Proxy Statement or any other statement,
filing, notice or application made by or on behalf of Parent Holdings, Golden
State or any of their respective Subsidiaries to any Governmental Entity in
connection with the Mergers and the other transactions contemplated by this
Agreement.
(d) Each of Parent Holdings and Golden State shall promptly furnish the
other with copies of written communications received by it or any of its
Subsidiaries, Affiliates or Associates (as such terms are defined in Rule 12b-2
under the Exchange Act as in effect on the date of this Agreement) from, or
delivered by any of the foregoing to, any Governmental Entity in respect of the
transactions contemplated hereby.
6.2 Access to Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, each of Parent
Holdings and Golden State shall, and shall cause its Subsidiaries to, afford to
the officers, employees, accountants, counsel and other representatives of the
other party, access, during normal business hours during the period prior to
the Effective Time, to all its properties, books, contracts, commitments,
records, officers, employees, accountants, counsel and other representatives
and, during such period, it shall, and shall cause its Subsidiaries to, make
available to the other party all information concerning its business,
properties and personnel as the other party may reasonably request. Neither
Parent Holdings nor Golden State nor any of their respective Subsidiaries shall
be required to provide access to or to disclose information where such access
or disclosure would violate or prejudice the rights of such party's customers,
jeopardize any attorney-client privilege or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement
entered into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) All information furnished by any party hereto or its Subsidiaries (the
"Delivering Party") to any other party hereto or its Subsidiaries (the
"Receiving Party") or their representatives pursuant hereto shall be treated as
the sole property of the Delivering Party and, if the Mergers shall not occur,
the Receiving Party and its representatives shall return to the Delivering
Party all of such written information and all documents, notes, summaries or
other materials containing, reflecting or referring to, or derived from, such
information. The Receiving Party shall, and shall use its reasonable best
efforts to cause its representatives to, keep confidential all such
information, and shall not directly or indirectly use such information for any
competitive or other commercial purpose. The obligation to keep such
information confidential shall continue for five years from the date the
proposed Merger is abandoned and shall not apply to (i) any information which
(x) was already in the Receiving Party's possession prior to the disclosure
thereof by the Delivering Party; (y) was then generally known to the public; or
(z) was disclosed to the Receiving Party by a third party not bound by an
obligation of confidentiality or (ii) disclosures made as required by law. It
is further agreed that, if in the absence of a protective order (which the
Receiving Party shall use reasonable best efforts to obtain) or the receipt of
a waiver hereunder the Receiving party is nonetheless, in the opinion of its
counsel, compelled to disclose information concerning the Delivering Party to
any tribunal or governmental body or agency or else stand liable for contempt
or suffer other censure or penalty, the Receiving Party may disclose such
information to such tribunal or governmental body or agency without liability
hereunder.
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(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
agreements of the other party set forth herein.
6.3. Stockholder Meeting. Golden State shall take all steps necessary to
duly call, give notice of, convene and hold a meeting of its stockholders to be
held as soon as is reasonably practicable after the date of this Agreement for
the purpose of voting upon the approval and adoption of this Agreement and the
Parent Plan of Merger. Golden State shall, through its Board of Directors,
recommend to its stockholders approval of this Agreement and the Parent Plan of
Merger and such other matters as may be submitted to its stockholders in
connection with this Agreement.
6.4. Legal Conditions to Merger. Each of Parent Holdings and Golden State
shall, and shall cause its Subsidiaries to, use its reasonable best efforts (a)
to take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements which may be imposed on such party
or its Subsidiaries with respect to the Mergers or the Subsidiary Merger and,
subject to the conditions set forth in Article VII hereof, to consummate the
transactions contemplated by this Agreement and (b) to obtain (and to cooperate
with the other party to obtain) any consent, authorization, order or approval
of, or any exemption by, any Governmental Entity and any other third party
which is required to be obtained by Parent Holdings or Golden State or any of
their respective Subsidiaries in connection with the Mergers and the Subsidiary
Merger and the other transactions contemplated by this Agreement, and to comply
with the terms and conditions of such consent, authorization, order or
approval.
6.5. Cash-out of Stock Options. Each holder of an option to purchase
Golden State Common Stock (a "Golden State Option") granted under Golden
State's Stock Option and Long-Term Performance Incentive Plan or under existing
stock option plans of CENFED or Redfed which are assumed by Golden State in
connection with the CENFED Merger and the Glenfed Merger, respectively
(collectively, the "Golden State Option Plans") which is outstanding and
unexercised on the day immediately prior to the Closing Date may elect, by
giving written notice to Golden State on or prior to the second business day
prior to the Closing Date, to surrender such Golden State Option in exchange
for a lump sum cash payment in an amount equal to the sum of (x)(i) the Average
Daily Price less the per share exercise price of such Golden State Option,
multiplied by (ii) the number of shares of Golden State Common Stock covered by
such Golden State Option, plus (y) at the election of the holder thereof,
either (i) one LTW in respect of each share of Golden State Common Stock
underlying such Golden State Option, or (ii) the product of the number of
shares of Golden State Common Stock underlying such Golden State Option and the
Average Daily LTW Price, whereupon such Golden State Option shall terminate and
be of no further force and effect. All such cash payments shall be paid by
Golden State on the day immediately prior to the Closing Date.
6.6. Employee Benefit Plans; Existing Agreements. (a) As soon as
practicable following the Effective Time, the employees of GFB (the "GFB
Employees") shall be entitled to participate in the employee benefit plans of
CFB in which similarly situated employees of CFB participate, to the same
extent as similarly-situated employees of CFB (it being understood that
inclusion of GFB Employees in CFB's employee benefit plans may occur at
different times with respect to different plans).
(b) With respect to each CFB Plan that is an "employee benefit plan," as
defined in Section 3(3)of ERISA, for purposes of determining eligibility to
participate, vesting, and entitlement to benefits, including for severance
benefits and vacation entitlement (but not for accrual of pension benefits),
service with GFB shall be treated as service with CFB; provided however, that
such service shall not be recognized to the extent that such recognition would
result in a duplication of benefits. Such service also shall apply for purposes
of satisfying any waiting periods, evidence of insurability requirements, or
the application of any preexisting condition limitations. GFB Employees shall
be given credit for amounts paid under a corresponding benefit plan during the
same period for purposes of applying deductibles, copayments and out-of-pocket
maximums as though such amounts had been paid in accordance with the terms and
conditions of the CFB Plan.
(c) Following the Effective Time, the Surviving Corporation shall honor
and shall cause CFB to honor in accordance with their terms all employment,
severance and other compensation agreements and arrangements existing on or
prior to the execution of this Agreement which are between Golden State or
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GFB and any director, officer or employee thereof and which have been disclosed
in the Golden State Disclosure Schedule and previously have been delivered to
Parent Holdings (provided that nothing in this Section 6.6(c) shall be deemed
to adversely affect the rights of any party to or beneficiary of any such
employment, severance and compensation agreements and arrangements under the
same, whether or not disclosed in the Golden State Disclosure Schedule or
previously delivered to Parent Holdings). Notwithstanding anything to the
contrary contained in this Agreement, Parent Holdings or the Surviving
Corporation, as the case may be, shall take and shall cause CFB to take all
actions necessary to effect the items set forth in Section 6.6 of the Golden
State Disclosure Schedule, and Section 6.6 of the Golden State Disclosure
Schedule shall be deemed incorporated into this Section 6.6(c).
6.7. Indemnification. (a) In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim, action, suit,
proceeding or investigation in which any person who is now, or has been at any
time prior to the date of this Agreement, or who becomes prior to the Effective
Time, a director or officer or employee of Golden State or any of its
Subsidiaries (the "Indemnified Parties") is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director, officer or employee of
Golden State, any of the Subsidiaries of Golden State or any of their
respective predecessors or (ii) this Agreement or any of the transactions
contemplated hereby, whether in any case asserted or arising before or after
the Effective Time, the parties hereto agree to cooperate and use their best
efforts to defend against and respond thereto. It is understood and agreed that
after the Effective Time, the Surviving Corporation shall indemnify and hold
harmless, as and to the extent permitted by Delaware law, each such Indemnified
Party against any losses, claims, damages, liabilities, costs, expenses
(including reasonable attorney's fees and expenses in advance of the final
disposition of any claim, suit, proceeding or investigation to each Indemnified
Party to the fullest extent permitted by law upon receipt of any undertaking
required by applicable law), judgments, fines and amounts paid in settlement in
connection with any such threatened or actual claim, action, suit, proceeding
or investigation, and in the event of any such threatened or actual claim,
action, suit, proceeding or investigation (whether asserted or arising before
or after the Effective Time), the Indemnified Parties may retain counsel
reasonably satisfactory to them after consultation with the Surviving
Corporation; provided, however, that (1) the Surviving Corporation shall have
the right to assume the defense thereof and upon such assumption the Surviving
Corporation shall not be liable to any Indemnified Party for any legal expenses
of other counsel or any other expenses subsequently incurred by any Indemnified
Party in connection with the defense thereof, except that if the Surviving
Corporation elects not to assume such defense or counsel for the Indemnified
Parties reasonably advises that there are issues which raise conflicts of
interest between the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with the Surviving Corporation, and the Surviving Corporation
shall pay the reasonable fees and expenses of such counsel for the Indemnified
Parties, (2) the Surviving Corporation shall in all cases be obligated pursuant
to this paragraph to pay for only one firm of counsel for all Indemnified
Parties (except that if counsel for the Indemnified Parties reasonably advises
that there are issues that raise conflicts of interest among the Indemnified
Parties, the Indemnified Parties may retain separate counsel paid for by the
Surviving Corporation to the extent reasonably necessary to remove such
conflicts), (3) the Surviving Corporation shall not be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld) and (4) the Surviving Corporation shall have no
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim Indemnification under this Section 6.7, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify promptly the Surviving Corporation thereof, provided that the failure to
so notify shall not affect the obligations of the Surviving Corporation under
this Section 6.7 except to the extent such failure to notify prejudices the
Surviving Corporation. The Surviving Corporation's obligations under this
Section 6.7 shall continue in full force and effect for a period of six (6)
years from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim (a "Claim") asserted or made within
such period shall continue until the final disposition of such Claim.
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(b) Parent Holdings shall use its reasonable best efforts to cause the
persons serving as officers and directors of Golden State immediately prior to
the Effective Time to be covered for a period of six (6) years from the
Effective Time by annual policies of directors' and officers' liability
insurance of at least the same coverage and amounts and containing terms and
conditions which are not less advantageous to such directors and officers of
Golden State than the terms and conditions of the existing policy of Golden
State with respect to acts or omissions occurring prior to the Effective Time
which were committed by such officers and directors in their capacity as such;
provided that Parent Holdings shall not be required as to any such policy to
pay premiums in excess of 300% of the amount currently expended annually be
Golden State to obtain such insurance, and if such insurance cannot be obtained
for such premium Parent Holdings shall obtain for such persons the maximum
coverage that may be obtained for such premiums.
(c) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its properties
and assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation assume the obligations set forth in this section.
(d) The provisions of this Section 6.7 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
6.8. Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or the Bank Merger Agreement or to vest the Surviving Corporation or
the Surviving Bank with full title to all properties, assets, rights,
approvals, immunities and franchises of any of the parties to the Mergers or
the Subsidiary Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary
action as may be reasonably requested by the Surviving Corporation.
6.9. Advice of Changes. Each of Parent Holdings and Golden State shall
promptly advise the other party of any change or event having a Material
Adverse Effect on it or which it believes would or would be reasonably likely
to cause or constitute a material breach of any of its representations,
warranties or covenants contained herein.
6.10. Execution and Authorization of Bank Merger Agreement. As soon as
reasonably practicable after the date of this Agreement, (a) FNH shall (i)
cause the Board of Directors of CFB to approve the Bank Merger Agreement, (ii)
cause CFB to execute and deliver the Bank Merger Agreement, and (iii) approve
the Bank Merger Agreement as the sole stockholder of CFB, and (b) GFC shall (i)
cause the Board of Directors of GFB to approve the Bank Merger Agreement, (ii)
cause GFB to execute and deliver the Bank Merger Agreement, and (iii) approve
the Bank Merger Agreement as the sole stockholder of GFB. The Bank Merger
Agreement shall contain terms that are normal and customary in light of the
transactions contemplated hereby and such additional terms as are necessary to
carry out the purposes of this Agreement.
6.11. Board of Directors. Golden State shall use its best efforts to
obtain on or prior to the Closing Date the signed resignations of all of the
directors of Golden State and each of its Subsidiaries other than five
directors (the "GSB Directors") who shall remain on the Board of Directors of
Golden State following the Effective Time. The five GSB Directors remaining on
the Board of Directors of Golden State following the Effective Time shall be
apportioned among the three classes of Golden State directors such that at
least one but no more than two of such five directors shall serve in each of
the three classes of director following the Effective Time. Effective as of the
Closing Date, Golden State shall cause its Board of Directors to be expanded to
fifteen members and to appoint ten persons designated by the Board of Directors
of Parent Holdings to fill the vacancies on Golden State's Board of Directors
resulting from the aforementioned resignations and such increase as of the
Effective Time. From and after the Effective Time until the earlier of a Change
in Control (as defined in the Management Agreement) or the resolution of all
matters relating to the Glendale Litigation and the LTWs, the Surviving
Corporation shall continue to elect each GSB Director to the Board of Directors
of the Surviving Bank and to include each GSB Director or his successor as
designated by such GSB Directors on the list of nominees for director presented
by the Board of Directors of the Surviving Corporation at any annual meeting of
stockholders
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of the Surviving Corporation at which such GSB Director's term shall expire,
and, subject to the Management Agreement, the Surviving Corporation shall cause
each GSB Director while such GSB Director is serving on the Board of Directors
of the Surviving Corporation or the Surviving Bank to be appointed as a member
of the Glendale Committee (as defined in the Management Agreement) and shall
maintain such Glendale Committee as contemplated by the Management Agreement.
The provisions of the immediately preceding sentence shall be enforceable by
each such GSB Director and any such successor.
6.12. Registration Rights Agreement. On or prior to the Closing Date,
Golden State shall enter into the Registration Rights Agreement.
