<PAGE>
SCHEDULE 14A INFORMATION
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:
[X]Preliminary Proxy Statement
[_]CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[_]Definitive Proxy Statement RULE 14A-6(E)(2))
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
GOLDEN STATE BANCORP INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X]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 ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_]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:
Notes:
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GOLDEN STATE BANCORP INC.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
February , 1998
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend a
Special Meeting of Stockholders of Golden State Bancorp Inc. (the "Company")
which will be held in the Hoeft Center Auditorium, located at 201 West
Lexington Drive, Glendale, California 91203, at 10:00 a.m., California time,
on March 23, 1998.
As described in the accompanying Notice of Special Meeting of Stockholders
and Proxy Statement, you will be asked at the Special Meeting to consider and
vote on a proposal (the "Proposal") to authorize certain amendments to the
Company's Certificate of Incorporation. If the Proposal is approved by the
stockholders, the Company expects to declare a distribution of Litigation
Tracking Warrants(TM) to the holders of the Company's Common Stock during the
June 1998 quarter. Further information regarding the Proposal and the
contemplated distribution of such warrants is contained in the accompanying
Proxy Statement.
The Board of Directors has unanimously approved the proposed amendments to
the Company's Certificate of Incorporation described in the accompanying Proxy
Statement and believes that the approval and adoption of the Proposal is in
the best interests of the Company and its stockholders. Accordingly, the Board
of Directors unanimously recommends that stockholders vote in favor of the
Proposal.
Your vote is very important, regardless of the amount of stock you own.
Please complete and sign each proxy card you receive and return it as soon as
possible in the postage-paid envelope provided even if you currently plan to
attend the Special Meeting. This will not prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
meeting.
Thank you for your consideration of these matters and please vote today.
Sincerely,
/s/ Stephen J. Trafton
Stephen J. Trafton
Chairman of the Board,
Chief Executive Officer and
President
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 INVESTOR RELATIONS: (818)
500-2723, OR CALL OUR PROXY SOLICITOR, CORPORATE INVESTOR COMMUNICATIONS,
INC.: (888) 203-7301.
<PAGE>
GOLDEN STATE BANCORP INC.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 23, 1998
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Golden
State Bancorp Inc. (the "Company") will be held in the Hoeft Center
Auditorium, located at 201 West Lexington Drive, Glendale, California 91203,
on March 23, 1998 at 10:00 a.m., California time, for the purpose of
considering and voting on a proposal to authorize the following amendments to
the Company's Certificate of Incorporation:
1. increase the total number of authorized shares of the Company's Common
Stock to 250,000,000; and
2. amend the Certificate of Designations for the Company's Noncumulative
Convertible Preferred Stock, Series A, as described in the accompanying
Proxy Statement.
If this proposal is approved by the stockholders, the Company expects to
declare a distribution of Litigation Tracking Warrants(TM) to the holders of
its Common Stock during the June 1998 quarter.
The Board of Directors has selected February 17, 1998 as the record date for
the Special Meeting. Only those record holders of Common Stock at the close of
business on that date will be entitled to notice of and to vote at the Special
Meeting or any postponements or adjournments thereof.
By order of the Board of Directors
/s/ James R. Eller, Jr.
James R. Eller, Jr.
Secretary
Glendale, California
February , 1998
<PAGE>
PRELIMINARY COPY--FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY. SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1998
GOLDEN STATE BANCORP INC.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
PROXY STATEMENT
<TABLE>
<S> <C>
PROXY STATEMENT SUMMARY..................................................... 3
THE SPECIAL MEETING....................................................... 3
THE PROPOSAL.............................................................. 3
THE LITIGATION............................................................ 6
TAX CONSEQUENCES.......................................................... 7
RISK FACTORS.............................................................. 7
RECENT DEVELOPMENTS....................................................... 7
GENERAL..................................................................... 8
THE PROPOSAL................................................................ 9
Charter Amendments........................................................ 9
Reasons for the Proposal.................................................. 10
Recommendation of the Board of Directors.................................. 10
No Appraisal Rights....................................................... 10
DISTRIBUTION OF LTWS........................................................ 10
Risk Factors.............................................................. 10
Effect of the Distribution on the Convertible Securities.................. 13
Accounting Treatment of the Distribution.................................. 13
ERISA Considerations...................................................... 13
THE LITIGATION.............................................................. 14
Introduction.............................................................. 14
Proceedings Establishing the Government's Liability....................... 14
Damages Trial............................................................. 14
Bank Case................................................................. 15
Government Case........................................................... 16
Motion for Judgment upon Partial Findings................................. 17
Pending Motions........................................................... 18
Anticipated Timing........................................................ 18
Proposed Settlement....................................................... 19
Ownership of the Claim; Management of the Litigation; Use of Proceeds..... 19
Legal Expenses............................................................ 19
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....................... 20
DESCRIPTION OF LTWS......................................................... 22
General................................................................... 22
Adjusted Litigation Recovery.............................................. 23
Determination of the Number of Warrant Shares............................. 23
Exercise of the LTWs...................................................... 23
Adjustments............................................................... 24
Rights of LTW Holders..................................................... 25
Reservation of Shares..................................................... 25
Amendment................................................................. 26
Reports................................................................... 26
The Warrant Agent......................................................... 26
</TABLE>
1
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<TABLE>
<S> <C>
DESCRIPTION OF CAPITAL STOCK................................................ 27
Common Stock.............................................................. 27
Preferred Stock........................................................... 27
BENEFICIAL OWNERSHIP OF COMMON STOCK BY MANAGEMENT.......................... 31
BENEFICIAL OWNERSHIP OF COMMON STOCK BY OTHERS.............................. 32
OTHER BUSINESS.............................................................. 33
STOCKHOLDER PROPOSALS....................................................... 33
AVAILABLE INFORMATION....................................................... 33
ANNEX A..................................................................... 34
</TABLE>
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PROXY STATEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere, or incorporated by reference, in this Proxy
Statement. Stockholders of the Company are urged to read this Proxy Statement
in its entirety.
THE SPECIAL MEETING
This Proxy Statement and the enclosed form of proxy are being furnished to
stockholders of Golden State Bancorp Inc., a Delaware corporation ("Golden
State" or the "Company"), in connection with the solicitation of proxies by the
Board of Directors of the Company (the "Board of Directors") for use at a
Special Meeting of Stockholders to be held in the Hoeft Center Auditorium, 201
West Lexington Drive, Glendale, California 91203 at 10:00 a.m., California
time, on March 23, 1998, and at any postponements or adjournments thereof (the
"Special Meeting").
At the Special Meeting, the holders of common stock of the Company (the
"Common Stock") will be asked to consider and vote on a proposal (the
"Proposal") to make certain amendments to the Company's Certificate of
Incorporation (the "Certificate of Incorporation"). If the Proposal is approved
by the stockholders, the Company expects to declare a distribution (the
"Distribution") of one Litigation Tracking Warrant(TM) (a "LTW(TM)") for each
share of Common Stock outstanding on a date (the "Distribution Record Date")
during the June 1998 quarter./1/ At the time of the Distribution, the Company
will also reserve additional LTWs for future issuance to holders of outstanding
Convertible Securities (as defined herein) of the Company. Unless the Proposal
is approved, the Company will not make the Distribution. See "The Proposal."
Completion of the Distribution is a condition to the Company's proposed merger
with First Nationwide. See "Recent Developments."
The Distribution is intended to provide holders of the Company's Common Stock
with securities that reflect the value of the Litigation separately from the
Company's underlying business and that afford investors an opportunity to
invest in either or both securities depending on their investment objectives.
The Board of Directors has selected February 17, 1998 as the record date (the
"Record Date") for the determination of stockholders entitled to notice of and
to vote at the Special Meeting. The only class of stock that will be entitled
to vote at the Special Meeting is the Company's Common Stock, of which
51,085,174 shares were issued and outstanding at the close of business on
January 30, 1998. The approval of the Proposal will require the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock.
THE PROPOSAL
CHARTER AMENDMENTS
The stockholders of the Company are being asked to consider and vote on the
Proposal to authorize the Company to amend its Certificate of Incorporation in
the following respects:
1. to increase the total number of authorized shares of Common Stock of
the Company to 250,000,000; and
2. to effect certain amendments to the Certificate of Designations for
the Company's Noncumulative Convertible Preferred Stock, Series A (the
"Preferred Stock"), as described in "The Proposal--Charter Amendments."
- - --------
/1/ "Litigation Tracking Warrants" and "LTW" are trademarks of the Credit
Suisse First Boston Corporation in connection with its investment banking
services.
3
<PAGE>
THE LTWS
If the Proposal is approved and the LTWs are distributed as currently
expected, the LTWs distributed to the holders of Common Stock will, if the
Triggering Event described herein occurs, entitle the holders thereof (the "LTW
Holders") to purchase shares of Common Stock having, in the aggregate, an
Adjusted Market Value (as defined under "Description of LTWs--Determination of
the Number of Warrant Shares") equal to the Adjusted Litigation Recovery (as
defined below), if any. Each LTW will be exercisable for the number of shares
of Common Stock having an Adjusted Market Value equal to the Adjusted
Litigation Recovery divided by the number of LTWs issued or reserved for
issuance as of the Distribution Record Date (expected to be approximately
85,700,000) at an exercise price per LTW equal to the number of shares of
Common Stock for which the LTW is then exercisable multiplied by $1.00 (the
"Exercise Price"). The Adjusted Litigation Recovery represents a portion of the
proceeds that may be received by the Company from the United States Government
(the "Government") as a result of the civil action (the "Litigation") filed by
the Company's subsidiary, Glendale Federal Bank, Federal Saving Bank (the
"Bank" or "Glendale Federal"), against the Government in 1990 in the United
States Court of Federal Claims (the "Claims Court"). In the Litigation, the
Government has been determined to be in breach of its contract with the Bank,
as a result of certain changes, mandated by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 and certain regulations promulgated
thereunder (collectively, "FIRREA"), with respect to the rules for computing
the Bank's regulatory capital. A trial is presently underway in the Claims
Court to determine the amount of damages, if any, due to Glendale Federal as a
result of the Government's breach of contract. See "The Litigation."
The shares of Common Stock issued upon exercise of the LTWs will be
registered under the Securities Act of 1933, as amended (the "Securities Act").
The LTWs will not entitle the holders thereof to receive any dividends paid on,
or to exercise any voting or other rights in respect of, the Common Stock prior
to the exercise of the LTWs. See "Description of LTWs."
The "Adjusted Litigation Recovery" will equal 85% of the amount obtained from
the following equation: (a) the aggregate amount (the "Payment") of any cash
payment and the fair market value of any property (as determined in good faith
by the Board of Directors, on the basis of such relevant factors as it in good
faith considers appropriate ("Fair Market Value")) actually received by the
Bank pursuant to a final, nonappealable judgment in or final settlement of the
Litigation (including any post-judgment interest actually received by the Bank
on any such payment), minus (b) the sum of the following: (i) the aggregate
expenses incurred previously and hereafter by the Bank in prosecuting the
Litigation and obtaining the Payment, (ii) the aggregate expenses incurred by
the Company 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 Payment (the 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 applicable to the Company during the tax year in
which the full Payment is received (currently approximately 42%).
Subject to the procedures established by the Company and described herein,
LTW Holders will be entitled to exercise their LTWs only upon the occurrence of
all of the following: (a) receipt by the Bank of the full Payment, (b)
calculation by the Bank of the full amount of the Adjusted Litigation Recovery
and (c) receipt of all regulatory approvals necessary to issue the shares of
Common Stock to be issued upon the exercise of the LTWs, including the
effectiveness of a registration statement relating to the issuance of such
Common Stock under the Securities Act. The occurrence of the events described
in clauses (a) through (c) is referred to herein as the "Triggering Event." See
"Description of LTWs--Exercise of the LTWs." If the Triggering Event occurs,
the Company will publicly announce (not more than 15 calendar days after the
occurrence thereof), by means of a press release and by written notice (the
"Exercise Notice") mailed to each record holder of LTWs, (i) that the
Triggering Event has occurred, (ii) the aggregate number of shares for which
the LTWs are exercisable, (iii) the number of shares of Common Stock for which
one LTW is exercisable, (iv) the Exercise Price per LTW, (v) the manner in
which the LTWs are exercisable and (vi) the date on which the LTWs will no
longer be exercisable.
4
<PAGE>
The LTWs will be exercisable for a period of 60 days following the date on
which the Exercise Notice is first sent to the LTW Holders. Any LTWs not
exercised prior to the end of such 60-day period will expire.
Holders of LTWs will not be entitled to any interest or additional shares of
Common Stock from the Company for the period of time between the date on which
the Bank receives any Payment in connection with the Litigation and the date on
which the LTWs become exercisable.
The Company intends to list the LTWs on a securities exchange or an automated
quotation system.
THE DISTRIBUTION
Subject to the approval of the Proposal by the stockholders, the Company
currently plans to distribute one LTW for each share of Common Stock
outstanding on the Distribution Record Date, which date is currently expected
to be during the June 1998 quarter.
