<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 333-44155
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COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST
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(Exact name of registrant as specified in its charter)
DELAWARE 13-7140975
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
E.A. Delle Donne Corporate Center, Montgomery Building, 1011 Centre Road,
Wilmington, Delaware 19805-1266
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 636-3300
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
As of November 2, 1998, the registrant had 20,283,360 contingent payment rights
certificates, no par value, outstanding.
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COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST
PART I FINANCIAL INFORMATION
Item 1. Not applicable
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Registration
Statement on Form S-1 with respect to the CPR Certificates referred to herein
filed by Coast Savings Financial, Inc. ("Coast") with, and declared effective
by, the Securities and Exchange Commission (the "SEC") on January 13, 1998 (SEC
File Number 333-44155).
GENERAL
The Coast Federal Litigation Contingent Payment Rights Trust (the "CPR Trust")
is a statutory business trust created under Delaware law on January 8, 1998. The
CPR Trust was created by Coast in connection with its merger, effected on
February 13, 1998 (the "Merger"), with and into H. F. Ahmanson & Co.
("Ahmanson"), for the purpose of holding the Commitment Agreement entered into
by Ahmanson and the CPR Trust, dated as of February 13, 1998 (the "Commitment").
The Commitment represents Ahmanson's obligation to pay to the CPR Trust an
amount equal to any net after-tax proceeds, as more particularly defined in the
CPR Trust Agreement referred to below (the "Commitment Amount"), that may be
received by Coast's wholly-owned subsidiary, Coast Federal Bank, FSB ("Coast
Federal") (or its successor), from Coast Federal's regulatory capital litigation
claims against the United States government in the case entitled Coast Federal
Bank, FSB v. United States, No. 92-466C (Cl. Ct. filed July 9, 1992) (the
"Litigation"). Subsequent to the merger, Ahmanson merged Coast Federal with and
into Ahmanson's wholly-owned subsidiary, Home Savings of America, FSB ("Home
Savings"), with Home Savings being the successor institution.
Ahmanson merged into Washington Mutual, Inc. ("WAMU") on October 3, 1998 and
Home Savings was thereafter merged into WAMU's wholly-owned subsidiary
Washington Mutual Bank, F.A.
The governing instrument of the CPR Trust is the Amended and Restated
Declaration of Trust, dated as of February 13, 1998 (the "CPR Trust Agreement"),
entered into among Coast, the Litigation Trustees, Bankers Trust Company (the
"Institutional Trustee") and Bankers Trust (Delaware) (the "Delaware Trustee").
Pursuant to the CPR Trust Agreement, the four senior executives of Coast with
knowledge of the facts underlying the Litigation were appointed as "Litigation
Trustees" of the CPR Trust, and were given full authority to make all decisions
on behalf of Coast Federal (and its successors) with respect to the prosecution
and resolution of the Litigation.
The assets of the CPR Trust consist solely of the Commitment and the right to
draw on amounts in the Expense Fund for purposes of funding expenses of the CPR
Trust, including expenses of the Litigation, fees and expenses of the Litigation
Trustees and all administrative expenses. Under the CPR Trust Agreement,
Ahmanson agreed to provide the sum of $19,884,294 (which is equal to $20 million
less expenses related to the Litigation incurred by Coast Federal between
September 1, 1997
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and February 13, 1998) (the "Expense Fund") to fund the Litigation and other
expenses of the CPR Trust, which amount is to be reimbursed to Ahmanson from any
proceeds of the Litigation, including any amounts received in settlement of the
Litigation, prior to the payment of any amounts to holders of the CPR
Certificates. The Expense Fund is on deposit in a non-interest bearing demand
deposit account established by Ahmanson in the name of the CPR Trust at Home
Savings.
Within 60 days of the receipt of any Commitment Amount, the CPR Trust is
required under the CPR Agreement to pay such amounts (other than $10 million or
such greater amount as the Litigation Trustees reasonably determine may be
reasonably likely to be required to pay additional expenses or to satisfy the
CPR Trust's indemnification obligations (the "Retained Amount")) less the amount
of any accrued but unpaid expenses payable by the CPR Trust but not covered by
the Expense Fund, to the holders of the CPR Certificates as of a record date to
be set by the Litigation Trustees. The Retained Amount will be retained for a
period of two years, or such longer period as the Litigation Trustees reasonably
determine may be required.
