<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GOLDEN STATE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6035 13-3990512
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
135 MAIN STREET
SAN FRANCISCO, CALIFORNIA 94105
(415) 904-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHRISTIE S. FLANAGAN, ESQ.
GOLDEN STATE HOLDINGS INC.
135 MAIN STREET
SAN FRANCISCO, CALIFORNIA 94105
(415) 904-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
STACY J. KANTER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
------------------------------ -------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Floating Rate Notes Due 2003.................. $ 250,000,000 100% $ 250,000,000 $ 73,750
6 3/4% Senior Notes Due 2001.................. $ 350,000,000 100% $ 350,000,000 $103,250
7% Senior Notes Due 2003...................... $ 600,000,000 100% $ 600,000,000 $177,000
7 1/8% Senior Notes Due 2005.................. $ 800,000,000 100% $ 800,000,000 $236,000
Total......................................... $2,000,000,000 100% $ 2,000,000,000 $590,000
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED SEPTEMBER 29, 1998
PROSPECTUS
OFFER FOR ALL OUTSTANDING FLOATING RATE NOTES DUE 2003, 6 3/4% SENIOR NOTES DUE
2001, 7% SENIOR NOTES DUE 2003 AND 7 1/8% SENIOR NOTES DUE 2005 IN EXCHANGE FOR
FLOATING RATE NOTES DUE 2003, 6 3/4% SENIOR NOTES DUE 2001, 7% SENIOR NOTES DUE
2003 AND 7 1/8% SENIOR NOTES DUE 2005, RESPECTIVELY, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
of
GOLDEN STATE HOLDINGS INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
------------------
Golden State Holdings Inc., a Delaware corporation (the "Issuer" or "Golden
State Holdings"), hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange (i) an aggregate
principal amount of up to $250,000,000 of its Floating Rate Notes Due 2003 (the
"New Floating Rate Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding Floating Rate Notes Due 2003 (the "Old Floating Rate
Notes" and, together with the New Floating Rate Notes, the "Floating Rate
Notes") from the holders thereof, (ii) an aggregate principal amount of up to
$350,000,000 of its 6 3/4% Senior Notes Due 2001 (the "New 2001 Notes"), which
have been registered under the Securities Act, for a like principal amount of
its issued and outstanding 6 3/4% Senior Notes Due 2001 (the "Old 2001 Notes"
and, together with the New 2001 Notes, the "2001 Notes") from the holders
thereof, (iii) an aggregate principal amount of up to $600,000,000 of its 7%
Senior Notes Due 2003 (the "New 2003 Notes"), which have been registered under
the Securities Act, for a like principal amount of its issued and outstanding 7%
Senior Notes Due 2003 (the "Old 2003 Notes" and, together with the New 2003
Notes, the "2003 Notes") from the holders thereof and (iv) an aggregate
principal amount of up to $800,000,000 of its 7 1/8% Senior Notes Due 2005 (the
"New 2005 Notes" and, together with the New 2001 Notes and the New 2003 Notes,
the "New Fixed Rate Notes" and, together with the New Floating Rate Notes, the
"New Notes"), which have been registered under the Securities Act, for a like
principal amount of its issued and outstanding 7 1/8% Senior Notes Due 2005 (the
"Old 2005 Notes" and, together with the New 2005 Notes, the "2005 Notes") from
the holders thereof.
The Old Floating Rate Notes, the Old 2001 Notes, the Old 2003 Notes and the
Old 2005 Notes, are collectively referred to herein as the "Old Notes," and the
Old Notes and the New Notes are collectively referred to herein as the "Notes."
The terms of the New Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes and except that, if the Exchange Offer is not consummated by
March 13, 1999, the interest rate on the Old Notes from and including such date
until but excluding the date of consummation of the Exchange Offer will increase
by 0.5%. The Old Notes were originally issued by GS Escrow Corp. ("Escrow
Corp.") on August 6, 1998 pursuant to an offering (the "Offering"), which was
exempt from registration under the Securities Act. Escrow Corp. was merged with
and into Golden State Holdings (the "Escrow Corp. Merger") on September 14,
1998, and Golden State Holdings assumed the obligations of Escrow Corp. under
the Old Notes and related indenture, as supplemented (the "Indenture").
The Floating Rate Notes bear interest at a rate equal to three-month LIBOR
(as defined herein) plus 100 basis points per annum, except that the initial
rate was 6 3/4% per annum, which was based on six-month LIBOR (which initial
interest rate will be reset on the first interest payment date and, thereafter,
reset on a quarterly basis), and will mature on August 1, 2003. The first
interest payment date for the Floating Rate Notes will be February 1, 1999.
Thereafter, interest on the Floating Rate Notes will be payable quarterly on
each May 1, August 1, November 1 and February 1. The 2001 Notes will mature on
August 1, 2001. The 2003 Notes will mature on August 1, 2003. The 2005 Notes
will mature on August 1, 2005.
(Continued on following page)
------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 29 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------
The date of this Prospectus is , 1998.
<PAGE>
(continued from cover page)
The Old Notes were originally offered to fund, in part, a series of
refinancings (the "Refinancing Transactions") that occurred following a series
of mergers and an asset transfer (the "Golden State Acquisition") that combined
the separate businesses operated by California Federal Bank, A Federal Savings
Bank ("Cal Fed" or the "Bank"), and Glendale Federal Bank, Federal Savings Bank
("Glendale Federal"). Golden State Holdings directly owns 100% of the common
stock of the combined Bank. See "Summary--The Refinancing Transactions" and
"--The Golden State Acquisition." Pending the Golden State Acquisition, the
Refinancing Transactions and the Escrow Corp. Merger, the proceeds of the
Offering were deposited with an escrow agent (the "Escrow Agent"). On September
14, 1998, a portion of such funds were used to fund the Refinancing Transactions
and the balance was released to Golden State Holdings.
The Floating Rate Notes are not redeemable prior to August 1, 2000 except
in the case of a Change of Control (as defined herein). Thereafter, the Floating
Rate Notes will be redeemable at the option of the Issuer, in whole or in part,
at any time prior to maturity at the redemption prices set forth herein plus
accrued interest, if any, to the date of redemption. In the event of a Change of
Control occurring prior to August 1, 2000, the Floating Rate Notes will be
redeemable, in whole but not in part, at the option of the Issuer at a
redemption price equal to the sum of the principal amount of the Floating Rate
Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of
redemption, plus the excess, if any, of (i) the sum of the present values of the
redemption price for the Floating Rate Notes on August 1, 2000 and the scheduled
interest payments that would be required from the redemption date to August 1,
2000 in respect of such Floating Rate Notes to be redeemed if the Applicable
LIBOR Rate (as defined herein) were the Designated Fixed Rate (as defined
herein), using in each case a discount rate equal to the Treasury Rate (as
defined herein) plus 50 basis points, over (ii) the outstanding principal amount
of the Floating Rate Notes to be redeemed.
The Fixed Rate Notes are redeemable, at the option of the Issuer, in whole
or in part, at any time prior to maturity at a redemption price equal to the sum
of the principal amount of the Fixed Rate Notes to be redeemed, plus accrued and
unpaid interest, if any, to the date of redemption, plus the excess, if any, of
(a) the sum of the present values of the remaining scheduled payments on the
Fixed Rate Notes (as defined herein) to be redeemed of principal and interest
discounted to the redemption date at the Treasury Rate plus a spread of (x) 40
basis points with respect to the 2001 Notes, (y) 50 basis points with respect to
the 2003 Notes, and (z) 50 basis points with respect to the 2005 Notes (in each
case, the "Make Whole Amount"), over (b) the outstanding principal amount of the
portion of Fixed Rate Notes to be redeemed. See "Description of the
Notes--Optional Redemption."
Upon a Change of Control, each holder of the Notes will have the right to
require the Issuer to repurchase all or a portion of such holder's Notes at a
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. See "Description of the Notes."
The Old Notes are, and the New Notes will be, senior unsecured obligations
of Golden State Holdings and the Old Notes rank, and the New Notes will rank,
pari passu in right of payment with all existing and future Senior Indebtedness
(as defined herein) of Golden State Holdings. At June 30, 1998, after giving
effect to the Golden State Acquisition, the Refinancing Transactions (assuming
all outstanding debt securities of FNH (as defined herein) are acquired in the
Refinancing Transactions) and the Escrow Corp. Merger, Golden State Holdings
would have had outstanding $2.0 billion of Senior Indebtedness, consisting
solely of the Notes. The Old Notes are, and the New Notes will be, effectively
subordinated to (i) all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of Golden State Holdings,
including the Bank, and (ii) all preferred stock issued by the Bank and its
subsidiaries.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from August 6, 1998. Accordingly, if the relevant record date for
interest payment occurs after the consummation of the Exchange Offer, registered
holders of New Notes on such record date will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from August 6, 1998. If, however, the relevant record date for interest
payment occurs prior to the consummation of the Exchange Offer,
2
<PAGE>
registered holders of Old Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from August 6, 1998. Old Notes accepted for exchange
will cease to accrue interest from and after the date of the consummation of the
Exchange Offer, except as set forth in the immediately preceding sentence.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after consummation
of the Exchange Offer.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuer contained in the Registration Agreement dated
August 6, 1998 among the Issuer and the other signatories thereto (the
"Registration Agreement"). Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") as set forth in no-action
letters issued to third parties, the Issuer believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement with any person to participate in the distribution of
such New Notes. However, the Issuer does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a period
of 180 days after the Expiration Date (as defined herein), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Issuer will not receive any proceeds from the Exchange Offer. The
Issuer will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Issuer terminates the Exchange Offer and does
not accept for exchange any Old Notes, the Issuer will promptly return the Old
Notes to the holders thereof. See "The Exchange Offer."
Following consummation of the Exchange Offer, the Issuer may, in its sole
discretion, commence one or more additional exchange offers to holders of Old
Notes who did not exchange their Old Notes for New Notes in the Exchange Offer
on terms which may differ from those contained in the Registration Agreement.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by the Issuer in connection with any such additional exchange offers.
------------------------------------
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. Salomon Brothers Inc,
Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Chase
Securities Inc. and NationsBanc Montgomery Securities LLC (the "Initial
Purchasers") have advised the Issuer that they currently intend to make a market
in the New Notes. The Initial Purchasers are not obligated to do so, however,
and any market-making with respect to the New Notes may be discontinued at any
time without notice. The Issuer does not intend to apply for listing or
quotation of the New Notes on any securities exchange or stock market.
3
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act, with respect
to the New Notes being offered by this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits thereto, to which reference is hereby made. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement.
The Registration Statement and the exhibits thereto may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will
also be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Issuer is not currently subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As a result of the Exchange Offer, the Issuer will become subject to such
requirements, and in accordance therewith will file periodic reports and other
information with the Commission. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as the Issuer, that file electronically with the
Commission and the address of such site is http://www.sec.gov. In the event the
Issuer is not required to be subject to the reporting requirements of the
Exchange Act in the future, the Issuer will be required under the Indenture,
pursuant to which the Old Notes have been, and the New Notes will be, issued, to
continue to file with the Commission and to furnish to holders of the Notes the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, including reports on Forms 10-K, 10-Q and 8-K, for so long as
any Notes are outstanding.
------------------------------------
The Prospectus 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 the Prospectus,
including, without limitation, statements regarding (a) cost savings that are
expected to be realized from the Golden State Acquisition, (b) the reductions of
interest expense and preferred stock dividend requirements to be realized from
the Refinancing Transactions, (c) the pro forma assets and deposits of the
combined Bank and (d) the financial condition, results of operations and
business of the Issuer and its subsidiaries following consummation of the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger, are
forward-looking statements. Although the Issuer believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Issuer's
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere in the Prospectus including, without limitation, in conjunction with
the forward-looking statements included in the Prospectus. All subsequent
written and oral forward-looking statements attributable to the Issuer or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus.