6.13. Distribution and Listing of LTWs; Amendment of Certificate of
Incorporation. Golden State shall take all actions necessary, and shall use its
reasonable best efforts, to cause the issuance and distribution of the LTWs to
the stockholders of Golden State as soon as practicable following the date
hereof and shall use its best efforts to cause the LTWs to be listed on the
NYSE or Nasdaq. The terms of the LTWs shall be substantially as set forth on
Annex E to this Agreement. Golden State shall use its reasonable best efforts
to effect an amendment to its Certificate of Incorporation to increase the
total number of shares of Golden State Common Stock authorized thereunder to
250,000,000. From and after the Effective Time, the Surviving Corporation shall
honor the LTWs in accordance with their terms.
6.14. Tax Sharing Agreement. (a) For any taxable period ending after the
Effective Time, (i) Golden State shall, at the Effective Time, replace Mafco
Holdings Inc. under the tax sharing agreement entered into on January 1st,
1994, between Mafco Holdings Inc., FNH, and First Madison Bank, FSB, the
predecessor of CFB (the "Tax Sharing Agreement") and will assume all of the
rights and obligations of Mafco Holdings Inc. under the Tax Sharing Agreement
with respect to such taxable periods; (ii) Merger Sub shall, at the Effective
Time, replace FNH under the Tax Sharing Agreement and will assume all of the
rights and obligations of FNH under the Tax Sharing Agreement with respect to
such taxable periods; and (iii) CFB shall continue to be bound by the Tax
Sharing Agreement.
(b) For any taxable period ending on or before the Effective Time (i)
Merger Sub shall be at the Effective Time the successor to FNH pursuant to the
Tax Sharing Agreement, and will assume all of the rights and obligations of FNH
under the Tax Sharing Agreement; and (ii) CFB and MAFCO Holdings, Inc. shall
continue to be bound by the Tax Sharing Agreement.
6.15. Transfer and Similar Taxes. Each party to this Agreement, shall
promptly pay all sales, use, privilege, transfer, documentary, gains, stamp,
duties, recording and similar Taxes and fees (including any penalties, interest
or additions) imposed upon such party incurred in connection with the
transactions contemplated by this Agreement (collectively, the "Transfer
Taxes"), and each such party shall, at its own expense, procure any stock
transfer stamps required by, and accurately file all necessary Tax Returns and
other documentation with respect to, any Transfer Tax.
6.16. Purchases of Golden State Securities. Parent Holdings shall not, and
shall cause its Subsidiaries not to, purchase or otherwise acquire, directly or
indirectly (other than in a fiduciary capacity or in respect of a debt
previously contracted or as contemplated by the Option Agreement), any shares
of capital stock of Golden State (x) during the period beginning fourteen days
prior to the 30 trading-day period contemplated by the definition of "Average
Daily Price" in Section 1.3 of this Agreement and ending on the Closing Date,
or (y) at any time prior to the Closing Date, if the purchase price paid in
such transaction would be more than $30.00 per share.
6.17. Stock Exchange Listing. Golden State shall use its reasonable best
efforts to cause the shares of Golden State Common Stock to be issued pursuant
to this Agreement to be approved for listing on the NYSE, subject to official
notice of issuance.
6.18. Certain Agreements of FGH, Parent Holdings and Ford. (a) FGH
represents and warrants that FGH is the record or beneficial owner of 100% of
the outstanding shares of Parent Holdings Common Stock (the "Parent Shares")
and that FGH is the lawful owner of all such shares, free and clear of all
liens, charges, encumbrances, voting agreements (other than as set forth below)
and commitments of every kind. Parent Holdings and Ford represent and warrant
that Parent Holdings and Ford are the lawful
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record or beneficial owners of 800 shares of FNH Class A Common Stock and 200
shares of FNH Class B Common Stock (collectively, the "FNH Shares"),
respectively, free and clear of all liens, charges, encumbrances, voting
agreements and commitments of every kind.
(b) FGH agrees that, prior to the Effective Time, FGH will not, and will
use its reasonable best efforts to cause any affiliate thereof not to, contract
to sell, sell or otherwise transfer or dispose of any of the Parent Shares, or
the FNH Shares owned by Parent Holdings, and Ford agrees that, prior to the
Effective Time, Ford will not, and will use its reasonable best efforts to
cause any affiliate thereof not to, contract to sell, sell or otherwise
transfer or dispose of any of the FNH Shares owned by Ford, or in each case any
interest therein or securities convertible thereinto or any voting rights with
respect thereto, other than pursuant to the Mergers or with Golden State's
prior written consent.
(c) Each of FGH and Ford represents and warrants that it is not the
beneficial or record owner, directly or indirectly, of any shares of capital
stock of Golden State (other than those held by a subsidiary in a fiduciary
capacity or in respect of a debt previously contracted or, in the case of FGH,
pursuant to the Option Agreement). Each of Ford and FGH agrees that it shall
not, and shall use its reasonable best efforts to cause its affiliates (other
than those affiliates that are parties to this Agreement) not to, purchase or
otherwise acquire, directly or indirectly (other than in a fiduciary capacity
or in respect of a debt previously contracted or as contemplated by the Option
Agreement), any shares of Golden State Common Stock (i) during the period
beginning fourteen days prior to the 30 trading-day period contemplated by the
definition of "Average Daily Price" in Section 1.3 of this Agreement and ending
on the Closing Date, or (y) at any time prior to the Closing Date, if at a
purchase price in excess of $30.00 per share.
(d) FGH agrees that all of the Parent Shares beneficially owned thereby,
or over which FGH has voting power or control, directly or indirectly, will be
voted in favor of this Agreement and the Parent Plan of Merger and the
transactions contemplated thereby, and against any proposal by a party other
than Golden State for a business combination, merger, consolidation or similar
transaction.
6.19. Bank Charter Amendment. Prior to the Effective Time, Parent Holdings
shall use its commercially reasonable efforts to cause CFB to amend its federal
stock charter for the purposes of granting to the holders of preferred stock of
CFB and to the holders of the CALGZs and the CALGLs voting rights not to exceed
in the aggregate 10% of the voting power of all voting securities of CFB.
ARTICLE VII
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation To Effect the Mergers. The
respective obligation of each party hereto to effect the Mergers shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement and the Parent Plan of Merger
shall have been approved and adopted by the requisite votes of the holders of
the outstanding capital stock of Golden State under applicable law and the
Certificate of Incorporation and By-laws of Golden State.
(b) Other Approvals. All regulatory approvals required to consummate the
transactions contemplated hereby (including the Mergers and the Subsidiary
Merger) shall have been obtained and shall remain in full force and effect
and all statutory waiting periods in respect thereof shall have expired
(all such approvals and the expiration of all such waiting periods being
referred to herein as the "Requisite Regulatory Approvals").
(c) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition (an "Injunction") preventing the
consummation of the Mergers, the Subsidiary Merger or any of the other
transactions contemplated by this Agreement or the Bank Merger Agreement
shall be in effect. No statute, rule, regulation, order, injunction or
decree shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restricts or makes illegal
consummation of the Mergers or the Subsidiary Merger.
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(d) Amendment to Certificate of Incorporation. Golden State shall have
effected an amendment to its Certificate of Incorporation to increase the
total number of shares of Golden State Common Stock authorized thereunder
to 250,000,000.
7.2. Conditions to Obligations of Parent Holdings and FNH. The obligation
of Parent Holdings and FNH to effect the Mergers is also subject to the
satisfaction or waiver by Parent Holdings and FNH at or prior to the Effective
Time of the following conditions:
(a) Representations and Warranties. (i) Subject to Section 2.2, the
representations and warranties of Golden State set forth in this Agreement
(other than those set forth in Sections 3.2 and 3.17) shall be true and
correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; and (ii) the
representations and warranties of Golden State set forth in Sections 3.2
and 3.17 of this Agreement shall be true and correct in all material
respects (without giving effect to Section 2.2 of this Agreement) as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date. Parent Holdings shall have received a
certificate signed on behalf of Golden State by the Chief Executive Officer
and the Chief Financial Officer of Golden State to the foregoing effect.
(b) Performance of Obligations of Golden State and Merger Sub. Golden
State and Merger Sub shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or
prior to the Closing Date, and Parent Holdings shall have received a
certificate signed on behalf of Golden State by the Chief Executive Officer
and the Chief Financial Officer of Golden State to such effect.
(c) No Pending Governmental Actions. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) Federal Tax Opinion. Parent Holdings shall have received an opinion
of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Parent Holdings
("Parent Holdings's Counsel"), dated the Effective Date, in form and
substance reasonably satisfactory to Parent Holdings, substantially to the
effect that, on the basis of facts, representations and assumptions set
forth in such opinion which are consistent with the state of facts existing
at the Effective Time, the Mergers and Subsidiary Merger will be treated as
reorganizations within the meaning of Section 368(a) of the Code and that,
accordingly, for federal income tax purposes:
(i) No gain or loss will be recognized by Golden State, Merger Sub,
Parent Holdings or FNH as a result of the Mergers;
(ii) No gain or loss will be recognized by CFB or GFB as a result of
the Subsidiary Merger (except to the extent CFB or GFB may be required
to recognize income due to the recapture of bad debt reserves as a
result of the Subsidiary Merger); and
(iii) No gain or loss will be recognized by the shareholders of Parent
Holdings or FNH solely as a result of the receipt of Golden State Common
Stock at the Effective Time in exchange for Parent Holdings Common Stock
or FNH Class B Common Stock pursuant to the Mergers.
In rendering such opinion, Parent Holding's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Parent Holdings, FNH, CFB, Golden State, Merger Sub, GFB and
others, including FGH and Ford, reasonably satisfactory in form and substance
to such counsel.
(e) Board of Directors. Golden State shall have received the director
resignations, and the Golden State Board of Directors shall have been
expanded, in each case as contemplated by Section 6.11, and the vacancies
resulting from such resignations and expansion shall have been filled as
contemplated by Section 6.11.
(f) Registration Rights Agreement. Golden State shall have executed the
Registration Rights Agreement.
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(g) Distribution of LTWs. Golden State shall have issued and distributed
to its stockholders the LTWs as contemplated by Section 6.13.
(h) Listing of Shares. The shares of Golden State Common Stock to be
issued upon consummation of the Mergers pursuant to Section 1.3 shall have
been authorized for listing on the NYSE, subject to official notice of
issuance.
7.3. Conditions to Obligations of Golden State and Merger Sub. The
obligations of Golden State and Merger Sub to effect the Mergers are also
subject to the satisfaction or waiver by Golden State and Merger Sub at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (i) Subject to Section 2.2, the
representations and warranties of Parent Holdings, Ford and FGH set forth
in this Agreement (other than those representations of Parent Holdings, FGH
and Ford set forth in Sections 4.2 and 6.18) shall be true and correct as
of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; and (ii) the
representations and warranties of Parent Holdings, Ford and FGH set forth
in Sections 4.2 and 6.18 of this Agreement shall be true and correct in all
material respects (without giving effect to Section 2.2 of this Agreement)
as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date. Golden State
shall have received a certificate signed on behalf of Parent Holdings by
the Executive Vice President and any Vice President of Parent Holdings to
the foregoing effect.
(b) Performance of Obligations of Parent Holdings and FNH. Parent
Holdings and FNH shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or
prior to the Closing Date, and Golden State shall have received a
certificate signed on behalf of Parent Holdings by the Executive Vice
President and any Vice President of Parent Holdings to such effect.
(c) No Pending Governmental Actions. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) Federal Tax Opinion. Golden State shall have received an opinion of
Wachtell, Lipton, Rosen & Katz ("Golden State's Counsel"), in form and
substance reasonably satisfactory to Golden State, dated the date of the
Effective Time, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time, the
Mergers and the Subsidiary Merger will be treated as reorganizations within
the meaning of Section 368(a) of the Code and that accordingly for federal
income tax purposes:
(i) No gain or loss will be recognized by Golden State, Merger Sub,
Parent Holdings or FNH as a result of the Mergers;
(ii) No gain or loss will be recognized by CFB or GFB as a result of
the Subsidiary Merger (except to the extent CFB or GFB may be required
to recognize income due to the recapture of bad debt reserves as a
result of the Subsidiary Merger); and
(iii) No gain or loss will be recognized by the shareholders of Parent
Holdings or FNH solely as a result of the receipt of Golden State Common
Stock at the Effective Time in exchange for Parent Holdings Common Stock
or FNH Class B Common Stock pursuant to the Mergers.
In rendering such opinion, Golden State's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Parent Holdings, FNH, CFB, Merger Sub, GFB and others, including
FGH and Ford, reasonably satisfactory in form and substance to such counsel.
(e) Distribution of LTWs. Golden State shall have issued and distributed
to its stockholders the LTWs as contemplated by Section 6.13.
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ARTICLE VIII
TERMINATION AND AMENDMENT
8.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented
in connection with the Mergers by the stockholders of Golden State:
(a) by mutual consent of Golden State and Parent Holdings in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by either Golden State or Parent Holdings upon written notice to the
other party (i) 60 days after the date on which any request or application
for a Requisite Regulatory Approval shall have been denied or withdrawn at
the request or recommendation of the Governmental Entity which must grant
such Requisite Regulatory Approval, unless within the 60-day period
following such denial or withdrawal a petition for rehearing or an amended
application has been filed with the applicable Governmental Entity,
provided, however, that no party shall have the right to terminate this
Agreement pursuant to this Section 8.1(b)(i) if such denial or request or
recommendation for withdrawal shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein or (ii) if any Governmental
Entity of competent jurisdiction shall have issued a final nonappealable
order enjoining or otherwise prohibiting the Mergers or the Subsidiary
Merger;
(c) by either Parent Holdings or Golden State if the Mergers shall not
have been consummated on or before December 31, 1998, unless the failure of
the Closing to occur by such date shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein;
(d) by either Parent Holdings or Golden State (provided that if the
terminating party is Golden State, Golden State shall not be in material
breach of any of its obligations under Section 6.3) if any approval of the
stockholders of Golden State required for the consummation of the Mergers
shall not have been obtained by reason of the failure to obtain the
required vote at a duly held meeting of such stockholders or at any
adjournment or postponement thereof;
(e) by either Parent Holdings or Golden State (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have
been a material breach of any of the representations or warranties set
forth in this Agreement on the part of the other party, which breach is not
cured within thirty days following written notice to the party committing
such breach, or which breach, by its nature, cannot be cured prior to the
Closing; provided, however, that neither party shall have the right to
terminate this Agreement pursuant to this Section 8.1(e) unless the breach
of representation or warranty, together with all other such breaches, would
entitle the party receiving such representation not to consummate the
transactions contemplated hereby under Section 7.2(a) (in the case of a
breach of representation or warranty by Golden State) or Section 7.3(a) (in
the case of a breach of representation or warranty by Parent Holdings); or
(f) by either Parent Holdings or Golden State (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have
been a material breach of any of the covenants or agreements set forth in
this Agreement on the part of the other party, which breach shall not have
been cured within thirty days following receipt by the breaching party of
written notice of such breach from the other party hereto, or which breach,
by its nature, cannot be cured prior to the Closing.