The Litigation Trustees maintain an office at 136 South Oak Knoll Avenue, Suite
320, Pasadena, California 91101, for the purpose of pursuing the Litigation and
administering their other duties under the CPR Trust Agreement.
THE LITIGATION
The following description of the Litigation does not purport to be a complete
description of the legal and factual issues presented, the court opinions
rendered or the relevant law, and the description is in all respects qualified
by reference to the documents filed in the Litigation, such opinions and the
relevant law.
On July 9, 1992, Coast Federal commenced litigation entitled Coast Federal Bank,
Federal Savings Bank v. United States, Civil Action Number 92-466C, against the
United States in the U.S. Claims Court (now the U.S. Court of Federal Claims,
the "Claims Court") alleging that the United States is in breach of a contract
with Coast Federal and has unlawfully taken Coast Federal's property without
just compensation or due process of law in violation of the U.S. Constitution.
As further described below, Coast Federal's claims arose from changes, mandated
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and certain regulations promulgated thereunder, with respect to the
rules for computing Coast Federal's regulatory capital.
On April 10, 1987, Coast Federal acquired substantially all of the assets and
liabilities of Central Savings and Loan Association ("Central") from the Federal
Savings and Loan Insurance Corporation (the "FSLIC") in a supervisory
transaction (the "Acquisition") that Coast Federal alleges was induced and
arranged by the FSLIC and the Federal Home Loan Bank Board ("FHLBB"). As part of
the Acquisition, Coast Federal entered into a contract with the FSLIC (the
"Assistance Agreement") under which the FSLIC made a cash contribution to Coast
Federal in the amount of $298.3 million (the "Capital Credit"). In the
Litigation, Coast Federal alleges that the Assistance Agreement and certain
resolutions and a forbearance letter issued by the FHLBB in connection with the
Assistance Agreement each expressly provided that the Capital Credit was to be
treated as a permanent addition to
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Coast Federal's regulatory capital. Coast Federal further alleges that such
treatment of the Capital Credit for regulatory capital purposes was essential to
inducing Coast Federal to consummate the Acquisition.
Pursuant to FIRREA, which became effective on August 9, 1989, the FSLIC and the
FHLBB were eliminated and were replaced as the regulators of federally insured
savings institutions by the Office of Thrift Supervision (the "OTS"). In
regulations implementing FIRREA (the "Capital Regulations") and subsequent
actions, the OTS took the position that the Capital Credit should be classified
as supervisory goodwill, as defined in the Capital Regulations, which action
resulted in an immediate exclusion of the Capital Credit from one of the three
measures of Coast Federal's regulatory capital and effected a five year phase-
out of the Capital Credit from such inclusion in the other two measures.
Coast Federal alleges that FIRREA and the Capital Regulations constituted a
breach by the United States of its contractual commitment regarding the
regulatory capital treatment of the Capital Credit and an unlawful taking of
Coast Federal's property rights in the Capital Credit. Coast Federal seeks
damages for such breach of the alleged contract by the United States.
RELATED CASES
The Litigation is one of a number of cases filed against the federal government
in the Claims Court involving acquisitions of failed savings institutions and
alleging that the changes in regulatory capital calculations brought about by
FIRREA and the Capital Regulations constitute a breach of the contract between
the acquiring institution and the federal government. For purposes of the
administration of such claims, the Claims Court bifurcated the trial proceedings
in the first three of such cases to be heard by it (Winstar Corporation, et al.
v. United States, Docket No. 90-8C; Statesman Savings Holding Corp., et al. v.
United States, Docket No. 90-773C (the "Statesman Case"); and Glendale Federal
Bank v. United States, Docket No. 90-772C (the "Glendale Case"), which cases are
collectively referred to herein as the "Related Cases"). In July 1992, the
Claims Court ruled in favor of the plaintiffs in the Related Cases on the
initial question of liability, finding in each case that the plaintiff had a
contract as alleged with the federal government and that the federal government
is in breach of that contract as a result of the enactment of FIRREA and the
issuance of the Capital Regulations thereunder. The decision of the Claims Court
on liability was appealed by the federal government. After extended appellate
proceedings, culminating in an appeal to the Supreme Court, the Supreme Court
ruled in favor of the plaintiffs in the Related Cases in United States v.