Prior to the Distribution, the Company intends to take appropriate steps to
provide that (i) upon exercise or conversion of the Company's Preferred Stock;
common stock purchase warrants (the "Five-Year Warrants") issued under the
Warrant Agreement, dated February 23, 1993, by and between the Company and
ChaseMellon Shareholder Services L.L.C. (as successor to Chemical Trust Company
of California), as Warrant Agent; common stock purchase warrants (the "Seven-
Year Warrants") issued under the Warrant Agreement, dated August 15, 1993, by
and between the Company and ChaseMellon Shareholder Services L.L.C. (as
successor to Chemical Trust Company of California), as Warrant Agent; and stock
options issued by the Company (the "Stock Options", and together with the
Preferred Stock, the Five-Year Warrants and the Seven-Year Warrants, the
"Convertible Securities") in each case prior to the Triggering Event, the
holders thereof would receive the shares of Common Stock underlying the
Convertible Securities, plus a number of LTWs equal to the number of LTWs such
holders would have received had such holders exercised or converted such
Convertible Securities immediately prior to the Distribution Record Date and
received LTWs in the Distribution and (ii) upon the exercise or conversion of
the Convertible Securities on or after the Triggering Event, the holders would
receive the number of shares of Common Stock equal to the number of shares of
Common Stock such holders would have received had such holders (a) exercised or
converted such Convertible Securities into LTWs and the shares of Common Stock
underlying the Convertible Securities immediately prior to the Triggering Event
and (b) then exercised such LTWs for the additional shares of Common Stock
underlying such LTWs immediately after the Triggering Event. In addition, upon
the occurrence of the Triggering Event, the conversion or exercise price of the
Convertible Securities would increase by an amount equal to the aggregate
Exercise Price of the number of LTWs underlying the Convertible Securities
immediately prior to the Triggering Event. As a consequence of the anti-
dilution provision described in clause (ii) above, the Convertible Securities
holders will not be required to exercise or convert their Convertible
Securities during the period that the LTWs are exercisable in order to obtain
the benefit of the LTWs underlying their Convertible Securities.
Based on the number of shares of Common Stock, Preferred Stock, Seven-Year
Warrants, Five-Year Warrants and Stock Options expected to be outstanding on
the Distribution Record Date (taking into account the currently expected
issuances of Common Stock and Stock Options in connection with the pending
merger of CENFED Financial Corporation, a Delaware corporation ("CENFED"), with
a subsidiary of the Company (the "Merger")), if the Distribution occurred as
currently anticipated, the number of LTWs that would be issued or reserved for
issuance in respect of the Company's security holders on a fully distributed
basis would be approximately 85,700,000. Of this total, the holders of the
Company's Common Stock would receive approximately 58,200,000 LTWs and the
number of LTWs reserved for issuance to holders of the Company's Preferred
Stock, Seven-Year Warrants, Five-Year Warrants and Stock Options would be
approximately 11,100,000; 10,800,000; 1,500 and 5,500,000, respectively.
5
<PAGE>
The Company will not issue any additional LTWs after the Distribution other
than those reserved for issuance in connection with the exercise or conversion
of Convertible Securities outstanding on the Distribution Record Date as
described above.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE CHARTER AMENDMENTS
DESCRIBED HEREIN AND BELIEVES THAT THE APPROVAL AND ADOPTION OF THE PROPOSAL IS
IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF
THE PROPOSAL.
UNLESS THE PROPOSAL IS APPROVED, THE COMPANY WILL NOT MAKE THE DISTRIBUTION.
COMPLETION OF THE DISTRIBUTION IS A CONDITION TO THE COMPANY'S PROPOSED MERGER
WITH FIRST NATIONWIDE. SEE "RECENT DEVELOPMENTS."
THE LITIGATION
The "Litigation" is the case against the Government in the Claims Court
captioned Glendale Federal Bank, F.S.B. v. United States, No. 90-772C, filed on
August 15, 1990, in which the Bank contends that the Government is in breach of
its contract with the Bank regarding the calculation of regulatory capital and,
separately, that the Government unlawfully took the Bank's property without
just compensation or due process in violation of the U.S. Constitution. The
Bank's claims arose from changes, mandated by FIRREA, with respect to the rules
for computing the Bank's regulatory capital.
In July 1992, the Claims Court found in favor of the Bank's breach of
contract claim, ruling that the Government had breached its express contractual
commitment to permit the Bank to include supervisory goodwill in its regulatory
capital and that the Bank is entitled to seek financial compensation. On
appeal, the U.S. Supreme Court (the "Supreme Court"), by a vote of 7 to 2,
ruled that the Government had breached its contract with the Bank and remanded
the case to the Claims Court for a determination of damages.
The trial to determine damages commenced on February 24, 1997 and a decision
is anticipated during the June or September 1998 quarter. The Bank has
presented evidence on three alternative damages theories in amounts ranging
from $900 million to $1.9 billion. The Government denies that the Bank has
suffered any compensable damages.
Following the Claims Court's entry of judgment, the unsuccessful party in the
case, or both parties, may appeal some or all of the decision to the U.S. Court
of Appeals for the Federal Circuit (the "Federal Circuit"). Following receipt
of the decision of the Federal Circuit, the unsuccessful party may petition for
a rehearing en banc by such Court of Appeals. If such a request for rehearing
is denied, the proceedings in the Federal Circuit are expected to take
approximately one year. Appeal from the final decision of the Federal Circuit
would be to the Supreme Court, although the Supreme Court could determine in
its sole discretion not to hear the case. See "Litigation."
There can be no assurance as to the amount or the timing of receipt of any
damage award should such an award be obtained.
6
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TAX CONSEQUENCES
In general, for federal income tax purposes the receipt of the LTWs is
expected not to result in taxable income to the holders of Common Stock.
Holders of Common Stock should consult their own tax advisors regarding the tax
consequences of the distribution, ownership and exercise of the LTWs. See
"Certain United States Federal Income Tax Consequences."
RISK FACTORS
The LTWs, if distributed, would involve a high degree of risk. Such risks
would include, among others, the risk of either no recovery in the Litigation
or a recovery that is less than the expenses of the Litigation and the LTW
issuance, in which case the LTWs will expire without ever becoming exercisable;
the possible lack of an active trading market for the LTWs; the possibility
that even if an active trading market does develop, the prices at which the
LTWs trade may be highly volatile; possible limitations, due to the litigation
process, on the Company's ability to make public disclosures regarding
potentially material developments in the Litigation; the fact that the LTW
Holders will have no right to control the Litigation; and the fact that the
number of shares of Common Stock for which the LTWs may become exercisable, if
any, will depend upon both the amount of the Adjusted Litigation Recovery as
well as the Adjusted Market Value of the Company's Common Stock on the
Determination Date (as defined herein), neither of which can be predicted at
this time.
RECENT DEVELOPMENTS
On February 5, 1998, the Company and First Nationwide Holdings Inc. ("First
Nationwide"), parent of California Federal Bank FSB, announced that they had
entered into an agreement to merge in a tax-free exchange of shares (the "Cal
Fed Merger"). After giving effect to the Cal Fed Merger, the resulting company,
which will be named California Federal Bank FSB at the operating level and
Golden State Bancorp Inc. at the holding company level, will be California's
largest statewide community bank and fifth-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 the third-largest thrift in the country with assets in excess of
$51 billion and will operate more than 400 branches with $28 billion in
deposits.
The transaction will take the form of a merger of First Nationwide into the
Company, with the Company being the surviving entity (the "Combined Entity").
The Company's stockholders will own 55% to 58% of the Combined Entity. The
terms and conditions of the Cal Fed Merger call for the Company's stockholders
to own 58% of the Combined Entity if the adjusted volume-weighted average
trading price (the "Adjusted Average Price") of the Common Stock during a
period preceding the close of the Cal Fed Merger, but after the Distribution
(the "Pricing Period"), is $32 per share or less, and to own 55% of the
Combined Entity if the Adjusted Average Price is more than $33 per share. For
purposes of determining the Adjusted Average Price, the Adjusted Average Price
will be adjusted downward by the implied market value per share of Common Stock
of the Company's retained interest in the Litigation, as determined by the
volume-weighted average trading price of the LTWs during the Pricing Period.
The remainder of the Combined Entity will be owned by the principal
shareholders of First Nationwide. Following the Cal Fed Merger, the Company is
expected to have approximately 135-145 million shares of Common Stock
outstanding.
Because the Company will survive the Cal Fed Merger, LTWs outstanding
immediately prior to the Cal Fed Merger would be exercisable into common stock
of the Combined Entity should the Triggering Event occur after the Cal Fed
Merger.
The Cal Fed Merger requires regulatory approval and the approval of the
stockholders of both the Company and First Nationwide. A proxy statement with
respect to the approval of the Cal Fed Merger by the Company's stockholders
will be mailed to the holders of the Company's Common Stock during the March or
June 1998 quarter. The consummation of the Cal Fed Merger is also subject to
other closing conditions, which include the approval of the Proposal and the
distribution of the LTWs. The Cal Fed Merger is expected to close late in the
September 1998 quarter.
7
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GENERAL
This Proxy Statement and the enclosed form of proxy are being furnished to
stockholders of the Company in connection with the solicitation of proxies by
the Board of Directors for use at the Special Meeting to be held in the Hoeft
Center Auditorium, 201 West Lexington Drive, Glendale, California 91203 at
10:00 a.m., California time, on March 23, 1998.
At the Special Meeting, the holders of Common Stock will be asked to
consider and vote on the Proposal, which, if approved, would authorize the
Company to amend its Certificate of Incorporation as described herein. If the
Proposal is approved by the stockholders, the Company expects to declare a
distribution of one LTW for each share of Common Stock during the June 1998
quarter. See "The Proposal."
The Board of Directors has selected February 17, 1998 as the record date
(the "Record Date") for the determination of stockholders entitled to notice
of and to vote at the Special Meeting. The only class of stock that will be
entitled to vote at the Special Meeting is the Company's Common Stock, of
which 51,085,174 shares were issued and outstanding at the close of business
on January 30, 1998.
The approval of the Proposal will require the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding on the Record
Date. The holders of Common Stock entitled to vote at the Special Meeting will
have one vote per share on the Proposal and all procedural matters to come
before the Special Meeting. The presence, in person or by proxy, at the
Special Meeting of the holders of a majority of the votes entitled to be cast
at the Special Meeting is necessary to constitute a quorum for the transaction
of business. Abstentions will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum, but as
unvoted for purposes of determining the approval of the Proposal. If a broker
indicates on its proxy that the broker does not have discretionary authority
to vote on the Proposal as to certain shares, those shares will be counted for
general quorum purposes but will not be considered as present and entitled to
vote with respect to the Proposal ("broker non-votes"). Because the vote on
the Proposal requires the approval of a majority of the votes entitled to be
cast by the stockholders of the outstanding shares of Common Stock,
abstentions and broker non-votes will have the same effect as a vote against
the Proposal.
All valid proxies received in response to this solicitation will be voted in
accordance with the instructions indicated thereon by the stockholders giving
such proxies. If no contrary instructions are given, such proxies will be
voted FOR the Proposal and in the discretion of the proxy holders on any other
matters submitted to a vote at the Special Meeting; provided, however, that no
proxy which is voted against the Proposal will be voted in favor of any
proposal to adjourn the Special Meeting in order to solicit additional votes
in favor of the Proposal. Any stockholder has the power to revoke his or her
proxy at any time before it is voted at the Special Meeting by giving written
notice of such revocation to the Secretary of the Company (which notice may be
given by the filing of a duly executed proxy bearing a later date) or by
attending the Special Meeting and voting in person. Attendance at the Special
Meeting will not, in and of itself, constitute revocation of a previously
granted proxy.
A proxy card is enclosed for your use. YOU ARE SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS TO COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE
ACCOMPANYING ENVELOPE, which is postage-paid if mailed in the United States.
The cost of this solicitation will be paid by Golden State. The Company has
retained Corporate Investor Communications, Inc. to assist in the solicitation
of proxies for a fee of $8,500 and reimbursement of certain expenses. To the
extent necessary, proxies may also be solicited by the Company's personnel in
person, by telephone or through other forms of communication. Golden State
personnel who participate in this solicitation will not receive any additional
compensation for such solicitation. The Company will request record holders of
shares of Common Stock beneficially owned by others to forward this Proxy
Statement and related materials to the beneficial owners of such shares and
will reimburse such record holders for their reasonable expenses incurred in
doing so.
The Company's principal office is located at 414 North Central Avenue,
Glendale, California 91203.
The approximate date of mailing of this Proxy Statement is February , 1998.
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THE PROPOSAL
CHARTER AMENDMENTS
The stockholders of the Company are being asked to consider and vote on the
Proposal, which, if approved, would authorize the Company to amend its
Certificate of Incorporation (collectively, the "Charter Amendments") in the
following respects:
1. to increase the total number of authorized shares of Common Stock to
250,000,000 (the "Authorized Share Increase"); and
2. to effect certain amendments to the Certificate of Designations for
the Preferred Stock, as described below (the "Preferred Stock
Amendment").
The Authorized Share Increase is being proposed by the Board of Directors so
that the Company would have sufficient authorized but unissued shares of
Common Stock to permit the exercise in full of all LTWs. Currently, depending
on the disposition of the Litigation and the market price of the Common Stock,
the Company would not necessarily have a sufficient number of shares of Common
Stock authorized and unissued or held in treasury to permit the full exercise
of the LTWs. In the Warrant Agreement (as defined herein), the Company will
covenant and agree that it will use its best efforts to cause to be reserved
and kept available out of its authorized and unissued shares of Common Stock
or any shares of Common Stock held in its treasury such number of shares of
Common Stock as will be sufficient to permit the exercise in full of all
outstanding LTWs. See "The LTWs--Reservation of Shares."
The Preferred Stock Amendment is being proposed by the Board of Directors in
order to clarify the effect that the Distribution would have on the anti-
dilution terms and conditions of the Preferred Stock. The Proposal is intended
to clarify these provisions by amending the Certificate of Designations for
the Preferred Stock to provide that (i) upon conversion of the Preferred Stock
prior to the Triggering Event, the holders would receive the shares of Common
Stock underlying the Preferred Stock, plus a number of LTWs equal to the
number of LTWs such holder would have received had such holder converted such
Preferred Stock immediately prior to the Distribution Record Date and received
LTWs in the Distribution and (ii) upon conversion of the Preferred Stock on or
after the Triggering Event, the holders would receive the number of shares of
Common Stock equal to the number of shares of Common Stock such holders would
have received had such holders (a) converted such Preferred Stock for LTWs and
the shares of Common Stock underlying the Preferred Stock immediately prior to
the Triggering Event and (b) then exercised such LTWs for the additional
shares of Common Stock underlying the LTWs immediately after the Triggering
Event. In addition, upon the occurrence of the Triggering Event, the
conversion price of the Preferred Stock would increase by an amount equal to
the aggregate Exercise Price of the number of LTWs underlying the Preferred
Stock immediately prior to the Triggering Event.