8.2. Effect of Termination; Expenses. In the event of termination of this
Agreement by either Parent Holdings or Golden State as provided in Section 8.1,
this Agreement shall forthwith become void and have no effect except (i)
Sections 6.2(b), 8.2 and 9.4 shall survive any termination of this Agreement,
(ii) that notwithstanding anything to the contrary contained in this Agreement,
no party shall be relieved or released from any liabilities or damages arising
out of its willful breach of any provision of this
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Agreement, and (iii) in the event that both an Initial Triggering Event and a
Subsequent Triggering Event (each as defined in the Option Agreement) shall
have occurred prior to the occurrence of an Exercise Termination Event (as
defined in the Option Agreement), then, in addition to any rights which Parent
Holdings may have under the Option Agreement, Golden State shall pay to Parent
Holdings a cash termination fee of $50 million. Such fee shall be payable in
immediately available funds on or before the second business day following the
occurrence of the Subsequent Triggering Event. Subject to the foregoing, the
fee payable pursuant to this Section 8.2 shall be payable by Golden State
regardless of any prior or subsequent termination of this Agreement.
8.3. Amendment. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Mergers by the stockholders of Golden
State. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
8.4. Extension; Waiver. At any time prior to the Effective Time, each of
the parties hereto, by action taken or authorized by its Board of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of any of the other parties hereto, (b)
waive any inaccuracies in the representations and warranties contained herein
or in any document delivered pursuant hereto and (c) waive compliance with any
of the agreements or conditions contained herein. Any agreement on the part of
a party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party, but such extension or
waiver or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1. Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on the
first day which is (a) the last business day of a month and (b) at least two
business days after the satisfaction or waiver (subject to applicable law) of
the latest to occur of the conditions set forth in Article VII hereof (other
than those conditions which relate to actions to be taken at the Closing)(the
"Closing Date"), at the offices of CFB, unless another time, date or place is
agreed to in writing by the parties hereto. At the Closing, upon surrender by
FGH and Ford of the certificates representing the Parent Shares and FNH Shares
owned by them, Golden State shall issue, or cause to be issued, to each of FGH
and Ford, in the manner specified by them, certificates representing the shares
of Golden State Common Stock which they shall be entitled to receive pursuant
to Section 1.3 of this Agreement.
9.2. Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, Parent Holdings shall
be entitled to revise the structure of the Mergers and/or the Subsidiary Merger
and related transactions provided that each of the transactions comprising such
revised structure shall (i) fully qualify as, or fully be treated as part of,
one or more tax-free reorganizations within the meaning of Section 368(a) of
the Code, and not change the amount of consideration to be received by the
stockholders of Parent Holdings and FNH, (ii) be capable of consummation in as
timely a manner as the structure contemplated herein and (iii) not otherwise be
materially prejudicial to the interests of the stockholders of Golden State.
This Agreement and any related documents shall be appropriately amended in
order to reflect any such revised structure.
9.3. Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement (other than pursuant to
the Option Agreement and the Management Agreement which shall terminate in
accordance with their respective terms) shall survive the Effective Time,
except for those covenants and agreements contained herein and therein which by
their terms apply in whole or in part after the Effective Time.
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9.4. Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such cost or expense, provided, however, that nothing contained
herein shall limit either party's rights to recover any liabilities or damages
arising out of the other party's willful breach of any provision of this
Agreement.
9.5. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by an express courier (with confirmation) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent Holdings, FNH or FGH, to:
MacAndrews & Forbes Holdings Inc.
35 East 62nd Street
New York, New York 10021
Attention: General Counsel
with a copy to:
Skadden, Arps Slate, Meagher
& Flom LLP
919 Third Avenue
New York, New York 10022
Attn: Fred B. White, III, Esq.
(b) if to Golden State and Merger Sub, to:
Golden State Bancorp Inc.
414 North Central Avenue
Glendale, California 91203
Attention: Chief Executive Officer
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 W. 52nd Street
New York, New York 10019
Attn: Edward D. Herlihy, Esq.
c) if to Ford, to:
Hunter's Glen/Ford, Ltd.
c/o Gerald J. Ford
California Federal Bank
200 Crescent Court, Suite 1350
Dallas, Texas 75201
9.6. Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof" and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to February 4, 1998.
9.7. Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9.8. Entire Agreement. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both
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written and oral, among the parties with respect to the subject matter hereof,
other than the Parent Plan of Merger, the FNH Plan of Merger, the Bank Merger
Agreement, the Management Agreement and the Option Agreement.
9.9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law.
9.10. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in Section 6.2(b)
of this Agreement were not performed in accordance with its specific terms or
was otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of Section 6.2(b)
of this Agreement and to enforce specifically the terms and provisions thereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in equity.
9.11. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
9.12. Publicity. Except as otherwise required by law or the rules of the
NYSE or Nasdaq, if applicable, so long as this Agreement is in effect, neither
Parent Holdings nor Golden State shall, or shall permit any of its Subsidiaries
to, issue or cause the publication of any press release or other public
announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld. Without
limiting the foregoing, the parties shall cooperate in any investor or analyst
presentation or conferences in respect of the transactions contemplated by this
Agreement.
9.13. Assignment; No Third Party Beneficiaries. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
expressly provided in this Agreement and in the documents expressly
incorporated herein, this Agreement (including the documents and instruments
referred to herein) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
GOLDEN STATE BANCORP INC.
By /s/ Stephen J. Trafton
-----------------------------------------
Name: Stephen J. Trafton
Title: Chairman, President and Chief
Executive
Officer
GOLDEN STATE FINANCIAL CORPORATION
By /s/ Stephen J. Trafton
-----------------------------------------
Name: Stephen J. Trafton
Title: Chairman, President and Chief
Executive
Officer
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
By /s/ Howard Gittis
-----------------------------------------
Name: Howard Gittis
Title: Vice Chairman
FIRST NATIONWIDE HOLDINGS INC.
By /s/ Howard Gittis
-----------------------------------------
Name: Howard Gittis
Title: Vice Chairman
FIRST GIBRALTAR HOLDINGS INC.
By /s/ Howard Gittis
-----------------------------------------
Name: Howard Gittis
Title: Vice Chairman
HUNTER'S GLEN/FORD, LTD.
By /s/ Gerald J. Ford
-----------------------------------------
Name: Gerald J. Ford
Title: General Partner
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AMENDMENT NO. 1
AMENDMENT NO. 1, dated as of July 13, 1998, by and among First Nationwide
(Parent) Holdings Inc., a Delaware corporation, First Nationwide Holdings Inc.,
a Delaware corporation, Golden State Bancorp Inc., a Delaware corporation,
Golden State Financial Corporation, a Delaware corporation, First Gibraltar
Holdings Inc., a Delaware corporation, and Hunter's Glen/Ford Ltd., Texas
limited partnership (collectively, the "Parties"), to the Agreement and Plan of
Reorganization (the "Agreement"), dated as of February 4, 1998, by and among
the Parties. Capitalized terms which are not otherwise defined herein shall
have the meanings set forth in the Agreement.
WHEREAS, in accordance with Section 8.3 of the Agreement, the Parties
desire to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the Parties hereby agree as follows:
1. Section 1.6(c)(ii)(C) of the Agreement is hereby amended by adding the
following new language at the end of subsection (3) thereof after the words
"Effective Date" but before the period:
, plus
(4) if the closing of the sale of assets and the assumption of
liabilities contemplated by the Purchase and Sale Agreement, dated as of
March 29, 1998, by and between CFB and Union Planters Bank of Florida(the
"Florida Branch Sale"), occurs on or before the Effective Date, then for
the first Taxable Period immediately following the Effective Date, any
federal income tax savings resulting from the Florida Branch Sale. For this
purpose, the amount of federal income tax savings resulting from the
Florida Branch Sale shall be an amount equal to (i) the product of the
amount of the gain recognized by CFB for federal income tax purposes as a
result of the Florida Branch Sale and the highest marginal federal income
tax rate applicable to corporations for the taxable year in which the
Florida Branch Sale occurs, less (ii) the amount of any federal income
taxes actually paid as a result of such sale (including any payment in lieu
of federal income taxes under the Tax Sharing Agreement(as defined in
Section 6.14)) by CFB.
2. Section 1.6(c)(ii)(A) of the Agreement is hereby amended by adding the
following new sentence at the end of such section:
In the calculation of the Tax Benefits there shall be excluded any
deductions resulting from or arising in connection with the refinancing of
all of the long-term debt of FNH and Parent Holdings and the purchasing of
all of the preferred stock of CFB, in each case outstanding as of the date
hereof, pursuant to the refinancing transactions contemplated to be
consummated immediately after the consummation of the transactions
contemplated by this Agreement, or any transactions with substantially
similar purpose or effect.
3. Section 6.7(b) of the Agreement is hereby deleted in its entirety and
replaced with the following new Section 6.7(b):
Parent Holdings shall use its reasonable best efforts to cause the
persons serving as officers and directors of Golden State immediately prior
to the Effective Time to be covered for a period of six (6) years from the
Effective Time (the "Coverage Period") by the directors' and officers'
liability insurance policy maintained by Golden State (except that
effective as of the Effective Time the single aggregate coverage limit
shall be increased to $100 million, and provided that Parent Holdings may
substitute for such policy, as amended pursuant hereto, policies of
directors' and officers' liability insurance of at least the same coverage
and amounts and containing terms and conditions which are not less
advantageous to such directors and officers of Golden State than the terms
and conditions of such policy, as amended pursuant hereto) with respect to
acts and omissions occurring prior to the Effective Time which were
committed by such officers and directors in their capacity as such;
provided that Parent Holdings shall not be required as to any such policy
to pay premiums in excess of 300% of the amount currently expended annually
by Golden State to obtain such insurance, and if such insurance cannot be
obtained for such premium Parent Holdings shall obtain for such persons
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<PAGE>
the maximum coverage that may be obtained for such premiums. It is the
understanding of the parties hereto that the obligations of Parent Holdings
contemplated by the preceding sentence are expected to be satisfied through
the purchase by Parent Holdings, by means of the payment of a single
premium prior to the Effective Time, of a directors' and officers'
liability insurance policy with a single aggregate coverage limit of $100
million, and shall be so satisfied for so long as such policy remains in
effect during the Coverage Period.
4. Section 6.14(a)(ii) and Section 6.14(b)(i) of the Agreement are hereby
amended by deleting the words "Merger Sub" and inserting instead the words "New
FNH".
5. All references to "this Agreement" in the Agreement shall be deemed to
refer to the Agreement as amended hereby.
6. Each of the Parties represents to the other that (i) it has full
corporate (or partnership) power and authority to execute and deliver this
Amendment and, subject to the terms and conditions set forth in the Agreement,
to consummate the transactions contemplated hereby, (ii) the execution and
delivery of this Amendment by such party have been duly and validly approved by
the Board of Directors of such party and no other corporate proceedings on the
part of such party are necessary in connection with the execution and delivery
of this Amendment by such party, and (iii) this Amendment has been duly and
validly executed and delivered by such party and constitutes a valid and
binding obligation of such party, enforceable against such party in accordance
with its terms.
7. Except as expressly amended by this Amendment, the Agreement is hereby
ratified and confirmed in all respects.
8. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which shall be considered one and
the same agreement, and shall become effective when counterparts have been
signed by each of the Parties and delivered to the other Parties, it being
understood that all Parties need not sign the same counterpart.
9. This Amendment shall be governed and construed in accordance with the
laws of the State of Delaware, without regard to any applicable conflicts of
law provisions.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed
by their respective officers thereunto duly authorized as of the date first
above written.
GOLDEN STATE BANCORP INC.
By: /s/ Richard A. Fink
-----------------------------------
Name: Richard A. Fink
Title: Vice Chairman
GOLDEN STATE FINANCIAL CORPORATION
By: /s/ Richard A. Fink
-----------------------------------
Name: Richard A. Fink
Title: Vice President
FIRST NATIONWIDE (PARENT)
HOLDINGS INC.
By: /s/ Glenn P. Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST GIBRALTAR HOLDINGS INC.
By: /s/ Glenn P. Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President
HUNTER'S GLEN/FORD, LTD.
By: /s/ Gerald J. Ford
-----------------------------------
Name: Gerald J. Ford
Title: General Partner
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<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
OF
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
WITH AND INTO
GOLDEN STATE BANCORP INC.
AGREEMENT AND PLAN OF MERGER ("Plan of Merger") dated as of February 4,
1998, by and between First Nationwide (Parent) Holdings Inc. ("FNPH"), a
Delaware corporation, and Golden State Bancorp Inc. ("GSB"), a Delaware
corporation.
WITNESSETH
WHEREAS, the respective Boards of Directors of FNPH and GSB deem the
merger of FNPH with and into GSB, under and pursuant to the terms and
conditions herein set forth or referred to, desirable and in the best interests
of the respective corporations and their respective stockholders, and the
respective Boards of Directors of FNPH and GSB have adopted resolutions
approving this Plan of Merger and an Agreement and Plan of Reorganization dated
of even date herewith (the "Reorganization Agreement"); and
WHEREAS, the parties hereto intend that the Merger (as defined herein)
shall qualify as or be part of a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto do hereby agree as follows:
ARTICLE I
MERGER
Subject to the terms and conditions of this Plan of Merger, at the
Effective Time (as hereinafter defined), FNPH shall be merged with and into
GSB, pursuant to the provisions of, and with the effect provided in, the
Delaware General Corporation Law (said transaction being hereinafter referred
to as the "Merger"). At the Effective Time, the separate existence of FNPH
shall cease and GSB, as the surviving entity, shall continue unaffected and
unimpaired by the Merger. GSB as existing at and after the Effective Time is
hereinafter sometimes referred to as the "Surviving Corporation". The name of
the Surviving Corporation shall be "Golden State Bancorp Inc."
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate of Incorporation and the By-Laws of GSB as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation and the By-Laws of the Surviving Corporation.