Winstar Corp., et al., No. 95-865 (the "Winstar Case").
The trial in the Glendale Case on the issue of damages resulting from the United
States' breach of contract concluded in September 1998 and the Judge in that
case has stated that he anticipates releasing his ruling in late 1998 or early
1999. The trial of the Statesman Case commenced in May of 1998, but the
government and the plaintiffs in that case reached a settlement prior to
completion of the trial.
In an attempt to manage the numerous cases against the federal government
involving the calculation of regulatory capital as a result of the adoption of
FIRREA (all such cases, the "Regulatory Capital Cases"), the Claims Court has
designated twelve cases as priority cases (the "Priority Cases") which will be
the first cases to go to trial following the trials on damages in the Glendale
Case. The first of the Priority Cases is expected to begin trial in December
1998. The Litigation is scheduled to be among the first group of thirty cases to
go to trial following completion of trial in the Priority Cases.
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LIABILITY
The Claims Court stayed proceedings in each of the other cases against the
federal government, including the Litigation, pending the outcome of
the liability phase of the Related Cases. Subsequent to the Supreme Court's
decision in the Winstar Case in July of 1996, such stay was lifted and Coast
reinstated its motion for partial summary judgment as to the federal
government's liability, which had been pending since March of 1993. On February
20, 1998, the United States filed its response to Coast Federal's motion. In its
response, the Government stated that "at this point, entry of an order regarding
the Government's liability would be appropriate. We believe that such an order
should reflect the Government's concession that a contract existed with respect
to Coast's claim for a capital credit to its net worth, and that the Government
acted inconsistently with the contract." On March 23, 1998, Chief Judge Loren
A. Smith entered an order in the Litigation granting Coast Federal's motion for
partial summary judgment as to liability with respect to Coast Federal's
claim for a capital credit to its net worth.
DAMAGES
Although Coast Federal has conducted preliminary reviews of the damages it
believes it suffered as a result of the government's actions, Coast has not made
a final determination regarding the amount or type of such damages it will seek
to recover. Each savings institution affected by FIRREA's and the Capital
Regulations' limitation on the inclusion in regulatory capital of supervisory
goodwill or FSLIC capital contributions reacted to the resulting reduction in
their regulatory capital in an individual fashion dictated by the unique facts
and circumstances faced by the institution. Accordingly, the extent and amount
of damages awarded to each such institution that has brought an action against
the federal government is expected to be fact-specific. Even if the plaintiffs
in the Related Cases are successful in securing damage awards, there can be no
assurance that Coast Federal will obtain a damage award.
In response to the federal government's request, Coast Federal agreed to
participate in the alternative dispute resolution process (the "ADR Process")
established by Judge Smith in his order dated March 3, 1998 with respect to the
Regulatory Capital Cases. Pursuant to the order, dated July 7, 1998, of Judge
Lawrence S. Margolis, the Claims Court judge appointed to implement the ADR
Process, the plaintiffs in the Litigation and two other Regulatory Capital Cases
submitted statements of their claims for damages for consideration by the
government and the Claims Court on August 3, 1998, the government responded to
the respective plaintiffs in early October 1998, and the respective parties were
scheduled to then meet with the Claims Court to discuss whether any possibility
of settling the respective lawsuits existed. However, with respect to the
Litigation, by Order dated October 22, 1998, Judge Margolis released the parties
from further participation in the ADR Process following the communication by the
parties to Judge Margolis of their mutual agreement that such participation was
not likely to be fruitful.
The United States has argued in the Related Cases that some or all of the
damages alleged by the plaintiffs in the Related Cases are too speculative to
permit a recovery. Any trial of Coast Federal's damage claims will occur after
the trial of the damage phases of the remaining Related Cases, and rulings in
the Related Cases may adversely affect some or all of Coast Federal's damage
claims. In addition, the Priority Cases are scheduled for trial before the
damages phase of Coast Federal's case is likely to go to trial, and rulings in
those cases may also adversely affect some or all of Coast Federal's damage
claims. For these and related reasons, there can be no assurance as to the type
or amount, if any, of damages that Coast Federal may recover. Without
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limiting the generality of the foregoing, there can be no assurance that Coast
Federal will obtain any monetary or other recovery in the Litigation.