As described herein, Cal Fed has grown substantially over the past five
years through a series of acquisitions. On January 3, 1997, First Nationwide
Bank, A Federal Savings Bank, merged with and into Cal Fed (the "Cal Fed
Acquisition"), and, on September 11, 1998, Glendale Federal merged with and into
Cal Fed. See "--The Golden State Acquisition."
Unless the context otherwise indicates:
o The "Issuer" refers to (i) Golden State Holdings, as the surviving
corporation in the Escrow Corp. Merger and the successor obligor on the
Notes, for periods after the Escrow Corp. Merger and (ii) Escrow Corp.,
as the initial obligor on the Notes, for periods prior to the Escrow
Corp. Merger;
o "Golden State Holdings" refers to Golden State Holdings Inc., which was
formerly known as New First Nationwide Holdings Inc.;
o The "Bank" or "Cal Fed" refers to California Federal Bank, A Federal
Savings Bank, as the surviving entity after the consummation of each of
the Cal Fed Acquisition and the Golden State Acquisition, and to First
Nationwide Bank, A Federal Savings Bank, and its predecessors with
respect to the period prior to the Cal Fed Acquisition; and
o "Old Cal Fed" and "Old California Federal" refer to Cal Fed Bancorp Inc.
and California Federal Bank, A Federal Savings Bank, respectively, with
respect to the period prior to the consummation of the Cal Fed
Acquisition.
An index of defined terms used in this Prospectus begins on page 247.
THE ISSUER AND THE BANK
The Issuer
Golden State Holdings is a holding company whose only significant asset is
all of the common stock of the Bank. Golden State Holdings was formed to acquire
all of the assets of First Nationwide Holdings Inc. ("FNH") (including all of
the common stock of the Bank) as part of the Golden State Acquisition. FNH was a
holding company whose only significant asset was all of the common stock of the
Bank. As such, the principal business operations of FNH were, and the principal
business operations of Golden State Holdings are, conducted by the Bank and its
subsidiaries.
The Bank
The Bank, which is headquartered in San Francisco, California, is a
diversified financial services company whose principal business consists of
(i) operating retail deposit branches to serve consumers in California and, to a
lesser extent, in Nevada, (ii) originating and/or purchasing, on a nationwide
basis, 1-4 unit residential loans and, to a lesser extent, certain commercial
real estate and consumer loans, for investment and (iii) conducting mortgage
banking activities, including originating and servicing 1-4 unit residential
loans for others. Recently, with its entry into the non-prime automobile finance
business, Cal Fed broadened its complement of consumer lending products. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings. As of June 30, 1998, Cal Fed had approximately $34.0 billion
in assets and approximately $16.0 billion in deposits and operated retail branch
offices at 225 locations in three states.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act ("HOLA") and regulated by the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation ("FDIC"), which, through
the Savings Association Insurance Fund ("SAIF"), insures the deposit accounts of
5
<PAGE>
Cal Fed, up to applicable limits. The Bank is also a member of the Federal Home
Loan Bank System ("FHLBS"). See "Business--The Issuer--The Bank."
THE GOLDEN STATE ACQUISITION
General
On February 4, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") entered into an Agreement and Plan of Reorganization (the "Merger
Agreement") with FNH, First Gibraltar Holdings Inc. ("First Gibraltar
Holdings"), Hunter's Glen/Ford, Ltd. ("Hunter's Glen"), Golden State Bancorp
Inc. ("Golden State"), and Golden State Financial Corporation ("Golden State
Financial"). On September 11, 1998, pursuant to or as contemplated by the Merger
Agreement, (i) FNH contributed all of its assets (including all of the common
stock of Cal Fed) to Golden State Holdings (the "FNH Asset Transfer"),
(ii) Parent Holdings, which then owned 80% of the common stock of FNH, merged
with and into Golden State, which indirectly owned 100% of the common stock of
Glendale Federal (the "Golden State Merger"), (iii) FNH merged with and into
Golden State Financial, which owned 100% of the common stock of Glendale Federal
(the "FNH Merger" and, together with the Golden State Merger, the "Holding
Company Mergers") and (iv) Glendale Federal merged with and into Cal Fed (the
"Subsidiary Bank Merger"). The FNH Asset Transfer, the Holding Company Mergers
and the Subsidiary Bank Merger are referred to collectively herein as the
"Golden State Acquisition." See "The Golden State Acquisition."
Glendale Federal and Golden State
Glendale Federal, formerly headquartered in Glendale, California, was a
federal stock savings bank. On a pro forma basis at June 30, 1998, after giving
effect to the acquisition of RedFed (as defined herein), Glendale Federal had
approximately $19.2 billion in assets and $11.6 billion in deposits and operated
205 banking offices and 26 loan offices throughout California. Glendale Federal
offered a broad range of consumer financial services including demand and term
deposits, mortgage, consumer and small business loans, and insurance and
investment products. Golden State is a Delaware chartered savings and loan
holding company whose only significant asset was the indirect ownership of all
of the common stock of Glendale Federal. Golden State is a publicly owned
corporation whose common shares are traded on the New York Stock Exchange (the
"NYSE") under the symbol "GSB."
Golden State completed the acquisition of CENFED Financial Corporation
("CENFED"), the parent company of CenFed Bank, A Federal Savings Bank ("CenFed
Bank"), through the merger on April 21, 1998 of CENFED with and into Golden
State Financial and the merger on May 8, 1998 of CenFed Bank with and into
Glendale Federal (collectively, the "CENFED Merger"). At April 21, 1998, CENFED,
through CenFed Bank, had total assets of $1.9 billion and deposits of
$1.4 billion and operated 18 branch offices located in Los Angeles, Orange,
Riverside and San Bernardino Counties in Southern California. The CENFED Merger
was accounted for using the purchase method of accounting.
On July 13, 1998, Golden State completed the acquisition of RedFed Bancorp,
Inc. ("RedFed"), and its federal savings bank subsidiary, Redlands Federal Bank,
through the mergers of RedFed with and into Golden State Financial and Redlands
Federal Bank with and into Glendale Federal (collectively, the "RedFed Merger").
At June 30, 1998, RedFed had total assets of $1.0 billion and deposits of
$864 million and operated 15 banking offices in Southern California's Riverside
and San Bernardino Counties. The RedFed Merger was accounted for using the
purchase method of accounting. See "Business--Glendale Federal."
Benefits
Management of the Issuer and Cal Fed believes the Golden State Acquisition
will produce the following substantial strategic benefits compared to what Cal
Fed and Glendale Federal could achieve on their own:
o Increased Size. The combined bank resulting from the Golden State
Acquisition creates California's largest community bank and would be,
based on published sources, the fourth largest depository institution in
California. On a pro forma basis after giving effect to the Golden State
Acquisition at June 30, 1998, the combined bank would have approximately
$54 billion in assets and $28 billion in
6
<PAGE>
deposits (including the $1.4 billion in deposits sold on September 14,
1998 in the Florida Branch Sale (as defined herein)). Of the $28 billion
in pro forma deposits, $26 billion are California retail deposits,
representing a 6.0% statewide market share.
o Strong Complementary Abilities. The Golden State Acquisition combines
Glendale Federal's lower-cost deposit generation ability with Cal Fed's
strong asset origination ability. On a pro forma basis at June 30, 1998,
cost of funds for the combined bank would be 4.85%, three basis points
lower than the Federal Home Loan Bank ("FHLB") 11th District Cost of
Funds at the same date. In addition, the combined mortgage banking
business will rank in the top 10 nationally, with a pro forma mortgage
servicing portfolio of approximately $96 billion at June 30, 1998, and
pro forma combined residential loan originations expected to exceed
$13 billion in 1998.
o Expanded Consumer Base and Business Banking Franchise. The Golden State
Acquisition broadens the base from which to expand Cal Fed's consumer and
business banking franchise. At June 30, 1998, Cal Fed had total business
banking loans of $25.4 million. On a pro forma basis, total business
banking loans at June 30, 1998 would be approximately $520 million, more
than a 20-fold increase. The total consumer loan portfolio, on a pro
forma basis, increases approximately 30% to $1.1 billion at June 30,
1998. It is estimated that the combined bank will service 2.2 million
deposit accounts, representing 1.5 million households.
o Sustained Credit Quality. The Golden State Acquisition provides growth
without compromising asset quality. Both Cal Fed and Glendale Federal
have exemplary credit quality relative to their savings bank peer group,
with a pro forma ratio of allowance for loan losses to non-performing
loans at June 30, 1998 of approximately 218%. The pro forma ratio of
non-performing assets to total assets of the Bank at June 30, 1998
approximates 0.71%.
o Increased Pre-Tax Income. Without giving effect to the Refinancing
Transactions, the Golden State Acquisition, on a pro forma basis,
increases pre-tax income by $110.6 million and $190.9 million, or
approximately 59% and 64%, for the six months ended June 30, 1998 and the
year ended December 31, 1997, respectively. The impact of the Golden
State Acquisition on after-tax earnings reflected in the pro forma
statement of income is much less significant because of the change in
FNH's effective tax rate from 12.78% to 42.15%.
o Economies of Scale. The Golden State Acquisition is expected to result
in economies of scale with estimated pre-tax cost savings of
$131 million annually (after being fully phased in). Further, Golden
State estimates that the CENFED and RedFed Mergers will result in an
additional $31 million of annual cost savings. The estimated cost savings
have not been reflected in the pro forma statements of income. With 45%
of Glendale Federal branches within two miles of a Cal Fed branch, it is
anticipated that approximately 60 branches will be consolidated. Back
office and other administrative efficiencies are expected to result in
the elimination of approximately 1,100 full-time equivalent positions
from the total workforce of the combined bank.
THE REFINANCING TRANSACTIONS
On August 6, 1998, the proceeds of the Offering were deposited with the
Escrow Agent pursuant to an escrow agreement. On September 14, 1998, such funds
were released from escrow, with approximately $552.2 million used to finance the
Parent Holdings Defeasance (as defined herein) and the balance delivered to the
Issuer. Concurrently with such release, Golden State Financial, as the successor
obligor, gave a 30-day notice of redemption for all of the outstanding
$455 million aggregate principal amount of 12 1/2% Senior Notes Due 2003 of
Parent Holdings (the "Parent Holdings Notes"), and irrevocably deposited in
trust money or government obligations in an amount sufficient to pay the
redemption price therefor, together with any accrued and unpaid interest to the
date of redemption, for the purpose of defeasing the Parent Holdings Notes (the
"Parent Holdings Defeasance").