ARTICLE III
CAPITAL STOCK OF GSB
At the Effective Time, all of the shares of capital stock of GSB issued
and outstanding immediately prior to the Effective Time shall remain
outstanding and unchanged by virtue of the Merger and shall constitute shares
of capital stock of the Surviving Corporation.
ARTICLE IV
CONVERSION AND EXCHANGE OF FNPH SHARES
At the Effective Time, all of the shares of common stock, par value $1.00
per share, of FNPH issued and outstanding immediately prior to the Effective
Time shall be converted in the manner set forth in Article I of the
Reorganization Agreement.
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<PAGE>
ARTICLE V
EFFECTIVE TIME OF THE MERGER
A certificate of merger evidencing the Merger contemplated herein shall be
delivered to the Delaware Secretary of State for filing as provided in the
Reorganization Agreement. The Merger shall be effective at the time and on the
date specified in such certificate of merger (such date and time being herein
referred to as the "Effective Time").
ARTICLE VI
CONDITIONS PRECEDENT
The obligations of FNPH and GSB to effect the Merger as herein provided
shall be subject to satisfaction, unless duly waived where permissible, of the
conditions set forth in Article VII of the Reorganization Agreement.
ARTICLE VII
TERMINATION
Anything contained in this Plan of Merger to the contrary notwithstanding,
and notwithstanding approval and adoption of this Plan of Merger by the
stockholders of GSB, this Plan of Merger shall be terminated and the Merger
abandoned upon any termination of the Reorganization Agreement as provided
therein.
ARTICLE VIII
MISCELLANEOUS
1. This Plan of Merger may be amended or supplemented at any time prior to
the Effective Time by mutual agreement of FNPH and GSB. Any such amendment or
supplement must be in writing and approved by their respective Boards of
Directors and executed by officers duly authorized thereby and shall be subject
to Section 8.3 of the Reorganization Agreement.
2. Any notice or other communication required or permitted under this Plan
of Merger shall be given, and shall be effective, in accordance with the
provisions of the Reorganization Agreement.
3. The headings of the several Articles herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Plan of Merger.
4. This Plan of Merger shall be governed by and construed in accordance
with the laws of the State of Delaware.
5. This Plan of Merger, taken together with the Reorganization Agreement,
shall constitute a plan of reorganization within the meaning of Section 368 of
the Code.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Plan of Merger to be executed in counterparts by their
duly authorized officers and attested by their officers thereunto duly
authorized, all as of the day and year first above written.
FIRST NATIONWIDE (PARENT)
HOLDINGS INC.
By: /s/ Howard Gittis
------------------------------------
Name: Howard Gittis
Title: Vice Chairman
GOLDEN STATE BANCORP INC.
By: /s/ Stephen J. Trafton
------------------------------------
Name: Stephen J. Trafton
Title: Chairman of the Board,
President and Chief Executive
Officer
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<PAGE>
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated February 4, 1998, between Golden State
Bancorp Inc., a Delaware corporation ("Issuer"), and First Nationwide (Parent)
Holdings Inc., a Delaware corporation ("Grantee").
W I T N E S S E T H:
WHEREAS, Grantee, Issuer, First Nationwide Holdings Inc., a Delaware
corporation and a wholly owned subsidiary of Grantee ("FNH"), and Golden State
Financial Corporation, a Delaware corporation and a wholly owned subsidiary of
Issuer ("Merger Sub") have entered into an Agreement and Plan of Reorganization
of even date herewith (the"Reorganization Agreement"), and Grantee and Issuer
have entered into an Agreement and Plan of Merger of even date herewith
(together with the Reorganization Agreement, the "Merger Agreement"), which
agreements have been executed by the parties hereto immediately prior to this
Stock Option Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option
(as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to
10,165,950 fully paid and nonassessable shares of Issuer's Common Stock, par
value $1.00 per share ("Common Stock"), at a price of $24.00 per share (the
"Option Price"); provided, however, that in no event shall the number of shares
of Common Stock for which this Option is exercisable exceed 19.9% of the
Issuer's issued and outstanding shares of Common Stock without giving effect to
any shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the
Option Price are subject to adjustment as herein set forth. Notwithstanding any
other provision of this Agreement, Issuer and Grantee agree that this Agreement
shall not entitle Grantee to any LTWs (as defined in the Reorganization
Agreement) or any payment in respect thereof, and, in the event Grantee becomes
entitled to receive any shares of Common Stock pursuant to the terms of this
Agreement, Issuer may make such provisions as are necessary to effectuate the
provisions of this sentence.
(b) In the event that any additional shares of Common Stock are either (i)
issued or otherwise become outstanding after the date of this Agreement (other
than pursuant to this Agreement) or (ii) redeemed, repurchased, retired or
otherwise cease to be outstanding after the date of this Agreement, the number
of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after such issuance, such number equals
19.9% of the number of shares of Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the Option.
Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be
deemed to authorize Issuer or Grantee to breach any provision of the Merger
Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), provided that the Holder shall have
sent the written notice of such exercise (as provided in subsection (e) of this
Section 2) within ninety days following such Subsequent Triggering Event (or
such longer period as provided in Section 10), provided further, however, that
if the Option cannot be exercised on any day because of any injunction, order
or similar restraint issued by a court of competent jurisdiction, the period
during which the Option may be exercised shall be extended so that the Option
shall expire no earlier than on the tenth business day after such injunction,
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<PAGE>
order or restraint shall have been dissolved or when such injunction, order or
restraint shall have become permanent and no longer subject to appeal, as the
case may be. Each of the following shall be an "Exercise Termination Event":
(i) the Effective Time (as defined in the Reorganization Agreement) of the
Merger; (ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of an
Initial Triggering Event except a termination by Grantee pursuant to Section
8.1(f) of the Reorganization Agreement (unless the breach by Issuer giving rise
to such right of termination is non-volitional); or (iii) the passage of 12
months after termination of the Merger Agreement if such termination follows
the occurrence of an Initial Triggering Event or is a termination by Grantee
pursuant to Section 8.1(f) of the Reorganization Agreement (unless the breach
by Issuer giving rise to such right of termination is non-volitional). The term
"Holder" shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"),
without having received Grantee's prior written consent, shall have entered
into an agreement to engage in an Acquisition Transaction (as hereinafter
defined) with any person (the term "person" for purposes of this Agreement
having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules
and regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "Grantee Subsidiary") or the Board of Directors of Issuer shall
have recommended that the stockholders of Issuer approve or accept any
Acquisition Transaction with any person other than Grantee or a Subsidiary
of Grantee. For purposes of this Agreement, "Acquisition Transaction" shall
mean (w) a merger or consolidation, or any similar transaction, involving
Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation
S-X promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Issuer, or (z)
any substantially similar transaction; provided, however, that in no event
shall any merger, consolidation, purchase or similar transaction involving
only the Issuer and one or more of its Subsidiaries or involving only two
or more of such Subsidiaries, be deemed to be an Acquisition Transaction,
provided that any such transaction is not entered into in violation of the
terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received Grantee's
prior written consent, shall have authorized, recommended, proposed or
publicly announced its intention to authorize, recommend or propose, to
engage in an Acquisition Transaction with any person other than Grantee or
a Grantee Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement in anticipation of engaging in an Acquisition
Transaction;
(iii) Any person other than Grantee, any Grantee Subsidiary or any Issuer
Subsidiary acting in a fiduciary capacity in the ordinary course of its
business shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the 1934 Act, and
the rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary shall have
made a bona fide proposal to Issuer or its stockholders by public
announcement or written communication that is or becomes the subject of
public disclosure to engage in an Acquisition Transaction;
(v) After an overture is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle Grantee to terminate the Merger Agreement and
(y) shall not have been cured prior to the Notice Date (as defined below);
or
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(vi) Any person other than Grantee or any Grantee Subsidiary, other than
in connection with a transaction to which Grantee has given its prior
written consent, shall have filed an application or notice with the Federal
Reserve Board, or other federal or state bank regulatory authority, which
application or notice has been accepted for processing, for approval to
engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20% or more
of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event of which it has
notice (together, a "Triggering Event"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 60 business days from the
Notice Date for the closing of such purchase (the "Closing Date"); provided
that if prior notification to or approval of the Federal Reserve Board or the
Office of Thrift Supervision (the "OTS") or any other regulatory agency is
required in connection with such purchase, the Holder shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder
thereof to purchase the balance of the shares purchasable hereunder, and the
Holder shall deliver to Issuer this Agreement and a letter agreeing that the
Holder will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject to
certain provisions of an agreement between the registered holder hereof and
Issuer and to resale restrictions arising under the Securities Act of 1933,
as amended. A copy of such agreement is on file at the principal office of
Issuer and will be provided to the holder hereof without charge upon
receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such
reference if the Holder shall have delivered to Issuer a copy of a letter from
the staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to Issuer, to the effect that
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such legend is not required for purposes of the 1933 Act; (ii) the reference to
the provisions to this Agreement in the above legend shall be removed by
delivery of substitute certificate(s) without such reference if the shares have
been sold or transferred in compliance with the provisions of this Agreement
and under circumstances that do not require the retention of such reference;
and (iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock;
(ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under any federal or state banking
law, prior approval of or notice to the Federal Reserve Board, the OTS or to
any state regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or notices and
providing such information to the Federal Reserve Board, the OTS or such state
regulatory authority as they may require) in order to permit the Holder to
exercise the Option and Issuer duly and effectively to issue shares of Common
Stock pursuant hereto; and (iv) promptly to take all action provided herein to
protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender
of this Agreement at the principal office of Issuer, for other Agreements
providing for Options of different denominations entitling the holder thereof
to purchase, on the same terms and subject to the same conditions as are set
forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any Stock Option Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Agreement, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Agreement, if mutilated, Issuer will execute and deliver a
new Agreement of like tenor and date. Any such new Agreement executed and
delivered shall constitute an additional contractual obligation on the part of
Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise
of the Option and the Option Price shall be subject to adjustment from time to
time as provided in this Section 5. In the event of any change in, or
distributions in respect of, the Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions, conversions,
exchanges of shares, distributions on or in respect of the Common Stock that
would be prohibited under the terms of the Merger Agreement, or the like, the
type and number of shares of Common Stock purchasable upon exercise hereof and
the Option Price shall be appropriately adjusted
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in such manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full satisfaction of
the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of this Option
(or part thereof) or any of the shares of Common Stock issued pursuant hereto)
delivered within six months of such Subsequent Triggering Event (or such longer
period as provided in Section 10), promptly prepare, file and keep current a
shelf registration statement under the 1933 Act covering this Option and any
shares issued and issuable pursuant to this Option and shall use its reasonable
best efforts to cause such registration statement to become effective and
remain current in order to permit the sale or other disposition of this Option
and any shares of Common Stock issued upon total or partial exercise of this
Option ("Option Shares") in accordance with any plan of disposition requested
by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided above, Issuer is in registration with respect to an
underwritten public offering of shares of Common Stock, and if in the good
faith judgment of the managing underwriter or managing underwriters, or, if
none, the sole underwriter or underwriters, of such offering the inclusion of
the Holder's Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of Option
Shares otherwise to be covered in the registration statement contemplated
hereby may be reduced; provided, however, that after any such required
reduction the number of Option Shares to be included in such offering for the
account of the Holder shall constitute at least 25% of the total number of
shares to be sold by the Holder and Issuer in the aggregate; and provided
further, however, that if such reduction occurs, then the Issuer shall file a
registration statement for the balance as promptly as practicable and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any registration
statement to be filed hereunder. If requested by any such Holder in connection
with such registration, Issuer shall become a party to any underwriting
agreement relating to the sale of such shares, but only to the extent of
obligating itself in respect of representations, warranties, indemnities and
other agreements customarily included in secondary offering underwriting
agreements for the Issuer. Upon receiving any request under this Section 6 from
any Holder, Issuer agrees to send a copy thereof to any other person known to
Issuer to be entitled to registration rights under this Section 6, in each case
by promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies. Notwithstanding anything to the
contrary contained herein, in no event shall Issuer be obligated to effect more
than two registrations pursuant to this Section 6 by reason of the fact that
there shall be more than one Grantee as a result of any assignment or division
of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event (as
defined below), (i) following a request of the Holder, delivered prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall repurchase
the Option from the Holder at a price (the "Option Repurchase Price") equal to
the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares for which this Option may
then be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence (or
such longer period as provided in Section 10), Issuer shall repurchase such
number of the Option Shares from the Owner as the Owner shall designate at a
price (the "Option Share Repurchase Price") equal to the Market/Offer Price
multiplied by the number of Option Shares so designated. The term "Market/Offer
Price" shall mean the highest of (i) the price per share of Common Stock at
which a tender offer or exchange offer therefor has been made, (ii) the price
per share of Common Stock to be paid by any third party pursuant to an
agreement with Issuer, (iii) the highest closing price for shares of Common
Stock within the six-month period immediately preceding the date the Holder
gives notice of the required repurchase of this Option or the Owner gives
notice of the required repurchase of Option Shares, as the case may be, or (iv)
in the event of a sale of all or a substantial portion of Issuer's assets,
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the sum of the price paid in such sale for such assets and the current market
value of the remaining assets of Issuer as determined by a nationally
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to Issuer, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the Market/Offer Price, the value of consideration other than cash
shall be determined by a nationally recognized investment banking firm selected
by the Holder or Owner, as the case may be, and reasonably acceptable to
Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the
Owner, as the case may be, elects to require Issuer to repurchase this Option
and/or the Option Shares in accordance with the provisions of this Section 7.
