<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:
[_]Preliminary Proxy Statement
[_]CONFIDENTIAL, FOR USE OF THE
[X]Definitive Proxy Statement COMMISSION ONLY (AS PERMITTED BY
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
March 4, 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 April 8, 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 APRIL 8, 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 April 8,
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
March 4, 1998
<PAGE>
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..................................................................... 9
THE PROPOSAL................................................................ 10
Charter Amendments........................................................ 10
Reasons for the Proposal.................................................. 11
Recommendation of the Board of Directors.................................. 11
No Appraisal Rights....................................................... 11
DISTRIBUTION OF LTWS........................................................ 11
Risk Factors.............................................................. 11
Effect of the Distribution on the Convertible Securities.................. 14
Accounting Treatment of the Distribution.................................. 14
ERISA Considerations...................................................... 14
THE LITIGATION.............................................................. 15
Introduction.............................................................. 15
Proceedings Establishing the Government's Liability....................... 15
Damages Trial............................................................. 15
Bank Case................................................................. 16
Government Case........................................................... 17
Motion for Judgment upon Partial Findings................................. 18
Pending Motions........................................................... 19
Anticipated Timing........................................................ 19
Proposed Settlement....................................................... 20
Ownership of the Claim; Management of the Litigation; Use of Proceeds..... 20
Legal Expenses............................................................ 20
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....................... 21
DESCRIPTION OF LTWS......................................................... 23
General................................................................... 23
Adjusted Litigation Recovery.............................................. 24
Determination of the Number of Warrant Shares............................. 24
Exercise of the LTWs...................................................... 24
Adjustments............................................................... 25
Rights of LTW Holders..................................................... 26
Reservation of Shares..................................................... 26
Amendment................................................................. 27
Reports................................................................... 27
The Warrant Agent......................................................... 27
</TABLE>
1
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<TABLE>
<S> <C>
DESCRIPTION OF CAPITAL STOCK................................................ 28
Common Stock.............................................................. 28
Preferred Stock........................................................... 28
BENEFICIAL OWNERSHIP OF COMMON STOCK BY MANAGEMENT.......................... 32
BENEFICIAL OWNERSHIP OF COMMON STOCK BY OTHERS.............................. 33
OTHER BUSINESS.............................................................. 34
STOCKHOLDER PROPOSALS....................................................... 34
AVAILABLE INFORMATION....................................................... 34
ANNEX A..................................................................... A-1
ANNEX B..................................................................... B-1
</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 April 8, 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 recently
announced proposed merger with First Nationwide (Parent) Holdings, Inc. ("First
Nationwide") and that company's subsidiary, California Federal Bank, A Federal
Savings Bank ("Cal Fed"). See "Recent Developments." Stockholders should note,
however, that the Golden State Board of Directors intends to proceed with the
Distribution of LTWs independently of the Cal Fed Merger (as defined herein)
and that only the Proposal described herein will be presented for consideration
and approval at the Special Meeting to which this Proxy Statement relates. The
Cal Fed Merger will be presented for consideration and approval at a separate
meeting of Golden State stockholders that will be held later this year. A proxy
statement containing a complete description of the Cal Fed Merger will be sent
to Golden State stockholders in connection with that meeting.
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
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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, including, without limitation, that
portion of the fees and expenses incurred pursuant to the Management Agreement
(as defined below) attributable to the Litigation, (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.
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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 (although there can be no assurance that any such listing will
be approved).
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 in connection with the pending merger of CENFED
Financial Corporation, a Delaware corporation ("CENFED"), with a subsidiary of
the Company (the "CENFED 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, the parent of Cal Fed,
announced that they had entered into an agreement (the "Cal Fed Merger
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 is
expected to be named California Federal Bank, A Federal Savings Bank, 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
institution 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, increasing to 55% of the
Combined Entity if the Adjusted Average Price is $33 per share or more. For
purposes of determining the Adjusted Average Price, the volume-weighted average
trading price of the Common Stock 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 two indirect
shareholders of Cal Fed. Following the Cal Fed Merger, the Company is expected
to have approximately 135 to 145 million shares of Common Stock outstanding.
Because the Company will survive the Cal Fed Merger, LTWs outstanding or
reserved for future issuance 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.
7
<PAGE>
The Cal Fed Merger requires regulatory approval and the approval of the
stockholders of the Company. A proxy statement with respect to the approval of
the Cal Fed Merger by the Company's stockholders is expected to be mailed to
the holders of the Company's Common Stock during the 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.
In connection with the execution of the Cal Fed Merger Agreement, the
Company, Glendale Federal, Cal Fed and Mr. Stephen Trafton, Chairman and Chief
Executive Officer, and Mr. Richard Fink, Vice Chairman, respectively, of the
Company, entered into a litigation management agreement (the "Management
Agreement"), which is to become effective upon the consummation of the Cal Fed
Merger. The Management Agreement contemplates, among other things, that Messrs.
Trafton and Fink will generally manage and make determinations concerning the
conduct of the Litigation (as well as comparable litigation with respect to the
treatment of regulatory goodwill in which Cal Fed is engaged against the U.S.
government) on behalf of the Combined Entity. In this connection, Messrs.
Trafton and Fink will report to a committee of the Board of Directors of the
Combined Entity (the "Golden State Committee") with respect to matters related
to the Litigation and the LTWs and to a separate committee with respect to the
comparable Cal Fed litigation, and the Board of Directors of the Combined
Entity will generally delegate its authority with respect to such matters to
the respective committees. The Cal Fed Merger Agreement provides that the
Combined Entity will cause each Golden State Director (as defined below)
serving on the Combined Entity's Board of Directors to be appointed as a member
of the Golden State Committee and that it will maintain the Golden State
Committee as contemplated by the Management Agreement. The portion of the
annual compensation and expenses of Messrs. Trafton and Fink pursuant to the
Management Agreement attributable to the Litigation plus a contingent
compensation payment equal in the aggregate to 0.5% of the amount of recovery,
if any, in the Litigation will be treated as an expense of the Litigation in
determining the Adjusted Litigation Recovery. The services of Messrs. Trafton
and Fink under the Management Agreement may be terminated under certain
circumstances set forth in the Management Agreement, and there is no assurance
that such individuals will continue to manage the Litigation after the
consummation of the Cal Fed Merger.
It is anticipated that upon consummation of the Cal Fed Merger, the number of
directors of the Combined Entity will be fifteen with five such directors (the
"Golden State Directors") being selected from among the then-existing Board of
Directors of the Company and the remaining ten such individuals, or two-thirds
of the whole Board of Directors of the Combined Entity, being appointed by the
Board of Directors of Cal Fed. From and after the consummation of the Cal Fed
Merger until the earlier of a change in control of the Combined Entity or the
resolution of all matters relating to the Litigation and the LTWs, the Combined
Entity will continue to include each Golden State Director, or such Golden
State Director's successor as designated by the Golden State Directors, on the
list of nominees for director presented by the Combined Entity's Board at any
annual meeting of stockholders at which such Golden State Director's term would
expire. Further, it is anticipated that, following the consummation of the Cal
Fed Merger, affiliates of Cal Fed will generally be in a position to control
the management of the Combined Entity.