On August 17, 1998, FNH commenced cash tender offers (the "Bank Preferred
Stock Tender Offers") for each of the Bank's two outstanding series of Bank
Preferred Stock (as defined herein) which together had a total aggregate
liquidation preference of $473.2 million. The Bank Preferred Stock Tender Offers
expired on
7
<PAGE>
September 14, 1998 and 222,721 shares of the 10 5/8% Preferred Stock (as defined
herein), constituting approximately 13% of the shares of 10 5/8% Preferred Stock
outstanding, and 995,437 shares of the 11 1/2% Preferred Stock (as defined
herein), constituting approximately 33% of the shares of 11 1/2% Preferred Stock
outstanding, were purchased by the Issuer pursuant thereto for an aggregate
purchase price of approximately $135.8 million. On September 14, 1998, Golden
State Holdings commenced cash tender offers and executed supplemental indentures
to effect the Amendments (collectively, the "Debt Tender Offers") for each of
its three outstanding series of FNH Notes (as defined herein) which together had
a total aggregate principal amount of $915 million. On September 17, 1998,
Golden State Holdings purchased $137,445,000 aggregate principal amount of the
FNH 12 1/4% Senior Notes (as defined herein), $109,555,000 aggregate principal
amount of the FNH 9 1/8% Senior Subordinated Notes (as defined herein) and
$488,820,000 aggregate principal amount of the FNH 10 5/8% Senior Subordinated
Notes (as defined herein) tendered by Salomon Smith Barney Inc. in the FNH Debt
Tender Offers. The Debt Tender Offers expired on October , 1998, and
approximately $ million principal amount of FNH Notes were purchased
pursuant thereto for an aggregate purchase price of approximately
$ million.
The Issuer financed the Debt Tender Offers, the Bank Preferred Stock Tender
Offers and the Parent Holdings Defeasance with the net proceeds of the Offering
and a cash dividend from the Bank of $ million (the "Bank Dividend"). The
Offering, the Bank Dividend, the Debt Tender Offers, the Bank Preferred Stock
Tender Offers and the Parent Holdings Defeasance are referred to collectively
herein as the "Refinancing Transactions."
The $ million principal amount of FNH 12 1/4% Senior Notes that
remain outstanding rank pari passu with the Notes and the $ million principal
amount of FNH 9 1/8% Senior Subordinated Notes and $ principal amount
of FNH 10 5/8% Senior Subordinated Notes that remain outstanding are
subordinated in right of payment to the Notes.
The Issuer may from time to time continue to purchase Bank Preferred Stock
in one or more open market or privately negotiated transactions. The Issuer
expects to purchase the outstanding Bank Preferred Stock not acquired in the
Bank Preferred Stock Tender Offers or such other transactions once it becomes
redeemable (April 1, 1999 in the case of the 10 5/8% Preferred Stock and
September 1, 1999 in the case of the 11 1/2% Preferred Stock).
As a result of the Refinancing Transactions (assuming that (i) 100% of the
FNH Notes are acquired in the Debt Tender Offers and (ii) all outstanding Bank
Preferred Stock is acquired in the Bank Preferred Stock Tender Offers or is
subsequently purchased by the Issuer), (i) the interest expense at FNH,
(ii) the interest expense at Parent Holdings (now Golden State) and (iii) the
preferred stock dividend requirement of the Bank was reduced as follows (in
thousands):
<TABLE>
<CAPTION>
PRE-TAX AFTER-TAX
-------- ---------
<S> <C> <C>
Old Debt and Bank Preferred Stock:
FNH Notes................................................................... $ 98,369 $ 56,907
Parent Holdings Notes....................................................... 56,875 32,902
Bank Preferred Stock........................................................ 52,912 52,912
-------- ---------
208,156 142,721
New Debt:
Notes....................................................................... 140,910 81,516
-------- ---------
Annual Savings.............................................................. $ 67,246 $ 61,205
-------- ---------
-------- ---------
</TABLE>
The pro forma statements of income of the Issuer included elsewhere in this
Prospectus do not include the reduction in interest expense relative to the
Parent Holdings Notes, which is expected to increase annual pre-tax earnings at
Parent Holdings (now Golden State) by approximately $56.9 million. Prior to the
Parent Holdings Defeasance, such interest expense had been financed by dividends
from the Bank to FNH and from FNH to Parent Holdings. Annual interest expense of
approximately $32.1 million (on a pre-tax basis) is included in pro forma
earnings for the portion of the Notes that was used to refinance the Parent
Holdings Notes.
8
<PAGE>
As a result of the Refinancing Transactions, the average life of the Notes
is longer than the average life of the debt that was refinanced. As a result of
the reduction in the consolidated Parent Holdings annual debt service, there is
a greater opportunity for accumulation of retained earnings at the Bank level.
Furthermore, the Debt Tender Offers and the Parent Holdings Defeasance
eliminated all of the restrictive covenants contained in the existing indentures
of FNH and Parent Holdings which would otherwise have precluded the assumption
by Golden State Holdings of the Notes and otherwise limited certain activities
of the Issuer and its subsidiaries, including the Bank. As a result of the
Refinancing Transactions, the Issuer and its subsidiaries, including the Bank,
have greater financial and operating flexibility.
The following table illustrates the sources and uses of funds in the
Refinancing Transactions (assuming that (i) 100% of the FNH Notes are acquired
in the Debt Tender Offers and (ii) all outstanding Bank Preferred Stock is
acquired in the Bank Preferred Stock Tender Offers or is subsequently purchased
by the Issuer) (in thousands):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Sale of the Notes............................................................... $1,993,919
Bank Dividend (a)............................................................... 122,923
----------
$2,116,842
----------
----------
USES OF FUNDS:
Debt Tender Offers:
FNH 12 1/4% Senior Notes...................................................... $ 200,000
FNH 9 1/8% Senior Subordinated Notes.......................................... 140,000
FNH 10 5/8% Senior Subordinated Notes......................................... 575,000
Bank Preferred Stock Tender Offers:
11 1/2% Preferred Stock....................................................... 300,730
10 5/8% Preferred Stock....................................................... 172,500
Parent Holdings Defeasance...................................................... 455,000
----------
1,843,230
Expenses of the Refinancing Transactions........................................ 273,612
----------
$2,116,842
----------
----------
</TABLE>
- ------------------
(a) Alternatively, the Issuer may borrow up to $200 million under a new
short-term senior unsecured credit facility, which borrowings are expected
to be repaid by the Issuer from payments received from the Bank under the
Tax Sharing Agreement (as defined herein). The Bank Dividend will be reduced
by the amount borrowed, if any, under such new credit facility. See "Risk
Factors--Tax Sharing Agreement; Availability of Net Operating Loss
Carryovers."
9
<PAGE>
BUSINESS STRATEGY
The Bank will continue to execute its business plan to increase
profitability, grow earnings, and diversify the sources of fee revenue while
preserving credit quality. Key elements of the business plan include:
o Cal Fed will continue its transition toward a more "bank-like"
institution. In particular, the traditional savings bank activities of
the Bank will be supplemented and expanded by the following initiatives:
-- Continuing to market demand deposit and transaction accounts as the
primary account relationship. The corollary reduction in emphasis on
certificates of deposits will contribute to a lower overall cost of
funds. Transaction account relationships also tend to generate greater
fee income.
-- Offering a broader range of retail products. Mutual funds, insurance
and annuity products, mortgage and home equity loans are currently
available to Bank customers. The Bank has only recently begun a
concerted marketing effort to realize the opportunity to sell more
products and services to its customers.
-- Expanding small business lending. The Bank generally ranks as one of
the top four depository institutions in most of the markets it serves.
This high profile positions the Bank to compete very effectively to
provide services to small businesses. Local, small business lending
generates wider margins than commercial lending.
o Cal Fed will continue to enhance operating efficiency by, among other
things, further expanding its customer base, increasing transaction
volumes and reducing costs through consolidation of administrative and
managerial functions. Management has achieved substantial progress in
reducing the Bank's efficiency ratio, which represents the ratio of
noninterest expense to net interest income and noninterest income
(excluding certain non-recurring items and goodwill amortization), from
63.47% for the year ended December 31, 1995 to 48.46% for the six months
ended June 30, 1998.
o First Nationwide Mortgage Corporation ("FNMC") will continue to increase
noninterest income and obtain incremental efficiencies in its mortgage
banking operations. In particular, FNMC will seek to maintain the
expected level of servicing of just over one million mortgage loans in
its Frederick, Maryland facility after the Golden State Acquisition.
o The Bank will continue to focus on risk management by seeking to protect
the credit quality of its assets through, among other things, continuing
to originate primarily residential loans in accordance with the Bank's
carefully developed underwriting standards, which have resulted in
non-performing assets of 0.67% of the Bank's total assets at June 30,
1998. Non-performing assets as a percentage of total assets of the Bank
was 0.87% and 1.36% at December 31, 1997 and 1996, respectively. The
ratio for Glendale Federal at June 30, 1998 and December 31, 1997 was
0.74% and 0.95%, respectively.
o The Bank will retain the best practices of both merger partners. Cal Fed
contributes an efficient back office operation, a large-scale mortgage
banking business, and proven merger integration skills. Glendale Federal
offers complementary attributes including consumer marketing skills, a
growing small business lending practice, and an attractive retail
mortgage origination network.
o The Bank will mitigate interest rate risk by adding primarily adjustable
rate mortgages ("ARMs") to its loan portfolio.
o The Bank will continue to evaluate external growth and revenue
diversification through selective acquisitions which are consistent with
its business strategy. This growth may include acquisitions of businesses
that management believes offer the potential for higher growth and margin
expansion, such as non-prime automobile and non-prime mortgage loan
origination. Since the FN Acquisition (as defined herein) in 1994, the
Bank's business strategy has been executed through three types of
transactions, as the information set forth in the tables below
illustrates:
-- Acquisitions which complement the Bank's geographic and business line
strategies, such as the Golden State Acquisition;
-- Divestitures of branches outside the Bank's primary geographic region;
and
-- Expansion of the Bank's mortgage servicing operations.
10
<PAGE>
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include general
and regional economic conditions, competition and changes in the regulatory
framework affecting the Bank and interest rates. Accordingly, no assurance can
be given that any of the Bank's strategies will prove to be effective or that
the Bank's goals will be achieved. See "Risk Factors."
The following tables summarize the selective acquisitions, opportunistic
divestitures and expansions of mortgage servicing operations consummated by the
Bank since 1994 in furtherance of its business strategy:
Acquisitions
<TABLE>
<CAPTION>
DATE DEPOSITS ACQUISITION
- --------------- ---------------------- -----------------------------------------------------------------
<S> <C> <C>
April 1995 $13 million Deposits from East-West Federal Bank, a federal savings bank
located in Tiburon, California (the "Tiburon Purchase")
August 1995 $356 million Three retail branches of ITT Federal Bank, fsb located in Orange
County, California (the "ITT Purchase")
December 1995 $144 million Four retail branches of Citizens Federal Bank, a Federal Savings
Bank located in Sonoma County, California (the "Sonoma Purchase"
and, collectively with the Tiburon Purchase and the ITT Purchase,
the "Branch Purchases")
February 1996 $2.7 billion San Francisco Federal Savings and Loan Association ("San
Francisco Federal"), and its parent holding company, SFFed Corp.