Within the latter to occur of (x) five business days after the surrender of the
Option and/or certificates representing Option Shares and the receipt of such
notice or notices relating thereto and (y) the time that is immediately prior
to the occurrence of a Repurchase Event, Issuer shall deliver or cause to be
delivered to the Holder the Option Repurchase Price and/or to the Owner the
Option Share Repurchase Price therefor or the portion thereof that Issuer is
not then prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full,
Issuer shall immediately so notify the Holder and/or the Owner and thereafter
deliver or cause to be delivered, from time to time, to the Holder and/or the
Owner, as appropriate, the portion of the Option Repurchase Price and the
Option Share Repurchase Price, respectively, that it is no longer prohibited
from delivering, within five business days after the date on which Issuer is no
longer so prohibited; provided, however, that if Issuer at any time after
delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7
is prohibited under applicable law or regulation from delivering to the Holder
and/or the Owner, as appropriate, the Option Repurchase Price and the Option
Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to
use its best efforts to obtain all required regulatory and legal approvals and
to file any required notices as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of repurchase of
the Option or the Option Shares either in whole or to the extent of the
prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver
to the Holder and/or the Owner, as appropriate, that portion of the Option
Repurchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Stock Option Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Stock Option
Agreement was exercisable at the time of delivery of the notice of repurchase
by a fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator of
which is the Option Repurchase Price, or (B) to the Owner, a certificate for
the Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed to
have occurred (i) upon the consummation of any merger, consolidation or similar
transaction involving Issuer or any purchase, lease or other acquisition of all
or a substantial portion of the assets of Issuer, other than any such
transaction which would not constitute an Acquisition Transaction pursuant to
the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition by any
person of beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, provided that no such event shall constitute a Repurchase Event
unless a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event. The parties hereto agree that Issuer's obligations to
repurchase the Option or Option Shares under this Section 7 shall not terminate
upon the occurrence of an Exercise Termination Event unless no Subsequent
Triggering Event shall have occurred prior to the occurrence of an Exercise
Termination Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or
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surviving corporation, but, in connection with such merger, the then
outstanding shares of Common Stock shall be changed into or exchanged for stock
or other securities of any other person or cash or any other property or the
then outstanding shares of Common Stock shall after such merger represent less
than 50% of the outstanding voting shares and voting share equivalents of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction shall
make proper provision so that the Option shall, upon the consummation of any
such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at the
election of the Holder, of either (x) the Acquiring Corporation (as hereinafter
defined) or (y) any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock issued by the
issuer of the Substitute Option upon exercise of the Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as defined in
Section 7.
(4) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the issuer
of the Substitute Option, the Average Price shall be computed with respect
to a share of common stock issued by the person merging into Issuer or by
any company which controls or is controlled by such person, as the Holder
may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option
shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option is then exercisable,
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than
19.9% of the shares of Substitute Common Stock outstanding prior to exercise
but for this clause (e), the issuer of the Substitute Option (the "Substitute
Option Issuer") shall make a cash payment to Holder equal to the excess of (i)
the value of the Substitute Option without giving effect to the limitation in
this clause (e) over (ii) the value of the Substitute Option after giving
effect to the limitation in this clause (e). This difference in value shall be
determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
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9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to the amount by which (i) the Highest Closing
Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common
Stock for which the Substitute Option may then be exercised, and at the request
of the owner (the "Substitute Share Owner") of shares of Substitute Common
Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase
the Substitute Shares at a price (the "Substitute Share Repurchase Price")
equal to the Highest Closing Price multiplied by the number of Substitute
Shares so designated. The term "Highest Closing Price" shall mean the highest
closing price for shares of Substitute Common Stock within the six-month period
immediately preceding the date the Substitute Option Holder gives notice of the
required repurchase of the Substitute Option or the Substitute Share Owner
gives notice of the required repurchase of the Substitute Shares, as
applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective right to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant
to this Section 9 by surrendering for such purpose to the Substitute Option
Issuer, at its principal office, the agreement for such Substitute Option (or,
in the absence of such an agreement, a copy of this Agreement) and certificates
for Substitute Shares accompanied by a written notice or notices stating that
the Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable, and in any event within five business
days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase
Price and/or to the Substitute Share Owner the Substitute Share Repurchase
Price therefor or, in either case, the portion thereof which the Substitute
Option Issuer is not then prohibited under applicable law and regulation from
so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following a
request for repurchase pursuant to this Section 9 shall immediately so notify
the Substitute Option Holder and/ or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the portion of the
Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five business days after the date on which
the Substitute Option Issuer is no longer so prohibited; provided, however,
that if the Substitute Option Issuer is at any time after delivery of a notice
of repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to receive
all required regulatory and legal approvals as promptly as practicable in order
to accomplish such repurchase), the Substitute Option Holder or Substitute
Share Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
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10. The 90-day or six-month period for exercise of certain rights under
Sections 2, 6, 7 and 14 shall be extended: (i) to the extent necessary to
obtain all regulatory approvals for the exercise of such rights, and for the
expiration of all statutory waiting periods; and (ii) to the extent necessary
to avoid liability under Section 16(b) of the 1934 Act by reason of such
exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock at
any time and from time to time issuable hereunder, and all such shares, upon
issuance pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required redeeming all of
the Rights or amending or terminating the Rights Agreement) so that the
entering into of this Option Agreement, the acquisition of shares of Common
Stock hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Rights Agreement
or enable or require the Rights to be exercised, distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or consents referred to herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the 1933 Act.
13. (a) Notwithstanding anything to the contrary contained herein, in no
event shall Grantee's Total Profit (as defined below in Section 13(c) hereof)
exceed $25 million.
(b) Notwithstanding anything to the contrary contained herein, the Option
may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below in Section 13(d)
hereof) of more than $25 million; provided, that nothing in this sentence shall
restrict any exercise of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7 hereof, (ii) (x) the amount received by Grantee pursuant to
Issuer's repurchase of Option Shares pursuant to Section 7 hereof, less (y)
Grantee's purchase price for such Option Shares, (iii) (x) the net cash amounts
received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to
any unaffiliated party, less (y) Grantee's purchase price of such Option
Shares, (iv) any amounts received by Grantee on the transfer of the Option (or
any portion thereof) to any unaffiliated party, and (v) any equivalent amount
with respect to the Substitute Option.
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(d) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise the Option shall
be the Total Profit determined as of the date of such proposed exercise
assuming that the Option were exercised on such date for such number of shares
and assuming that such shares, together with all other Option Shares held by
Grantee and its affiliates as of such date, were sold for cash at the closing
market price for the Issuer Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within 90
days following such Subsequent Triggering Event (or such longer period as
provided in Section 10); provided, however, that until the date 15 days
following the date on which the Federal Reserve Board or the OTS, as
applicable, approves an application by Grantee to acquire the shares of Common
Stock subject to the Option, Grantee may not assign its rights under the Option
except in (i) a widely dispersed public distribution, (ii) a private placement
in which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker
or investment banker) for the purpose of conducting a widely dispersed public
distribution on Grantee's behalf, or (iv) any other manner approved by the
Federal Reserve Board or the OTS, as applicable.
15. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the New York Stock Exchange upon
official notice of issuance and applying to the Federal Reserve Board and/or
the OTS, as applicable, for approval to acquire the shares issuable hereunder,
but Grantee shall not be obligated to apply to state banking authorities for
approval to acquire the shares of Common Stock issuable hereunder until such
time, if ever, as it deems appropriate to do so.
16. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
17. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Holder is not permitted to acquire, or Issuer is not
permitted to repurchase pursuant to Section 7, the full number of shares of
Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section
1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to
acquire or to require Issuer to repurchase such lesser number of shares as may
be permissible, without any amendment or modification hereof.
18. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Reorganization Agreement.
19. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
20. This Agreement may be executed in two counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and
the same agreement.
21. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
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22. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties
with respect to the transactions contemplated hereunder and supersedes all
prior arrangements or understandings with respect thereof, written or oral. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective successors
and permitted assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement, except as expressly provided herein.
23. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
GOLDEN STATE BANCORP INC.
By: /s/ Stephen J. Trafton
------------------------------------
Name: Stephen J. Trafton
Title: Chairman, President and
Chief Executive Officer
FIRST NATIONWIDE (PARENT)
HOLDINGS INC.
By: /s/ Howard Gittis
------------------------------------
Name: Howard Gittis
Title: Vice Chairman
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APPENDIX C
LITIGATION MANAGEMENT AGREEMENT
THIS AGREEMENT (the "Management Agreement"), dated as of February 4, 1998,
is by and among Golden State Bancorp Inc., a Delaware corporation ("GSB" and,
as the surviving corporation in the merger contemplated by the Agreement (as
defined herein), the "Company"), Glendale Federal Bank, Federal Savings Bank
("Glendale Federal"), California Federal Bank, A Federal Savings Bank
("California Federal" and, together with Glendale Federal, the "Banks")), and
the other persons whose names are set forth on the signature pages hereto.
WHEREAS, Glendale Federal is currently a plaintiff in an action titled
Glendale Federal Bank, F.S.B. v. United States of America, Civil Action No.
90-772C, U.S. Court of Federal Claims (together with any appeal thereof or
other proceeding related thereto, the "Glendale Litigation"); and
WHEREAS, California Federal is currently a plaintiff in an action titled
California Federal Bank, A Federal Savings Bank v. United States of America,
Civil Action No. 92-138C, U.S. Court of Federal Claims (together with any
appeal thereof or other proceedings related thereto, the "CalFed Litigation"
and, together with the Glendale Litigation, the "Goodwill Litigation"); and
WHEREAS, on July 28, 1995, California Federal distributed Participation
Interests representing the right to receive a pro rata portion of approximately
25 percent of the net after-tax proceeds of the CalFed Litigation (each, a
"CALGZ") and on January 3, 1997, California Federal distributed Secondary
Participation Interests representing the right to receive a pro rata portion of
60 percent of the net after-tax proceeds, in excess of certain threshold
recovery amounts and net of distributions to the holders of the CALGZs, of the
CalFed Litigation (each, a "CALGL" and, together with the CALGZs, the "CalFed
Securities"); and
WHEREAS, GSB has announced its intention to distribute Litigation Tracking
Warrants (Trademark) , each representing the right to receive a pro rata
distribution of shares of Golden State Common Stock with an aggregate value
equal to the a percentage, set forth in the Warrant Agreement relating to such
Warrants, of the net after-tax proceeds of the Glendale Litigation (each, a
"GSB LTW"), which distribution is expected to take place prior to consummation
of the Merger; and
WHEREAS, GSB, through its subsidiaries, will, after giving effect to the
distribution of the GSB LTWs and the CalFed Securities, retain an interest in
the proceeds of the Glendale Litigation and the CalFed litigation,
respectively; and
WHEREAS, the parties hereto intend that the Goodwill Litigation be
pursued, prosecuted, managed and conducted in a manner that is consistent with
the best interests of the holders of the GSB LTWs, the CalFed Securities, the
Banks and the Company; and
WHEREAS, the parties hereto have agreed to conduct the Goodwill Litigation
as provided in this Management Agreement in connection with the execution of
the Agreement and Plan of Reorganization, dated February, 1998, by and among
First Nationwide (Parent) Holdings, a Delaware corporation, First Nationwide
Holdings, Inc. a Delaware corporation, First Gibraltar Holdings, Inc., a
Delaware corporation, Hunter's Glen/Ford, Ltd. and GSB (the "Agreement")
(capitalized terms used but not otherwise defined in this Management Agreement
shall have the meanings ascribed to them in the Agreement);
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
PURSUIT AND MANAGEMENT OF GOODWILL LITIGATION
1.1 In order to assure that those parties with prior knowledge of and
experience regarding the Goodwill Litigation, including the facts forming the
basis for the claims underlying the Goodwill Litigation and regarding the
strategies developed to pursue those claims, remain involved in the Goodwill
Litigation, the parties hereto agree that the Company shall, effective as of
the Effective Time, employ and
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retain Stephen J. Trafton and Richard A. Fink (the "Litigation Managers") as
Litigation Managers with respect to the Glendale Litigation, and that the
Company shall employ and retain Messrs. Trafton and Fink as Litigation Managers
with respect to the CalFed Litigation.
1.2 The Litigation Managers, on behalf of the holders of the GSB LTWs (the
"GSB Holders"), Glendale Federal and the Company from and after the Effective
Time, shall be granted authority, subject to the terms of this Management
Agreement, to prosecute, appeal, negotiate, resolve, settle, compromise,
arbitrate or otherwise pursue the Glendale Litigation, in whole or in part, and
to oversee for Glendale Federal and the Company the matters related to the GSB
LTWs and the recovery, disposition or other handling of any proceeds of the
Glendale Litigation and any expenses thereof (except with respect to the tax
treatment of the receipt or payment of any recovery, proceeds or expenses),
subject to and in accordance with the provisions of this Management Agreement.
1.3 The Litigation Managers, on behalf of the holders of the CalFed
Securities (the "CalFed Holders" and, together with the GSB Holders, the
"Holders"), California Federal and the Company from and after the Effective
Time shall be granted authority, subject to the terms of this Management
Agreement, to prosecute, appeal, negotiate, resolve, settle, compromise,
arbitrate or otherwise pursue the CalFed Litigation, in whole or in part, and
to oversee for the Surviving Bank and the Company the matters related to the
CalFed Certificates and the recovery, disposition or other handling of any
proceeds of the CalFed Litigation and any expenses thereof (except with respect
to the tax treatment of the receipt or payment of any recovery, proceeds or
expenses), subject to and in accordance with the provisions of this Management
Agreement.
1.4 As of and following the Effective Time, the Board of Directors of the
Company will establish a Glendale Litigation committee (the "Glendale
Committee") and a CalFed Litigation committee (the "CalFed Committee"). As of
and following the Effective Time, the powers and rights of the Board of
Directors of the Company shall be vested in the Glendale Committee with respect
to all matters related to the Glendale Litigation and the GSB LTWs and in the
CalFed Committee with respect to all matters related to the CalFed Litigation
and the CalFed Certificates. The Litigation Managers will report directly to
the Glendale Committee with respect to matters related to the Glendale
Litigation and the GSB LTWs, and will report directly to the CalFed Committee
with respect to matters related to the CalFed Litigation and the CalFed
Certificates.
1.5 The CalFed Committee may at any time, or from time to time, reduce or
terminate any or all of the specific powers of one or both of the Litigation
Managers with respect to the CalFed Litigation and in such event shall provide
prior written notice thereof to such Litigation Manager or Litigation Managers.
The decision of the CalFed Committee in this respect shall not be subject to
arbitration, dispute or litigation. Any dimunition of the powers of the
Litigation Managers shall not reduce any compensation due to the Litigation
Managers under this Agreement.