MANAGEMENT OF THE LITIGATION
Pursuant to the CPR Trust Agreement, the Litigation Trustees have sole and
exclusive right to instruct Coast Federal and its successors with respect to the
prosecution of the Litigation (including all decisions as to retention,
dismissal and the terms of engagement of existing or new counsel for Coast
Federal, which retention may involve fees that are partly contingent, and other
advisors). The CPR Trust Agreement also provides that the Litigation Trustees
have the right, in their sole discretion, to instruct Coast Federal and its
successors to dismiss, settle or cease prosecution of the Litigation at any time
and on any terms; Ahmanson, including any successor, is required by the CPR
Trust Agreement to cause Coast Federal and its successors to follow such
instructions from the Litigation Trustees other than instructions that are not
reasonable.
The Litigation Trustees have entered into a letter agreement with the law firm
which has prosecuted the Litigation to date, Cooper, Carvin & Rosenthal (the
"Firm"), dated February 13, 1998 (the "Letter Agreement"), pursuant to which the
Firm agrees that it will not bill Coast Federal or the CPR Trust for any fees
incurred subsequent to September 1, 1997 in excess of $7,650,000 (the "Cap"). In
addition, up to $2 million of the Cap, i.e., any amounts over $5,650,000, will
only be payable to the Firm out of the Commitment Amount, if any, when received
by the CPR Trust from Ahmanson. In consideration of such limitations on the
Firm's customary charges for professional services, the Letter Agreement
provides that the CPR Trust will pay to the Firm, in addition to the Cap, a
contingent incentive fee in the amount of one percent (1%) of the Commitment
Amount, provided that no such incentive fee shall be payable in the events (1)
that both Charles J. Cooper and Steven S. Rosenthal shall cease to be partners
of the Firm prior to a final decision, including appeals, or other final
resolution of the Litigation, or (2) that either Mr. Cooper or Mr. Rosenthal
shall cease to be a partner of the Firm prior to a final decision, including any
appeals, or other final resolution of the Litigation, other than by death,
disability, or appointment to federal office.
The CPR Trust Agreement provides that as compensation the CPR Trust will pay
each Litigation Trustee, during the term of his service as a Litigation Trustee,
fees of $400,000 per year for five years (except that if the Litigation is
sooner terminated, the remainder of such fees (but in no event with respect to a
period longer than the remainder of such year plus two additional years) will be
accelerated upon final resolution of the Litigation and receipt by Ahmanson of
the Litigation Proceeds), plus reimbursement of all reasonable out-of-
pocket expenses. If the services of the Litigation Trustees continue to be
necessary after the initial five-year period or such receipt of Litigation
Proceeds, the Litigation Trustees shall be entitled to a fee of $200 per hour
until termination of the CPR Trust. Pursuant to the CPR Trust Agreement, each
Litigation Trustee may, but is not obligated to, defer all or part of his
compensation until 30 days after the earliest to occur of (i) the date on which
he elected to defer such
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compensation, (ii) the date he ceases to be a Litigation Trustee, and (iii) the
date of the receipt of the Commitment Amount in full by the CPR Trust. Any
Litigation Trustee electing to so defer will receive the compensation he would
have received plus an amount, calculated on a monthly basis during the period of
deferral (and included in the amount deferred), equal to the product of the
monthly balance of the amount deferred and an annual rate equal to the Reference
Rate, as defined in the CPR Trust Agreement, plus 250 basis points. For the year
ending December 31, 1998, Mr. Martin, Mr. Hunt, Mr. Barritt and Mr. Raiden have
elected to defer one-half of their 1998 compensation.
SUMMARY FINANCIAL INFORMATION
The CPR Trust has no revenues. The Expense Fund is the CPR Trust's only source
of funding for the payment of expenses and operations. Following is a statement
that details the activity in the Expense Fund, and expenses that have been
accrued but not yet paid for the three months ended September 30, 1998, and for
the period February 13, 1998 (the date of commencement of operations of the CPR
Trust) through September 30, 1998, as well as the balance of the Expense Fund
that was available to cover future expenses as of September 30, 1998.