Subject to the approval by the stockholders of the Proposal, the Company
plans to declare a distribution of one LTW for each share of Common Stock
outstanding on the Distribution Record Date, which date is currently expected
to be during the June 1998 quarter. At the time of the Distribution, the
Company will also reserve additional LTWs for future issuance (as described
above and elsewhere herein) to holders of Convertible Securities of the
Company which are outstanding on the Distribution Record Date.
If the Proposal is approved and the LTWs are distributed as currently
expected, the Company, prior to delivering LTWs to its stockholders, would (i)
declare the Distribution and set the Distribution Record Date in order to
determine the holders of Common Stock entitled to receive LTWs, (ii) file an
amendment to its Certificate of Incorporation substantially in the form of
Annex A hereto with the Delaware Secretary of State in order to effect the
Charter Amendments, (iii) file a registration statement with the Securities
and Exchange Commission (the "SEC") in order to register the LTWs under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iv) file a
registration statement with the SEC in order to register shares of Common
Stock underlying the LTWs under the Securities Act and (v) file the necessary
application and list the LTWs.
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IF THE PROPOSAL IS NOT APPROVED BY THE STOCKHOLDERS, THE COMPANY WILL NOT
DECLARE THE DISTRIBUTION AND THE LTWS WILL NOT BE ISSUED.
REASONS FOR THE PROPOSAL
After extensive study by management and outside advisors, the Board of
Directors has determined that the Distribution is in the best interests of the
Company and its stockholders. In order to effect the Distribution, the Board
of Directors, after consultation with the Company's management and outside
advisors, determined that it was necessary to amend certain provisions of the
Company's Certificate of Incorporation before the Distribution could be made.
The Distribution is intended to provide investors with securities reflecting
the value of the Litigation separately from the Company's underlying business.
In arriving at its decision, the Board of Directors considered various aspects
of the Distribution. As part of this process the Board considered reports and
analyses prepared with the advice and assistance of its financial and legal
advisors. Among the principal factors considered by the Board were the
following:
1. A separate security tied to the value of the Litigation, such as the
LTWs, would enable investors to gain a better understanding of the separate
values of the Litigation and the Company and would create a framework for
more focused equity research coverage by the investment community on the
underlying business of the Company; and
2. The Distribution would be tax free to both the Company and the Common
Stockholders of the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE CHARTER AMENDMENTS
DESCRIBED HEREIN AND BELIEVES THAT THE APPROVAL AND ADOPTION OF THE PROPOSAL
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF
THE PROPOSAL.
NO APPRAISAL RIGHTS
Under Delaware law and the Certificate of Incorporation, holders of shares
of Common Stock and Convertible Securities will not have any appraisal rights
in connection with the Proposal.
DISTRIBUTION OF LTWS
RISK FACTORS
General. IF THE PROPOSAL IS APPROVED AND THE LTWS ARE DISTRIBUTED AS
CURRENTLY EXPECTED, THE LTWS RECEIVED BY STOCKHOLDERS WILL INVOLVE A HIGH
DEGREE OF RISK. RECIPIENTS OF THE LTWS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, AS WELL AS ALL THE OTHER INFORMATION SET FORTH HEREIN REGARDING
THE LTWS.
Forward Looking Statements. This Proxy Statement includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. All statements other than statements of
historical facts included in this Proxy Statement may be forward-looking
statements. When used in this Proxy Statement, the words "intend," "estimate"
and "expect" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements speak only as of the date hereof.
The Company undertakes no obligation to update or revise publicly any forward-
looking statements, whether as a
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result of new information, future events or otherwise. Although management
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
be correct. Important factors that could cause actual matters to differ
materially from management's expectations ("Cautionary Statements") are
disclosed in this Proxy Statement, including, without limitation, in
conjunction with the forward-looking statements included in this Proxy
Statement and in the following paragraphs under this caption. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
Amount of Damages. The trial to determine damages commenced on February 24,
1997 and is expected to conclude in the June 1998 quarter, with a decision
anticipated in the June or September 1998 quarter. Due to the possibility of
appeals of the trial court's decision, as well as other post-judgment
procedures, it is currently anticipated that there may be an extended delay
between the issuance of the trial court's judgment and the receipt by the Bank
of any damage award.
The Bank completed presentation of its case in chief on July 21, 1997. The
Bank has presented evidence on three alternative damages theories: (1)
"Expectation Damages", pursuant to which the Bank has presented evidence of
damages in the amount of approximately $1.5 billion; (2) "Restitution",
pursuant to which the Bank has presented evidence that it is entitled to
receive in excess of approximately $1.9 billion; and (3) "Reliance Damages",
pursuant to which the Bank has presented evidence of damages in the amount of
approximately $900 million.
The Government has filed motions with the Claims Court seeking leave to
plead four new affirmative defenses to the Bank's claims. One of these new
defenses asserts that certain testimony by Bank witnesses at the trial is
inconsistent with prior documents filed by the Bank and that these
inconsistencies constitute a fraud against the Government that should result
in forfeiture of the Bank's right to compensation for the Government's breach
of contract. The Government also requested the Claims Court to grant summary
judgment on its fraud claim. On October 2, 1997, the Claims Court granted the
Government leave to file an answer in the Litigation, including the addition
of the four new affirmative defenses.
While Glendale Federal has stated that the Government's motion is unfounded
and without merit and urged the Claims Court not only to deny the motion but
also to levy sanctions against the Government on the grounds that the fraud
claim and related summary judgment motion appear to have been filed either for
their intimidating effect or for the purpose of harassment, delay or
increasing litigation costs, there can be no assurance that the Claims Court
will deny the Government's summary judgment motion, that the Government's
affirmative defenses will fail, that the Bank will obtain a recovery in the
Litigation or that the LTWs will not be worthless.
The Claims Court has deferred action on the Government's summary judgment
motion and on Glendale Federal's motion for sanctions until the conclusion of
the damages trial.
Control of the Litigation. The Bank will retain sole and exclusive control
of the Litigation and will retain 100% of any recovery from the Litigation.
The Bank intends to pursue the Litigation with the same vigor as it has in the
past. The Bank reserves the right, however, to terminate the Litigation in any
manner it deems appropriate to serve the Bank's best interest. The LTW Holders
will not have any rights against the Company or the Bank for any decision
regarding the conduct or disposition of the Litigation, including, without
limitation, any decision to dispose of the Litigation for an amount less than
the amount it has claimed in damages in the ongoing trial in the Claims Court,
without regard to the effect of any such settlement on the value of the LTWs.
Although the Bank currently intends to continue prosecuting the Litigation and
to seek a cash recovery in the amount claimed, there can be no assurance that
the Bank will not make a different determination in the future.
Resolution of the Litigation. The Bank has asserted two principal legal
theories to support its claims in the Litigation against the Government:
first, the Bank maintains that the Government is in breach of a contractual
commitment regarding the computation of the Bank's regulatory capital; and
second, the Bank argues that changes to such computation methods constituted
an unlawful taking of its property in violation of the U.S.
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Constitution. The Supreme Court has held that the Government breached an
express written contract with the Bank and is liable to the Bank for damages
resulting from that breach. Notwithstanding the existence of the final
judgment in favor of the Bank on the liability issues, there can be no
assurance that the Bank will ultimately recover any damages. See "The
Litigation." Neither the Claims Court nor the Supreme Court has considered the
merits of the takings theory in the Litigation, and there can be no assurance
that the Bank could prevail on that theory or that a recovery on such theory
would be different from that under the breach of contract theory.
Availability of Information Regarding Developments in the Litigation. The
Company intends to report any material development regarding the Litigation to
the extent feasible in its reports filed under the Exchange Act. The Company's
ability to disclose details of the Litigation on a regular basis may be
limited, however, by the inherent nature and rules of judicial proceedings,
including, among other things, proceedings and filings that are sealed by the
court, matters involving attorney-client privilege and proceedings that are
conducted on a confidential basis by agreement of the parties, such as
settlement negotiations.
Limited Period for Exercise of the LTWs. No assurance can be given as to
when the Litigation will be resolved and when, if ever, the Bank will receive
a payment in respect of the Litigation. In addition, subject to the procedures
established by the Bank and described herein, the LTW Holders will be entitled
to exercise their LTWs only upon the occurrence of all of the following: (a)
receipt by the Bank of the full Payment, (b) calculation by the Company of the
full amount of the Adjusted Litigation Recovery and (c) receipt by the Company
of all regulatory approvals necessary to issue the shares of Common Stock to
be issued upon the exercise of the LTWs, including the effectiveness of a
registration statement relating to the issuance of such Common Stock under the
Securities Act. The occurrence of the events described in clauses (a) through
(c) is referred to herein as the "Triggering Event." If the Triggering Event
occurs, the Company will publicly announce (not more than 15 calendar days
after the occurrence thereof), by means of a press release and by written
notice mailed to each record holder of LTWs, (i) that the Triggering Event has
occurred, (ii) the aggregate number of shares for which the LTWs are
exercisable, (iii) the number of shares of Common Stock for which one LTW is
exercisable, (iv) the Exercise Price per LTW, (v) the manner in which the LTWs
are exercisable and (vi) the date on which the LTWs will no longer be
exercisable. The LTWs will become exercisable for a period of 60 days after
the date on which the Exercise Notice is first sent to LTW Holders and will
then expire. Any LTWs not exercised during such period will expire and be of
no further value.
Lack of Market for the LTWs; Possible Volatility in Trading Price. There is
no current market for the LTWs. The Company intends to apply for listing of
the LTWs on a securities exchange or an automated quotation system, but there
can be no assurance, however, that the LTWs will be listed or, if so listed,
that an active market will develop or be sustained. If such a market were to
develop, there can be no assurance as to the prices at which the LTWs will
trade or the volatility of such prices. The price of the LTWs is expected to
depend primarily on a number of factors relating to the Litigation, including,
without limitation, the nature of court decisions and opinions in the
Litigation or in other similar proceedings, and speculation about the outcome
of the Litigation, rather than by the Company's future results of operations
and other factors that typically affect the price of traditional equity
securities. As a result, while no prediction can be made as to the trading
prices for the LTWs, such trading prices may experience significant volatility
that is unrelated to the Company's operating results and prospects.
Effect of the Distribution on the Trading Prices of the Common Stock. After
the Distribution, the trading prices of the Common Stock are expected to
depend primarily on the Company's results of operations and other factors that
typically affect the price of traditional equity securities, rather than
factors relating to the Litigation. However, there can be no assurance that
the trading prices of the Common Stock will not be affected by factors
relating to the Litigation and to the potential issuances of significant
amounts of Common Stock upon exercise of the LTWs, particularly as the
Litigation approaches final resolution. Accordingly, while the LTWs are
outstanding the trading prices of the Common Stock may also experience
significant volatility that is unrelated to the Company's operating results
and prospects.
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<PAGE>
Limitations on Ownership. Certain corporate or institutional holders of the
Common Stock may be restricted by charter or by policy from holding securities
such as the LTWs. All such holders of Common Stock should confirm that they
are not prohibited from holding the LTWs.
EFFECT OF THE DISTRIBUTION ON THE CONVERTIBLE SECURITIES
If the stockholders approve the Proposal, the Company will take appropriate
steps prior to the Distribution to provide that (i) upon exercise or
conversion of the Company's Convertible Securities prior to the Triggering
Event, the holders thereof would receive the shares of Common Stock underlying
the Convertible Securities, plus a number of LTWs equal to the number of LTWs
such holders would have received had such holders exercised or converted such
Convertible Securities immediately prior to the Distribution Record Date and
received LTWs in the Distribution and (ii) upon the exercise or conversion of
the Convertible Securities on or after the Triggering Event, the holders would
receive the number of shares of Common Stock equal to the number of shares of
Common Stock such holders would have received had such holders (a) exercised
or converted such Convertible Securities for LTWs and the shares of Common
Stock underlying the Convertible Securities immediately prior to the
Triggering Event and (b) then exercised such LTWs for the additional shares of
Common Stock underlying the LTWs immediately after the Triggering Event. In
addition, upon the occurrence of the Triggering Event, the conversion or
exercise price of the Convertible Securities would increase by an amount equal
to the aggregate Exercise Price of the number of LTWs underlying the
Convertible Securities immediately prior to the Triggering Event. As a
consequence of the anti-dilution provision described in clause (ii) above, the
Convertible Securities holders will not be required to exercise or convert
their Convertible Securities during the period that the LTWs are exercisable
in order to obtain the benefit of the LTWs underlying their Convertible
Securities.
Based on the number of shares of Common Stock, Preferred Stock, Seven-Year
Warrants, Five-Year Warrants and Stock Options expected to be outstanding on
the Distribution Record Date (taking into account the currently expected
issuances of Common Stock and Stock Options in connection with the Merger), if
the Distribution occurred as currently anticipated, the number of LTWs that
would be issued or reserved for issuance to the Company's security holders on
a fully distributed basis would be approximately 85,700,000. Of this total,
the Common Stockholders would receive approximately 58,200,000 LTWs, and the
number of LTWs reserved for issuance to holders of the Company's Preferred
Stock, Seven-Year Warrants, Five-Year Warrants and Stock Options would be
approximately 11,100,000; 10,800,000; 1,500 and 5,500,000, respectively.
The Company will not issue any additional LTWs after the Distribution other
than those reserved for issuance in connection with the exercise or conversion
of Convertible Securities outstanding as of the Distribution Record Date as
described above.