ARTICLE II
THE LITIGATION MANAGERS
2.1 (a) Subject to the terms of this Agreement, the Litigation Managers
shall have all power to carry out in their sole discretion their
responsibilities pursuant to Article 1 hereof, subject to (a) periodic
consultation with the Glendale Committee as to the Glendale Litigation and with
the CalFed Committee as to the CalFed Litigation and (b) the approval of the
Glendale Committee (with respect to the Glendale Litigation) or the CalFed
Committee (with respect to the CalFed Litigation) with respect to any final
settlement of the Glendale Litigation or the CalFed Litigation, any decision to
permanently abandon or otherwise cease to prosecute the Glendale Litigation or
the CalFed Litigation or any decision to expend funds of the Company or the
Surviving Bank. The powers and authority of the Litigation Managers shall
include, without limitation, the power and authority to, and the Litigation
Managers shall:
(i) without prior or further authorization, to control and exercise
authority over, subject to the terms of the GSB LTWs and the CalFed
Securities, the management and conduct of the Glendale Litigation and the
CalFed Litigation and matters relating to the GSB LTWs and the CalFed
Securities;
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(ii) to coordinate and manage the application for any regulatory, stock
exchange, stock market or other approvals or the making of any filings
required to carry out the transactions contemplated by the GSB LTWs or the
CalFed Certificates, including without limitation directing the Company to
issue the shares of common stock of the Company or any successor thereto
upon exercise of the GSB LTWs;
(iii) to authorize the payment by the Company or its subsidiaries of
expenses relating to the Glendale Litigation and the GSB LTWs, or to the
CalFed Litigation and the CalFed LTWs, as the case may be;
(iv) to retain counsel and advisors, including accountants, investment
bankers, experts, transfer agents, escrow agents, consultants, and other
assistances, in connection with the Goodwill Litigation or the GSB LTWs or
the CalFed Certificates (or any other matters contemplated by this
Management Agreement), or to retain sub-managers or other agents, and to
cause the same to be reasonably compensated by the Company or its
subsidiaries for services rendered;
(v) to enter into contracts, agreements, commitments and other
arrangements and to execute pleadings, affidavits and other court
documents, and to participate in, initiate or request settlement or other
conferences, hearings or discussions on behalf of the Company, or Glendale
Federal or California Federal or their successors, necessary or appropriate
to carry out their responsibilities hereunder;
(vi) subject to Section 2.1(b), to make any determinations or valuations
contemplated by the terms of the GSB LTWs or that are otherwise required to
be made in order to fulfill the intent of the terms of such securities;
(vii) with respect to any non-cash proceeds of the Goodwill Litigation,
to sell, convey, transfer, assign, pledge, encumber or liquidate on behalf
of the Company such non-cash proceeds or any part thereof or any interest
therein, upon such terms and for such consideration as the Litigation
Managers in their sole and absolute discretion deem desirable, and to file
on behalf of the Company such documents as are customarily required to
effect any of the foregoing, including the filing of necessary UCC
financing statements; and
(viii) to publish or mail, or cause to be published or mailed, any
notices contemplated by the GSB LTWs or the CalFed Securities or otherwise
deemed advisable by the Litigation Managers in connection with such
securities.
Notwithstanding anything contained in this Management Agreement that may be
deemed to be to the contrary, the Board of Directors of the Company shall
(solely through the Glendale Committee in the case of the Glendale Litigation
and the GSB LTWs) have and maintain ultimate authority with respect to all
matters relating to the Goodwill Litigation, the GSB LTWs and the CalFed
Securities, and nothing contained herein shall be deemed to relieve the Board
of Directors (or, with respect to matters related to the Glendale Litigation
and the GSB LTWs, the Glendale Committee) of any of its rights, authorities or
obligations under applicable law or to create any obligations in conflict with
or in derogation of such rights, authorities or obligations.
(b) Any determinations or valuations contemplated by the terms of the GSB
LTWs or the CalFed Securities or that are otherwise required to be made in
order to fulfill the intent of the terms of such securities (including without
limitation determination of the "Adjusted Litigation Recovery," as such term is
used in the GSB LTWs and the CALGLs, or the "Litigation Recovery," as such term
is used in the CALGZs, or whether or when any event triggering any obligations
thereunder has occurred) shall be made in the first instance by the Litigation
Managers. Such determinations and valuations of the Litigation Managers shall
be subject to review by the Glendale Committee (in the case of the GSB LTWs) or
the CalFed Committee (in the case of the CalFed Securities), the decision of
which Committee in respect of such matters shall be final and binding on the
Company and the Holders, absent manifest error. In making such determinations
or valuations the Litigation Managers shall be entitled to retain such
accountants, investment bankers, counsel or other advisers and experts as they
deem appropriate, and shall be fully protected in relying upon the foregoing in
such connection.
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(c) During his employment as Litigation Manager, each Litigation Manager
shall be an Executive Vice President of the Company and shall be entitled to
(i) receive from the Company an annual salary of $600,000, payable monthly, in
the case of Mr. Trafton, and an annual salary of $400,000, payable monthly, in
the case of Mr. Fink; (ii) participation in employee welfare benefit plans,
deferred compensation and other plans, policies and perquisites, in each case
on a basis no less beneficial than that made available to any other Executive
Vice President of the Company or its successors (other than participation in
any stock option plan, the Severance Pay Plan for Executive Officers or in the
Deferred Executive Compensation Plan of the Company); and (iii) office space
comparable to such space as is presently provided to such individuals by GSB in
such location as Messrs. Trafton and Fink may reasonably specify, secretarial
and clerical assistance, travel allowance and expense reimbursement, in each
case no less beneficial than made available to any other Executive Vice
President of the Company or its successors. In addition, in consideration for
their services hereunder and for the restrictions imposed by the noncompetition
and nonsolicitation provisions set forth in Section 6.2 hereof, Stephen J.
Trafton shall be entitled to the benefits set forth with respect to him on
Schedule 2.1(c)(i) hereto (the "Trafton Benefits") and Richard A. Fink shall be
entitled to the benefits set forth with respect to him on Schedule 2.1(c)(ii)
hereto (the "Fink Benefits"). The cost to the Company or any of its
subsidiaries of any of the compensation payable or benefits due to the
Litigation Managers contemplated by this Section 2.1(c) (including without
limitation Schedules 2.1(c)(i) and 2.1(c)(ii)) or Section 2.1(d) shall be
deemed to be expenses of the Glendale Litigation and the GSB LTWs (to the
extent related thereto) or the CalFed Litigation and the CalFed Securities (to
the extent related thereto) for purposes of determining the amount of any
proceeds payable or securities issuable to the Holders under the GSB LTWs or
the CalFed Securities, as the case may be.
(d) In addition to the compensation contemplated by Section 2.1(c), the
Litigation Managers shall each be entitled (and shall be fully vested in such
entitlement) to receive out of any recovery pursuant to the Goodwill Litigation
an incentive fee in an amount equal to 0.25% of the aggregate value of the
pre-tax recovery including post-judgment interest (whether paid in cash or
noncash consideration, or in a lump sum or in installments) in respect of each
of the Glendale Litigation (the "Glendale Incentive Fee") and the CalFed
Litigation (the "CalFed Incentive Fee" and, together with the Glendale
Incentive Fee, the "Incentive Fees"). If any recovery is paid, in whole or in
part, in a form other than cash or other than in a single lump sum, the
Litigation Managers shall determine in the first instance the value of such
recovery, subject to review by the Glendale Committee (in the case of the
Glendale Litigation) or the CalFed Committee (in the case of the CalFed
Litigation). The Glendale Incentive Fee and the CalFed Incentive Fee, as the
case may be, shall be payable upon the receipt of a final nonappealable
judgment or in the event of a final settlement (a "Final Resolution") of the
Glendale Litigation or the CalFed Litigation, respectively (whether or not any
consideration in respect of such judgment or settlement has been received as of
such time). Notwithstanding the foregoing, a Litigation Manager shall be
divested of his right to receive such Litigation Manager's share of the
Glendale Incentive Fee or CalFed Incentive Fee if his employment hereunder in
respect of the Glendale Litigation or the CalFed Litigation, respectively, is
terminated prior to the date of a Final Resolution (1) by such Litigation
Manager other than for Good Reason (as defined herein), death or incapacity, or
(2) by the Company for Cause (as defined herein).
(e) Each of the Litigation Managers may be removed from his position as
such (including as an Executive Vice President of the Company) with respect to
the Glendale Litigation or the CalFed Litigation or both, but only for Cause
and only upon the unanimous vote of the Glendale Committee (with respect to the
Glendale Litigation) or the CalFed Committee (with respect to the CalFed
Litigation) as to such removal (provided that any Litigation Manager shall
cease to be an Executive Vice President of the Company upon removal as to both
the Glendale Litigation and the CalFed Litigation). The Company or a Committee
shall have "Cause" to terminate a Litigation Manager's employment hereunder
only upon (i) the conviction of the Litigation Manager for the commission of a
felony involving dishonesty with respect to the Company or the Holders or (ii)
gross and willful misconduct undertaken in bad faith by the Litigation Manager
that is demonstrably and materially injurious to the Company or to the economic
interests of the Holders as a group. Further, no breach, act or failure to act
on the Litigation Manager's part shall constitute "Cause" if such breach, act
or failure to act resulted from the Litigation Manager's incapacity due to
physical or mental illness or any such actual or anticipated breach, act or
failure to act resulted from a resignation by the Litigation Manager for Good
Reason.
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(f) A Litigation Manager may terminate his employment hereunder as to
either or both of the Glendale Litigation and the CalFed Litigation for "Good
Reason." "Good Reason" shall mean (i) a material breach by the Company of a
material obligation of the Company under this Management Agreement after the
Litigation Manager has given the Company notice of the breach within 90 days of
the breach and the Company has not remedied the breach in accordance with the
next sentence or (ii) the existence of a conflict of interest not due to any
misconduct by the Litigation Manager which in the reasonable judgment of the
Litigation Manager renders inappropriate the Litigation Manager's employment
hereunder with respect to either the Glendale Litigation or the CalFed
Litigation. A breach described in this clause includes, without limitation, (i)
a detrimental alteration to the terms of the Litigation Manager's employment as
described herein, (ii) any reduction in the Litigation Manager's annual salary
or other fees, benefits or working conditions described herein or the failure
of the Company to pay when due to the Litigation Manager any salary or fee or
other benefits referred to in this Management Agreement, (iii) the failure of
the Company to obtain an agreement reasonably satisfactory to the Litigation
Manager from any successor to the Company to assume and agree to perform this
Management Agreement, or if the business for which the Litigation Manager's
services are principally performed is sold or transferred, the failure of the
Company to obtain such an agreement from the purchaser or transferee of such
business or (iv) any termination of the Litigation Manager's employment which
is not effected pursuant to the terms of this Management Agreement and which is
not remedied within 30 days after receipt of written notice from the Litigation
Manager delineating each such claimed breach and setting forth the Litigation
Manager's intention to terminate employment if such breach is not remedied;
provided, that if the specified breach cannot reasonably be remedied within
such 30-day period and the Company commences reasonable steps within such
30-day period to remedy such breach and diligently continues such steps
thereafter until a remedy is effected, such breach shall not constitute "Good
Reason" provided that such breach is remedied within 60 days after receipt of
written notice.
(g) In the event of the removal, resignation, retirement, death or
incapacity of a Litigation Manager with respect to the Glendale Litigation, the
CalFed Litigation or both, such Litigation Manager shall not be replaced and
the remaining Litigation Manager shall continue to serve in such capacity until
such service is terminated pursuant hereto. Resignation or removal as to one of
the Goodwill Litigations shall not affect a Litigation Manager's rights,
powers, privileges, immunities or obligations hereunder with respect to the
Goodwill Litigation as to which such Litigation Manager has not resigned or
been removed. In the event that a Litigation Manager resigns or is removed or
ceases to serve in such capacity for any reason, the remaining Litigation
Manager shall be entitled to such former Litigation Manager's rights hereunder
in respect of compensation and otherwise, including salary and any forfeited
portion of the Incentive Fees, provided that only Stephen J. Trafton shall be
entitled to the Trafton Benefits, and only Richard A. Fink shall be entitled to
the Fink Benefits.
(h) At such time as there are no Litigation Managers with respect to the
Glendale Litigation (or the remaining Litigation Manager has informed the
Company in writing that such Litigation Manager intends to retire, resign or
otherwise cease to serve in such capacity), the Glendale Committee, by majority
vote, shall be authorized to appoint a successor Litigation Manager or
Litigation Managers with respect to the Glendale Litigation and the GSB LTWs.
At such time as there are no Litigation Managers with respect to the CalFed
Litigation (or the remaining Litigation Manager has informed the Company in
writing that such Litigation Manager intends to retire, resign or otherwise
cease to serve in such capacity), the CalFed Committee, by majority vote, shall
be authorized to appoint a successor Litigation Manager or Litigation Managers
with respect to the CalFed Litigation and the CalFed Securities.
2.2 California Federal, GSB and Glendale Federal, and their respective
successors, shall cooperate with the Litigation Managers with respect to the
duties and responsibilities of the Litigation Managers hereunder and, without
limiting the generality of the foregoing, shall provide the Litigation Managers
with such access to their books, records, offices and other facilities and to
their employees, agents, attorneys and independent accountants as the
Litigation Managers shall reasonably require for the purpose of performing
their respective duties and exercising their powers hereunder. The Litigation
Managers shall have the authority on behalf of the Company and its
subsidiaries, as the case may be, to consult with and instruct attorneys of
California Federal and Glendale Federal in connection with the
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CalFed Litigation and the Glendale Litigation, respectively. GSB agrees to use
its reasonable best efforts to cause the relevant officers, employees, agents
and representatives of the Surviving Bank and its successors to be available to
provide testimony and to execute documents, in each case required in the
reasonable judgment of the Litigation Managers, for the purpose of prosecuting
the Goodwill Litigation, including execution of any complaints, motions,
answers and other pleadings, affidavits, requests and notices, other than
pursuant to instructions that are determined to be unreasonable by the Glendale
Committee or the CalFed Committee, as applicable.
2.3 (a) The Company shall provide the Litigation Managers and the
Committees with drafts of any tax return, report, declaration or certification
(each, a "Tax Return") reporting, reflecting or relating to any Final
Resolution or receipt of proceeds in respect thereof at least 30 days prior to
the date such Tax Return is required to be filed. The Litigation Managers shall
provide comments upon such Tax Returns within 10 days of the receipt thereof,
and the Company shall give due consideration of such comments of the Litigation
Managers as are provided within such period.
(b) The Committees (as defined in the Agreement), in consultation with the
KPMG Peat Marwick LLP (or any successor thereto), shall review (i) any Tax
Return, audit, contest, claim, proceeding or inquiry with respect to taxes
arising from or relating to (A) any Final Resolution or receipt of proceeds in
respect thereof or (B) the distribution of the CalFed Securities or the GSB
LTWs or any payment in respect of the CalFed Securities or (ii) matters related
to any responsibility of KPMG Peat Marwick LLP (or any successor thereto) under
Section 1.6 of the Agreement.