The description of the provisions of the Management Agreement set forth above
is not complete and is qualified in its entirety by reference to the Management
Agreement, which is attached as Annex B hereto.
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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 April 8, 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 March 4, 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 to list the LTWs on a securities exchange or an automated
quotation system (although there can be no assurance that any such listing
will be approved).
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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. COMPLETION OF THE
DISTRIBUTION IS A CONDITION TO THE CAL FED MERGER. SEE "PROXY STATEMENT
SUMMARY--RECENT DEVELOPMENTS."
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 Company's 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. Upon
completion of the Cal Fed Merger, the Litigation will be controlled, pursuant
to the Management Agreement, by the Golden State Committee of the Combined
Entity's Board of Directors and Messrs. Trafton and Fink (or any successors to
either of them as Litigation Managers).
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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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 in connection with the CENFED 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 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 case in chief on February 26, 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 and the
testimony of its witnesses as of February 26, 1998. The Bank expects that the
Government's case will be closed and the Bank will begin the presentation of
its rebuttal case on March 2, 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 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. Upon
completion of the Cal Fed Merger, the Litigation will be managed by the Golden
State Committee of the Combined Entity's Board of Directors and Messrs.
Trafton and Fink (or any successors as Litigation Managers), pursuant to the
Management Agreement. 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, including that
portion of the compensation and expenses of Messrs. Trafton and Fink pursuant
to the Management Agreement that are attributable to 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 deals only with
matters discussed herein and does not address the United States federal income
tax consequences to holders who may receive Common Stock in business
combinations or other transactions such as the Merger between a subsidiary of
the Company and CENFED and 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 MATERIAL 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 material
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 $2.9171. 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 0.3890 and the
value per LTW would be $11.6685. 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, including, without limitation, that
portion of the compensation and expenses of Messrs. Trafton and Fink under the
Management Agreement attributable to the Litigation, (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)
24
<PAGE>
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
25
<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
26
<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.
27
<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.
28
<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
29
<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.
30
<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.
31
<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.
32
<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 February 17,
1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------------ -------------------- ----------
<S> <C> <C>
FMR Corp.; Fidelity Management & Research
Company; Edward C. Johnson 3d; Abigail P.
Johnson, Devonshire Street, Boston,
Massachusetts 02109......................... 5,087,380(1) 9.99%(1)
RCM Capital Management LLC, Four Embarcadero
Center,
San Francisco, California 94111............. 3,482,075(2) 6.90%(2)
Boston Partners Asset Management LP;
Boston Partners, Inc.; Desmond John
Heathwood,
One Financial Center, Boston Massachussetts
02111....................................... 2,880,100(3) 5.5%(3)
</TABLE>
- --------
(1) Amount and nature of beneficial ownership and percent of class are taken
from a Schedule 13G dated February 14, 1998 filed pursuant to the Exchange
Act which states that FMR Corp.'s beneficial ownership derives from its
ownership of Fidelity Management & Research Company, which acts as an
investment advisor and beneficially owns 4,944,730 shares (9.71%) of
Common Stock, and from its ownership of Fidelity Management Trust Company.
Such filing indicates that (i) of FMR Corp.'s and Fidelity Management &
Research Company's beneficially owned shares, 468,780 are shares that may
be obtained upon the conversion of 195,000 shares of the Preferred Stock,
(ii) the beneficial ownership of Edward C. Johnson 3d and Abigail P.
Johnson derives from their control of FMR Corp. and (iii) FMR Corp. and
Mr. and Ms. Johnson have sole power to vote and to dispose of all reported
shares.
(2) Amount and nature of beneficial ownership and percent of class are taken
from Schedule 13G dated January 30, 1998 filed pursuant to the Exchange
Act which states that RCM Capital Management LLC ("RCM") has sole voting
power over 2,336,500 shares, sole investment discretion over 3,406,075
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 3,482,075 shares only to the extent that
Dresdner may be deemed to have beneficial ownership of securities owned by
RCM. As of January 31, 1998, Dresdner also held 20,800 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 3,482,075 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 3,406,075 shares to the extent that RCM General may be deemed to have
beneficial ownership of securities beneficially owned by RCM.
(3) Amount and nature of beneficial ownership and percent of class are taken
from Amendment No. 2 dated February 14, 1998 to a Schedule 13G filed
pursuant to the Exchange Act which states that Boston Partners Asset
Management LP ("BPAM") beneficially owns 2,880,100 shares of Common Stock.
Such filing indicates that of BPAM's beneficially owned shares, (i)
680,266 shares are Common Stock owned of record, (ii) 1,827,040 are shares
that may be obtained upon the conversion of 760,000 shares of Preferred
Stock and (iii) 372,794 are shares that may be obtained upon the exercise
of 372,794 presently exercisable Warrants. Boston Partners, Inc. ("BP") is
the sole general partner of BPAM and has beneficial ownership of the
2,880,100 shares to the extent that BP may be deemed to have beneficial
ownership of securities beneficially owned by BPAM. Mr. Heathwood is the
principal stockholder of BP and has beneficial ownership of the 2,880,100
shares to the extent that Mr. Heathwood may be deemed to have beneficial
ownership of securities beneficially owned by BP.
33
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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 New York Stock Exchange 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
March 4, 1998
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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.
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ANNEX B
LITIGATION MANAGEMENT AGREEMENT
THIS AGREEMENT (the "Management Agreement"), dated as of February 4, 1998,
is by and among Golden State Bancorp Inc., a Delaware corporation ("GSB" and,
as the surviving corporation in the merger contemplated by the Agreement (as
defined herein), the "Company"), Glendale Federal Bank, Federal Savings Bank
("Glendale Federal"), California Federal Bank, A Federal Savings Bank
("California Federal" and, together with Glendale Federal, the "Banks")), and
the other persons whose names are set forth on the signature pages hereto.
WHEREAS, Glendale Federal is currently a plaintiff in an action titled
Glendale Federal Bank, F.S.B. v. United States of America, Civil Action No.