ACCOUNTING TREATMENT OF THE DISTRIBUTION
It is anticipated that the Distribution will be accounted for in a manner
similar to a stock split. Under this method of accounting, there will be no
impact to the total amount of the Company's stockholders' equity.
ERISA CONSIDERATIONS
Section 407 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), limits the extent to which the Company's pension plans (the
"Company Plans") may hold "employer securities" which are not "qualifying
employer securities". "Qualifying employer securities" for purposes of Section
407 are either stock or marketable obligations, which in either case meet the
requirements set forth in ERISA. To the extent the LTWs would not constitute
"qualifying employer securities", holding the LTWs could give rise to
violations of Sections 406 and 407 of ERISA, which could result in the
imposition of excise taxes or other liabilities. Consequently, unless the
Company's Plans obtain an exemption from the requirements of ERISA Section 407
from the U.S. Department of Labor, such plans will have to sell or dispose of
the LTWs shortly after issuance.
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THE LITIGATION
THE LITIGATION INVOLVES FACTUAL AND LEGAL ISSUES THAT ARE HIGHLY COMPLEX AND
CONTESTED. THEREFORE, THE FOLLOWING SUMMARY OF MATERIAL EVENTS DOES NOT
PURPORT TO BE A FULL OR COMPLETE DESCRIPTION OF THOSE ISSUES PRESENTED, OR THE
COURT OPINIONS RENDERED, IN THE LITIGATION; AND THE DESCRIPTION IS IN ALL
RESPECTS QUALIFIED BY REFERENCE TO THE RECORDS OF PROCEEDINGS BEFORE THE
COURTS INVOLVED IN THE LITIGATION, SUCH COURT OPINIONS AND THE RELEVANT LEGAL
AUTHORITIES. As of January 31, 1998, the record of proceedings before the
Claims Court consisted of thousands of pages of procedural filings, over
18,000 pages of testimony, and a comparably large (but uncounted) number of
pages of evidentiary exhibits. The record of proceedings before the Claims
Court may be examined at the Office of the Clerk of the Court located at 717
Madison Place, N.W. in Washington, D.C.
INTRODUCTION
On August 15, 1990, the Bank commenced the Litigation, captioned Glendale
Federal Bank, F.S.B. v. United States, No. 90-772C, against the Government in
the Claims Court contending that the Government (i) was in breach of contract
with the Bank and (ii) had unlawfully taken the Bank's property without just
compensation or due process in violation of the U.S. Constitution. The Bank's
claims arose from the contract entered into with the Government in connection
with the Bank's acquisition of a failing Florida thrift in 1981. Under the
contract, the Bank was authorized to include in its regulatory capital the
goodwill recorded under the purchase method of accounting for that acquisition
and to amortize that goodwill over a period of forty years. Following the
adoption of FIRREA, the Bank was required to deduct this goodwill from its
regulatory capital over a five-year phase-out period.
PROCEEDINGS ESTABLISHING THE GOVERNMENT'S LIABILITY
The Claims Court initially bifurcated the proceedings in the Litigation,
electing to decide liability issues first and reserving any consideration of
damages until liability was decided. In July 1992 the Claims Court found in
favor of the Bank's position on liability, ruling that the Government had
entered into a legally binding contractual commitment to permit the Bank to
include supervisory goodwill in its regulatory capital and had breached the
contract so that the Bank is entitled to compensation. The Claims Court
reserved ruling on the Bank's constitutional claims based upon a principle
that such claims should not be addressed if complete relief is otherwise
available to the claimant. Those constitutional claims remain pending and
unresolved in the Claims Court. However, the constitutional claims may be
rendered moot by the evidentiary proceedings on damages that are currently
underway.
The Government appealed the July 1992 Claims Court decision on liability. On
May 25, 1993, a three-judge panel of the Federal Circuit reversed that
decision, ruling that the Government was not liable for breach of contract,
and remanded the case for trial of the Bank's constitutional and other claims.
On August 18, 1993, the Federal Circuit granted the Bank's request for
rehearing en banc and vacated the panel decision. On August 30, 1995, the
Federal Circuit, by a 9 to 2 decision, affirmed the liability decision of the
Claims Court in favor of the Bank. The Government subsequently appealed this
decision to the Supreme Court. On July 1, 1996, the Supreme Court affirmed the
Claims Court decision, with 7 of 9 Justices concurring that the Government had
breached its contract with the Bank, and remanded the case to the Claims Court
for a determination of damages.
DAMAGES TRIAL
The trial to determine the amount of compensation owed the Bank by the
Government as a consequence of its breach of contract commenced in the Claims
Court on February 24, 1997, and is continuing. On the basis of pretrial
motions of the parties argued in December 1996, the Claims Court granted
permission for the Bank to present evidence on three alternative damage
theories: (1) Expectation Damages, (2) Restitution, and (3) Reliance Damages.
It is impractical to provide a full description of the elements of damage
recoverable under each of those alternative damage theories. However, the
following descriptions are provided for purposes of communicating a basic
understanding of the Bank's legal theories.
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Expectation damages are generally intended to place the injured party in as
good a position as it would have been in if the contract had been performed.
Such damages may include the loss of any monetary benefits that the injured
party would have received in the absence of the breach plus any other losses
caused by the breach, less any costs or losses avoided by the injured party as
a direct result of the breach.
Restitution generally involves restoration to the injured party of any
benefits conferred by it on the breaching party. The injured party's
restitution interest is ordinarily measured by the reasonable value of the
benefits conferred by its performance of the contract on the breaching party,
reduced by any benefits received by the injured party through the breaching
party's partial performance.
Reliance damages are generally intended to restore the injured party to the
position it would have been in if the contract had not been made. Reliance
damages are generally measured by any expenditures made by the injured party
in the course of performance of the contract or as a result of entering into
the contract.
Contract damages are generally limited to those which are foreseeable as a
probable result of the breach, and require proof of the fact of damage with
reasonable certainty. The Bank has the burden of proving the amounts of its
damages, or the value of its performance as a basis for restitution, by a
preponderance of the evidence.
A federal statute prohibits the award of interest against the United States
in judgments of the Claims Court unless a contract or statute expressly
provides for payment of interest. The contract between the Bank and the
Government does not provide for payment of interest by the Government in the
event of breach, and the Bank is not aware of any statute which would provide
for the award of interest on its claim against the United States. In the
absence of such a contract or statute, interest is not recoverable, either for
the period from the date of the breach through the date of entry of judgment
by the Claims Court or upon a judgment of the Claims Court pending appeal. In
the event that the Federal Circuit were to affirm a judgment by the Claims
Court, the Bank could receive interest at a statutorily specified rate on the
judgment from the time of the Federal Circuit decision through any subsequent
appeals to the date of payment.
BANK CASE
In support of its claims, the Bank has submitted evidence in support of its
principal contentions, which are summarized as follows. Following the adoption
of FIRREA in 1989 and the resulting reductions of its regulatory capital due
to the phased elimination of the contractual goodwill from the Florida
acquisition, the Bank faced imminent regulatory seizure by the Office of
Thrift Supervision (the "OTS") in 1993. The Bank claims that in the attempt to
remain in compliance with applicable regulatory capital requirements and avoid
such seizure, it was forced to shrink from over $25 billion in total assets at
the time of adoption of FIRREA to less than $15 billion in total assets in
1996. The Bank also claims that, due to the regulatory capital compliance
problems caused by the Government's breach of contract and the resulting
regulatory sanctions imposed by the OTS on the Bank, the Bank experienced a
loss of public confidence in its financial stability that caused a significant
increase in its cost of funds. Although the Bank successfully completed a
major recapitalization in 1993, including raising $451 million of new equity
capital, the Bank claims that it was also ultimately forced to sell its
Florida operations and a wholly owned subsidiary bank located in the state of
Washington because of regulatory capital compliance concerns.
Under the Bank's expectation damages claim, the Bank has presented evidence
at trial that the Government's breach had two principal adverse effects on the
Bank. First, as noted above, the breach forced the Bank to shrink its asset
size by more than $10 billion in an effort to maintain capital compliance. The
Bank presented evidence that its forced asset shrinkage deprived the Bank of
approximately $1.1 billion of past and future net earnings. Second, in
addition to forcing the Bank to shrink significantly, the Government's breach
substantially increased the costs of operating the smaller bank that remained.
These increased operating costs include approximately $335 million in
additional interest costs paid to depositors and lenders for funds,
approximately $11.5 million in increased deposit insurance premiums paid to
the FDIC, approximately $4.7 million in increased examination assessments paid
to the OTS, and approximately $50 million in other increased costs caused by
the breach. The Bank's claims for expectation damages total approximately $1.5
billion.
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Under its restitution claim, the Bank asserts that it is entitled to an
amount in excess of $1.9 billion. The Bank has presented evidence that the
Government has received benefits in that amount from its contract with the
Bank which should be disgorged as a consequence of the breach of contract. The
first of the benefits is based in part upon Government statements made at the
time of the Bank's 1981 acquisition of the failing Florida thrift that the
acquisition had saved the Government an estimated $750 million, apparently
based on the Government's estimate of the cost of liquidating the Florida
thrift, if that thrift had been forced into receivership. The Bank's
calculations after the contract was entered put the estimated savings at
approximately $800 million. The Bank claims that, having avoided those
expenditures, the Government subsequently benefited by over $1 billion in
insurance fund earnings on the amount saved. The Bank claims that the
Government has also benefited by receiving approximately $18 million in
payments from the Bank under certain provisions of the contract and by
receiving approximately $16 million in increased deposit insurance premiums
and OTS assessments. Offsetting benefits received by the Bank from the Florida
acquisition and additional costs claimed by the Bank as a result of the breach
make up the remaining elements of the Bank's $1.9 billion restitution claim.
Under the Bank's reliance claim, the Bank has presented evidence at trial
that its net expenditures made in reliance on the contract were comprised of:
(a) the Bank's assumption of net liabilities from the Florida thrift of more
than $734 million; (b) the Bank's approximately $18 million in interest rate
provision payments under the contract; (c) the approximately $335 million
increase in the Bank's costs of funds caused by the breach; (d) the
approximately $16 million in increased deposit insurance premiums and OTS
assessments caused by the breach; and (e) other costs incurred because of the
contract. When the Bank's gains under the contract are offset against its
losses as contemplated by prevailing legal principles, the Bank's claims for
reliance damages totals approximately $863 million.
The Bank completed the presentation of its case in chief on July 21, 1997.
At a status conference conducted in the Claims Court on July 29, 1997, the
Court provided the parties with its impressions of the Bank's case while
carefully stressing that those impressions were based solely on having heard
the Bank's evidence and without benefit of hearing the Government's evidence.
With that important limitation, the Claims Court nonetheless characterized the
Bank's case as "exceedingly strong" and "convincing," and stated that it
would, on the strength of the Bank's case, "grant . . . the recovery that [the
Bank is] seeking, essentially the same amounts [it is] seeking."
GOVERNMENT CASE
The Government began the presentation of its case on September 2, 1997 and
had not completed its presentation of its case as of January 31, 1998.
Therefore, this is a summary of what the Bank perceives the Government's
principal contentions to be based upon the Government's pretrial memoranda,
opening arguments, the partially completed testimony of its principal economic
expert witness, and the testimony of other witnesses that have been called by
the Government as of January 31, 1998.
The Government contends and has presented evidence to support the position
that the Bank was not damaged by the breach of the contract. Rather, the
Government has presented evidence that, as a large, well capitalized
institution, the Bank remained in capital compliance well after FIRREA and
benefited from the elimination of supervisory goodwill because that eliminated
poorly capitalized savings associations and thus reduced competition.
In opposition to the Bank's claims for expectation damages, the Government
has presented evidence to show that if, at the time of the breach, the Bank
had possessed significant opportunities for earning profits, then the Bank
could have avoided the loss of those profitable opportunities by replacing the
supervisory goodwill with equity capital. The Government has contended that
the only circumstances in which a thrift can both have credible opportunities
for profits and be unable to raise capital to pursue those opportunities is if
there has been a failure of the capital markets. The Government has presented
evidence to show that the capital markets had not failed following FIRREA. As
additional defenses against expectation damages, the Government has contended
that the lost profits claimed by the Bank are speculative, remote and
indirect; and, therefore, not allowable. Furthermore, the Government contends
that it was simply unforeseeable at the time of the agreement that a breach
which restricted the use of supervisory goodwill could cause the Bank to lose
profits.
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The Government has also argued that the breach not only did not cause the
Bank to forego any profitable opportunities, but that the breach benefited the
Bank in prompting it to exit from high risk lending activities in which it was
engaged prior to the breach, and which later resulted in substantial losses.
The Government contends that the Bank had planned to expand the high risk
lending activities even after the breach, and that the breach therefore caused
the Bank to avoid additional high risk lending losses. The Government further
contends that the Bank was forced by the breach to concentrate its investments
in low risk-weighted mortgage-backed securities which, due to a favorable
interest rate environment between 1990 and 1996, proved to be profitable for
the Bank. The Government has further argued and presented evidence to support
the position that the principal assumption underlying the Bank's claim for
past and future lost profits, i.e. that the Bank would have earned a pre-tax
return on the foregone assets ("ROA") of at least 1.1%, is invalid because,
among other things, (1) it implies a degree of interest rate risk that would
have been unacceptable to the Bank's management and Board of Directors and to
the OTS; (2) the Bank would not have been able to acquire the amount of assets
with the yield and credit characteristics necessary to produce a 1.1% pre-tax
ROA; (3) the strategy implied by the Bank's lost profits claim is, at least
for some years, inconsistent with the strategy the Bank in fact pursued during
such years; (4) the Bank's calculation of the 1.1% pre-tax ROA erroneously
assumes that retail deposits are cheaper than wholesale borrowings, which is
often not true on a marginal basis (which the Government contends is the
appropriate basis of comparison for damages purposes); and (5) the use of an
expected pre-tax ROA of 1.1% is not supported by the Bank's prior operating
history. The Government has presented evidence at trial that if the Government
is liable for any damages at all, it is not for lost profits (because no
profits were lost). Rather, any award of damages should be limited to
transaction costs associated with the 1993 recapitalization of the Bank, and
additional costs of funds, if any, caused by being out of regulatory capital
compliance prior to raising replacement capital. Finally, the Government has
argued that any damage award should not exceed the value of the total
supervisory goodwill on the Bank's balance sheet at the time of FIRREA as the
loss of that supervisory goodwill could not have injured the Bank in an amount
greater than the amount of that goodwill, which was approximately $578 million
as of December 31, 1989 according to a stipulation of the parties.