(c) The Company shall use its best efforts not to take any action that
would or would be reasonably likely to have the effect of increasing the tax
benefits or decreasing the tax burden associated with (i) any Final Resolution
of the CalFed Litigation or the receipt of proceeds in respect thereof or (ii)
the distribution of the CalFed Securities or any payment in respect of the
CalFed Securities, at the cost of decreasing the tax benefits or increasing the
tax burden associated with (i) any Final Resolution of the Glendale Litigation
or receipt of proceeds in respect thereof or (ii) the distribution of the GSB
LTWs.
ARTICLE III
THE COMMITTEES
3.1 (a) The initial members of the Glendale Committee shall be the GSB
Directors. The initial members of the CalFed Committee shall be Gerald J. Ford,
Howard Gittis, Carl B. Webb, Paul M. Bass, Jr. and George W. Bramblett, Jr.
Each of the Glendale Committee and the CalFed Committee shall at all times have
at least two members, and all such members shall be members of the Board of
Directors of the Company and of the federal savings bank that is the surviving
corporation in the merger of Glendale Federal and California Federal pursuant
to the Agreement (the "Bank"); provided, however, that members of the
Committees shall not be required to be members of such Boards of Directors
after a Change of Control of the Company (it being understood that any such
Change of Control shall not diminish, to the extent permitted under applicable
law, the rights and powers of such Committee members hereunder). In order to
maintain continuity in respect of the prosecution of the Goodwill Litigation,
the Board of Directors of the Company shall, subject to Section 3.3 hereof,
nominate the persons who are members of the Committees from time to time to be
elected to further terms as Directors of the Company or of the Bank, as the
case may be, it being the understanding of the parties hereto that continuity
of membership on such Committees is in the best interests of the Company and
the Holders.
For the purpose of this Management Agreement, a "Change of Control" shall
mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended) of beneficial ownership of 50% or more of either (x) the
then outstanding shares of common stock of the Company (the "Outstanding
Common Stock") or (y) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Voting Securities"); provided, however, that
such acquisitions by any of First Gibraltar Holdings, Inc. or Hunter's
Glen/Ford, Ltd., their respective successors or any affiliate or associate
of the foregoing (each, an "FGH Entity") shall not constitute a "Change of
Control" hereunder; or
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(ii) Individuals who, as of the Effective Time, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board; or
(iii) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets of another entity (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Common
Stock and Outstanding Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Common Stock and Outstanding Voting Securities, as the case may
be, (ii) no Person (excluding the Company, such corporation resulting from
such Business Combination or the FGH Entities) beneficially owns, directly
or indirectly, 50% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company. The Company agrees not to effect
or allow to be effected any Change of Control unless any acquiror or
successor in such Change of Control agrees to take such actions as are
necessary and appropriate to assure that the rights of the Litigation
Managers hereunder, as well as the rights of the Holders, are honored and
not affected in any adverse manner.
(b) Except as otherwise expressly provided herein, each Committee may act
only with the concurrence of a majority of its members; provided, however, that
a Committee may, in its discretion, designate a Chairman to act as the
administrative Committee member. A Committee may delegate to its Chairman such
authority as the Committee may determine.
3.2 Each member of the Committees shall be entitled to receive reasonable
fees for service thereon as determined by the Board of Directors of the Company
from time to time, but in no event less than the highest fees received by
members of other committees of the Board of Directors of the Company.
3.3 If any member of a Committee shall resign, die or become
incapacitated, or shall otherwise become unable to act as a member of such
Committee, a majority of the remaining members of such Committee (or the
remaining member, if only one) shall have the sole authority to appoint a
successor. If such successor is required pursuant to Section 3.1(a) to be a
member of the Board of Directors of the Company, such Board of Directors shall
promptly appoint the individual chosen as successor to such Board of Directors
and shall cause such individual to be nominated for election to such Board of
Directors at the next meeting at which directors are to be elected (provided
that such individual is reasonably acceptable to the Board of Directors of the
Company). A majority of the members of a Committee may vote at any time to
remove a committee member and to appoint a new member to fill the vacancy so
created. A successor or a new Committee member appointed pursuant to this
Section 3.3 shall be entitled to all of the rights, powers, immunities and
privileges of the other members of such Committee, without the need of any
further act or writing.
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3.4 Subject to Section 2.1 hereof, each Committee may commit to and shall
pay its attorneys' compensation for services rendered and expenses incurred and
may enter into arrangements on such terms as may be approved by such Committee
with such counsel. A Committee may commit to and shall pay all such persons or
entities that it retains compensation for services rendered and expenses
incurred.
3.5 Any member of a Committee and any Litigation Manager may also be a GSB
Holder or a CalFed Holder or an officer, director, employee or affiliate of a
GSB Holder or of a CalFed Holder and will have all the rights of such a Holder
to the same extent as if he or she were not a member of the Committee.
ARTICLE IV
COSTS AND EXPENSES
4.1 (a) The GSB Committee and the Litigation Managers shall have the power
to authorize the expenditure by the Company of all funds deemed by the GSB
Committee or the Litigation Managers to be reasonably necessary to pursue the
Glendale Litigation or in respect of the GSB LTWs (it being the understanding
of the parties that such funds are expected to amount to at least $10 million),
such expenditures including, without limitation, all legal and other
professional fees and costs incurred in connection with the Glendale
Litigation, the GSB LTWs, the compensation and expense reimbursements of the
Committee described in Sections 3.2 and 3.4, payment of any expenses incurred
by or on behalf of the Litigation Managers pursuant hereto and the compensation
of the Litigation Managers, costs and expenses of counsel and experts retained
by the GSB Committee pursuant to Section 3.4, and any amounts paid pursuant to
Article 5.
(b) The CalFed Committee and the Litigation Managers shall have the power
to authorize the expenditure by the Company of all funds deemed by the CalFed
Committee or the Litigation Managers to be reasonably necessary to pursue the
CalFed Litigation or in respect of the CalFed Securities (it being the
understanding of the parties that such funds are expected to amount to at least
$20 million), such expenditures including, without limitation, all legal and
other professional fees and costs incurred in connection with the CalFed
Litigation, the CalFed Securities, the compensation and expense reimbursements
of the CalFed Committee described in Sections 3.2 and 3.4, payment of any
expenses incurred by or on behalf of the Litigation Managers pursuant hereto
and the compensation of such Litigation Managers, costs and expenses of counsel
and experts retained by the CalFed Committee pursuant to Section 3.4, and any
amounts paid pursuant to Article 5.
ARTICLE V
INDEMNIFICATION; LIMITATION OF LIABILITY
5.1 In taking any action hereunder, or in refraining therefrom, a
Committee, the members thereof and the Litigation Managers shall each be
protected in relying upon any notice, paper or other document reasonably
believed by it or them to be genuine and signed by the proper parties, or upon
any evidence reasonably deemed by it or them to be sufficient. A Committee, the
members thereof and the Litigation Managers may each rely on the statements
contained in such writings. In no event shall the Committee, any member thereof
or the Litigation Managers be liable to the Company, any subsidiary thereof or
to the CalFed Holders or GSB Holders for any action, omission, decision,
determination or undertaking by such Committee, any of its members or a
Litigation Manager unless it has been shown by clear and convincing evidence in
a court of competent jurisdiction that such action, omission, decision,
determination or undertaking was undertaken with deliberate intent to cause
substantial injury to the Company or the CalFed Holders or GSB Holders or with
reckless disregard for the best interests of such persons. If a Committee, any
member thereof or a Litigation Manager consults with counsel or other experts
in connection with its or their duties hereunder, it and they shall be fully
protected by any action, omission, decision, determination or undertaking
taken, suffered or permitted by it or them in good faith and in accordance with
the advice of such counsel or other experts, including counsel or experts who
are affiliates of one or more of the members of a Committee or of one or both
Litigation Managers.
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5.2 Each member of the Committees and each of the Litigation Managers
shall be indemnified and held harmless by the Company against all claims,
demands, obligations, liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise (so long as the Company has approved
such compromise, which approval shall not be unreasonably withheld), or as
fines or penalties, and counsel fees, reasonably incurred by him or her in
connection with the defense or disposition of any action, suit or other
proceeding by one or more GSB Holders or CalFed Holders or by any other person,
whether civil or criminal, in which he or she may be involved, or with which he
or she may be threatened, by reason of the fact that he or she is or was a
Committee Member or a Litigation Manager, provided that such Committee member
or Litigation Manager shall not be entitled to have such indemnification in
respect of any matter as to which it shall have been shown in a court of
competent jurisdiction that an action, omission, decision, determination or
undertaking of a Committee member or Litigation Manager was undertaken by such
person with deliberate intent to cause substantial injury to the Company or the
CalFed Holders or GSB Holders or with reckless disregard for the best interests
of such persons.
5.3 Advance payments in connection with indemnification under this Article
5 shall be made by the Company, if so requested by any person entitled to
indemnity pursuant to Section 5.2, provided that such indemnified person shall
have given a written undertaking to repay any amount advanced by or on behalf
of the Company in the event it is subsequently determined that he or she is not
entitled to indemnification under the standard set forth in Section 5.2.
5.4 The Company shall use its reasonable best efforts to cause an
endorsement to its Directors and Officers insurance policy to adequately insure
that each of the members of such Committee and the Litigation Managers shall be
indemnified against any loss, liability or damage for which such person is
entitled to be indemnified pursuant to this Article 5 and that is attributable
to the Glendale Litigation or the GSB LTWs, in the case of the GSB Committee,
or the CalFed Litigation or the CalFed Securities, in the case of the CalFed
Committee.
5.5 The rights accruing to any Committee member or Litigation Manager
under this Article 5 shall not exclude any other right to which such person may
be entitled, and, notwithstanding the other provisions of this Article 5, each
Committee member and Litigation Manager shall be indemnified and insured as a
director and employee of the Company to the fullest extent provided to
directors and executive officers, respectively, of the Company, provided that
no such indemnification or insurance shall be less favorable than that provided
by GSB in favor of such persons as of the date hereof.
ARTICLE VI
AMENDMENTS; MISCELLANEOUS
6.1 This Management Agreement may be amended from time to time, but only
by an instrument in writing executed by the parties hereto or their successors
and approved by resolution of a majority of the members of each Committee;
provided, however, that any amendment or other modification of this Management
Agreement that would result in any change to, or any provision inconsistent
with, a provision of this Management Agreement that contemplates Committee
action by more than a majority of the members thereof shall not be amended
except by an instrument in writing executed by the parties hereto or their
successors and approved by resolution of such higher number of the members of
each Committee.
6.2 (a) Subject to Section 6.2(b), nothing in this Management Agreement
shall be construed to prevent service by any Litigation Manager as a director
or employee of, or a consultant to, a financial institution or other business,
other than the Company.
(b) As of the Effective Time and for three years thereafter, neither
Litigation Manager will directly or indirectly, own, manage, operate, control
or participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director or otherwise with, or have
any financial interest in, any business principally engaged in the savings and
loan or federally insured thrift business in California which is in material
competition with the business conducted by the Company. Ownership for personal
investment purposes only of less than 5% of the voting stock of any publicly
held corporation shall not constitute a violation hereof.
C-9
<PAGE>
(c) As of the Effective Time and for three years thereafter, neither
Litigation Manager will, directly or indirectly, solicit for employment by
other than the Company any person employed by the Company at the Effective
Time, nor will either Litigation Manager, directly or indirectly, solicit for
employment by other than the Company any person known by such Litigation
Manager to be employed at the time by the Company.
(d) Each Litigation Manager shall hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or
data relating to the Company, which shall have been obtained by the Litigation
Manager during his employment by the Company and which shall not be or become
public knowledge (other than by acts by the Litigation Manager in violation of
this Management Agreement). After termination of the Litigation Manager's
employment with the Company, the Litigation Manager shall not, without the
prior written consent of the Company or as may otherwise be required by law or
legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 6.2 constitute a basis
for deferring or withholding any amounts otherwise payable to a Litigation
Manager under this Management Agreement.
6.3 This Management Agreement and the Agreement constitute the entire
agreement among the parties and their affiliates with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties and their affiliates or any of them with
respect to the subject matter hereof, and nothing in this Management Agreement
shall be deemed to create any fiduciary or additional obligations on the part
of any person in favor of the Holders or to affect in any manner the rights of
the Holders under the GSB LTWs and the CalFed Securities (and, without limiting
the foregoing, no Litigation Manager shall be deemed to owe a fiduciary duty to
the Company or the Holders as a result of their service as such hereunder).
6.4 This Management Agreement, and all of the provisions hereof, shall be
binding upon and inure to the benefit of the parties hereto and their
respective permitted successors (including without limitation any transferee of
all or substantially all of the assets of a party hereto or the entity
resulting from or surviving a Change of Control or succeeding to a party hereto
in such Change of Control) and assigns, but the obligations and
responsibilities of the Litigation Managers under this Management Agreement
with respect to the Glendale Litigation and the GSB LTWs, on the one hand, or
the CalFed Litigation and the CalFed Certificates, on the other hand, shall not
be assigned by such Litigation Managers without the prior consent of the
Company.
6.5 The parties hereto hereby agree to execute, acknowledge and deliver
such further agreements and instruments and to do such further acts, or to
cause their respective affiliates to execute, acknowledge and deliver such
further agreements and instruments and to do such further acts, as may be
necessary or proper to effectively carry out the purposes and intents of this
Management Agreement.
6.6 Any provision of this Management Agreement that is prohibited or
unenforceable in any jurisdiction shall not invalidate the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable any such provision in any other
jurisdiction.
6.7 This Management Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and the applicable laws of
the United States of America, without reference to principles of conflict of
laws. The captions of this Management Agreement are not part of the provisions
hereof and shall have no force or effect.
6.8 All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Litigation Managers:
Stephen J. Trafton
Richard A. Fink
c/o Golden State Bancorp Inc.
414 North Central Avenue
Glendale, California 91203
C-10
<PAGE>
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 W. 52nd Street
New York, New York 10019
Attention: Edward D. Herlihy, Esq.
If to the Company or the Surviving Bank:
MacAndrews & Forbes Holdings Inc.
35 East 62nd Street
New York, New York 10021
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Fred B. White, III, Esq.