90-772C, U.S. Court of Federal Claims (together with any appeal thereof or
other proceeding related thereto, the "Glendale Litigation"); and
WHEREAS, California Federal is currently a plaintiff in an action titled
California Federal Bank, A Federal Savings Bank v. United States of America,
Civil Action No. 92-138C, U.S. Court of Federal Claims (together with any
appeal thereof or other proceedings related thereto, the "CalFed Litigation"
and, together with the Glendale Litigation, the "Goodwill Litigation"); and
WHEREAS, on July 28, 1995, California Federal distributed Participation
Interests representing the right to receive a pro rata portion of
approximately 25 percent of the net after-tax proceeds of the CalFed
Litigation (each, a "CALGZ") and on January 3, 1997, California Federal
distributed Secondary Participation Interests representing the right to
receive a pro rata portion of 60 percent of the net after-tax proceeds, in
excess of certain threshold recovery amounts and net of distributions to the
holders of the CALGZs, of the CalFed Litigation (each, a "CALGL" and, together
with the CALGZs, the "CalFed Securities"); and
WHEREAS, GSB has announced its intention to distribute Litigation Tracking
Warrants, each representing the right to receive a pro rata distribution of
shares of Golden State Common Stock with an aggregate value equal to the a
percentage, set forth in the Warrant Agreement relating to such Warrants, of
the net after-tax proceeds of the Glendale Litigation (each, a "GSB LTW"),
which distribution is expected to take place prior to consummation of the
Merger; and
WHEREAS, GSB, through its subsidiaries, will, after giving effect to the
distribution of the GSB LTWs and the CalFed Securities, retain an interest in
the proceeds of the Glendale Litigation and the CalFed litigation,
respectively; and
WHEREAS, the parties hereto intend that the Goodwill Litigation be pursued,
prosecuted, managed and conducted in a manner that is consistent with the best
interests of the holders of the GSB LTWs, the CalFed Securities, the Banks and
the Company; and
WHEREAS, the parties hereto have agreed to conduct the Goodwill Litigation
as provided in this Management Agreement in connection with the execution of
the Agreement and Plan of Reorganization, dated February, 1998, by and among
First Nationwide (Parent) Holdings, a Delaware corporation, First Nationwide
Holdings, Inc. a Delaware corporation, First Gibraltar Holdings, Inc., a
Delaware corporation, Hunter's Glen/Ford, Ltd. and GSB (the "Agreement")
(capitalized terms used but not otherwise defined in this Management Agreement
shall have the meanings ascribed to them in the Agreement);
NOW, THEREFORE, the parties agree as follows:
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ARTICLE 1.
PURSUIT AND MANAGEMENT OF GOODWILL LITIGATION
1.1 In order to assure that those parties with prior knowledge of and
experience regarding the Goodwill Litigation, including the facts forming the
basis for the claims underlying the Goodwill Litigation and regarding the
strategies developed to pursue those claims, remain involved in the Goodwill
Litigation, the parties hereto agree that the Company shall, effective as of
the Effective Time, employ and retain Stephen J. Trafton and Richard A. Fink
(the "Litigation Managers") as Litigation Managers with respect to the
Glendale Litigation, and that the Company shall employ and retain Messrs.
Trafton and Fink as Litigation Managers with respect to the CalFed Litigation.
1.2 The Litigation Managers, on behalf of the holders of the GSB LTWs (the
"GSB Holders"), Glendale Federal and the Company from and after the Effective
Time, shall be granted authority, subject to the terms of this Management
Agreement, to prosecute, appeal, negotiate, resolve, settle, compromise,
arbitrate or otherwise pursue the Glendale Litigation, in whole or in part,
and to oversee for Glendale Federal and the Company the matters related to the
GSB LTWs and the recovery, disposition or other handling of any proceeds of
the Glendale Litigation and any expenses thereof (except with respect to the
tax treatment of the receipt or payment of any recovery, proceeds or
expenses), subject to and in accordance with the provisions of this Management
Agreement.
1.3 The Litigation Managers, on behalf of the holders of the CalFed
Securities (the "CalFed Holders" and, together with the GSB Holders, the
"Holders"), California Federal and the Company from and after the Effective
Time shall be granted authority, subject to the terms of this Management
Agreement, to prosecute, appeal, negotiate, resolve, settle, compromise,
arbitrate or otherwise pursue the CalFed Litigation, in whole or in part, and
to oversee for the Surviving Bank and the Company the matters related to the
CalFed Certificates and the recovery, disposition or other handling of any
proceeds of the CalFed Litigation and any expenses thereof (except with
respect to the tax treatment of the receipt or payment of any recovery,
proceeds or expenses), subject to and in accordance with the provisions of
this Management Agreement.
1.4 As of and following the Effective Time, the Board of Directors of the
Company will establish a Glendale Litigation committee (the "Glendale
Committee") and a CalFed Litigation committee (the "CalFed Committee"). As of
and following the Effective Time, the powers and rights of the Board of
Directors of the Company shall be vested in the Glendale Committee with
respect to all matters related to the Glendale Litigation and the GSB LTWs and
in the CalFed Committee with respect to all matters related to the CalFed
Litigation and the CalFed Certificates. The Litigation Managers will report
directly to the Glendale Committee with respect to matters related to the
Glendale Litigation and the GSB LTWs, and will report directly to the CalFed
Committee with respect to matters related to the CalFed Litigation and the
CalFed Certificates.
1.5 The CalFed Committee may at any time, or from time to time, reduce or
terminate any or all of the specific powers of one or both of the Litigation
Managers with respect to the CalFed Litigation and in such event shall provide
prior written notice thereof to such Litigation Manager or Litigation
Managers. The decision of the CalFed Committee in this respect shall not be
subject to arbitration, dispute or litigation. Any dimunition of the powers of
the Litigation Managers shall not reduce any compensation due to the
Litigation Managers under this Agreement.
ARTICLE 2.
THE LITIGATION MANAGERS
2.1 (a) Subject to the terms of this Agreement, the Litigation Managers
shall have all power to carry out in their sole discretion their
responsibilities pursuant to Article 1 hereof, subject to (a) periodic
consultation with the Glendale Committee as to the Glendale Litigation and
with the CalFed Committee as to the CalFed Litigation and (b) the approval of
the Glendale Committee (with respect to the Glendale Litigation) or the CalFed
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Committee (with respect to the CalFed Litigation) with respect to any final
settlement of the Glendale Litigation or the CalFed Litigation, any decision
to permanently abandon or otherwise cease to prosecute the Glendale Litigation
or the CalFed Litigation or any decision to expend funds of the Company or the
Surviving Bank. The powers and authority of the Litigation Managers shall
include, without limitation, the power and authority to, and the Litigation
Managers shall:
(i) without prior or further authorization, to control and exercise
authority over, subject to the terms of the GSB LTWs and the CalFed
Securities, the management and conduct of the Glendale Litigation and the
CalFed Litigation and matters relating to the GSB LTWs and the CalFed
Securities;
(ii) to coordinate and manage the application for any regulatory, stock
exchange, stock market or other approvals or the making of any filings
required to carry out the transactions contemplated by the GSB LTWs or the
CalFed Certificates, including without limitation directing the Company to
issue the shares of common stock of the Company or any successor thereto
upon exercise of the GSB LTWs;
(iii) to authorize the payment by the Company or its subsidiaries of
expenses relating to the Glendale Litigation and the GSB LTWs, or to the
CalFed Litigation and the CalFed LTWs, as the case may be;
(iv) to retain counsel and advisors, including accountants, investment
bankers, experts, transfer agents, escrow agents, consultants, and other
assistances, in connection with the Goodwill Litigation or the GSB LTWs or
the CalFed Certificates (or any other matters contemplated by this
Management Agreement), or to retain sub-managers or other agents, and to
cause the same to be reasonably compensated by the Company or its
subsidiaries for services rendered;
(v) to enter into contracts, agreements, commitments and other
arrangements and to execute pleadings, affidavits and other court
documents, and to participate in, initiate or request settlement or other
conferences, hearings or discussions on behalf of the Company, or Glendale
Federal or California Federal or their successors, necessary or appropriate
to carry out their responsibilities hereunder;
(vi) subject to Section 2.1(b), to make any determinations or valuations
contemplated by the terms of the GSB LTWs or that are otherwise required to
be made in order to fulfill the intent of the terms of such securities;
(vii) with respect to any non-cash proceeds of the Goodwill Litigation,
to sell, convey, transfer, assign, pledge, encumber or liquidate on behalf
of the Company such non-cash proceeds or any part thereof or any interest
therein, upon such terms and for such consideration as the Litigation
Managers in their sole and absolute discretion deem desirable, and to file
on behalf of the Company such documents as are customarily required to
effect any of the foregoing, including the filing of necessary UCC
financing statements; and
(viii) to publish or mail, or cause to be published or mailed, any
notices contemplated by the GSB LTWs or the CalFed Securities or otherwise
deemed advisable by the Litigation Managers in connection with such
securities.