The Government has further argued that no amount should be paid to the Bank
based on its restitution and reliance claims. The Government asserts that the
Bank was insolvent on a market value basis and, thus, had little to risk and
little to contribute when it acquired the Florida thrift, and that the parties
utilized supervisory goodwill as a bridge to assist the merged entity until
interest rates fell. The Government has also presented evidence that the
Bank's acquisition of the Florida thrift did not save the Government the
approximately $800 million asserted by the Bank because that savings assumes
the liquidation of the Florida thrift and the Government would not have
followed that course of action. Instead, the Government asserts, it would have
resolved the imminent failure of the Florida thrift through a substantially
less expensive means, such as by the use of income capital certificates or
placing the Florida thrift in a holding status until interest rates fell.
The Government has further asserted that when interest rates did in fact
fall after the merger, the assets acquired by the Bank increased significantly
in value and thus the Bank profited substantially from the transaction. In
addition, the Government asserts the Bank obtained substantial tax benefits
from the acquisition of the Florida thrift, and received a substantial premium
from the sale of both the Florida franchise and the Bank's Washington
subsidiary. The Government claims that, as a result of these and other
benefits, the Bank profited substantially from the merger, and therefore, is
not entitled to restitution and has no reliance damages.
MOTION FOR JUDGMENT UPON PARTIAL FINDINGS
After the conclusion of the Bank's presentation of its case on July 21,
1997, the Government filed a Motion for Judgment upon Partial Findings,
seeking judgment in favor of the Government as a matter of law. The motion's
contentions are summarized as follows:
1. While the merger involved little or no actual cost to the Bank, it
provided the Bank with certain and immediate benefits including (i) the
generation of accounting income that increased the Bank's ability to
withstand a period of high interest rates, (ii) the production of
substantial tax advantages, (iii) access to an attractive market, and (iv)
the franchise value of the acquired Florida thrift.
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2. Since the Bank paid nothing and risked nothing, and since it was
insolvent on a mark-to-market value basis at the time of the Florida
acquisition, returning the Bank to the status quo ante can hardly cost $2
billion.
3. Following the adoption of FIRREA, the Bank's own business decisions,
not the Government's actions, caused the Bank to experience a negative or
otherwise weak return on assets throughout much of the 1990s.
4. The Bank claims that it would have purchased securities on the
wholesale market, funding those securities with borrowed funds and hoping
that the interest generated by the securities would exceed the cost of such
borrowing. As the profits or losses to be made depend solely on whether the
interest rates paid on the borrowed funds turn out to be lower or higher
than the interest received from the purchased security, such earnings
projections, particularly running far out into the future, are speculative
and uncertain.
5. The Bank claims that, even when the Bank finally raised capital to
replace the phased-out goodwill, that replacement does not limit its
damages. Indeed, the Bank claims that the Government is liable for lost
profits over a period of 32 years no matter how much capital the Bank
actually raises in the meantime. Therefore, the Court should conclude that
the Bank's damages claims are unsupportable as a matter of law.
The Motion for Judgment upon Partial Findings was denied by the Claims Court
on October 2, 1997. Such action is not a ruling on the merits of the
Government's contentions, but rather it reflects an exercise of the Court's
discretion to defer any action with respect to such proposed findings until
the conclusion of the damages trial.
PENDING MOTIONS
The Government has also filed a motion for summary judgment based upon a
special plea in fraud. In support of that motion, the Government contends that
certain affidavits of the Bank's management filed in 1991 and 1993 and the
1993 Statement of Remedy Claims filed by the Bank are inconsistent with trial
testimony presented during the Bank's case in chief in their respective
explanations of certain of management's decisions during the post-breach
period. The Government's argument is that the respective documents and
testimony were all submitted in support of the Bank's claim against the United
States and, because of the inconsistencies, they cannot be all true. The
Government motion contends that these circumstances constitute fraud in that
the Bank has submitted false information in support of a claim against the
United States and that, under the provisions of an applicable federal statute,
the Bank has forfeited its claims.
The Bank has opposed the Government's motion contending that there is no
evidence of intentional misrepresentation; therefore, that the central
proposition of the Government that the cited inconsistencies constitute fraud
is frivolous. The Government extensively cross-examined the Bank's witnesses
regarding these inconsistencies and the Court, in response to a direct inquiry
from Government counsel during a July 29 status conference, stated that "those
things were credibly explained to a high degree. The cross-examination did
really no damage to the credibility of the witnesses." In view of these facts,
in addition to its opposition to the Government's motion, the Bank filed a
motion for Rule 11 sanctions against the Government. Rule 11 sanctions can be
imposed for conduct which has an "improper purpose, such as to harass or to
cause unnecessary delay or needless increase in the cost of litigation." The
Court has deferred consideration of both the Government's motion for summary
judgment and the Bank's motion for Rule 11 sanctions until after the
conclusion of the trial.
ANTICIPATED TIMING
It is anticipated that the evidentiary phase of the damages trial will
conclude during the June 1998 quarter. Assuming that the trial concludes in
that quarter, post-trial briefs would likely be filed and closing arguments
conducted during the June or September 1998 quarter. A decision by the Claims
Court is expected thereafter. Following the Claims Court's entry of judgment,
the unsuccessful party in the case, or both parties, may appeal some or all of
the decision to the Federal Circuit. Following receipt of the decision of the
Federal Circuit, the
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unsuccessful party may petition for a rehearing en banc by such Court of
Appeals. Assuming such a request for rehearing is denied, any proceedings in
the Federal Circuit would be expected to take approximately one year (although
there can be no assurance as to such timing). Appeal from the final decision
of the Federal Circuit lies in the Supreme Court, although such Court could
determine in its sole discretion not to hear the case.
There can be no assurance as to the amount or the timing of receipt of any
damage award in the event such award is made in the Bank's favor.
PROPOSED SETTLEMENT
On November 20, 1997, the Bank offered to settle the Litigation for $1.5
billion, and committed to investing an amount equal to such settlement
proceeds in loans and other investments for the benefit of low- and moderate-
income and minority communities in the Bank's service area. The settlement
offer expired on January 30, 1998 without having been accepted by the
Government. In the event that any settlement were agreed to by the Bank and
the Government, prior to the time the distribution of the LTWs is declared by
the Board of Directors, the Bank would not proceed with the declaration of a
distribution of LTWs.
OWNERSHIP OF THE CLAIM; MANAGEMENT OF THE LITIGATION; USE OF PROCEEDS
The Bank's claims against the Government that are the basis for the
Litigation are, and will remain, an asset of the Bank. Federal law prohibits
the assignment or transfer of claims against the Government without the
Government's consent except under limited circumstances not applicable to the
claims involved in the Litigation. Accordingly, the creation and distribution
of the LTW's will not result in the ownership, direct or indirect, by holders
of LTWs of any interest in the Bank's claims against the Government or the
Litigation. Holders of LTWs will own only the right to acquire, for the
Exercise Price, shares of the Company's Common Stock having an Adjusted Market
Value equal to the Adjusted Litigation Recovery.
Because ownership of the claims against the Government will remain with the
Bank, the Bank will have the sole and exclusive right to manage the Litigation
and to resolve the claims involved therein in its sole discretion. Holders of
LTWs will have no right or interest in directing any decision with respect to
the conduct of the Litigation.
The proceeds, if any, received by the Bank in resolution or settlement of
the Litigation will also be owned by the Bank, which will have the sole and
exclusive right to determine how such proceeds will be employed. Such uses
could include, but are not limited to, retention in the Bank or distribution
to the Company to fund the ongoing business activities of the Bank or the
Company, to fund acquisition activities of the Bank or the Company, to fund
the repurchase of outstanding securities of the Company, or to fund a special
cash dividend or distribution to security holders of the Company. To the
extent holders of LTWs exercise their LTWs following the Bank's receipt of
such proceeds, their interest in such proceeds will be limited to their
interests as holders of the Common Stock of the Company. Holders of LTWs will
have no other interest in Litigation proceeds.
LEGAL EXPENSES
Legal expenses related to the Litigation are substantial. During the period
from the commencement of the Litigation to December 31, 1997, the Bank has
incurred legal expenses in the amount of approximately $38.4 million. The Bank
expects to incur legal expenses of up to approximately $6 million pre-tax per
quarter for the duration of the damages trial. Costs will be incurred during
any appeal process; however, they are expected to be at a significantly lower
rate per quarter. Under the terms of the LTWs, the amount of the Bank's
aggregate expenses incurred in prosecuting the Litigation would be deducted
from the amount of proceeds prior to determining the amount of Common Stock
distributable upon exercise of the LTWs.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett, special United States federal
income tax counsel to the Company, the following summary addresses the
material United States federal income tax consequences of the distribution,
ownership and exercise of the LTWs. This discussion is intended only as a
descriptive summary and does not address any special United States tax
consequences that may be applicable to holders that are subject to special
treatment under the Internal Revenue Code of 1986, as amended, such as foreign
holders, dealers in securities, financial institutions, life insurance
companies or persons holding Common Stock as part of a hedging or conversion
transaction or a straddle. In addition, this discussion does not address the
United States federal income tax consequences to holders who may receive
Common Stock pursuant to the Merger between a subsidiary of the Company and
CENFED or the effect of the Cal Fed Merger. Such holders should consult the
proxy statements that will be distributed in connection with the CENFED Merger
and the Cal Fed Merger.
In general, for federal income tax purposes (1) the receipt of the LTWs will
not result in taxable income to the holders of Common Stock; (2) if the fair
market value of the LTWs is 15% or more of the value of the Common Stock, the
tax basis of a holder's Common Stock held on the date of the distribution of
the LTWs will be allocated between the LTWs and such Common Stock based on the
relative fair market values of the LTWs and the Common Stock; (3) the holding
period of the LTWs will include the holding period during which the holders
held the Common Stock upon which the LTWs were distributed; (4) holders will
recognize capital gain or loss on the sale or exchange of the LTWs; (5) upon
exercise of the LTWs, holders will not recognize gain or loss upon the receipt
of Common Stock; (6) upon exercise of the LTWs, holders will recognize taxable
capital gain or loss equal to the difference between the cash received in lieu
of a fractional share and any tax basis allocable to the fractional share; (7)
the basis in the Common Stock received upon exercise of the LTWs will include
the amount paid for such Common Stock plus the basis in the LTWs exercised;
and (8) the holding period of the Common Stock received on exercise of the
LTWs will begin on the date upon which such LTWs are exercised.
There is no authority that specifically defines the meaning of a "right to
acquire stock" or that bears directly on the characterization of rights with
terms that are identical to the LTWs or the circumstances under which the LTWs
are issued. The foregoing summary of the federal income tax consequences is
based on the treatment of the LTWs as rights to acquire stock within the
meaning of Section 305 of the Internal Revenue Code of 1986, as amended. It is
possible, therefore, that the Internal Revenue Service (the "Service") could
recharacterize the LTWs or the distribution thereof. The Service could assert,
for example, that the LTWs represent stock of the Company instead of the right
to acquire such Common Stock. If the LTWs were characterized as stock of the
Company, the receipt of such LTWs would not result in taxable income to the
holders. However, if the LTWs were treated as stock of the Company, upon
exercise of such LTWs, the holding period of the common stock received would
include the period that the holder held the LTWs. Moreover, the Company
believes that full adjustments have been made for the holders of the
Convertible Securities to take into account the distribution of the LTWs, as
required under Section 305, and to prevent an increase in the proportionate
interest of the holders of Common Stock. However, if a full adjustment has not
been made, such an increase in the proportionate interests of the holders of
Common Stock could be treated as a distribution to such holders, taxable as
ordinary income to the extent of the Company's current and accumulated
earnings and profits.
FIVE-YEAR WARRANTS AND SEVEN-YEAR WARRANTS
As a result of the distribution of the LTWs, holders of both the Five-Year
Warrants and the Seven-Year Warrants will be entitled to acquire Common Stock
of the Company and LTWs prior to the occurrence of a Triggering Event (or
Common Stock of the Company after the occurrence of a Triggering Event), as
discussed in "Distribution of LTWs--Effect of the Distribution on the
Convertible Securities." Upon the exercise of the Five-Year Warrants and
Seven-Year Warrants for Common Stock and LTWs, the basis and purchase price
payable would be allocated among the Common Stock and the LTWs received based
on their relative fair market values.
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PREFERRED STOCK
As discussed in "Distribution of LTWs--Effect of the Distribution on the
Convertible Securities," the Proposal would, if adopted, amend the terms of
the Preferred Stock to entitle the holders of the Preferred Stock to the same
rights in respect of the Distribution as the Five-Year Warrants and Seven-Year
Warrants. Under Treasury regulations that are effective March 9, 1998, the
conversion of the Preferred Stock into Common Stock and LTWs would not be
taxable to the holders of the Preferred Stock and each holder's basis in the
Preferred Stock converted would be allocated among the Common Stock and LTWs
received based on their respective fair market values.