("SFFed") which had approximately $4.0 billion in assets and
operated 35 branches in the Northern California area (the "SFFed
Acquisition")
June 1996 $632 million Home Federal Savings and Loan Association of San Francisco ("Home
Federal"), and its parent holding company, Home Federal Financial
Corporation ("HFFC") which had approximately $717 million in
assets and operated 15 branches in Northern California (the "Home
Federal Acquisition" and, together with the SFFed Acquisition,
the "1996 Acquisitions")
January 1997 $8.9 billion Old California Federal which had approximately $14.1 billion in
assets and operated 119 branches in California and Nevada
September 1997 N/A Auto One Acceptance Corporation ("Auto One"), the origination,
processing and servicing capabilities of a Dallas-based
automobile finance company, primarily engaged in indirect
non-prime automobile financing activities, providing loan
processing, funding and loan servicing for over 800 franchised
automobile dealers (the "Auto One Acquisition")
February 1998 N/A Gulf States Acceptance Company, a Houston-based finance company
that had non-prime automobile loans of approximately
$113 million purchased from franchised dealers (the "GSAC
Acquisition")
September 1998 $11.6 billion Golden State and Glendale Federal which had, on a pro forma basis
(pro forma) at June 30, 1998, after giving effect to the RedFed Merger,
approximately $19.2 billion in assets and operated 205 banking
offices and 26 loan offices throughout California
</TABLE>
11
<PAGE>
Branch Sales
<TABLE>
<CAPTION>
DATE DEPOSITS DESCRIPTION
---- -------- -----------
<S> <C> <C>
January 1996 $1.4 billion Sale of 28 branches located in Ohio (the "Ohio Branch Sale")
January to $2.4 billion Sale of 30 branches located in New York and New Jersey (the
March 1996 "Northeast Branch Sales")
June 1996 $799 million Sale of 21 branches located in Michigan (the "Michigan Branch
Sale" and, collectively with the Ohio Branch Sale and the
Northeast Branch Sales, the "Branch Sales")
September 1998 $1.4 billion Sale of 24 branches located in Florida (the "Florida Branch
Sale")
</TABLE>
Mortgage Servicing Operations
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO
DATE ACQUIRED OR SOLD DESCRIPTION
---- ------------------- -----------
<S> <C> <C>
February 1995 $11.4 billion Acquisition of a 1-4 unit residential loan servicing portfolio
(the "Maryland Acquisition")
October 1995/ $5.6 billion Acquisition of a loan servicing portfolio of approximately
January 1996 (master servicing $11.1 billion and a portfolio of mortgage servicing rights
portfolio) ("MSRs") of approximately $2.9 billion from Lomas Mortgage USA,
$25.2 billion Inc. ("LMUSA")(the "LMUSA 1995 Purchase")
(servicing portfolio) Acquisition of LMUSA's remaining loan servicing portfolio of
approximately $14.1 billion, together with a master servicing
portfolio of approximately $2.7 billion and other assets (the
"LMUSA 1996 Purchase" and, together with the LMUSA 1995 Purchase,
the "LMUSA Purchases")
May 1997 $3.2 billion Acquisition of a 1-4 unit residential loan servicing portfolio
from WMC Mortgage Corporation (the "Weyerhaeuser Purchase")
September 1997 $2.3 billion Sale of MSRs for approximately 52,000 loans (the "Servicing
Sale")
</TABLE>
12
<PAGE>
These transactions have expanded and strengthened the Bank's presence on
the West Coast, providing additional economies of scale and diversity of
operations within its target California markets. Management believes that
consummation of the Golden State Acquisition will further strengthen the Bank's
competitive position. The Bank's retail deposits in California will have
increased from $2.3 billion at the time of the FN Acquisition in October 1994 to
$26.0 billion at June 30, 1998, on a pro forma basis after giving effect to the
Golden State Acquisition. The Bank's retail deposits outside California will
have decreased from $6.9 billion at the time of the FN Acquisition to
$0.6 billion at June 30, 1998 on a pro forma basis after giving effect to the
Golden State Acquisition and the Florida Branch Sale.
The Bank believes that the 1996 Acquisitions, the Branch Sales and the Cal
Fed Acquisition have enabled it to enhance, and expects that the Golden State
Acquisition will enable it to further enhance, the value of its franchise and
improve its operating efficiency through the consolidation or elimination of
duplicative back office operations and administrative and management functions.
The Bank's acquisitions of loan servicing portfolios have enabled it to
increase the percentage of its income represented by noninterest income through
fees generated from its mortgage servicing operations. Because the Bank had
excess servicing capacity and existing servicing expertise, it was able to
accommodate the loan servicing portfolios acquired in these transactions without
the need for significant additional investment. Since the FN Acquisition, the
Bank's mortgage servicing portfolio will have increased from $6.7 billion to
$96 billion at June 30, 1998 on a pro forma basis after giving effect to the
Golden State Acquisition.
The Bank applies carefully developed underwriting standards in originating
1-4 unit residential loans, commercial real estate and consumer loans, as well
as in evaluating acquisition opportunities. The Bank has a specialized credit
risk management group that is charged with the development of credit policies
and performing credit risk analyses for all asset portfolios.
OWNERSHIP
Golden State Holdings is an indirect wholly owned subsidiary of Golden
State. MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation
wholly owned through Mafco Holdings Inc. ("Mafco Holdings," and together with
MacAndrews Holdings, "MacAndrews & Forbes"), by Ronald O. Perelman, owns 34.7%
of the common stock of Golden State and Hunter's Glen, a limited partnership
controlled by Gerald J. Ford, Chairman of the Board, Chief Executive Officer and
a director of the Bank, owns 13.2% of the common stock of Golden State, with the
balance of the common stock of Golden State being publicly held. In addition,
pursuant to the Merger Agreement, Mafco Holdings and Hunter's Glen will be
entitled to receive contingent consideration based on certain conditions, which
contingent consideration could cause the ownership percentages of Mafco Holdings
and Hunter's Glen to increase. See "The Golden State Acquisition." The board of
directors of Golden State is composed of 15 directors, with ten directors
initially designated by MacAndrews & Forbes. See "Ownership of the Common Stock"
and "Certain Relationships and Related Transactions--Transactions with Mr.
Ford."
13
<PAGE>
The following chart summarizes the ownership of the common equity of the
Issuer.
[OWNERSHIP CHART]
Mafco Holdings Inc. Hunter's Glen/Ford Ltd. Public
("Mafco Holdings") ("Hunter's Glen") (b) Stockholders
and related entities ----------------------- ------------
-------------------- | |
| | |
34.7% (a) | 11.6% (a) | 53.7% (a) |
| | |
| | |
---------------------------------------------------------------------
Golden State Bancorp Inc. ("Golden State")
---------------------------------------------------------------------
|
| 100%
|
|
---------------------------------------------------------------------
Golden State Financial Corporation ("Golden State Financial")
---------------------------------------------------------------------
|
| 100%
|
|
---------------------------------------------------------------------
Golden State Holdings Inc. ("Golden State Holdings")
---------------------------------------------------------------------
|
| 100% (c)
|
|
---------------------------------------------------------------------
California Federal Bank, A Federal Savings Bank
("Cal Fed" or the "Bank"), as successor by merger with
Glendale Federal Savings Bank ("Glendale Federal")
---------------------------------------------------------------------
- ------------
(a) Pursuant to the Merger Agreement, Mafco Holdings and Hunter's Glen will be
entitled to receive contingent consideration following the Golden State
Merger based on certain conditions, which contingent consideration could
cause the actual ownership percentages of Mafco Holdings and Hunter's Glen
to exceed the amounts set forth above. See "The Golden State Acquisition."
(b) Hunter's Glen is a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the Bank.
See "Ownership of the Common Stock."
(c) Immediately prior to the consummation of the Golden State Acquisition, the
charter of the Bank was amended to provide that each share of Bank Preferred
Stock is entitled to one vote and each CALGZ (as defined herein) and each
CALGL (as defined herein) has 1/5 of one vote with the holders of the common
stock of the Bank, the Bank Preferred Stock, the CALGZs and the CALGLs
voting together as a single class. In addition, after giving effect to a
stock split of the common stock of the Bank, Golden State Holdings'
ownership of 100% of the common stock represents approximately 90% of the
total voting power of voting securities of the Bank. In addition to its
common stock ownership of the Bank, Golden State Holdings owns the $121.8
million liquidation value of Bank Preferred Stock purchased in the Bank
Preferred Stock Tender Offers.
14
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered........................ Up to $250,000,000 aggregate principal amount of Floating Rate Notes
Due 2003, up to $350,000,000 aggregate principal amount of 6 3/4%
Senior Notes Due 2001, up to $600,000,000 aggregate principal amount
of 7% Senior Notes Due 2003 and up to $800,000,000 aggregate
principal amount of 7 1/8% Senior Notes Due 2005, each of which has
been registered under the Securities Act. The terms of the New Notes
and the Old Notes are identical in all material respects, except for
certain transfer restrictions and registration rights relating to the
Old Notes and except that, if the Exchange Offer is not consummated
by March 15, 1999, the interest rate on the Old Notes from and
including such date until but excluding the date of consummation of
the Exchange Offer will increase by 0.5%. See "--Summary Description
of the New Notes" and "Description of the Notes--Registration
Rights."
The Exchange Offer........................ The New Notes are being offered in exchange for a like aggregate
principal amount of Old Notes. The issuance of the New Notes is
intended to satisfy obligations of the Issuer contained in the
Registration Agreement. For procedures for tendering the Old Notes,
see "The Exchange Offer--Procedures for Tendering Old Notes."
Tenders; Expiration Date;
Withdrawal.............................. The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1998, or such later date and time to which it is
extended (the "Expiration Date"). The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Note not accepted for exchange for any
reason will be returned without expense to the tendering holder
thereof as promptly as practicable after the expiration or
termination of the Exchange Offer. See "The Exchange Offer--Terms of
the Exchange Offer; Period for Tendering Old Notes" and "The Exchange
Offer--Withdrawal Rights."
Certain Conditions to Exchange
Offer................................... The Issuer shall not be required to accept for exchange, or to issue
New Notes in exchange for, any Old Notes and may terminate or amend
the Exchange Offer if at any time before the acceptance of the Old
Notes for exchange or the exchange of the New Notes for such Old
Notes certain events have occurred, which, in the reasonable judgment
of the Issuer, make it inadvisable to proceed with the Exchange Offer
and/or with such acceptance for exchange or with such exchange. Such
events include (i) any threatened, instituted or pending action
seeking to restrain or prohibit the Exchange Offer, (ii) a general
suspension of trading in securities on any national securities
exchange or in the over-the-counter market, (iii) a general banking
moratorium, (iv) the commencement of a war or armed hostilities
involving the United States and (v) a material adverse change or
development involving a prospective material adverse change in the
Issuer's business, properties, assets, liabilities, financial
condition, operations, results of operations or prospects that may
affect the value of the Old Notes or the New Notes. In addition, the
Issuer will not accept for exchange any Old Notes
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
tendered, and no New Notes will be issued in exchange for any such
Old Notes, at any such time as any stop order shall be threatened or
in effect with respect to the Registration Statement of which this
Prospectus constitutes a part or the qualification of the Indenture
under the Trust Indenture Act of 1939, as amended. See "The Exchange
Offer--Certain Conditions to the Exchange Offer."
Federal Income Tax Consequences........... The exchange pursuant to the Exchange Offer will not result in gain
or loss to the holders or the Issuer for federal income tax purposes.
See "Certain U.S. Federal Income Tax Considerations."
Use of Proceeds........................... There will be no proceeds to the Issuer from the exchange pursuant to
the Exchange Offer. See "Use of Proceeds."
Exchange Agent............................ The Bank of New York is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Offer.