Notwithstanding anything contained in this Management Agreement that may be
deemed to be to the contrary, the Board of Directors of the Company shall
(solely through the Glendale Committee in the case of the Glendale Litigation
and the GSB LTWs) have and maintain ultimate authority with respect to all
matters relating to the Goodwill Litigation, the GSB LTWs and the CalFed
Securities, and nothing contained herein shall be deemed to relieve the Board
of Directors (or, with respect to matters related to the Glendale Litigation
and the GSB LTWs, the Glendale Committee) of any of its rights, authorities or
obligations under applicable law or to create any obligations in conflict with
or in derogation of such rights, authorities or obligations.
(b) Any determinations or valuations contemplated by the terms of the GSB
LTWs or the CalFed Securities or that are otherwise required to be made in
order to fulfill the intent of the terms of such securities (including without
limitation determination of the "Adjusted Litigation Recovery," as such term
is used in the GSB LTWs and the CALGLs, or the "Litigation Recovery," as such
term is used in the CALGZs, or whether or when any event triggering any
obligations thereunder has occurred) shall be made in the first instance by
the Litigation Managers. Such determinations and valuations of the Litigation
Managers shall be subject to review by the
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Glendale Committee (in the case of the GSB LTWs) or the CalFed Committee (in
the case of the CalFed Securities), the decision of which Committee in respect
of such matters shall be final and binding on the Company and the Holders,
absent manifest error. In making such determinations or valuations the
Litigation Managers shall be entitled to retain such accountants, investment
bankers, counsel or other advisers and experts as they deem appropriate, and
shall be fully protected in relying upon the foregoing in such connection.
(c) During his employment as Litigation Manager, each Litigation Manager
shall be an Executive Vice President of the Company and shall be entitled to
(i) receive from the Company an annual salary of $600,000, payable monthly, in
the case of Mr. Trafton, and an annual salary of $400,000, payable monthly, in
the case of Mr. Fink; (ii) participation in employee welfare benefit plans,
deferred compensation and other plans, policies and perquisites, in each case
on a basis no less beneficial than that made available to any other Executive
Vice President of the Company or its successors (other than participation in
any stock option plan, the Severance Pay Plan for Executive Officers or in the
Deferred Executive Compensation Plan of the Company); and (iii) office space
comparable to such space as is presently provided to such individuals by GSB
in such location as Messrs. Trafton and Fink may reasonably specify,
secretarial and clerical assistance, travel allowance and expense
reimbursement, in each case no less beneficial than made available to any
other Executive Vice President of the Company or its successors. In addition,
in consideration for their services hereunder and for the restrictions imposed
by the noncompetition and nonsolicitation provisions set forth in Section 6.2
hereof, Stephen J. Trafton shall be entitled to the benefits set forth with
respect to him on Schedule 2.1(c)(i) hereto (the "Trafton Benefits") and
Richard A. Fink shall be entitled to the benefits set forth with respect to
him on Schedule 2.1(c)(ii) hereto (the "Fink Benefits"). The cost to the
Company or any of its subsidiaries of any of the compensation payable or
benefits due to the Litigation Managers contemplated by this Section 2.1(c)
(including without limitation Schedules 2.1(c)(i) and 2.1(c)(ii)) or Section
2.1(d) shall be deemed to be expenses of the Glendale Litigation and the GSB
LTWs (to the extent related thereto) or the CalFed Litigation and the CalFed
Securities (to the extent related thereto) for purposes of determining the
amount of any proceeds payable or securities issuable to the Holders under the
GSB LTWs or the CalFed Securities, as the case may be.
(d) In addition to the compensation contemplated by Section 2.1(c), the
Litigation Managers shall each be entitled (and shall be fully vested in such
entitlement) to receive out of any recovery pursuant to the Goodwill
Litigation an incentive fee in an amount equal to 0.25% of the aggregate value
of the pre-tax recovery including post-judgment interest (whether paid in cash
or noncash consideration, or in a lump sum or in installments) in respect of
each of the Glendale Litigation (the "Glendale Incentive Fee") and the CalFed
Litigation (the "CalFed Incentive Fee" and, together with the Glendale
Incentive Fee, the "Incentive Fees"). If any recovery is paid, in whole or in
part, in a form other than cash or other than in a single lump sum, the
Litigation Managers shall determine in the first instance the value of such
recovery, subject to review by the Glendale Committee (in the case of the
Glendale Litigation) or the CalFed Committee (in the case of the CalFed
Litigation). The Glendale Incentive Fee and the CalFed Incentive Fee, as the
case may be, shall be payable upon the receipt of a final nonappealable
judgment or in the event of a final settlement (a "Final Resolution") of the
Glendale Litigation or the CalFed Litigation, respectively (whether or not any
consideration in respect of such judgment or settlement has been received as
of such time). Notwithstanding the foregoing, a Litigation Manager shall be
divested of his right to receive such Litigation Manager's share of the
Glendale Incentive Fee or CalFed Incentive Fee if his employment hereunder in
respect of the Glendale Litigation or the CalFed Litigation, respectively, is
terminated prior to the date of a Final Resolution (1) by such Litigation
Manager other than for Good Reason (as defined herein), death or incapacity,
or (2) by the Company for Cause (as defined herein).
(e) Each of the Litigation Managers may be removed from his position as such
(including as an Executive Vice President of the Company) with respect to the
Glendale Litigation or the CalFed Litigation or both, but only for Cause and
only upon the unanimous vote of the Glendale Committee (with respect to the
Glendale Litigation) or the CalFed Committee (with respect to the CalFed
Litigation) as to such removal (provided that any Litigation Manager shall
cease to be an Executive Vice President of the Company upon removal as to both
the Glendale Litigation and the CalFed Litigation). The Company or a Committee
shall have "Cause" to terminate a Litigation Manager's employment hereunder
only upon (i) the conviction of the Litigation Manager
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for the commission of a felony involving dishonesty with respect to the
Company or the Holders or (ii) gross and willful misconduct undertaken in bad
faith by the Litigation Manager that is demonstrably and materially injurious
to the Company or to the economic interests of the Holders as a group.