STOCK OPTIONS
As a result of the distribution of the LTWs, holders of Stock Options will
be entitled to acquire Common Stock of the Company and LTWs prior to the
occurrence of a Triggering Event (or Common Stock of the Company after the
occurrence of a Triggering Event), as discussed in "Distribution of LTWs--
Effect of the Distribution on the Convertible Securities." As Stock Option
holders are generally not taxed until exercise of their Stock Options, the
adjustment of such options as described herein will not result in immediate
taxation. Upon exercise of the Stock Options, however, the holders thereof
will recognize ordinary income equal to the excess of (a) the fair market
value of the Common Stock and LTWs received upon exercise of the Stock Option
over (b) the exercise price of such option.
THE FOREGOING IS A GENERAL DESCRIPTION OF CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF THE LTWS BY THE COMPANY.
HOLDERS OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FEDERAL INCOME TAX CONSEQUENCES OF THE RECEIPT, DISPOSITION AND EXERCISE OF
THE LTWS IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES
ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
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DESCRIPTION OF LTWS
The LTWs will be issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C.,
as warrant agent (the "Warrant Agent"). The following summary of certain
provisions of the Warrant Agreement and the LTWs does not purport to be
complete and is qualified in its entirety by reference to the Warrant
Agreement and the LTWs, including the definitions therein of certain terms.
GENERAL
The LTWs, in the aggregate, will, upon exercise, entitle the LTW Holders to
purchase shares of Common Stock (the "Warrant Shares") with an Adjusted Market
Value (as defined herein) equal to the Adjusted Litigation Recovery, if any.
Each LTW will be exercisable for the number of shares of Common Stock having
an Adjusted Market Value equal to the Adjusted Litigation Recovery divided by
the number of LTWs issued or reserved for issuance as of the Distribution
Record Date, currently estimated to be approximately 85,700,000, at an
exercise price per LTW equal to the number of whole shares of Common Stock
into which the LTW is then exercisable times $1.00 (the "Exercise Price").
Unless exercised, the LTWs will automatically expire on the date, which is not
subject to extension by the Company, that is the earlier of (a) 60 days after
the date on which the Exercise Notice is first sent to LTW Holders or (b) the
giving of notice by the Company to the Warrant Agent that the Litigation has
been disposed of in a manner such that no shares of Common Stock will be
issuable under the terms of the LTWs (the "Expiration Date"). The Warrant
Shares will be registered under the Securities Act.
To determine the number of Warrant Shares that an LTW would be exercisable
for and the value of such LTW, an LTW holder can apply the following formula:
ALR = Adjusted Litigation Recovery
AMV = the Adjusted Market Value of a share of Common Stock
the number of LTWs issued or reserved for issuance on the
ALTWs = Distribution Record Date
WS = the number of Warrant Shares
Number of Warrant Shares per LTW = ALR x 1
--- -----
AMV ALTWs
The value of one LTW = (WS x (AMV + $1.00)) - (WS x $1.00)
For example, if the Adjusted Market Value of the Common Stock on the
occurrence of the Triggering Event were $30.00, the number of LTWs issued or
reserved for issuance on the Distribution Record Date were 85,700,000 and the
Adjusted Litigation Recovery were $250 million, then the number of Warrant
Shares issuable upon exercise of each LTW would be 0.0972 and the value per
LTW would be $2.916. If, in the same example, the Adjusted Litigation Recovery
were $500 million, then the number of Warrant Shares issuable upon exercise of
each LTW would be 0.1945 and the value per LTW would be $5.8343, and if the
Adjusted Litigation Recovery were $1.0 billion, then the number of Warrant
Shares issuable upon exercise of each LTW would be 0.3889 and the value per
LTW would be $11.6669. However, if the Adjusted Litigation Recovery were zero,
the LTWs would be worthless.
The holders of the LTWs will have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive dividends or
other distributions on the Common Stock prior to the exercise of the LTWs. The
holders of the LTWs will not be entitled to share in the assets of the Company
in the event of the liquidation, dissolution or winding up of the Company's
affairs.
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ADJUSTED LITIGATION RECOVERY
The "Adjusted Litigation Recovery" will equal 85% of the amount obtained
from the following equation: (a) the aggregate amount (the "Payment") of any
cash payment and the Fair Market Value of any property actually received by
the Bank pursuant to a final, nonappealable judgment in or final settlement of
the Litigation (including any post-judgment interest actually received by the
Bank on any payment), minus (b) the sum of the following: (i) the aggregate
expenses incurred previously and hereafter by the Bank in prosecuting the
Litigation and obtaining the Payment, (ii) the aggregate expenses incurred by
the Company 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 Payment (the 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 applicable to the Company during the tax
year in which the full Payment is received (currently approximately 42%). The
Company's determination of the amounts to be deducted from the Payment and the
amount of the Adjusted Litigation Recovery will be final, conclusive and
binding on the LTW Holders.
DETERMINATION OF THE NUMBER OF WARRANT SHARES
At such time, if any, as the Company receives the Payment, the Company shall
determine the Adjusted Market Value of a share of Common Stock on the 30th
calendar day prior to the date on which the Bank receives the total amount of
the Payment (the "Determination Date"). The "Adjusted Market Value" of a share
of Common Stock on the Determination Date will equal the average of the daily
Closing Prices (as defined below) for the thirty consecutive Trading Days
ending on and including the Determination Date, minus $1.00; provided that if
the context in which this defined term is used is with respect to securities
other than shares of Common Stock, then "Adjusted Market Value" means the
average daily Closing Prices of a unit of such securities for the thirty
consecutive Trading Days ending on and including the Determination Date, minus
$1.00; and provided further that if the context in which this defined term is
used is with respect to property other than securities, then "Adjusted Market
Value" means the Fair Market Value of the amount of such property
distributable in respect of one share of Common Stock. The term "Closing
Price" on any day shall mean the closing sale price regular way (with any
relevant due bills attached) on such day, or in case no such sale takes place
on such day, the average of the reported closing bid and asked prices regular
way (with any relevant due bills attached), in each case on the New York Stock
Exchange Consolidated Tape (or any successor composite tape reporting
transactions on national securities exchanges), or, if the Common Stock is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which the Common Stock is listed or admitted
to trading (which shall be the national securities exchange on which the
greatest number of shares of Common Stock has been traded during the five
consecutive Trading Days ending on and including the Determination Date), or,
if not listed or admitted to trading on any national securities exchange, the
average of the closing bid and asked prices regular way (with any relevant due
bills attached) of the Common Stock on the over-the-counter market on the day
in question as reported by Nasdaq, or a similar generally accepted reporting
service, or if not so available as determined in good faith by the Board of
Directors, on the basis of such relevant factors as it in good faith considers
appropriate. The term "Trading Day " shall mean a day on which the New York
Stock Exchange or Nasdaq (or any of their successors) is open for the
transaction of business. The aggregate number of Warrant Shares will equal the
Adjusted Litigation Recovery divided by the Adjusted Market Value of a share
of Common Stock on the Determination Date. Each LTW will be exercisable for
the number of shares of Common Stock (or other securities or property as
described above) having an Adjusted Market Value equal to the Adjusted
Litigation Recovery divided by the number of LTWs issued or reserved for
issuance on the Distribution Record Date, currently estimated to be
approximately 85,700,000.
EXERCISE OF THE LTWS
Subject to the procedures established by the Company and described herein,
the LTW Holders will be entitled to exercise their LTWs only upon the
occurrence of all of the following: (a) receipt by the Company of the full
Payment, (b) calculation by the Company of the full amount of the Adjusted
Litigation Recovery and (c)
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receipt by the Company of all regulatory approvals necessary to issue the
Warrant Shares, including the effectiveness of a registration statement
relating to the issuance of such shares under the Securities Act. The
occurrence of the events described in clauses (a) through (c) is referred to
herein as the "Triggering Event." If the Payment is payable by the Government
in installments, the Triggering Event will not occur until the Bank receives
the last installment of the Payment.
Holders of LTWs will not be entitled to any interest or additional shares of
Common Stock from the Company for the period of time between the date on which
the Bank receives any Payment in connection with the Litigation and the date
on which the LTWs become exercisable.
If the Triggering Event occurs, the Company will publicly announce (not more
than 15 calendar days after the occurrence thereof) by means of a press
release and by written notice mailed to each record holder of LTWs (i) that
the Triggering Event has occurred, (ii) the aggregate number of shares for
which the LTWs are exercisable, (iii) the number of shares of Common Stock for
which one LTW is exercisable, (iv) the Exercise Price per LTW, (v) the manner
in which the LTWs are exercisable and (vi) the date on which the LTWs will no
longer be exercisable. The LTWs may be exercised prior to the Expiration Date
by surrendering to the Company the certificates representing the LTWs (the
"LTW Certificates"), with the accompanying form of election to purchase,
properly completed and executed, together with payment of the Exercise Price.
Payment of the Exercise Price may be made in the form of a certified or
official bank check or personal check payable to the order of the Company or
by wire transfer of funds to an account designated by the Company for such
purpose. Upon surrender of the LTW Certificate and payment of the Exercise
Price, the Warrant Agent will deliver or cause to be delivered, to or upon the
written order of such holder, stock certificates representing the number of
whole Warrant Shares or other securities or property to which such holder is
entitled under the LTWs and Warrant Agreement, including, without limitation,
any cash payable to adjust for fractional interests in Warrant Shares issuable
upon such exercise. If less than all of the LTWs evidenced by an LTW
Certificate are exercised, a new LTW Certificate will be issued for the
remaining number of LTWs.
No fractional Warrant Share will be issued upon exercise of the LTWs. If
more than one Warrant shall be exercised in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of Warrant
Shares purchasable pursuant thereto. If any fraction of a Warrant Share would,
except for the foregoing provision, be issuable upon the exercise of any LTWs
(or specified portion thereof), the LTW Holder will receive an amount in cash
equal to the sum of the Adjusted Market Value per Warrant Share and $1.00,
multiplied by such fraction, computed to the nearest whole cent.
LTW Certificates will be issued in global form or registered form as
definitive warrant certificates and no service charge will be made for
registration of transfer or exchange upon surrender of any LTW Certificate at
the office of the Warrant Agent maintained for that purpose. The Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of LTW Certificates.
ADJUSTMENTS
In case of certain reclassifications, redesignations, reorganizations or
changes in the outstanding shares of Common Stock or consolidations or mergers
of the Company or the sale of all or substantially all of the assets of the
Company, each LTW shall thereafter be exercisable for the right to receive the
kind of shares of stock or other securities or property into which the Common
Stock was converted or for which the Common Stock was exchanged or which was
distributed to the holders of the Common Stock in such transaction or event,
such that each LTW may be exercised for a number of shares of such stock or
other securities or an amount of property equal to the Adjusted Litigation
Recovery divided by the number of LTWs issued or reserved for issuance on the
Distribution Record Date (currently estimated to be approximately 85,700,000)
divided by the Adjusted Market Value of the shares of capital stock or other
securities or property for or into which one share of Common
24
<PAGE>
Stock was exchanged or converted into as a result of such event. For example,
if the Company were to be acquired for securities and, upon the occurrence of
the Triggering Event, the Adjusted Market Value of the number of securities
that one share of Common Stock was converted into was $30, the number of LTWs
issued or reserved for issuance on the Distribution Record Date was 85,700,000
and the Adjusted Litigation Recovery was $500 million, then, upon exercise of
an LTW and the payment of the Exercise Price of $0.1945, the holder of such
LTW would receive $6.0288 in such securities.
RIGHTS OF LTW HOLDERS
The Bank will retain sole and exclusive control of the Litigation and will
retain 100% of the proceeds of any recovery from the Litigation. The
Litigation will remain an asset of the Bank and the Bank intends to pursue the
Litigation with the same vigor as it has in the past. The Bank reserves the
right, however, to terminate the Litigation in any manner it deems appropriate
to serve the Bank's best interest. The LTW Holders will not have any rights
against the Company or the Bank for any decision regarding the conduct of the
Litigation or disposition of the Litigation for an amount less than the amount
it has claimed in damages in the ongoing trial in the Claims Court, regardless
of the effect on the value of the LTWs. Although the Bank currently intends to
continue prosecuting the Litigation and to seek a cash recovery in the amount
claimed, there can be no assurance that the Bank will not make a different
determination in the future.
All rights of action in respect of the LTWs will be vested in the respective
registered LTW Holders; provided, however, that no registered LTW Holder will
have the right to enforce, institute or maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, the
LTWs, unless (a) such registered LTW Holder has previously given written
notice to the Company of the substance of such dispute, and registered LTW
Holders of at least 25% in interest of the issued and outstanding LTWs have
given written notice to the Company of their support for the institution of
such proceeding to resolve such dispute, (b) written notice of the substance
of such dispute and of the support for the institution of such proceeding by
such holders has been provided by the Company to the Warrant Agent, and (c)
the Warrant Agent has not instituted appropriate proceedings with respect to
such dispute within 30 days following the date of such written notice to the
Warrant Agent, it being understood and intended that no one or more registered
LTW Holders will have the right in any manner whatsoever to affect, disturb or
prejudice the rights of any other registered LTW Holders, or to obtain or to
seek to obtain priority or preference over any other LTW Holders or to enforce
any rights of the LTW Holders, except in the manner described above for the
equal and ratable benefit of all registered LTW Holders. Except as described
above, no LTW Holder will have the right to enforce, institute or maintain any
suit, action or proceeding to enforce, or otherwise act in respect of, the
LTWs.
The LTW Holders will have no voting rights, no liquidation preference and no
rights to dividends or other distributions prior to the exercise of such LTWs
following the occurrence, if any, of the Triggering Event.
RESERVATION OF SHARES
In the Warrant Agreement, the Company will covenant and agree that it will
use its best efforts to cause to be reserved and kept available out of its
authorized and unissued shares of Common Stock or any shares of Common Stock
held in its treasury, such number of shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding LTWs. Currently,
depending on the disposition of the Litigation, the Company may not have a
sufficient number of shares of Common Stock authorized and unissued or held in
treasury to permit the full exercise of the LTWs. Accordingly, the Proposal is
intended to increase the number of shares of Common Stock that the Company is
authorized to issue to 250,000,000, which the Company estimates (based on
various assumptions) will be sufficient to permit the exercise in full of all
LTWs expected to be outstanding. There can be no assurance, however, that this
will be the case.