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
6.9 The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Management Agreement were not performed by
the Company in accordance with its specific terms or otherwise breached.
Accordingly, it is agreed that the parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of this Management Agreement and
to enforce specifically the terms and provisions thereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
6.10 This Management Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
6.11 Any dispute or controversy arising under or in connection with this
Management Agreement (relating to any issue other than the compensation, fees
or benefits of the Litigation Managers hereunder, including without limitation
the matters contemplated by Sections 2.1(c) (and the schedules referred to
therein) and 2.1(d) hereunder) shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect or of such similar organization as the parties hereto may mutually
agree. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company agrees to pay, as incurred, all legal or arbitration
fees and expenses which a Litigation Manager may reasonably incur as a result
of any proceeding with respect to such enforcement hereunder, plus interest on
any delayed payment at the rate set forth in Section 7872(f)(2)(A) of the
Internal Revenue Code of 1986, as amended.
6.12 This Agreement shall automatically terminate and be of no further
force or effect upon the earlier to occur of (a) the termination of the
Agreement in accordance with its terms or (b) the occurrence of all of the
following events: (i) a final nonappealable judgment or order in or a final
settlement of the Goodwill Litigation, (ii) fulfillment of all obligations to
the Holders under the terms of the GSB LTWs and the CalFed Securities and (iii)
the payment of all amounts owing hereunder to the Litigation Managers in
respect of the subject matter of this Management Agreement (except that, in the
case of a termination pursuant to clause (b), (A) the provisions of Sections
5.2 and 5.3 shall continue for a period of six years following such
termination; provided, however, that all rights to indemnification in respect
of any claim asserted or made within such period shall continue until the final
disposition of such claim, and (B) the obligations of the Company set forth in
Schedules 2.1(c)(i) and 2.1(c)(ii) to this Management Agreement shall survive
such termination.
C-11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement, or caused this Management Agreement to be executed by their
respective officers thereunto duly authorized, as of the date first above
written.
GOLDEN STATE BANCORP INC.
By: /s/ Stephen J. Trafton
------------------------------------
Name: Stephen J. Trafton
Title: Chairman of the Board,
President and Chief Executive
Officer
GLENDALE FEDERAL BANK, FEDERAL
SAVINGS BANK
By: /s/ Stephen J. Trafton
------------------------------------
Name: Stephen J. Trafton
Title: Chairman of the Board,
President and Chief Executive
Officer
CALIFORNIA FEDERAL BANK, A FEDERAL
SAVINGS BANK
By: /s/ Carl B. Webb
------------------------------------
Name: Carl B. Webb
Title: President and Chief Operating
Officer
/s/ Stephen J. Trafton
----------------------------------------
Stephen J. Trafton
/s/ Richard A. Fink
----------------------------------------
Richard A. Fink
C-12
<PAGE>
APPENDIX D
[LETTERHEAD OF CREDIT SUISSE/FIRST BOSTON]
July 15, 1998
Board of Directors
Golden State Bancorp Inc.
414 North Central Avenue
Glendale, California 91203
Dear Sirs:
You have asked us to advise you with respect to the fairness to the common
stockholders of Golden State Bancorp Inc., a Delaware corporation ("Golden
State") from a financial point of view of the consideration to be paid by
Golden State pursuant to the terms of the Agreement and Plan of Reorganization,
dated as of February 4, 1998 (as amended the "Agreement"), by and among Golden
State, First Nationwide (Parent) Holdings Inc., a Delaware corporation ("Parent
Holdings") and certain other parties named therein. The Agreement provides,
among other things, for the merger (the "Merger") of Parent Holdings with and
into Golden State with Golden State being the surviving corporation of the
Merger. Pursuant to the Merger, the outstanding shares of common stock of
Parent Holdings will be converted into (i) that number of shares of common
stock of Golden State representing a percentage of the shares of Golden State's
common stock that will be outstanding after the Merger (ranging from 55% to
58%) determined in accordance with the formula set forth in the Agreement, and
(ii) the right to receive additional shares of Golden State common stock upon
the occurrence of certain contingencies, in each case as set forth in the
Agreement.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to Parent Holdings, as well as the
Agreement. We have also reviewed certain other information, including financial
forecasts, provided to us by Golden State, and have met with Golden State's
management to discuss the business and prospects of Parent Holdings. In
addition, we have discussed with management of Golden State their views
regarding the business, operational and strategic benefits and implications of
the Merger, including estimates of future cost savings, operating synergies and
revenue enhancements expected to be achieved as a result of the Merger.
We have also considered certain financial data of Parent Holdings, and we
have compared those data with similar data for other publicly held companies in
businesses similar to Parent Holdings and we have considered the financial
terms of certain other business combinations and other transactions which have
recently been effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market
criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
it being complete and accurate in all material respects. With respect to the
financial forecasts (including estimates of future cost savings, operating
synergies and revenue enhancements expected to be achieved as a result of the
Merger), we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of Golden
State's management as to the future financial performance of Parent Holdings.
In addition, we have not been requested to make, and have not made, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Parent Holdings, nor have we been furnished with any such
evaluations or appraisals. Our opinion is necessarily based upon financial,
economic, market and other conditions as they exist and can be evaluated on the
date hereof. We are not expressing any opinion as to the actual value of the
common stock of Golden State when issued to Parent Holdings' stockholders
pursuant to the Merger or the prices at which such stock will trade subsequent
to the Merger.
We have acted as financial advisor to Golden State in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger.
D-1
<PAGE>
Board of Directors
Golden State Bancorp Inc.
July 15, 1998
Page 2
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of both Parent Holdings and Golden State
for our own and such affiliates' accounts and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this letter is for the information of the Board of
Directors of Golden State in connection with its consideration of the Merger
and is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be paid by Golden State in the Merger is fair
to the common stockholders of Golden State from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Michael E. Martin
--------------------------------------
Michael E. Martin
Managing Director
D-2
<PAGE>
REVOCABLE PROXY
GOLDEN STATE BANCORP INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GOLDEN STATE
The undersigned hereby appoints Stephen J. Trafton, Richard A. Fink and
John F. King, or any of them, each with full power of substitution, as the
lawful proxies of the undersigned, and hereby authorizes them to represent
and to vote as designated on the reverse side all shares of the common stock
of Golden State Bancorp Inc. ("Golden State") which the undersigned would be
entitled to vote if personally present at the Special Meeting of Stockholders
of Golden State to be held on August 17, 1998 and at any postponement or
adjournment thereof.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
<PAGE>
PLEASE MARK YOUR
VOTES AS IN THIS [X]
EXAMPLE.
I Plan to Attend Meeting
[ ]
PROPOSAL:
1. Approve and adopt the Agreement and Plan of Reorganization, dated as of
February 4, 1998, as amended, by and among the Company, First Nationwide
(Parent) Holdings Inc. ("Parent Holdings"), First Nationwide Holdings
Inc., First Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., and Golden
State Financial Corporation, and the Agreement and Plan of Merger, dated
as of February 4, 1998, between the Company and Parent Holdings, pursuant
to which, among other things, Parent Holdings will merge with and into the
Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before
the meeting or any adjournment thereof.
When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign partnership name by
authorized person.
Whether or not you plan to attend the meeting, you are
urged to execute and return this proxy, which may be
revoked at any time prior to its use.
Dated: , 1998
------------------------------------------
------------------------------------------------------
(Signature or Stockholder)
------------------------------------------------------
(Signature(s) of Additional Stockholder(s))
Please sign your name exactly as it appears hereon,
date and return this proxy in the reply envelope
provided. If you receive more than one proxy card,
please sign and return all proxy cards received.
- - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT TO GOLDEN STATE
PLEASE SIGN AND RETURN YOUR PROXY BY
TEARING OFF THE TOP PORTION OF THE THIS SHEET
AND RETURNING IT IN THE ENCLOSED POSTAGE PAID ENVELOPE.
<PAGE>
REVOCABLE PROXY
GOLDEN STATE BANCORP INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GOLDEN STATE
The undersigned hereby appoints Stephen J. Trafton, Richard A. Fink and
John F. King, or any of them, each with full power of substitution, as the
lawful proxies of the undersigned, and hereby authorizes them to represent
and to vote as designated on the reverse side all shares of the common stock
of Golden State Bancorp Inc. ("Golden State") which the undersigned would be
entitled to vote if personally present at the Special Meeting of Stockholders
of Golden State to be held on August 17, 1998 and at any postponement or
adjournment thereof.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
<PAGE>
PLEASE MARK YOUR
VOTES AS IN THIS [X]
EXAMPLE.
I Plan to Attend Meeting
[ ]
PROPOSAL:
1. Approve and adopt the Agreement and Plan of Reorganization, dated as of
February 4, 1998, as amended, by and among the Company, First Nationwide
(Parent) Holdings Inc. ("Parent Holdings"), First Nationwide Holdings
Inc., First Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., and Golden
State Financial Corporation, and the Agreement and Plan of Merger, dated
as of February 4, 1998, between the Company and Parent Holdings, pursuant
to which, among other things, Parent Holdings will merge with and into the
Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before
the meeting or any adjournment thereof.
When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign partnership name by
authorized person.
Whether or not you plan to attend the meeting, you are
urged to execute and return this proxy, which may be
revoked at any time prior to its use.
Dated: , 1998
------------------------------------------
------------------------------------------------------
(Signature or Stockholder)
------------------------------------------------------
(Signature(s) of Additional Stockholder(s))
Please sign your name exactly as it appears hereon,
date and return this proxy in the reply envelope
provided. If you receive more than one proxy card,
please sign and return all proxy cards received.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
YOUR VOTE IS VERY IMPORTANT TO GOLDEN STATE. PLEASE SIGN AND RETURN
YOUR PROXY BY TEARING OFF THE TOP PORTION OF THE THIS SHEET AND RETURNING
IT IN THE ENCLOSED POSTAGE PAID ENVELOPE.
ATTENTION STOCKHOLDER:
Our records indicate you have not yet mailed in your GLENFED, Inc.
common stock certificates. We urge you to exchange your GLENFED, Inc.
certificate(s) to receive your new shares of Golden State Bancorp Inc., as
provided for under the Plan of Reorganization which was approved by a
majority of the stockholders at a Special Meeting of Stockholders held on
August 19, 1993.
Please locate your old GLENFED certificate(s) of common stock and
mail them to our agent at the address below, or your stock will escheat in
accordance with the laws of the state in which you reside.
ChaseMellon Shareholder Services
P.O. Box 845
Midtown Station
New York, NY 10018
PLEASE DO NOT MAIL YOUR CERTIFICATE(S) WITH YOUR PROXY.
<PAGE>
REVOCABLE PROXY
GOLDEN STATE BANCORP INC.
The undersigned hereby appoints Stephen J. Trafton, Richard A. Fink and
John F. King, or any of them, each with full power of substitution, as the
lawful proxies of the undersigned, and hereby authorizes them to represent
and vote as designated below all shares of the common stock of Golden State
Bancorp Inc. ("Golden State") which the undersigned would be entitled to vote
if personally present at the Special Meeting of Stockholders of Golden State
to be held on August 17, 1998 and at any postponement or adjournment thereof.
PROPOSAL:
1. Approve and adopt the Agreement and Plan of Reorganization, dated as
of February 4, 1998, as amended, by and among the Company, First
Nationwide (Parent) Holdings Inc. ("Parent Holdings"), First
Nationwide Holdings Inc., First Gibraltar Holdings Inc., Hunter's
Glen/Ford, Ltd., and Golden State Financial Corporation, and the
Agreement and Plan of Merger, dated as of February 4, 1998, between
the Company and Parent Holdings, pursuant to which, among other
things, Parent Holdings will merge with and into the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion on such other business as may properly come before
the meeting or any adjournment thereof.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY
(Continued on other side)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GOLDEN STATE
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
When signing as attorney, executor, administrator, trustee, or guardian,
please give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
Whether or not you plan to attend the meeting, you are urged to execute
and return this proxy, which may be revoked at any time prior to its use.
DATE: , 1998
---------- -------------------------------------------
(SIGNATURE OF STOCKHOLDER)
-------------------------------------------
(SIGNATURE(S) OF ADDITIONAL STOCKHOLDER(S))
Please sign your name exactly as it appears
hereon, date and return this proxy in the
reply envelope provided. If you receive more
than one proxy card, please sign and return
all proxy cards received.
<PAGE>
CONFIDENTIAL VOTING INSTRUCTIONS
GOLDEN STATE BANCORP INC.
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST 17, 1998
TO: CG TRUST COMPANY AS TRUSTEE UNDER THE GLENDALE FEDERAL BANK SHELTERED PAY
PLAN (THE "PLAN")
I hereby instruct the Trustee to vote (in person or by proxy) all the
shares of Golden State Bancorp Inc. ("Golden State") Common Stock which are
credited to my account under the Plan on July 6, 1998, at the Special Meeting
of Stockholders of Golden State on August 17, 1998, and any postponement or
adjournment thereof, on the following matters, as provided in the proxy
statement, and in its discretion upon any other matter which may properly
come before the meeting of any adjournment thereof.
PROPOSAL:
1. Approve and adopt the Agreement and Plan of Reorganization, dated as
of February 4, 1998, as amended, by and among the Company, First
Nationwide (Parent) Holdings Inc. ("Parent Holdings"), First
Nationwide Holdings Inc., First Gibraltar Holdings Inc., Hunter's
Glen/Ford, Ltd., and Golden State Financial Corporation, and the
Agreement and Plan of Merger, dated as of February 4, 1998, between
the Company and Parent Holdings, pursuant to which, among other
things, Parent Holdings will merge with and into the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion on such other business as may properly come before
the meeting or any adjournment thereof.
SIGN AND DATE ON REVERSE SIDE
<PAGE>
THESE VOTING INSTRUCTIONS ARE BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GOLDEN STATE.
PLEASE DATE AND SIGN EXACTLY AS YOUR NAME APPEARS BELOW AND RETURN IN THE
ENCLOSED ENVELOPE. YOUR SHARES WILL BE VOTED ACCORDING TO YOUR INSTRUCTIONS.
IF YOUR INSTRUCTIONS ARE RETURNED SIGNED WITH NO VOTING INSTRUCTIONS, YOUR
SHARES WILL BE VOTED FOR PROPOSAL 1.
DATE: , 1998
--------------- ---------------------------------------------------
(Please sign EXACTLY as your name appears hereon.) When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such.
PLEASE DO NOT FOLD THIS CARD