Further, no breach, act or failure to act on the Litigation Manager's part
shall constitute "Cause" if such breach, act or failure to act resulted from
the Litigation Manager's incapacity due to physical or mental illness or any
such actual or anticipated breach, act or failure to act resulted from a
resignation by the Litigation Manager for Good Reason.
(f) A Litigation Manager may terminate his employment hereunder as to either
or both of the Glendale Litigation and the CalFed Litigation for "Good
Reason." "Good Reason" shall mean (i) a material breach by the Company of a
material obligation of the Company under this Management Agreement after the
Litigation Manager has given the Company notice of the breach within 90 days
of the breach and the Company has not remedied the breach in accordance with
the next sentence or (ii) the existence of a conflict of interest not due to
any misconduct by the Litigation Manager which in the reasonable judgment of
the Litigation Manager renders inappropriate the Litigation Manager's
employment hereunder with respect to either the Glendale Litigation or the
CalFed Litigation. A breach described in this clause includes, without
limitation, (i) a detrimental alteration to the terms of the Litigation
Manager's employment as described herein, (ii) any reduction in the Litigation
Manager's annual salary or other fees, benefits or working conditions
described herein or the failure of the Company to pay when due to the
Litigation Manager any salary or fee or other benefits referred to in this
Management Agreement, (iii) the failure of the Company to obtain an agreement
reasonably satisfactory to the Litigation Manager from any successor to the
Company to assume and agree to perform this Management Agreement, or if the
business for which the Litigation Manager's services are principally performed
is sold or transferred, the failure of the Company to obtain such an agreement
from the purchaser or transferee of such business or (iv) any termination of
the Litigation Manager's employment which is not effected pursuant to the
terms of this Management Agreement and which is not remedied within 30 days
after receipt of written notice from the Litigation Manager delineating each
such claimed breach and setting forth the Litigation Manager's intention to
terminate employment if such breach is not remedied; provided, that if the
specified breach cannot reasonably be remedied within such 30-day period and
the Company commences reasonable steps within such 30-day period to remedy
such breach and diligently continues such steps thereafter until a remedy is
effected, such breach shall not constitute "Good Reason" provided that such
breach is remedied within 60 days after receipt of written notice.
(g) In the event of the removal, resignation, retirement, death or
incapacity of a Litigation Manager with respect to the Glendale Litigation,
the CalFed Litigation or both, such Litigation Manager shall not be replaced
and the remaining Litigation Manager shall continue to serve in such capacity
until such service is terminated pursuant hereto. Resignation or removal as to
one of the Goodwill Litigations shall not affect a Litigation Manager's
rights, powers, privileges, immunities or obligations hereunder with respect
to the Goodwill Litigation as to which such Litigation Manager has not
resigned or been removed. In the event that a Litigation Manager resigns or is
removed or ceases to serve in such capacity for any reason, the remaining
Litigation Manager shall be entitled to such former Litigation Manager's
rights hereunder in respect of compensation and otherwise, including salary
and any forfeited portion of the Incentive Fees, provided that only Stephen J.
Trafton shall be entitled to the Trafton Benefits, and only Richard A. Fink
shall be entitled to the Fink Benefits.
(h) At such time as there are no Litigation Managers with respect to the
Glendale Litigation (or the remaining Litigation Manager has informed the
Company in writing that such Litigation Manager intends to retire, resign or
otherwise cease to serve in such capacity), the Glendale Committee, by
majority vote, shall be authorized to appoint a successor Litigation Manager
or Litigation Managers with respect to the Glendale Litigation and the GSB
LTWs. At such time as there are no Litigation Managers with respect to the
CalFed Litigation (or the remaining Litigation Manager has informed the
Company in writing that such Litigation Manager intends to retire, resign or
otherwise cease to serve in such capacity), the CalFed Committee, by majority
vote, shall be authorized to appoint a successor Litigation Manager or
Litigation Managers with respect to the CalFed Litigation and the CalFed
Securities.
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2.2 California Federal, GSB and Glendale Federal, and their respective
successors, shall cooperate with the Litigation Managers with respect to the
duties and responsibilities of the Litigation Managers hereunder and, without
limiting the generality of the foregoing, shall provide the Litigation
Managers with such access to their books, records, offices and other
facilities and to their employees, agents, attorneys and independent
accountants as the Litigation Managers shall reasonably require for the
purpose of performing their respective duties and exercising their powers
hereunder. The Litigation Managers shall have the authority on behalf of the
Company and its subsidiaries, as the case may be, to consult with and instruct
attorneys of California Federal and Glendale Federal in connection with the
CalFed Litigation and the Glendale Litigation, respectively. GSB agrees to use
its reasonable best efforts to cause the relevant officers, employees, agents
and representatives of the Surviving Bank and its successors to be available
to provide testimony and to execute documents, in each case required in the
reasonable judgment of the Litigation Managers, for the purpose of prosecuting
the Goodwill Litigation, including execution of any complaints, motions,
answers and other pleadings, affidavits, requests and notices, other than
pursuant to instructions that are determined to be unreasonable by the
Glendale Committee or the CalFed Committee, as applicable.
2.3 (a) The Company shall provide the Litigation Managers and the Committees
with drafts of any tax return, report, declaration or certification (each, a
"Tax Return") reporting, reflecting or relating to any Final Resolution or
receipt of proceeds in respect thereof at least 30 days prior to the date such
Tax Return is required to be filed. The Litigation Managers shall provide
comments upon such Tax Returns within 10 days of the receipt thereof, and the
Company shall give due consideration of such comments of the Litigation
Managers as are provided within such period.
(b) The Committees (as defined in the Agreement), in consultation with the
KPMG Peat Marwick LLP (or any successor thereto), shall review (i) any Tax
Return, audit, contest, claim, proceeding or inquiry with respect to taxes
arising from or relating to (A) any Final Resolution or receipt of proceeds in
respect thereof or (B) the distribution of the CalFed Securities or the GSB
LTWs or any payment in respect of the CalFed Securities or (ii) matters
related to any responsibility of KPMG Peat Marwick LLP (or any successor
thereto) under Section 1.6 of the Agreement.
(c) The Company shall use its best efforts not to take any action that would
or would be reasonably likely to have the effect of increasing the tax
benefits or decreasing the tax burden associated with (i) any Final Resolution
of the CalFed Litigation or the receipt of proceeds in respect thereof or (ii)
the distribution of the CalFed Securities or any payment in respect of the
CalFed Securities, at the cost of decreasing the tax benefits or increasing
the tax burden associated with (i) any Final Resolution of the Glendale
Litigation or receipt of proceeds in respect thereof or (ii) the distribution
of the GSB LTWs.
ARTICLE 3.