If, upon the occurrence of the Triggering Event, the number of shares of
Common Stock authorized but unissued plus the number of shares of Common Stock
held in the Company's treasury is less than the number of shares of Common
Stock necessary to permit the exercise of the LTWs in full (the number of
shares of Common
25
<PAGE>
Stock comprising such deficiency being the "Number of Shortfall Shares"), then
the Company will be required by the terms of the Warrant Agreement either (i)
to the extent permitted by applicable law and any material agreements then in
effect to which the Company is a party, commence a tender offer for an
aggregate number of shares of Common Stock at least equal to the Number of
Shortfall Shares or (ii) call a special meeting of Common Stockholders for the
purpose of increasing the number of authorized shares of Common Stock in an
amount at least equal to the Number of Shortfall Shares. In such an event, the
Expiration Date of the LTWs will be automatically extended to 60 days after
(a) the date on which the tender offer referred to in clause (i) is
successfully completed or (b) the effective date of the increase in the number
of authorized shares of Common Stock referred to in clause (ii) above.
The Warrant Agreement provides that shares of Common Stock issued upon
exercise of the LTWs will, upon such issuance, be fully paid and non-
assessable, free of preemptive rights and free from all taxes, liens, charges
and security interests with respect to the issue thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the LTWs, may amend or supplement the Warrant Agreement for
certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not adversely affect the rights
of any holder. Any amendment or supplement to the Warrant Agreement that has
an adverse effect on the interests of the holders of the LTWs will require the
written consent of the holders of a majority of the then outstanding LTWs. The
consent of each holder of the LTWs affected will be required for any amendment
pursuant to which the Exercise Price would be increased or the number of
Warrant Shares (or other securities or property) purchasable upon exercise of
LTWs would be decreased (other than pursuant to adjustments provided for in
the Warrant Agreement).
REPORTS
So long as any of the LTWs remain outstanding, the Company shall cause
copies of its annual report to stockholders and all other documents which are
provided to holders of its Common Stock generally to be filed with the Warrant
Agent and mailed to the holder at their addresses appearing in the register of
LTWs maintained by the Warrant Agent.
THE WARRANT AGENT
ChaseMellon Shareholder Services, L.L.C. will act as warrant agent for the
LTWs (the "Warrant Agent"). The Warrant Agent will maintain books for
registration and transfer of the LTWs issued hereunder. The Company and its
affiliates may maintain banking relationships and obtain other services from
the Warrant Agent and its affiliates in the ordinary course of their
respective businesses.
26
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The statements under this caption are brief summaries of the material terms
of the Company's capital stock, do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, the more complete
descriptions contained in the Certificate of Incorporation and By-laws which
are incorporated by reference herein.
The current authorized capital stock of the Company consists of (i)
100,000,000 shares of Common Stock, $1.00 par value per share, and (ii)
50,000,000 shares of preferred stock, $1.00 par value per share. As of
January 30, 1998, 51,085,174 shares of Common Stock and 4,621,982 shares of
preferred stock were issued and outstanding.
COMMON STOCK
Shares of Common Stock are entitled to share equally in the assets available
for distribution upon liquidation, subject to any prior rights of the holders
of any series of preferred stock then outstanding. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors of the Company out of assets of the Company legally available for
payment, subject to the superior rights of the holders of any series of
preferred stock that may be issued. Because the Company is a holding company,
the right of the Company to participate in any distribution of the assets of
Glendale Federal or its other subsidiaries is subject to the prior claims of
creditors of Glendale Federal and such other subsidiaries. There are various
legal limitations on the extent to which the Bank may extend credit, pay
dividends or otherwise supply funds to, or engage in transactions with, the
Company. Each share of Common Stock is entitled to one vote, except as to the
cumulation of votes in the election of directors. There are no preemptive or
other rights to subscribe for any shares.
Effect of the Proposal. If approved and adopted by the stockholders, the
Proposal would increase the number of shares of Common Stock the Company is
authorized to issue to 250,000,000.
PREFERRED STOCK
The outstanding shares of Preferred Stock currently constitute the Company's
only outstanding series of preferred stock.
Rank. The Preferred Stock is subordinate to all indebtedness of the Company
and structurally subordinate to all liabilities of Glendale Federal
(including, without limitation, its customer deposit accounts) and the
Company's other subsidiaries. The Preferred Stock is, prior to conversion,
superior and prior in rank to the Common Stock and to all other Junior Stock.
"Junior Stock" is defined for this purpose to mean Common Stock and any other
classes or series of equity securities of the Company not expressly designated
as being on a parity with, or senior to, the Preferred Stock. The Company has
the power to create and issue additional preferred stock or other classes of
stock ranking on a parity with the Preferred Stock, or that constitute Junior
Stock, without any approval or consent of the holders of the Preferred Stock.
Dividends. Holders of the Preferred Stock are entitled to receive, when, as,
and if declared by the Board of Directors out of funds legally available
therefor, noncumulative cash dividends at an annual rate of 8.75% (expressed
as a percentage of the per share liquidation preference of the Preferred
Stock). Dividends on the Preferred Stock are payable in quarterly installments
as of the first day of January, April, July and October of each year to
holders of record as of a date fixed by the Board of Directors of the Company
not less than 30 or more than 60 days prior to the date such dividend is paid.
Quarterly dividend periods (each a "Preferred Stock Dividend Period") include
December 1, March 1, June 1 and September 1 of each year and end on and
include the date preceding commencement of the next following Preferred Stock
Dividend Period. Dividends on the shares of Preferred Stock are noncumulative
so that if a dividend on the shares of Preferred Stock with respect to any
Preferred Stock Dividend Period is not declared by the Board of Directors,
then the Company will not be obligated at any time to pay a dividend on the
shares of Preferred Stock in respect of such Preferred Stock Dividend Period,
whether or not dividends are declared and paid in respect of any subsequent
dividend period.
27
<PAGE>
Unless full cash dividends on the Preferred Stock for a Preferred Stock
Dividend Period have been or are contemporaneously declared and paid (or
declared and a sum sufficient for the payment thereof set apart), no full
dividends may be declared or paid or set apart for payment on preferred stock
of any series ranking, as to dividends, on a parity with the Preferred Stock
for any period. When cash dividends are not paid in full (or declared and a
sum sufficient for such full payment so set apart) upon the preferred stock of
any series ranking, as to dividends, on a parity with the Preferred Stock, no
dividends may be declared on any series of stock ranking, as to dividends,
junior to the Preferred Stock and all dividends declared upon shares of
Preferred Stock and any such parity stock will be declared pro rata based upon
the respective amounts that would have been paid thereon had dividends been
paid in full.
Unless (i) full cash dividends on the Preferred Stock have been declared and
paid or set aside for payment for the four most recent Preferred Stock
Dividend Periods and (ii) the Company has declared a cash dividend on the
Preferred Stock at the annual dividend rate for the current Preferred Stock
Dividend Period and sufficient funds have been set apart for the payment of
such cash dividend, the Company may not declare, pay or set aside for payment
any dividends (other than dividends payable in Common Stock or Junior Stock)
or make any other distribution upon Junior Stock or redeem, purchase or
otherwise acquire any Junior Stock for any consideration (and no monies may be
paid to or made available for a sinking fund for the redemption of any shares
of any such stock) except by conversion into or exchange for Junior Stock.
Conversion. The Preferred Stock is convertible, at the option of the holders
thereof, into Common Stock at a conversion ratio of 2.404 shares of Common
Stock for each share of Preferred Stock, subject to adjustment in certain
events as described below.
The conversion right with respect to such shares terminates at the close of
business on the fifth day immediately preceding the date fixed for redemption
(as described under "Optional Redemption" below) of such shares, provided that
no default by the Company in the payment of the applicable redemption price
(including any declared and unpaid dividends) shall have occurred and be
continuing on the date fixed for such redemption, unless a notice of
conversion shall have been received, and the certificate(s) representing the
shares to be converted shall have been surrendered, prior to that time.
The holder of record of a share of Preferred Stock on a record date with
respect to the payment of a dividend declared on the Preferred Stock is
entitled to receive such dividend on such share of Preferred Stock on the
corresponding dividend payment date notwithstanding the conversion thereof
after such record date. No payment or adjustment is to be made on conversion
for dividends declared on the shares of Preferred Stock or for dividends on
Common Stock issued on conversion.
The conversion price is subject to adjustment in certain events, including:
(i) the issuance of any capital stock of the Company as a dividend or
distribution on Common Stock; (ii) the combination, subdivision or
reclassification of Common Stock; (iii) the issuance to all holders of Common
Stock of rights or warrants entitling them to subscribe for or purchase Common
Stock at less than the then current market price (as defined) of Common Stock;
(iv) the distribution to all holders of Common Stock of evidences of
indebtedness or other assets (including securities, but excluding the
dividends, distributions, rights and warrants, referred to in clauses (i) and
(iii) above, and any dividend or distribution paid in cash out of surplus or
retained earnings); or (v) the issuance, sale or exchange of shares of Common
Stock for consideration having a fair market value that is less than the
current market value. No such adjustment of less than 1% of the conversion
rate will be required; provided, that any such adjustment not made due to this
limitation must be carried forward and taken into account in any subsequent
adjustment determination.
Optional Redemption. Subject to applicable laws or regulations, the shares
of Preferred Stock are redeemable, in whole or in part, at the option of the
Company, on 20 to 45 days notice, from time to time at any
28
<PAGE>
time on or after October 1, 1998 at the following per share redemption prices
plus, in each case, an amount equal to any dividends that have been declared
thereon but remain unpaid as of the date of redemption, if redeemed during the
twelve-month period beginning October 1 of each of the following years:
<TABLE>
<CAPTION>
REDEMPTION PRICE PER
YEAR SHARE OF PREFERRED STOCK
---- ------------------------
<S> <C>
1998................ $26.09375
1999................ 25.87500
2000................ 25.65625
2001................ 25.43750
2002................ 25.21875
2003 and
thereafter......... 25.00000
</TABLE>
If a notice to convert shares of Preferred Stock into shares of Common
Stock, as described under "Conversion" above, shall have been received by the
Company and the certificates representing such shares shall have been
surrendered on or prior to the fifth day immediately preceding the redemption
date specified in the notice of redemption, such shares may not be redeemed.
After a notice of redemption has been given, if on or before the redemption
date specified therein all funds necessary for such redemption have been set
aside by the Company separate and apart from its other funds or deposited in
trust for the account of the holders of the shares to be redeemed, on and
after such redemption date, notwithstanding that any certificate for shares of
the Preferred Stock so called for redemption has not been surrendered for
cancellation, the shares represented thereby will be deemed no longer to be
outstanding, the dividends thereon will cease to accrue, and all rights with
respect to such shares so called for redemption will cease and terminate,
except only the right to receive such money set aside or deposited in trust
without interest.
Voting Rights. Except as described below or as otherwise required by law,
the holders of Preferred Stock do not have any voting rights.
If the Company fails to pay cash dividends on the Preferred Stock with
respect to any six Preferred Stock Dividend Periods the number of directors of
the Company will be increased by two and, subject to compliance with any
requirement for regulatory approval of (or nonobjection to) persons serving as
directors, the holders of Preferred Stock, together with any other holders of
parity stock having similar voting rights as the Preferred Stock, voting
together as a single class, will have the right to elect two additional
members of the Board of Directors at the next annual meeting and at each
subsequent annual meeting until dividends have been paid or declared on the
Preferred Stock and set apart for payment for four consecutive Preferred Stock
Dividend Periods.
So long as any Preferred Stock is outstanding and unless the consent or
approval of a greater number of shares is then required by law or regulation,
the Company may not, without the affirmative vote or consent of the holders of
two-thirds of all outstanding shares of Preferred Stock voting as a separate
class, amend or otherwise alter or repeal any provision of the Company's
Certificate of Incorporation, including any supplementary charter section,
which would materially and adversely affect the rights, preferences, powers or
privileges of the Preferred Stock, including any amendment which would
authorize, create, issue or increase the authorized or issued amount of any
class or series of any equity securities of the Company, ranking prior thereto
as to dividends or upon liquidation, dissolution or winding up of the Company
or any warrants, options or other rights convertible or exchangeable into or
evidencing a right to purchase any amount of any such class or series.
In addition, the Company may not, under the terms of the Preferred Stock,
incur Indebtedness (as defined) that would rank prior to the Preferred Stock
without the affirmative vote or consent of the holders of a majority of the
outstanding shares of Preferred Stock. The term "Indebtedness" is defined for
this purpose as indebtedness for money borrowed, indebtedness evidenced by
notes, debentures, bonds or other securities and any renewals, deferrals,
increases or extensions of any such indebtedness, but does not include any of
the foregoing types of indebtedness incurred by a subsidiary of the Company or
the proceeds of which are to be applied to redeem or repurchase all then
outstanding shares of the Preferred Stock.
29
<PAGE>
Liquidation Rights. Upon liquidation, dissolution or winding up of the
affairs of the Company, after payment or provision for payment of the debts
and other liabilities of the Company, the holders of Preferred Stock are
entitled to receive in full out of the assets of the Company, including its
capital, $25.00 per share of Preferred Stock, plus any dividends that have
been declared but remain unpaid as of such date, before any amount shall be
paid or distributed to the holders of Common Stock or other Junior Stock. If,
upon any liquidation, dissolution or winding up of the Company, the amounts
payable with respect to the Preferred Stock and all other outstanding parity
stock cannot be paid in full, the holders of each series of such stock will
share ratably in any such distribution of assets in proportion to the full
respective preferential amount to which they are entitled. After payment of
the full preferential amount to which they are entitled upon any liquidation,
dissolution or winding up, the holders of Preferred Stock will have no right
or claim to any of the remaining assets of the Company. The merger or
consolidation of the Company into or with any other company or the merger of
any other company into it, or the sale, lease or conveyance of all or part of
the assets of the Company, shall not be deemed to be a voluntary or
involuntary dissolution, liquidation, or winding up.