<TABLE>
<CAPTION>
For the Period
For the Three February 13, 1998
Months Ended Through
September 30, 1998 September 30, 1998
------------------- ---------------------
<S> <C> <C>
Initial deposit by Ahmanson $19,884,294
Expense Fund balance available for future
Expenses as of June 30, 1998 $17,868,404
Disbursements:
Litigation Trustee fees (200,000) (433,333)
Litigation and trust administration (65,000) (140,833)
Outside legal counsel and expert fees (325,944) (380,208)
Premises and equipment (14,900) (105,222)
Insurance - (1,003,249)
Office expenses (11,783) (25,390)
----------- -----------
Expense Fund balance as of
September 30, 1998 17,796,059
Accrued expenses:
Deferred Litigation Trustee fees (200,000) (500,000)
Accrued Litigation Trustee fees - (66,667)
Accrued litigation and trust
administration fees - (21,667)
Decrease (increase) in accrual for outside
legal counsel and expert fees 50,000 (100,000)
Accrued interest on deferred Litigation
Trustee fees (12,101) (19,049)
----------- -----------
Expense Fund balance available
for future expenses as of
September 30, 1998 $17,088,676 $17,088,676
=========== ===========
</TABLE>
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In addition, $101,948 of expense was accrued through September 30, 1998, for
interest payable to Ahmanson on disbursements from the Expense Fund. Payment of
such accrued interest payable is contingent upon receipt of sufficient
Litigation Proceeds to make any such payments.
Expenses for "Litigation and trust administration" refer to fees paid to
three individuals retained by the CPR Trust to provide litigation and trust
administration support services. The expense for insurance includes
$1 million for a single premium policy of indemnity insurance for the life of
the CPR Trust.
The amounts in the Expense Fund will be applied to a variety of expenses,
including the costs of prosecuting the Litigation (including the fees and
expenses of counsel, experts, support staff and consultants), compensation of
the Institutional Trustee, the Delaware Trustee and the Litigation Trustees, the
CPR Trust's indemnification obligations, liability insurance for the CPR Trust's
indemnification obligations and any liabilities of the Litigation Trustees. To
the extent that Coast Federal and its successors must engage in protracted
litigation, such fees and expenses may increase significantly, and there can be
no assurance that the Expense Fund will be sufficient to cover such fees and
expenses.
The CPR Trust may issue additional CPR Certificates that represent pro rata
interests in the assets of the CPR Trust in order to pay expenses. However, it
may not be possible to obtain purchasers of the additional CPR Certificates and
there is no assurance that the terms of any such purchases would be reasonable.
In the event additional CPR Certificates are issued and existing CPR Certificate
holders are not given the opportunity to purchase, or do not purchase, a pro
rata amount in such issuance, such CPR Certificate holders' indirect interest in
the Payment Amount will be diluted. The CPR Trust will be authorized to borrow
additional funds for the sole purpose of funding expenses of the CPR Trust, but
only if such borrowings represent debt of the CPR Trust (and not ownership
interests therein) for federal income tax purposes. Furthermore, it may not be
possible for the CPR Trust to borrow funds and, if it is able to borrow funds,
there can be no assurance as to the terms upon which such borrowings may be
available.
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COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a discussion of Coast Federal Bank, FSB v. The United States, which is the
Litigation to which the Registrant's CPR Certificates relate, see PART 1, Item
2. "Management's Discussion and Analysis of Financial Condition and Results of
Operations The Litigation."
Items 2 through 5 are not applicable or the answers are negative.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On October 28, 1998, the registrant filed a report on Form 8-K attaching its
press release dated October 27, 1998 and reporting that Judge Margolis' has
released the parties to the Litigation from the previously reported ADR Process.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COAST FEDERAL LITIGATION
CONTINTENT PAYMENT RIGHTS TRUST
-------------------------------
(Registrant)
/s/ Ray Martin
-------------------------------------
Ray Martin, Litigation Trustee
/s/ Robert L. Hunt II
-------------------------------------
Robert L. Hunt II, Litigation Trustee
/s/ Norman H. Raiden
-------------------------------------
Norman H. Raiden, Litigation Trustee
/s/ James F. Barritt
-------------------------------------
James F. Barritt, Litigation Trustee
Dated: November 10, 1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,796,059
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,686,185
<CURRENT-LIABILITIES> 707,382
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,007,439)
<TOTAL-LIABILITY-AND-EQUITY> 18,686,185
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 817,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,566
<INCOME-PRETAX> (904,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (904,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (904,411)
<EPS-PRIMARY> (0.045)
<EPS-DILUTED> (0.045)
</TABLE>