</TABLE>
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indentures regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate that
it will register Old Notes under the Securities Act. See "Description of the
Notes--Registration Rights." Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Issuer believes that New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold or otherwise transferred by
holders thereof (other than any holder which is an "affiliate" of the Issuer
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such New Notes. However, the Issuer does not
intend to request the Commission to consider, and the Commission has not
considered, the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes. If
any holder is an affiliate of the Issuer, is engaged in or intends to engage in
or has any arrangement or understanding with respect to the distribution of the
New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could
not rely on the applicable interpretations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a period
of 180 days after the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." In addition, to comply with the state securities laws, the New
Notes may not be offered or sold in any state unless they have been registered
or qualified for sale in such state or an exemption from registration or
qualification is available and is complied with. The offer and sale of the New
Notes to "qualified institutional
16
<PAGE>
buyers" (as such term is defined under Rule 144A of the Securities Act) is
generally exempt from registration or qualification under the state securities
laws. The Issuer currently does not intend to register or qualify the sale of
the New Notes in any state where an exemption from registration or qualification
is required and not available. See "The Exchange Offer--Consequences of
Exchanging or Failing to Exchange Old Notes" and "Description of the
Notes--Registration Rights."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by March 13, 1999, the interest rate on the Old Notes from and
including such date until but excluding the date of consummation of the Exchange
Offer will increase by 0.5%. The New Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid on the Old Notes, from August 6, 1998. Accordingly, if the
relevant record date for interest payment occurs after the consummation of the
Exchange Offer, registered holders of New Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from August 6, 1998. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer, registered holders of Old Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from August 6, 1998. Old Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of the Exchange Offer, except as set forth in the immediately preceding
sentence. Holders of Old Notes whose Old Notes are accepted for exchange will
not receive any payment in respect of interest on such Old Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer.
<TABLE>
<S> <C>
Securities Offered........................ Up to $250 million aggregate principal amount of Floating Rate Senior
Notes Due 2003, which have been registered under the Securities Act.
Up to $350 million aggregate principal amount of 6 3/4% Senior Notes
Due 2001, which have been registered under the Securities Act.
Up to $600 million aggregate principal amount of 7% Senior Notes Due
2003, which have been registered under the Securities Act.
Up to $800 million aggregate principal amount of 7 1/8% Senior Notes
Due 2005, which have been registered under the Securities Act.
Maturity Date............................. The Floating Rate Notes will mature on August 1, 2003.
The 2001 Notes will mature on August 1, 2001.
The 2003 Notes will mature on August 1, 2003.
The 2005 Notes will mature on August 1, 2005.
Interest Payment Dates.................... Interest on the Floating Rate Notes will accrue from the Issue Date
(as defined herein). The first interest payment date will be
February 1, 1999. Thereafter, interest will be payable quarterly in
arrears on each May 1, August 1, November 1 and February 1. The
interest rate on the Floating Rate Notes will be equal to three-month
LIBOR plus 100 basis points per annum, except that the initial rate
will be 6 3/4%, which is based on six-month LIBOR. The initial
interest rate will remain in effect until, and will be reset on, the
first interest payment date, and, thereafter, the interest rate will
be reset quarterly.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
Interest on each of the 2001 Notes, the 2003 Notes and the 2005 Notes
will accrue from the Issue Date and is payable semi-annually in
arrears on each February 1 and August 1, commencing February 1, 1999.
Ranking................................... The Old Notes constitute, and the New Notes will constitute,
unsecured and unsubordinated obligations of Golden State Holdings and
the Old Notes rank, and the New Notes will rank, pari passu in right
of payment with all other unsubordinated and unsecured indebtedness
("Senior Indebtedness") of Golden State Holdings.
Sinking Fund.............................. None.
Optional Redemption....................... The Floating Rate Notes are not redeemable prior to August 1, 2000
except in the event of a Change of Control. Thereafter, the Floating
Rate Notes will be redeemable at the option of the Issuer, in whole
or in part, at any time prior to maturity at the redemption prices
set forth herein plus accrued interest, if any, to the date of
redemption. In the event that the redemption date will occur
following the next scheduled Interest Reset Date (as defined herein),
the rate of interest on the Floating Rate Notes for the period from
the Notice Date (as defined herein) to the redemption date will be
the higher of (x) the Applicable LIBOR Rate on the Floating Rate
Notes in effect on the Notice Date and (y) the Applicable LIBOR Rate
that is determined by using the second London Banking Day (as defined
herein) preceding the Notice Date as the Interest Rate Determination
Date (as defined herein). In such case, the Applicable LIBOR Rate
will not be reset on the Interest Reset Date which follows the Notice
Date and precedes the redemption date, although accrued interest will
remain due and payable on the related Floating Rate Interest Payment
Date (as defined herein). In the event of a Change of Control
occurring prior to August 1, 2000, the Floating Rate Notes are
redeemable, in whole but not in part, at the option of the Issuer at
a redemption price equal to the sum of the principal amount of the
Floating Rate Notes to be redeemed, plus accrued and unpaid interest,
if any, to the date of redemption, plus the excess, if any, of
(i) the sum of the present values of the redemption price for the
Floating Rate Notes on August 1, 2000 and the remaining scheduled
interest payments from the redemption date to August 1, 2000 in
respect of such Floating Rate Notes to be redeemed if the Applicable
LIBOR Rate were the Designated Fixed Rate, using in each case a
discount rate equal to the Treasury Rate plus 50 basis points, over
(ii) the outstanding principal amount of the Floating Rate Notes to
be redeemed. The Fixed Rate Notes are redeemable, at the option of
the Issuer, in whole or in part, at any time prior to maturity at a
redemption price equal to the sum of the principal amount of the
Fixed Rate Notes to be redeemed, plus accrued and unpaid interest, if
any, to the date of redemption, plus the excess, if any, of (a) the
sum of the present values of the remaining scheduled payments on the
Fixed Rate Notes of principal and interest discounted to the
redemption date at the Treasury Rate plus a spread of (x) 40 basis
points with respect to the 2001 Notes, (y) 50 basis points with
respect to the 2003 Notes, and (z) 50 basis points with respect to
the 2005 Notes (in each case, the "Make Whole Amount"), over (b) the
outstanding principal amount of the portion of Fixed Rate Notes to
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
be redeemed. See "Description of the Notes--Optional Redemption."
Change of Control......................... Upon a Change of Control each holder of the Notes will have the right
to require the Issuer to repurchase all or a portion of such holder's
Notes at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase. See
"Description of the Notes--Optional Redemption--Change of Control."
Certain Covenants......................... The Indenture for the Notes contains limitations on, among other
things, (i) the creation of certain indebtedness, (ii) the creation
of certain Liens, (iii) the merger of, or sale of assets or capital
stock of the Bank, (iv) any change in the insured status of the Bank,
(v) the making of certain Restricted Payments, including Investments
in Affiliates, (vi) the creation of payment restrictions affecting
Subsidiaries and (vii) transactions with Affiliates (the foregoing
capitalized terms are defined in "Description of the Notes--Certain
Definitions"). All of these limitations are subject to a number of
important qualifications. See "Description of the Notes--Certain
Covenants."
Exchange Offer; Registration Rights....... Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. Pursuant to the Registration Agreement, the
Issuer has agreed that it would, at its cost, use its best efforts to
cause a registration statement to be declared effective under the
Securities Act for the exchange of Old Notes for registered notes.
The Registration Statement of which this Prospectus is a part
constitutes the registration statement for purposes of the
Registration Agreement. See "Description of the Notes--Registration
Rights."
Use of Proceeds........................... The Issuer will not receive any proceeds from the Exchange Offer. The
Issuer used the net proceeds of the Offering, which were
approximately $1,965.3 million (net of discounts to the Initial
Purchasers and fees and expenses), to finance the Refinancing
Transactions. See "Use of Proceeds."
</TABLE>
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors" before making a decision to
tender their Old Notes in the Exchange Offer.
19
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data gives effect to the Golden
State Acquisition, the CENFED Merger, the RedFed Merger and the Refinancing
Transactions (assuming that (i) 100% of the FNH Notes are acquired in the Debt
Tender Offers and (ii) all outstanding Bank Preferred Stock is acquired in the
Bank Preferred Stock Tender Offers or is subsequently purchased by the Issuer).
The following summary pro forma financial data as of and for the six months
ended June 30, 1998 are based on (i) the historical consolidated balance sheet
of FNH giving effect to the Golden State Acquisition, the RedFed Merger and the
Refinancing Transactions as if such transactions occurred on June 30, 1998, and
(ii) the historical consolidated statement of income of FNH for the six months
ended June 30, 1998 giving effect to the Golden State Acquisition, the CENFED
Merger, the RedFed Merger and the Refinancing Transactions as if such
transactions occurred on January 1, 1997. The following summary pro forma
financial data for the year ended December 31, 1997 is based on the historical
consolidated statement of income of FNH for the year ended December 31, 1997
giving effect to the Golden State Acquisition, the CENFED Merger, the RedFed
Merger and the Refinancing Transactions as if such transactions occurred on
January 1, 1997. However, for purposes of computing the purchase price, the
daily volume weighted average price of Golden State common stock and the
Litigation Tracking Warrants(Trademark) for the three days ended September 10,
1998 was used, as such prices are considered to provide more relevant
information to investors. For purposes of pro forma presentation, Glendale
Federal's consolidated statements of operations have been recast to conform to
the calendar year end used by FNH. The pro forma adjustments are based on
available information and upon certain assumptions that management believes are
reasonable under the circumstances. The Golden State Acquisition, the CENFED
Merger and the RedFed Merger are accounted for under the purchase method of
accounting. Under this method of accounting, the purchase price has been
allocated to the assets and liabilities acquired based on preliminary estimates
of fair value. The actual fair value is determined as of the consummation of
each respective acquisition. The summary pro forma financial data do not
necessarily reflect the results of operations or the financial position of the
Issuer that actually would have resulted had the Golden State Acquisition, the
CENFED Merger, the RedFed Merger and the Refinancing Transactions occurred at
the dates indicated, or project the results of operations or financial position
of the Issuer for any future date or period.
The summary pro forma financial data should be read in conjunction with the
notes accompanying the "Pro Forma Financial Data" included elsewhere in this
Prospectus. In addition, the summary pro forma financial data should be read in
conjunction with the Consolidated Financial Statements of FNH and the notes
thereto included elsewhere in this Prospectus and the Consolidated Financial
Statements of Glendale Federal and the notes thereto included elsewhere in this
Prospectus. See "Selected Historical Financial Data," and "Pro Forma Financial
Data."
20
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GLENDALE GOLDEN STATE REFINANCING
FNH FEDERAL(1) ACQUISITION TRANSACTIONS PRO FORMA
(HISTORICAL) (PRO FORMA) ADJUSTMENTS ADJUSTMENTS COMBINED
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due from banks............... $ 345,921 $ 361,175 $ -- $ (45,002) $ 662,094
Federal funds sold............................ -- 172,000 -- -- 172,000
Other investments............................. 879,071 136,305 -- -- 1,015,376
Loans receivable, net......................... 20,351,922 14,685,298 6,807 -- 35,044,027
Mortgage-backed securities, net............... 9,180,282 2,385,605 6,962 -- 11,572,849
Real estate held for sale or investment....... -- 6,327 -- -- 6,327
Real estate acquired in settlement of loans... 64,892 44,109 -- -- 109,001
Investment in capital stock of FHLB, at
cost........................................ 540,127 310,073 -- -- 850,200
Mortgage servicing assets..................... 669,056 243,314 54,243 -- 966,613
Goodwill and other intangible assets.......... 656,177 229,230 61,875 -- 947,282
Other assets.................................. 1,348,509 615,385 184,446 (28,847) 2,158,076
28,625
9,958
------------ ----------- ---------- ----------- -----------
$ 34,035,957 $19,188,821 $ 314,333 $ (35,266) $53,503,845
------------ ----------- ---------- ----------- -----------
------------ ----------- ---------- ----------- -----------
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Deposits...................................... $ 16,044,288 $11,566,018 $ 2,588 $ -- $27,612,894
Securities sold under agreements to
repurchase.................................. 2,861,604 175,551 -- -- 3,037,155
Borrowings from the FHLB...................... 10,993,707 5,683,537 1,194 -- 16,678,438
Other borrowings.............................. 1,282,580 8,763 993 (915,000) 2,371,255
2,000,000
(6,081)
Other liabilities............................. 729,131 327,987 563,578 (12,159) 1,621,765
13,228
Minority interest............................. 986,296 -- -- (486,458) 499,838
Stockholder's equity.......................... 1,138,351 1,426,965 (254,020) (134,600) 1,682,500
(494,196)
------------ ----------- ---------- ----------- -----------
$ 34,035,957 $19,188,821 $ 314,333 $ (35,266) $53,503,845
------------ ----------- ---------- ----------- -----------
------------ ----------- ---------- ----------- -----------
</TABLE>
- ------------------
(1) Represents the historical balance sheet for Glendale Federal, adjusted for
the RedFed Merger, accounted for as a purchase, together with related pro
forma purchase accounting adjustments.