Effect of the Proposal. The Proposal is intended to clarify the effect the
Distribution would have on holders of Preferred Stock by amending the
Certificate of Designations for the Preferred Stock to provide that (i) upon
conversion of the Preferred Stock prior to the Triggering Event, the holders
would receive the shares of Common Stock underlying the Preferred Stock, plus
a number of LTWs equal to the number of LTWs such holder would have received
had such holder converted such Preferred Stock immediately prior to the
Distribution Record Date and received LTWs in the Distribution and (ii) upon
the conversion of the Preferred Stock on or after the Triggering Event, the
holders would receive the number of shares of Common Stock equal to the number
of shares of Common Stock such holders would have received had such holders
(a) converted such Preferred Stock for LTWs and the shares of Common Stock
underlying the Preferred Stock immediately prior to the Triggering Event and
(b) then exercised such LTWs for the additional shares of Common Stock
underlying the LTWs immediately after the Triggering Event. In addition, upon
the occurrence of the Triggering Event, the conversion price of the Preferred
Stock would increase by an amount equal to the aggregate Exercise Price of the
number of LTWs underlying the Preferred Stock immediately prior to the
Triggering Event.
30
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK BY MANAGEMENT
The following table sets forth information as of December 31, 1997,
concerning the shares of Common Stock beneficially owned by each director of
the Company, by the Chief executive officer of the Company and the four other
highest paid executive officers of the Company's and by all directors and
executive officers of the Company as a group. All shares are of Common Stock
except as otherwise specifically indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------ -------------------- ----------
<S> <C> <C>
William J. Birch.......................... 170,177(1) *
Diane C. Creel............................ 20,100(2) *
Brian P. Dempsey.......................... 30,500(3) *
Richard A. Fink........................... 292,000(4) *
John E. Haynes............................ 173,342(5) *
Terry D. Hess............................. 141,717(6) *
John F. King.............................. 20,300(2) *
John F. Kooken............................ 33,404(2)(7) *
Paul J. Orfalea........................... 1,000 *
Thomas S. Sayles.......................... 0 *
Cora M. Tellez............................ 0 *
Stephen J. Trafton........................ 834,633(8) 1.57%
Gilbert R. Vasquez........................ 20,331(2) *
All directors and executive officers as a
group (25 persons)....................... 2,159,232(9) 4.06%
</TABLE>
- - --------
*Less than one percent of the outstanding shares in each case.
(1) Includes options to acquire 170,167 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 290,000 shares and 2,000 shares of Common
Stock that are held jointly with Mr. Fink's spouse, as to which voting and
investment power are shared.
(5) Includes options to acquire 173,334 shares.
(6) Includes options to acquire 141,667 shares.
(7) Includes 2,404 shares of Common Stock that Mr. Kooken has the right to
receive upon the conversion of 1,000 shares of Preferred Stock owned by
him.
(8) Includes options to acquire 833,333 shares. 1,300 shares of Common Stock
are held as Trustee of the Trafton Family Trust, for which voting
authority is shared. Options to acquire 80,000 shares are held by the
Stephen J. Trafton and Diane L. Trafton Limited Partnership, L.P., of
which Mr. Trafton is a general partner. Voting authority is shared as to
such shares in such Partnership.
(9) Includes 143 shares held at December 31, 1997 under the Company's
Sheltered Pay Plan, 2,404 shares that Mr. Kooken has the right to acquire
upon the conversion of his 1,000 shares of Preferred Stock, 962 shares
that an executive has the right to acquire upon the conversion of 400
shares of Preferred Stock, and an aggregate of 2,133,932 shares which the
directors and executive officers have the power to acquire pursuant to
outstanding options granted under the Golden State Amended and Restated
Stock Option and Long-Term Performance Incentive Plan. Also includes
103,500 shares as to which voting and investment power are shared.
31
<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 Company's outstanding Common Stock as of December 31,
1997.
<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......................... 3,568,700(1) 7.47%(1)
Merrill Lynch & Co., Inc.; Merrill Lynch
Group, Inc.; Princeton Services, Inc. World
Financial Center, North Tower 250 Vesey
Street New York, New York 10281............. 4,288,633(2) 8.6%(2)
RCM Capital Management LLC Four Embarcadero
Center San Francisco, California 94111...... 4,662,400(3) 9.2%(3)
Gerald B. Unterman 70 East 55th Street New
York, New York 10022........................ 2,903,898(4) 5.7%(4)
</TABLE>
- - --------
(1) Amount and nature of beneficial ownership and percent of class are taken
from a Schedule 13G dated February 14, 1997 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 3,289,280 shares (6.89%) 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) of FMR's beneficially owned shares, an additional 132,220 are shares
that may be obtained upon the conversion of 55,000 shares of the Preferred
Stock beneficially owned by Fidelity Management Trust Company, (iii) the
beneficial ownership of Edward C. Johnson 3d and Abigail P. Johnson
derives from their control of FMR Corp. and (iv) FMR Corp. and Mr. and Ms.
Johnson have sole power to vote 279,420 shares and sole power to dispose
of all reported shares.
(2) Amount and nature of beneficial ownership and percent of class are taken
from Amendment No. 5 dated February 10, 1997 to a Schedule 13G filed
pursuant to the Exchange Act which states that Merrill Lynch & Co., Inc.,
Merrill Lynch Group, Inc. and Princeton Services, Inc. are parent holding
companies that may be deemed to share voting and dispositive power as to
such shares with their affiliated companies. Included within such shares
beneficially owned are (i) 4,288,633 shares (8.6%) that Merrill Lynch
Asset Management, L.P., an investment advisor, may be deemed to own
beneficially and as to which such corporation may be deemed to have shared
voting and dispositive power; and (ii) 4,180,934 shares (8.4%) that
Merrill Lynch Global Allocation Fund, Inc., an investment company, may be
deemed to beneficially own and as to which such corporation may be deemed
to have shared voting and dispositive power. Included in the holdings of
Merrill Lynch & Co. are warrants that are exercisable for 770,194 shares
of Common Stock and 664,700 shares of Preferred Stock that are convertible
into 1,597,939 shares of Common Stock.
(3) Based upon advice from RCM Capital Management LLC ("RCM") as to its
holding at July 31, 1997. Of these shares, RCM had sole voting power over
3,440,600 shares, sole investment discretion over 4,586,400 shares and
shared investment discretion over 76,000 shares. RCM is a wholly owned
subsidiary of Dresdner Bank AG ("Dresdner"), an international banking
organization headquartered in Frankfurt, Germany. Dresdner has beneficial
ownership of the 4,662,400 shares only to the extent that Dresdner may be
deemed to have beneficial ownership of securities owned by RCM. As of July
31, 1997, Dresdner also held 18,000 shares of Common Stock, over which it
had sole voting power and sole investment discretion. RCM Limited, L.P.
("RCM Limited") is the managing agent of RCM and has beneficial ownership
of the 4,662,400 shares to the extent that RCM Limited may be deemed to
have beneficial ownership of securities beneficially owned by RCM. RCM
General Corporation ("RCM General") is the general partner of RCM Limited.
RCM General has beneficial ownership of the 4,586,400 shares to the extent
that RCM General may be deemed to have beneficial ownership of securities
beneficially owned by RCM.
32
<PAGE>
(4) Amount and nature of beneficial ownership and percent of class are taken
from Amendment No. 3 to Schedule 13D dated February 10, 1997 filed
pursuant to the Exchange Act which states that Mr. Unterman acts through
registered investment advisors that advise investment funds and managed
accounts. Voting and investment power are shared as to all shares.
Included are 590,250 shares of Preferred Stock, which are convertible into
1,418,961 shares of Common Stock.
OTHER BUSINESS
The Company'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
consideration of the Proposal shall be considered or taken up at the Special
Meeting.
STOCKHOLDER PROPOSALS
Any stockholder wishing to have a proposal considered for inclusion in the
Board of Directors' proxy solicitation materials for the 1998 Annual Meeting
must, in addition to other applicable requirements, set forth such proposal in
writing and file it with the Secretary of Golden State on or before May 30,
1998. The Board of Directors 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.
AVAILABLE INFORMATION
The Company and Glendale Federal are subject to the informational
requirements of the Exchange Act, and in accordance therewith file reports and
other information with the SEC and the OTS, respectively. Such reports and
other information filed by the Company may be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the SEC's regional offices at The Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Thirteenth
Floor, New York, New York 10048. Copies of such material can be obtained by
mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a site
accessible to the public by computer on the World Wide Web, at
http://www.sec.gov, which site contains registration statements, reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC, including the Company. Such reports and
other information filed by the Bank may be inspected and copied at the public
reference facilities maintained by the OTS at 1700 G Street, N.W., Washington,
D.C. 20552, or at the OTS Western Region Office, One Montgomery Street, San
Francisco, California 94120.
The Common Stock is listed on the New York Stock Exchange and the Pacific
Exchange. Reports and other information concerning the Company may also be
inspected at the NYSE located at 11 Wall Street, New York, New York 10006 and
at the Pacific Exchange located at 301 Pine Street, San Francisco, California
94104.
By order of the Board of Directors
/s/ James R. Eller, Jr.
James R. Eller, Jr.
Secretary
February , 1998
33
<PAGE>
ANNEX A
PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation currently authorizes the Company
to issue 100,000,000 shares of its Common Stock, par value $1.00 per share.
The Board of Directors has determined that it is in the best interest of the
Company and its stockholders that the number of authorized shares of Common
Stock be increased to an aggregate total of 200,000,000 shares.
Accordingly, the Board of Directors recommends that the stockholders approve
an amendment to the first paragraph of Article FOURTH of the Certificate of
Incorporation to read as follows:
FOURTH: The total number of shares of all classes of stock which this
corporation shall have authority to issue is three hundred million
(300,000,000), of which two hundred and fifty million (250,000,000) shall
be common stock, par value $1.00 per share, and fifty million (50,000,000)
shall be serial preferred stock, par value $1.00 per share.
PROPOSED AMENDMENT TO CERTIFICATE OF DESIGNATIONS
In connection with the Distribution, the Board of Directors has approved an
amendment to the Certificate of Designations of the Company's Noncumulative
Convertible Preferred Stock, Series A (the "Preferred Stock") to clarify the
application of the antidilution provisions therein to a distribution of LTWs.
Accordingly, the Board of Directors recommends that the holders of the
Common Stock approve amending Section IV.C(3) of the Certificate of
Designations of the Preferred Stock by (i) inserting the subparagraph
reference "(a)" immediately following "(3)" and (ii) adding a new paragraph
(b) as follows:
(b) In the event that the Company shall, at any time or from time to time
while any shares of the Series A Preferred Stock are outstanding, issue to
holders of shares of Common Stock as a dividend or distribution, any
litigation tracking warrants ("LTWs"), then (i) if a holder of the Series A
Preferred Stock converts its shares of Series A Preferred Stock prior to
the date upon which such warrants to purchase shares of Common Stock become
exercisable (the "Triggering Date"), such holder shall receive (A) the
number of shares of Common Stock into which such shares of Series A
Preferred Stock are convertible without giving any effect to such dividend
or distribution of LTWs and (B) the number of LTWs equal to the number of
LTWs such holder would have received had such holder converted its Series A
Preferred Stock into Common Stock immediately prior to the record date for
the distribution of the LTWs and received LTWs in such dividend or
distribution or (ii) if a holder of the Series A Preferred Stock converts
its shares of Series A Preferred Stock into Common Stock on or after the
Triggering Date, such holder shall receive the number of shares of Common
Stock equal to the number of shares of Common Stock such holder would have
received had such holder (x) converted its shares of Series A Preferred
Stock into shares of Common Stock and LTWs immediately prior to the
Triggering Date and (y) then exercised such LTWs for the shares of Common
Stock underlying such LTWs immediately after the Triggering Date. As a
result of an adjustment pursuant to clause (ii) above, the Conversion Price
of the Series A Preferred Stock shall be increased by an amount equal to
the aggregate exercise price of the number of LTWs underlying the Series A
Preferred Stock immediately prior to the Triggering Date.
34
<PAGE>
[LOGO]Printed on Recycled Paper
<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 to
vote as designated below all shares of the common stock of Golden State
Bancorp Inc. (the "Company") which the undersigned would be entitled to vote
if personally present at the Special Meeting of Stockholders of the Company to
be held on March 23, 1998 and at any postponement or adjournment thereof.
PROPOSAL:
Amend the Company's Certificate of Incorporation to increase the total
number of authorized shares of Common Stock of the Company to
250,000,000 and to effect certain amendments to the Certificate of
Designations for the Noncumulative Convertible Preferred Stock, Series
A, all as described in the Company's Proxy Statement dated February ,
1998.
[_] FOR [_] AGAINST [_] ABSTAIN
In their discretion on such other business as may properly come before
the meeting or any adjournment thereof; provided, however, that no
proxy which is voted against the Proposal will be voted in favor of any
proposal to adjourn the Special Meeting in order to solicit additional
votes in favor of the Proposal.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY. THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY.
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 THE ABOVE PROPOSAL.
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: February , 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.
PLEASE DO NOT FOLD THIS CARD
YOUR VOTE IS IMPORTANT TO THE COMPANY. PLEASE SIGN AND RETURN YOUR PROXY BY
TEARING OFF THE TOP PORTION OF THIS SHEET AND RETURNING IT IN THE ENCLOSED
POSTAGE PAID ENVELOPE.