THE COMMITTEES
3.1 (a) The initial members of the Glendale Committee shall be the GSB
Directors. The initial members of the CalFed Committee shall be [ ]. Each of
the Glendale Committee and the CalFed Committee shall at all times have at
least two members, and all such members shall be members of the Board of
Directors of the Company and of the federal savings bank that is the surviving
corporation in the merger of Glendale Federal and California Federal pursuant
to the Agreement (the "Bank"); provided, however, that members of the
Committees shall not be required to be members of such Boards of Directors
after a Change of Control of the Company (it being understood that any such
Change of Control shall not diminish, to the extent permitted under applicable
law, the rights and powers of such Committee members hereunder). In order to
maintain continuity in respect of the prosecution of the Goodwill Litigation,
the Board of Directors of the Company shall, subject to Section 3.3 hereof,
nominate the persons who are members of the Committees from time to time to be
elected to further terms as Directors of the Company or of the Bank, as the
case may be, it being the understanding of the parties hereto that continuity
of membership on such Committees is in the best interests of the Company and
the Holders.
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For the purpose of this Management Agreement, a "Change of Control" shall
mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended) of beneficial ownership of 50% or more of either (x) the
then outstanding shares of common stock of the Company (the "Outstanding
Common Stock") or (y) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Voting Securities"); provided, however, that
such acquisitions by any of First Gibraltar Holdings, Inc. or Hunter's
Glen/Ford, Ltd., their respective successors or any affiliate or associate
of the foregoing (each, an "FGH Entity") shall not constitute a "Change of
Control" hereunder; or
(ii) Individuals who, as of the Effective Time, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board; or
(iii) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets of another entity (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Common
Stock and Outstanding Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Common Stock and Outstanding Voting Securities, as the case may
be, (ii) no Person (excluding the Company, such corporation resulting from
such Business Combination or the FGH Entities) beneficially owns, directly
or indirectly, 50% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
The Company agrees not to effect or allow to be effected any Change of
Control unless any acquiror or successor in such Change of Control agrees to
take such actions as are necessary and appropriate to assure that the rights
of the Litigation Managers hereunder, as well as the rights of the Holders,
are honored and not affected in any adverse manner.
(b) Except as otherwise expressly provided herein, each Committee may act
only with the concurrence of a majority of its members; provided, however,
that a Committee may, in its discretion, designate a Chairman to act as the
administrative Committee member. A Committee may delegate to its Chairman such
authority as the Committee may determine.
3.2 Each member of the Committees shall be entitled to receive reasonable
fees for service thereon as determined by the Board of Directors of the
Company from time to time, but in no event less than the highest fees received
by members of other committees of the Board of Directors of the Company.
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3.3 If any member of a Committee shall resign, die or become incapacitated,
or shall otherwise become unable to act as a member of such Committee, a
majority of the remaining members of such Committee (or the remaining member,
if only one) shall have the sole authority to appoint a successor. If such
successor is required pursuant to Section 3.1(a) to be a member of the Board
of Directors of the Company, such Board of Directors shall promptly appoint
the individual chosen as successor to such Board of Directors and shall cause
such individual to be nominated for election to such Board of Directors at the
next meeting at which directors are to be elected (provided that such
individual is reasonably acceptable to the Board of Directors of the Company).
A majority of the members of a Committee may vote at any time to remove a
committee member and to appoint a new member to fill the vacancy so created. A
successor or a new Committee member appointed pursuant to this Section 3.3
shall be entitled to all of the rights, powers, immunities and privileges of
the other members of such Committee, without the need of any further act or
writing.
3.4 Subject to Section 2.1 hereof, each Committee may commit to and shall
pay its attorneys' compensation for services rendered and expenses incurred
and may enter into arrangements on such terms as may be approved by such
Committee with such counsel. A Committee may commit to and shall pay all such
persons or entities that it retains compensation for services rendered and
expenses incurred.
3.5 Any member of a Committee and any Litigation Manager may also be a GSB
Holder or a CalFed Holder or an officer, director, employee or affiliate of a
GSB Holder or of a CalFed Holder and will have all the rights of such a Holder
to the same extent as if he or she were not a member of the Committee.
ARTICLE 4.
COSTS AND EXPENSES
4.1 (a) The GSB Committee and the Litigation Managers shall have the power
to authorize the expenditure by the Company of all funds deemed by the GSB
Committee or the Litigation Managers to be reasonably necessary to pursue the
Glendale Litigation or in respect of the GSB LTWs (it being the understanding
of the parties that such funds are expected to amount to at least $10
million), such expenditures including, without limitation, all legal and other
professional fees and costs incurred in connection with the Glendale
Litigation, the GSB LTWs, the compensation and expense reimbursements of the
Committee described in Sections 3.2 and 3.4, payment of any expenses incurred
by or on behalf of the Litigation Managers pursuant hereto and the
compensation of the Litigation Managers, costs and expenses of counsel and
experts retained by the GSB Committee pursuant to Section 3.4, and any amounts
paid pursuant to Article 5.
(b) The CalFed Committee and the Litigation Managers shall have the power to
authorize the expenditure by the Company of all funds deemed by the CalFed
Committee or the Litigation Managers to be reasonably necessary to pursue the
CalFed Litigation or in respect of the CalFed Securities (it being the
understanding of the parties that such funds are expected to amount to at
least $20 million), such expenditures including, without limitation, all legal
and other professional fees and costs incurred in connection with the CalFed
Litigation, the CalFed Securities, the compensation and expense reimbursements
of the CalFed Committee described in Sections 3.2 and 3.4, payment of any
expenses incurred by or on behalf of the Litigation Managers pursuant hereto
and the compensation of such Litigation Managers, costs and expenses of
counsel and experts retained by the CalFed Committee pursuant to Section 3.4,
and any amounts paid pursuant to Article 5.
ARTICLE 5.
INDEMNIFICATION; LIMITATION OF LIABILITY
5.1 In taking any action hereunder, or in refraining therefrom, a Committee,
the members thereof and the Litigation Managers shall each be protected in
relying upon any notice, paper or other document reasonably believed by it or
them to be genuine and signed by the proper parties, or upon any evidence
reasonably deemed by it or them to be sufficient. A Committee, the members
thereof and the Litigation Managers may each rely on
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the statements contained in such writings. In no event shall the Committee,
any member thereof or the Litigation Managers be liable to the Company, any
subsidiary thereof or to the CalFed Holders or GSB Holders for any action,
omission, decision, determination or undertaking by such Committee, any of its
members or a Litigation Manager unless it has been shown by clear and
convincing evidence in a court of competent jurisdiction that such action,
omission, decision, determination or undertaking was undertaken with
deliberate intent to cause substantial injury to the Company or the CalFed
Holders or GSB Holders or with reckless disregard for the best interests of
such persons. If a Committee, any member thereof or a Litigation Manager
consults with counsel or other experts in connection with its or their duties
hereunder, it and they shall be fully protected by any action, omission,
decision, determination or undertaking taken, suffered or permitted by it or
them in good faith and in accordance with the advice of such counsel or other
experts, including counsel or experts who are affiliates of one or more of the
members of a Committee or of one or both Litigation Managers.