See the accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Statements under "Pro Forma Financial Data."
21
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOLDEN STATE REFINANCING
FNH GLENDALE FEDERAL ACQUISITION TRANSACTIONS PRO FORMA
(HISTORICAL) (PRO FORMA)(1) ADJUSTMENTS ADJUSTMENTS COMBINED
------------ ---------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Interest income................................. $1,091,523 $667,194 $ (5,129) $ (1,238) $1,752,350
Interest expense................................ 752,596 403,571 (1,616) (49,185) 1,176,639
70,455
818
---------- -------- -------- -------- ----------
Net interest income............................. 338,927 263,623 (3,513) (23,326) 575,711
Provision for loan losses....................... 20,000 (2,917) -- -- 17,083
---------- -------- -------- -------- ----------
Net interest income after provision for loan
losses........................................ 318,927 266,540 (3,513) (23,326) 558,628
Other income:
Fee income.................................... 71,363 53,359 (4,068) -- 120,654
Gain (loss) on sale of loans, net............. 36,124 796 -- -- 36,920
Gain on sale of mortgage-backed securities,
net......................................... -- 5,155 -- -- 5,155
Other income, net............................. 62,685 367 -- -- 63,052
---------- -------- -------- -------- ----------
Total other income.......................... 170,172 59,677 (4,068) -- 225,781
Other expenses:
Compensation and employee benefits............ 127,620 88,782 -- -- 216,402
Occupancy expense, net........................ 41,406 19,493 -- -- 60,899
Regulatory insurance.......................... 5,054 4,601 -- -- 9,655
Advertising and promotion..................... 9,914 10,819 -- -- 20,733
Furniture, fixtures and equipment............. -- 8,109 -- -- 8,109
Other general and administrative expenses..... 99,611 48,806 -- (3,336) 147,835
2,754
---------- -------- -------- -------- ----------
Total general and administrative expenses... 283,605 180,610 -- (582) 463,633
Restructuring charges........................... -- 8,213 -- -- 8,213
Legal expense--goodwill lawsuit................. -- 9,068 -- -- 9,068
Operations of real estate held for sale or
investment.................................... -- 46 -- -- 46
Operations of real estate acquired in settlement
of loans...................................... (5,138) (1,914) -- -- (7,052)
Amortization of goodwill and other intangible
assets........................................ 23,229 9,932 2,063 -- 35,224
---------- -------- -------- -------- ----------
Total other expense......................... 301,696 205,955 2,063 (582) 509,132
Earnings (loss) before income tax provision
(benefit)..................................... 187,403 120,262 (9,644) (22,744) 275,277
Income tax provision (benefit).................. (221,134) 49,075 56,415 (9,552) (125,196)
---------- -------- -------- -------- ----------
Earnings (loss) before minority interest........ 408,537 71,187 (66,059) (13,192) 400,473
Minority interest............................... 45,614 -- (6,666) (26,456) 12,492
---------- -------- -------- -------- ----------
Net earnings (loss)............................. $ 362,923 $ 71,187 $(59,393) $ 13,264 $ 387,981
---------- -------- -------- -------- ----------
---------- -------- -------- -------- ----------
Memo Item:
Common dividends necessary for debt service on
the Parent Holdings Notes..................... $ 28,438 -- -- $(28,438) --
Effective tax rate.............................. 12.78% N/A N/A N/A 42.15%
</TABLE>
(1) Represents the historical statement of income for Glendale Federal, adjusted
for the CENFED Merger and the RedFed Merger, each accounted for as a
purchase, together with related pro forma purchase accounting adjustments.
See the accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Statements under "Pro Forma Financial Data."
22
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOLDEN STATE REFINANCING
FNH GLENDALE FEDERAL ACQUISITION TRANSACTIONS PRO FORMA
(HISTORICAL) (PRO FORMA)(1) ADJUSTMENTS ADJUSTMENTS COMBINED
------------ ---------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Interest income................................ $2,127,490 $1,357,054 $ (10,256) $ (2,475) $3,471,813
Interest expense............................... 1,440,804 859,760 (3,231) (98,369) 2,341,510
140,910
1,636
---------- ---------- ---------- -------- ----------
Net interest income............................ 686,686 497,294 (7,025) (46,652) 1,130,303
Provision for loan losses...................... 79,800 19,154 -- -- 98,954
---------- ---------- ---------- -------- ----------
Net interest income after provision for loan
losses....................................... 606,886 478,140 (7,025) (46,652) 1,031,349
Other income:
Fee income................................... 143,919 110,771 (8,136) -- 246,554
Gain (loss) on sale of loans, net............ 24,721 (347) -- -- 24,374
Gain on sale of mortgage-backed securities,
net........................................ -- 1,803 -- -- 1,803
Other income, net............................ 171,054 2,466 -- -- 173,520
---------- ---------- ---------- -------- ----------
Total other income......................... 339,694 114,693 (8,136) -- 446,251
Other expenses:
Compensation and employee benefits........... 256,448 154,143 -- -- 410,591
Occupancy expense, net....................... 81,914 46,300 -- -- 128,214
Regulatory insurance......................... 10,680 11,382 -- -- 22,062
Advertising and promotion.................... 20,186 24,854 -- -- 45,040
Furniture, fixtures and equipment............ -- 13,649 -- -- 13,649
Other general and administrative expenses.... 233,642 80,940 -- (6,672) 313,417
5,507
---------- ---------- ---------- -------- ----------
Total general and administrative expenses.. 602,870 331,268 -- (1,165) 932,973
SAIF special assessment........................ -- (3,153) -- -- (3,153)
Legal expense--goodwill lawsuit................ -- 28,517 -- -- 28,517
Operations of real estate held for
investment................................... -- (387) -- -- (387)
Operations of real estate acquired in
settlement of loans.......................... (3,304) 6,766 -- -- 3,462
Restructuring charges.......................... -- 2,884 -- -- 2,884
Amortization of goodwill and other intangible
assets....................................... 49,153 16,789 4,125 -- 70,067
---------- ---------- ---------- -------- ----------
Total other expense........................ 648,719 382,684 4,125 (1,165) 1,034,363
Earnings (loss) before income tax
provision (benefit).......................... 297,861 210,149 (19,286) (45,487) 443,237
Income tax provision (benefit)................. 47,148 86,914 92,230 (19,105) 207,187
---------- ---------- ---------- -------- ----------
Earnings (loss) before minority interest....... 250,713 123,235 (111,516) (26,382) 236,050
Minority interest.............................. 89,344 -- (12,331) (52,912) 24,101
---------- ---------- ---------- -------- ----------
Net earnings (loss)........................ $ 161,369 $ 123,235 $ (99,185) $ 26,530 $ 211,949
---------- ---------- ---------- -------- ----------
---------- ---------- ---------- -------- ----------
Memo Item:
Common dividends necessary for debt service on
the Parent Holdings Notes.................... $ 56,875 -- -- $(56,875) --
Effective tax rate............................. 12.78% N/A N/A N/A 42.15%
</TABLE>
(1) Represents the historical statement of income for Glendale Federal, adjusted
for the CENFED Merger and the RedFed Merger, each accounted for as a
purchase, together with related pro forma purchase accounting adjustments.
See the accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Statements under "Pro Forma Financial Data."
23
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical financial data presented under the captions
"Selected Operating Data" and "Selected Financial Data," have been derived from
the Consolidated Financial Statements of FNH and the Consolidated Financial
Statements of Glendale Federal.
The following data should be read in conjunction with the Consolidated
Financial Statements of FNH and the notes thereto and the Consolidated Financial
Statements of Glendale Federal and the notes thereto included elsewhere in this
Prospectus. See "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
FNH
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------
1998 1997(1) 1997(1) 1996(2)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income....................................... $1,076,961 $1,040,588 $2,102,700 $1,233,799
Interest expense...................................... 752,596 706,056 1,440,804 807,800
Net interest income................................... 324,365 334,532 661,896 425,999
Provision for loan losses............................. 20,000 39,900 79,800 39,600
Noninterest income.................................... 184,734 161,287 364,484 653,378
Noninterest expense................................... 301,696 324,475 648,719 490,569
Income before income taxes, extraordinary item and
minority interest................................... 187,403 131,444 297,861 549,208
Income tax expense (benefit)(3)....................... (221,134) 21,891 47,148 (73,131)
Income before extraordinary item and
minority interest................................... 408,537 109,553 250,713 622,339
Extraordinary item--gain on early extinguishment of
FHLB advances, net.................................. -- -- -- (1,586)
Income before minority interest....................... 408,537 109,553 250,713 620,753
Minority interest(4).................................. 45,614 42,993 89,344 43,230
Net income............................................ 362,923 66,560 161,369 577,523
SELECTED PERFORMANCE RATIOS
Return on average assets(5)........................... 2.25% 0.44% 0.52% 3.37%
Return on average common equity(6).................... 76.84 15.25 19.11 72.71
Average equity to average assets...................... 2.95 2.92 2.83 4.85
Yield on interest-earning assets(7)................... 7.41 7.55 7.53 7.76
Cost of interest-bearing liabilities(8)............... 5.18 5.17 5.16 5.15
Net interest margin(9)................................ 2.19 2.38 2.37 2.68
Efficiency ratio of the Bank(10)...................... 48.46 53.40 51.16 54.48
</TABLE>
(Footnotes on next page)
24
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, DECEMBER 31,
----------- --------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale..................................... $ 783,029 $ 813,085 $ 542,019
Securities held to maturity....................................... 58,557 58,299 4,272
Mortgage-backed securities available for sale..................... 8,037,170 5,076,598 1,598,652
Mortgage-backed securities held to maturity....................... 1,143,112 1,337,877 1,621,662
Loans receivable, net............................................. 18,626,425 19,424,410 10,212,583
Total assets...................................................... 34,035,957 31,347,079 16,618,168
Deposits.......................................................... 16,044,288 16,202,605 8,501,883
Securities sold under agreements to repurchase.................... 2,861,604 1,842,442 1,583,387
Borrowings........................................................ 12,276,287 10,769,594 4,902,696
Total liabilities................................................. 31,911,310 29,517,116 15,389,575
Minority interest................................................. 986,296 986,456 309,376
Stockholders' equity.............................................. 1,138,351 843,507 919,217
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital.................................................. 5.46% 5.65% 7.17%
Core capital...................................................... 5.46 5.65 7.17
Risk-based capital:
Core capital.................................................... 10.37 10.14 11.50
Total capital................................................... 12.15 11.93 13.62
SELECTED OTHER DATA
Number of full service customer facilities........................ 225 225 116
Loans serviced for others(11)..................................... $48,037,154 $47,933,469 $44,034,194
Approximate number of employees................................... 5,486 5,235 3,547
Non-performing assets as a percentage of the Bank's
total assets.................................................... 0.67% 0.87% 1.36%
</TABLE>
- ------------------
(1) On January 3, 1997, the Bank acquired assets with fair values totalling
approximately $14.2 billion and liabilities (including deposit liabilities)
with fair value totalling approximately $12.9 billion in the Cal Fed
Acquisition. In addition, on May 31, 1997, the Bank consummated the
Weyerhaeuser Purchase, acquiring a $3.2 billion loan servicing portfolio.
Noninterest income for the year ended December 31, 1997 includes pre-tax
gains of $14.0 million on the sale of MSRs, $25 million on the sale of
stock of Affiliated Computer Services ("ACS"), and $3.6 million on the sale
of deposits. Noninterest expense for the year ended December 31, 1997,
includes a $29.0 million provision for professional fees and unreimbursable
costs related to the foreclosure of 1-4 unit residential loans serviced for
others.
(2) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
$14.1 billion loan servicing portfolio. On February 1, 1996, the Bank
acquired SFFed, with assets at fair values totalling approximately
$4 billion and liabilities (including deposit liabilities) with fair values
totalling approximately $3.8 billion. During the year ended December 31,
1996, the Bank closed the Branch Sales, with associated deposit accounts
totalling $4.6 billion. Noninterest income for the year ended December 31,
1996 includes pre-tax gains of $363.3 million related to the Branch Sales.
Noninterest expense for the year ended December 31, 1996 includes a pre-tax
charge of $60.1 million for the Special SAIF Assessment (as defined
herein).
(3) Income tax benefit for the six months ended June 30, 1998 includes a
$250 million reduction of the valuation allowance related to FNH's deferred
tax asset, offset by federal alternative minimum tax ("AMT") reduced, to
the extent of 90%, by net operating loss carryovers, and state tax at an
assumed rate of 11%. Income tax benefit for 1996 includes the recognition
of a deferred tax benefit of $125 million, offset by federal AMT reduced,
to the extent of 90%, by net operating loss carryovers and state tax
(Footnotes continued on next page)
25
<PAGE>
(Footnotes continued from previous page)
generally at an assumed rate of 8%. Income tax expense for 1997 and 1998
represents federal AMT reduced, to the extent of 90%, by net operating loss
carryovers, and state tax at an assumed rate of 11%.
(4) Represents dividends on the REIT Preferred Stock (as defined herein), net
of related tax benefit and the Bank Preferred Stock. The REIT Preferred
Stock was issued on January 31, 1997. Minority interest for the six months
ended June 30, 1998 also includes a 20% minority interest in Auto One.
(5) Return on average assets represents net income as a percentage of average
assets for the periods presented. For the periods ended June 30, 1998 and
1997, return on average assets is annualized.
(6) Return on average common equity represents net income available to common
stockholders as a percentage of average common equity for the periods
presented. For the periods ended June 30, 1998 and 1997, return on average
common equity is annualized.
(7) Yield on interest-earning assets represents interest income as a percentage
of average interest-earning assets. For the periods ended June 30, 1998 and
1997, yield on interest-earning assets is annualized.
(8) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the periods ended
June 30, 1998 and 1997, cost of interest-bearing liabilities is annualized.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the periods ended June 30, 1998 and
1997, net interest margin is annualized.
(10) Efficiency ratio represents noninterest expense reduced by goodwill
amortization as a percentage of net interest income plus noninterest income
(adjusted for non-recurring and expected non-recurring items).
(11) Includes loans serviced by the Bank and its subsidiaries, excluding loans
serviced for the Bank by FNMC.
26
<PAGE>
GLENDALE FEDERAL
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED OPERATING DATA
Interest income....................................................... $1,157,945 $1,072,956 $1,080,035
Interest expense...................................................... 717,321 693,972 746,970
---------- ---------- ----------
Net interest income.............................................. 440,624 378,984 333,065
Provision for loan losses............................................. (1,727) 25,204 40,350
---------- ---------- ----------
Net interest income after provision for loan losses.............. 442,351 353,780 292,715
Other income
Fee income.......................................................... 98,076 90,696 69,977
Loss on sale of loans, net.......................................... 605 (291) (690)
Gain (loss) on sale of mortgage-backed securities,
net.............................................................. 4,562 (1,804) (34,222)
Other income (loss), net............................................ 1,643 62 (707)
---------- ---------- ----------
Total other income............................................... 104,886 88,663 34,358
Other expenses
Compensation and employee benefits.................................. 135,966 114,270 101,502
Occupancy expense, net.............................................. 34,215 31,777 29,698
Regulatory insurance................................................ 7,843 16,317 27,491
Other general and administrative expenses........................... 115,665 100,860 88,244
---------- ---------- ----------
Total general and administrative expenses........................ 293,689 263,224 246,935
SAIF special assessment............................................. -- 55,519 --
Legal expense--goodwill lawsuit..................................... 19,045 24,058 1,929
Acquisition and restructuring costs................................. 6,939 -- --
Operations of real estate held for sale or investment............... (664) 935 1,242
Operations of real estate acquired in settlement of
loans............................................................ (3,111) 6,623 8,426
Amortization of goodwill and other intangible assets................ 9,151 5,530 5,147
---------- ---------- ----------
Total other expenses............................................. 325,049 355,889 263,679
Earnings before income tax provision.................................. 222,188 86,554 63,394
Income tax provision.................................................. 93,113 36,131 21,342
---------- ---------- ----------
Net earnings..................................................... $ 129,075 $ 50,423 $ 42,052
---------- ---------- ----------
---------- ---------- ----------
Earnings applicable to common shareholder:
Net earnings........................................................ $ 129,075 $ 50,423 $ 42,052
Dividends declared on preferred stock(1)............................ (10,108) (10,841) (16,156)
Premium on exchange of preferred stock for common stock............. -- (4,173) (9,443)
---------- ---------- ----------
Earnings applicable to common shareholder........................... $ 118,967 $ 35,409 $ 16,453
---------- ---------- ----------
---------- ---------- ----------
SELECTED PERFORMANCE RATIOS
Return on average assets.............................................. 0.78% 0.33% 0.28%
Return on average equity.............................................. 11.65 5.14 4.45
Efficiency ratio(2)................................................... 54.52 56.04 61.27
</TABLE>
- ------------------
(1) On July 24, 1997, Glendale Federal was reorganized into a holding company
structure which resulted in Glendale Federal becoming a wholly owned
subsidiary of Golden State. As part of the reorganization Golden State
issued its preferred stock in exchange for the Glendale Federal preferred
stock with substantially the same terms.
(2) Defined as total general and administrative expenses divided by the sum of
net interest income before provision for loan losses plus fee income.
27
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and amounts due from banks.................................................. $ 289,978 $ 221,557
Federal funds sold and assets purchased under resale agreements.................. 172,000 632,000
Other investments................................................................ 128,308 31,799
Loans receivable, net............................................................ 13,774,580 11,905,093
Mortgage-backed securities, net.................................................. 2,375,363 2,279,534
Real estate held for sale or investment.......................................... 6,327 8,689
Real estate acquired in settlement of loans...................................... 37,393 61,500
Investment in capital stock of FHLB, at cost..................................... 300,339 259,587
Mortgage servicing assets........................................................ 243,314 284,472
Goodwill and other intangible assets............................................. 180,463 99,533
Other assets..................................................................... 587,331 434,495
----------- -----------
$18,095,396 $16,218,259
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposits......................................................................... $10,701,157 $ 9,356,909
Securities sold under agreements to repurchase................................... 175,551 768,682
Borrowings from the FHLB......................................................... 5,613,458 4,788,000
Other borrowings................................................................. 70 10,782
Other liabilities................................................................ 326,761 281,812
Stockholder's equity(1).......................................................... 1,278,399 1,012,074
----------- -----------
$18,095,396 $16,218,259
----------- -----------
----------- -----------
REGULATORY CAPITAL RATIOS
Tangible capital................................................................. 6.02% 5.67%
Core capital..................................................................... 6.02% 5.67%
Risk-based capital............................................................... 11.54% 11.17%
SELECTED OTHER DATA
Common shares outstanding........................................................ 57,754,480 50,348,509
Interest rate spread............................................................. 2.90% 2.68%
Ratio of non-performing assets to total assets................................... 0.74% 1.26%
Average equity to average assets................................................. 6.68% 6.45%
Number of full service customer facilities....................................... 195 166
</TABLE>
- ------------------
(1) Glendale Federal was a publicly held company at June 30, 1997. On July 24,
1997, Glendale Federal was reorganized into a holding company structure
which resulted in Glendale Federal becoming a wholly owned subsidiary of
Golden State.
28
<PAGE>
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
following risks before tendering their Old Notes in the Exchange Offer, although
the risk factors set forth below (other than "--Consequences of Failure to
Exchange") are generally applicable to the Old Notes as well as the New Notes.
In addition, certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends,""expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the respective entity or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; changes in the interest
rate environment; existing government regulations and changes in, or the failure
to comply with, government regulations; liability and other claims; significant
increases in competitive pressure in the banking and financial services
industry; deposit attrition or customer loss; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; and
other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail elsewhere in this Prospectus, including, without
limitation, under the captions "Summary," "Risk Factors," "The Golden State
Acquisition," "The Refinancing Transactions," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." Such
statements reflect the current views of management with respect to future events
and are subject to certain risks, uncertainties and assumptions, including those
matters discussed in the risk factors set forth below and elsewhere in this
Prospectus. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Issuer disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate that
it will register the Old Notes under the Securities Act or under any applicable
state securities laws. See "The Exchange Offer--Consequences of Exchanging or
Failing to Exchange Old Notes."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY
DIVIDENDS
The Issuer is a holding company with no significant business operations of
its own. The Issuer's only significant asset is all of the common stock of the
Bank. The Issuer's only source of cash to pay interest on and principal of the
Notes and the outstanding FNH Notes (which FNH Notes will mature prior to the
Notes) is expected to be distributions from the Bank. As of June 30, 1998, on an
unconsolidated basis after giving effect to the Golden State Acquisition, the
Refinancing Transactions (assuming all outstanding debt securities of FNH are
acquired in the Refinancing Transactions) and the Escrow Corp. Merger, the
Issuer's total indebtedness would have been $2.0 billion, consisting solely of
the Notes. See "Consolidated Capitalization." The annual interest payable on the
Notes is approximately $140.9 million. Although the Issuer expects that
distributions from the Bank will be sufficient to pay interest when due,
distributions from the Bank may not be sufficient to pay the principal amount of
the Notes at maturity or prior to maturity upon the occurrence of an Event of
Default (as defined herein) or to redeem or repurchase the Notes upon a Change
of Control Put Event. In addition, the Issuer may use such distributions to make
dividends, distributions or other payments. In addition, there can be no
assurance that the earnings from the Bank will be sufficient to make
distributions to the Issuer to enable it to pay
29
<PAGE>
interest on the Notes when due or principal of the Notes at maturity or that
such distributions will be permitted by the terms of any debt instruments of the
Issuer's subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank and its subsidiaries, including any Bank Preferred
Stock or under applicable federal thrift laws or regulations.