5.2 Each member of the Committees and each of the Litigation Managers shall
be indemnified and held harmless by the Company against all claims, demands,
obligations, liabilities and expenses, including amounts paid in satisfaction
of judgments, in compromise (so long as the Company has approved such
compromise, which approval shall not be unreasonably withheld), or as fines or
penalties, and counsel fees, reasonably incurred by him or her in connection
with the defense or disposition of any action, suit or other proceeding by one
or more GSB Holders or CalFed Holders or by any other person, whether civil or
criminal, in which he or she may be involved, or with which he or she may be
threatened, by reason of the fact that he or she is or was a Committee Member
or a Litigation Manager, provided that such Committee member or Litigation
Manager shall not be entitled to have such indemnification in respect of any
matter as to which it shall have been shown in a court of competent
jurisdiction that an action, omission, decision, determination or undertaking
of a Committee member or Litigation Manager was undertaken by such person with
deliberate intent to cause substantial injury to the Company or the CalFed
Holders or GSB Holders or with reckless disregard for the best interests of
such persons.
5.3 Advance payments in connection with indemnification under this Article 5
shall be made by the Company, if so requested by any person entitled to
indemnity pursuant to Section 5.2, provided that such indemnified person shall
have given a written undertaking to repay any amount advanced by or on behalf
of the Company in the event it is subsequently determined that he or she is
not entitled to indemnification under the standard set forth in Section 5.2.
5.4 The Company shall use its reasonable best efforts to cause an
endorsement to its Directors and Officers insurance policy to adequately
insure that each of the members of such Committee and the Litigation Managers
shall be indemnified against any loss, liability or damage for which such
person is entitled to be indemnified pursuant to this Article 5 and that is
attributable to the Glendale Litigation or the GSB LTWs, in the case of the
GSB Committee, or the CalFed Litigation or the CalFed Securities, in the case
of the CalFed Committee.
5.5 The rights accruing to any Committee member or Litigation Manager under
this Article 5 shall not exclude any other right to which such person may be
entitled, and, notwithstanding the other provisions of this Article 5, each
Committee member and Litigation Manager shall be indemnified and insured as a
director and employee of the Company to the fullest extent provided to
directors and executive officers, respectively, of the Company, provided that
no such indemnification or insurance shall be less favorable than that
provided by GSB in favor of such persons as of the date hereof.
ARTICLE 6.
AMENDMENTS; MISCELLANEOUS
6.1 This Management Agreement may be amended from time to time, but only by
an instrument in writing executed by the parties hereto or their successors
and approved by resolution of a majority of the members of each Committee;
provided, however, that any amendment or other modification of this Management
Agreement that would result in any change to, or any provision inconsistent
with, a provision of this Management Agreement that contemplates Committee
action by more than a majority of the members thereof shall not be amended
except
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by an instrument in writing executed by the parties hereto or their successors
and approved by resolution of such higher number of the members of each
Committee.
6.2 (a) Subject to Section 6.2(b), nothing in this Management Agreement
shall be construed to prevent service by any Litigation Manager as a director
or employee of, or a consultant to, a financial institution or other business,
other than the Company.
(b) As of the Effective Time and for three years thereafter, neither
Litigation Manager will directly or indirectly, own, manage, operate, control
or participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director or otherwise with, or
have any financial interest in, any business principally engaged in the
savings and loan or federally insured thrift business in California which is
in material competition with the business conducted by the Company. Ownership
for personal investment purposes only of less than 5% of the voting stock of
any publicly held corporation shall not constitute a violation hereof.
(c) As of the Effective Time and for three years thereafter, neither
Litigation Manager will, directly or indirectly, solicit for employment by
other than the Company any person employed by the Company at the Effective
Time, nor will either Litigation Manager, directly or indirectly, solicit for
employment by other than the Company any person known by such Litigation
Manager to be employed at the time by the Company.
(d) Each Litigation Manager shall hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or
data relating to the Company, which shall have been obtained by the Litigation
Manager during his employment by the Company and which shall not be or become
public knowledge (other than by acts by the Litigation Manager in violation of
this Management Agreement). After termination of the Litigation Manager's
employment with the Company, the Litigation Manager shall not, without the
prior written consent of the Company or as may otherwise be required by law or
legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 6.2 constitute a basis
for deferring or withholding any amounts otherwise payable to a Litigation
Manager under this Management Agreement.
6.3 This Management Agreement and the Agreement constitute the entire
agreement among the parties and their affiliates with respect to the subject
matter hereof and supersede all other prior agreements and understandings,
both written and oral, among the parties and their affiliates or any of them
with respect to the subject matter hereof, and nothing in this Management
Agreement shall be deemed to create any fiduciary or additional obligations on
the part of any person in favor of the Holders or to affect in any manner the
rights of the Holders under the GSB LTWs and the CalFed Securities (and,
without limiting the foregoing, no Litigation Manager shall be deemed to owe a
fiduciary duty to the Company or the Holders as a result of their service as
such hereunder).
6.4 This Management Agreement, and all of the provisions hereof, shall be
binding upon and inure to the benefit of the parties hereto and their
respective permitted successors (including without limitation any transferee
of all or substantially all of the assets of a party hereto or the entity
resulting from or surviving a Change of Control or succeeding to a party
hereto in such Change of Control) and assigns, but the obligations and
responsibilities of the Litigation Managers under this Management Agreement
with respect to the Glendale Litigation and the GSB LTWs, on the one hand, or
the CalFed Litigation and the CalFed Certificates, on the other hand, shall
not be assigned by such Litigation Managers without the prior consent of the
Company.
6.5 The parties hereto hereby agree to execute, acknowledge and deliver such
further agreements and instruments and to do such further acts, or to cause
their respective affiliates to execute, acknowledge and deliver such further
agreements and instruments and to do such further acts, as may be necessary or
proper to effectively carry out the purposes and intents of this Management
Agreement.
6.6 Any provision of this Management Agreement that is prohibited or
unenforceable in any jurisdiction shall not invalidate the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable any such provision
in any other jurisdiction.
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6.7 This Management Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and the applicable laws of
the United States of America, without reference to principles of conflict of
laws. The captions of this Management Agreement are not part of the provisions
hereof and shall have no force or effect.
6.8 All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Litigation Managers:
[Address]
Stephen J. Trafton
Richard A. Fink
If to the Company or the Surviving Bank:
[Golden State Bancorp Inc.]
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
6.9 The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Management Agreement were not performed by
the Company in accordance with its specific terms or otherwise breached.
Accordingly, it is agreed that the parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of this Management Agreement and
to enforce specifically the terms and provisions thereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
6.10 This Management Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
6.11 Any dispute or controversy arising under or in connection with this
Management Agreement (relating to any issue other than the compensation, fees
or benefits of the Litigation Managers hereunder, including without limitation
the matters contemplated by Sections 2.1(c) (and the schedules referred to
therein) and 2.1(d) hereunder) shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect or of such similar organization as the parties hereto may mutually
agree. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company agrees to pay, as incurred, all legal or arbitration
fees and expenses which a Litigation Manager may reasonably incur as a result
of any proceeding with respect to such enforcement hereunder, plus interest on
any delayed payment at the rate set forth in Section 7872(f)(2)(A) of the
Internal Revenue Code of 1986, as amended.
6.12 This Agreement shall automatically terminate and be of no further force
or effect upon the earlier to occur of (a) the termination of the Agreement in
accordance with its terms or (b) the occurrence of all of the following
events: (i) a final nonappealable judgment or order in or a final settlement
of the Goodwill Litigation, (ii) fulfillment of all obligations to the Holders
under the terms of the GSB LTWs and the CalFed Securities and (iii) the
payment of all amounts owing hereunder to the Litigation Managers in respect
of the subject matter of this Management Agreement (except that, in the case
of a termination pursuant to clause (b), (A) the provisions of Sections 5.2
and 5.3 shall continue for a period of six years following such termination;
provided, however, that all rights to indemnification in respect of any claim
asserted or made within such period shall continue until the final disposition
of such claim, and (B) the obligations of the Company set forth in Schedules
2.1(c)(i) and 2.1(c)(ii) to this Management Agreement shall survive such
termination.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement, or caused this Management Agreement to be executed by their
respective officers thereunto duly authorized, as of the date first above
written.
Golden State Bancorp Inc.
/s/ Stephen J. Trafton
By: _________________________________
Name: Stephen J. Trafton
Title: Chairman and Chief Executive
Officer
Glendale Federal Bank, Federal
Savings Bank
/s/ Stephen J. Trafton
By: _________________________________
Name: Stephen J. Trafton
Title: Chairman and Chief Executive
Officer
California Federal Bank, A Federal
Savings Bank
/s/ Carl B. Webb
By: _________________________________
Name: Carl B. Webb
Title: President and Chief Operating
Officer
/s/ Stephen J. Trafton
-------------------------------------
Stephen J. Trafton
/s/ Richard A. Fink
-------------------------------------
Richard A. Fink
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SCHEDULE 2.1(C)(I)
Notwithstanding any provision of the Management Agreement or the Agreement
to the contrary, Stephen J. Trafton ("Trafton") shall be provided with the
following benefits:
1. Retirement Benefit. Trafton shall be entitled to an annual pension
benefit of $1,000,000 (the "Pension Benefit"), payable, at Trafton's election,
in one of the forms and commencing at the times described herein: (i) the
Pension Benefit payable monthly in advance commencing on Trafton's 60th
birthday and for the rest of his life; (ii) the actuarial equivalent of the
Pension Benefit, payable in a lump sum on Trafton's 60th birthday; or (iii)
the actuarial equivalent of the Pension Benefit payable upon Trafton's
termination of employment as a Litigation Manager for any reason, either in a
lump-sum or on an annuity basis, and actuarially reduced to take into account
commencement prior to Trafton's 60th birthday. In the event Trafton's Pension
Benefit is payable in accordance with clauses (ii) or (iii) of the foregoing
sentence, the amount of such benefit shall be determined in good faith based
on reasonable assumptions by the Company's actuaries. Upon Trafton's death and
provided that the Pension Benefit has not previously been paid as a lump-sum,
his spouse, should she survive him, shall be entitled to an annual pension
benefit of 50% of the Pension Benefit, payable monthly in advance. Trafton
shall be fully vested in the Pension Benefit at the Effective Time.
2. Medical Benefits. Notwithstanding anything to the contrary contained in
Section 2.1(c) of the Management Agreement, during Trafton's employment as
Litigation Manager and thereafter, upon Trafton's termination of employment
for any reason, for the remainder of Trafton's life and the life of his
spouse, he and his spouse shall be provided with medical benefits at the
Company's expense pursuant to an indemnity plan reasonably acceptable to
Trafton (the "Medical Benefits"). Trafton shall be fully vested in the Medical
Benefits at the Effective Time.
3. Enforceability. The provisions of this Schedule 2.1(c)(i) are for the
benefit of Trafton and shall be enforceable by him against the Company in a
court of competent jurisdiction. The Company agrees to pay, as incurred, all
legal fees and expenses which Trafton may reasonably incur as a result of any
proceeding with respect to such enforcement hereunder, plus interest on any
delayed payment at the rate set forth in Section 7872(f)(2)(A) of the Internal
Revenue Code of 1986, as amended.
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SCHEDULE 2.1(C)(II)
Notwithstanding any provision of the Management Agreement or the Agreement
to the contrary, Richard A. Fink ("Fink") shall be provided with the following
benefits:
1. Retirement Benefit. Fink shall be entitled to an annual pension benefit
of $325,000 (the "Pension Benefit"), payable at Fink's election in one of the
forms and commencing at the times described herein: (i) the Pension Benefit
payable monthly in advance commencing on Fink's 65th birthday and for the rest
of his life; (ii) the actuarial equivalent of the Pension Benefit, payable in
a lump sum on Fink's 65th birthday; or (iii) the actuarial equivalent of the
Pension Benefit payable upon Fink's termination of employment as a Litigation
Manager for any reason, either in a lump-sum or on an annuity basis, and
actuarially reduced to take into account commencement prior to Fink's 65th
birthday. In the event Fink's Pension Benefit is payable in accordance with
clauses (ii) or (iii) of the foregoing sentence, the amount of such benefit
shall be determined in good faith based on reasonable assumptions by the
Company's actuaries. Upon Fink's death and provided that the Pension Benefit
has not previously been paid as a lump-sum, his spouse, should she survive
him, shall be entitled to an annual pension benefit of 50% of the Pension
Benefit, payable monthly in advance. Fink's Pension Benefit shall vest in two
equal installments on each of the first and second anniversaries of the
Effective Time and shall be fully vested on the second anniversary of the
Effective Time, provided that the Pension Benefit shall be immediately and
fully vested upon Fink's termination of employment as a Litigation Manager for
Good Reason or without Cause or upon Fink's disability. For purposes hereof,
"disability" shall have the meaning set forth in the change of control
employment agreement between Fink and Glendale Federal Bank, Federal Savings
Bank, dated as of December 31, 1997, as amended.
2. Medical Benefits. Notwithstanding anything to the contrary contained in
Section 2.1(c) of the Management Agreement, during Fink's employment as
Litigation Manager and thereafter, upon Fink's termination of employment for
any reason, for the remainder of Fink's life and the life of his spouse, he
and his spouse shall be provided with medical benefits at the Company's
expense pursuant to an indemnity plan reasonably acceptable to Fink (the
"Medical Benefits"). Fink shall be fully vested in the Medical Benefits at the
Effective Time.
3. Enforceability. The provisions of this Schedule 2.1(c)(ii) are for the
benefit of Fink and shall be enforceable by him against the Company in a court
of competent jurisdiction. The Company agrees to pay, as incurred, all legal
fees and expenses which Fink may reasonably incur as a result of any
proceeding with respect to such enforcement hereunder, plus interest on any
delayed payment at the rate set forth in Section 7872(f)(2)(A) of the Internal
Revenue Code of 1986, as amended.
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[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 April 8, 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 March 4,
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: , 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.