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends to the Issuer. The Bank generally may not
declare dividends or make any other capital distribution if, after the payment
of such dividend or other distribution, it would fall within any of the three
undercapitalized categories under the prompt corrective action standards of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Other
limitations apply to the Bank's ability to pay dividends, the magnitude of which
depends upon current earnings and the extent to which the Bank meets its
regulatory capital requirements. In addition, the HOLA requires every savings
association subsidiary of a savings and loan holding company to give the OTS at
least 30 days' advance notice of any proposed dividends to be made on its
guarantee, permanent or othernon-withdrawable stock or else such dividend will
be invalid. Further, the OTS may prohibit any capital distribution that it
determines would constitute an unsafe or unsound practice. See
"Regulation--Regulation of the Bank--Capital Distribution Regulation" and
"Business--The Issuer--Dividend Policy of the Bank."
As a holding company, any right of the Issuer and its creditors to
participate in the assets of any of the Issuer's subsidiaries, including the
Bank, upon any liquidation, receivership or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors,
including the Bank's depositors and trade creditors (except to the extent that
the Issuer may itself be a creditor of such subsidiary). Accordingly, the Notes
will be effectively subordinated to (i) all existing and future liabilities,
including deposits, indebtedness and trade payables, of the Issuer's
subsidiaries, including the Bank, and (ii) all preferred stock issued by the
Bank, including the Bank Preferred Stock not purchased by Golden State Holdings
in the Bank Preferred Stock Tender Offers. At June 30, 1998, after giving effect
to the Golden State Acquisition and the Refinancing Transactions, the
outstanding interest-bearing liabilities, including deposits, of such
subsidiaries would have been approximately $47.7 billion, the other liabilities
of such subsidiaries, including trade payables and accrued expenses, would have
been approximately $1.6 billion.
ABILITY TO PAY PRINCIPAL ON THE NOTES
The Issuer currently anticipates that, in order to pay the principal amount
of the Notes upon the occurrence of an Event of Default or to redeem or
repurchase the Notes upon a Change of Control Put Event or, in the event that
earnings from the Bank are not sufficient to make distributions to the Issuer to
enable it to pay the principal amount of the Notes at maturity, the Issuer may
be required to adopt one or more alternatives, such as borrowing funds, selling
its equity securities, or the equity securities or assets of the Bank, or
seeking capital contributions or loans from its affiliates. None of the
affiliates of the Issuer is required to make any capital contributions or other
payments to the Issuer with respect to the Issuer's obligations on the Notes.
There can be no assurance that any of the foregoing actions could be effected on
satisfactory terms, that any of the foregoing actions would enable the Issuer to
pay the principal amount of the Notes or that any of such actions would be
permitted by the terms of the Indenture or any other debt instruments of the
Issuer or the Issuer's subsidiaries then in effect, by the terms of the Bank
Preferred Stock, or under applicable federal thrift laws or regulations.
RESTRICTIONS IMPOSED BY TERMS OF THE ISSUER'S INDEBTEDNESS; CONSEQUENCES OF
FAILURE TO COMPLY
The terms and conditions of the Indenture impose restrictions that affect,
among other things, the ability of the Issuer to incur debt, pay dividends or
make distributions, create liens, sell assets and make certain investments. The
ability of the Issuer to comply with the foregoing provisions can be affected by
events beyond the Issuer's control. The breach of any of these covenants could
result in a default under one or more of the debt instruments of the Issuer. In
the event of a default under any indebtedness of the Issuer or the Issuer's
subsidiaries, the holders of such indebtedness could elect to declare all
amounts outstanding under their respective debt instruments to be due and
payable. Any such declaration under a debt instrument of the Issuer or the
Issuer's subsidiaries is likely to result in an event of default under one or
more of the other debt instruments of the Issuer or the Issuer's subsidiaries.
If indebtedness of the Issuer or the Issuer's subsidiaries were to be
accelerated, there could be no assurance that the assets of the Issuer or the
Issuer's subsidiaries, as the case may be, would be sufficient to repay in full
borrowings under all of such debt instruments, including the Notes. See
30
<PAGE>
"--Ability to Pay Principal on the Notes," "Business--The Issuer--Sources of
Funds" and "Description of the Notes."
CONCENTRATION OF BUSINESS IN CALIFORNIA; EFFECT ON ASSET QUALITY
The Bank's loan portfolio is concentrated in California 1-4 unit
residential real estate. As a result, the financial condition of the Bank will
be subject to general economic conditions in California and, in particular, to
conditions in the California 1-4 unit residential real estate market. As of
June 30, 1998, the Bank had 74% of its loan portfolio secured by 1-4 unit
residential real estate located in California. As of June 30, 1998, after giving
effect to the Golden State Acquisition the Bank would have had 75% of its loan
portfolio secured by 1-4 unit residential real estate located in California. The
Bank may find it difficult to originate a sufficient volume of high-quality 1-4
unit residential loans or maintain its asset quality, either of which could
negatively impact future performance. In addition, any downturn in the economy
generally, and in California in particular, could further reduce real estate
values and the volume of loans originated. Real estate values in California
could also be affected by earthquakes or other catastrophic events.
As a result of the Auto One and GSAC Acquisitions, the Bank is engaging in
non-prime auto financing. Accordingly, the ratio of non-performing assets to
total assets could increase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--FNH--Impact of Other Acquisitions
and Dispositions."
INTEREST RATE RISK
It is expected that the Bank will continue to realize income primarily from
the differential or "spread" between the interest earned on loans, securities
and other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. It is expected that a substantial majority of the Bank's assets
will continue to be indexed to changes in market interest rates and a
substantial majority of its liabilities will continue to be short term. Although
the Bank's management believes that this fact should mitigate the negative
effect of a decline in yield on its assets, there can be no assurance that the
Bank's interest rate risk will be minimized or eliminated. At June 30, 1998, the
Bank had $22.1 billion in assets indexed to changes in market rates and
$21.7 billion in liabilities maturing or repricing within one year. At June 30,
1998, after giving effect to the Golden State Acquisition, the Bank would have
had $28.9 billion in assets indexed to changes in market rates and
$35.3 billion in liabilities maturing or repricing within one year. In addition,
the lag in implementing repricing terms on the Bank's adjustable rate assets may
result in a decline in net interest income in a rising interest rate
environment. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially adversely affect the Bank's net interest spread,
asset quality, loan origination volume and overall results of operations.
MORTGAGE PORTFOLIO AND MORTGAGE SERVICING RIGHTS ("MSRS")
At June 30, 1998, the Bank held a 1-4 unit residential loan portfolio with
a carrying value of approximately $13.4 billion, and MSRs on a 1-4 unit
residential loan portfolio with outstanding loan balances totalling
approximately $61.5 billion, including Bank owned loans serviced by FNMC. The
Bank's MSRs had a carrying value of $669.1 million at June 30, 1998. At
June 30, 1998, on a pro forma basis after giving effect to the Golden State
Acquisition, the Bank would have held a 1-4 unit residential loan portfolio with
a carrying value of approximately $22.2 billion, and MSRs on a 1-4 unit
residential loan portfolio with outstanding loan balances totalling
approximately $96 billion. The Bank's MSRs would have had a carrying value of
$966.6 million at June 30, 1998 on a pro forma basis after giving effect to the
Golden State Acquisition. A decline in long-term interest rates generally
results in an acceleration in mortgage loan prepayments, and higher than
anticipated levels of prepayments generally cause the accelerated amortization
of MSRs and generally will result in reductions in the market value of the MSRs
and in the Bank's servicing fee income. There can be no assurances that
long-term interest rates will not decline or that the rate of mortgage loan
prepayments will not exceed management's
31
<PAGE>
estimates, resulting in a charge to earnings in the period of adjustment and
reductions in the market value of the MSRs and in loan servicing fee income, or
that management will be able to reinvest the cash from mortgage loan prepayments
in assets earning yields comparable to the yields on the prepaid mortgages.
REGULATION
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Issuer and the Bank. Statutes and
regulations to which the Bank and its parent companies are subject may be
changed at any time, and the interpretation of these regulations is also subject
to change. There can be no assurance that future changes in such regulations or
in their interpretation will not adversely affect the business of the Issuer and
the Bank.
ELIMINATION OF THE SAVINGS ASSOCIATION CHARTER
Congress has been considering legislation in various forms that would
require federal savings associations, such as the Bank, to convert their
charters to national bank charters. In the absence of appropriate "grandfather"
provisions, legislation eliminating the savings association charter could have a
material adverse effect on the Bank and its parent holding companies because,
among other things, the regulatory capital and accounting treatment for bank
holding companies and savings and loan holding companies differ in certain
significant respects. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would contain adequate grandfather rights for the
Bank and its parent holding companies.
THE YEAR 2000 ISSUE
The "Year 2000 issue" arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. Many of these programs may fail due to an inability to interpret
properly date codes beginning January 1, 2000. The Bank has developed and is
currently executing a comprehensive plan to make its computer systems,
applications and facilities Year 2000 ready. It is expected that, by
December 31, 1998, all issues related to Year 2000 will be addressed. Extensive
testing is expected to occur during 1999. Although management believes there is
no material risk that the Bank will fail to address Year 2000 issues in a timely
manner, there can be no assurance that it will eliminate any potential Year 2000
issues in a timely manner or as to the ultimate cost of doing so. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--FNH--Year 2000."
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
FNH, Mafco Holdings and the Bank were parties to a tax sharing agreement
effective as of January 1, 1994 (the "Tax Sharing Agreement"), which was
subsequently amended in connection with the Golden State Acquisition. See
"Certain Relationships and Related Transactions--Tax Sharing Agreement." Prior
to the Golden State Acquisition, pursuant to the Tax Sharing Agreement, (i) the
Bank paid to FNH amounts equal to the income taxes that the Bank would have been
required to pay if it were to file a return separately from the affiliated group
for which Mafco Holdings was the common parent (the "Mafco Group") and (ii) FNH
paid to Mafco Holdings amounts equal to the income taxes that FNH would be
required to pay if it were to file a consolidated return on behalf of itself and
the Bank separately from the Mafco Group. The Tax Sharing Agreement allowed the
Bank to take into account, in determining its liability to FNH, any net
operating loss carryovers that it would have been entitled to utilize if it had
filed separate returns for each year since the formation of the Bank. The Tax
Sharing Agreement also allowed FNH to take into account, in determining its
liability to Mafco Holdings, any net operating loss carryovers that it would
have been entitled to utilize if it had filed a consolidated return on behalf of
itself and the Bank for each year since the formation of the Bank. Accordingly,
pursuant to the Tax Sharing Agreement, the benefits of any net operating loss
carryovers generated by the Bank since its formation are retained by the Bank
and FNH.
As a result of the transfer of assets, including the stock of the Bank, by
FNH to Golden State Holdings as part of the Golden State Acquisition, the Issuer
succeeded to the tax attributes of FNH. As a result of this transaction, the net
operating losses included in the tax attributes are subject to annual limitation
under Section
32
<PAGE>
382 of the Code (as defined herein). In addition, pursuant to an amendment to
the Tax Sharing Agreement dated as of September 11, 1998, and in accordance with
the Merger Agreement, for any taxable period ending after the Golden State
Acquisition, (i) Golden State replaced Mafco Holdings under the Tax Sharing
Agreement and assumed all of the rights and obligations of Mafco Holdings under
the Tax Sharing Agreement with respect to such taxable periods; (ii) the Issuer
replaced FNH under the Tax Sharing Agreement and assumed all of the rights and
obligations of FNH under the Tax Sharing Agreement with respect to such taxable
periods; and (iii) the Bank continues to be bound by the Tax Sharing Agreement.
If for any reason the Bank and the Issuer were to deconsolidate from the
group, only the amount of the net operating loss carryovers of the Bank and the
Issuer not utilized by the group (up to the end of the taxable year of the group
in which the deconsolidation took place) would be available to offset the
taxable income of the Bank and the Issuer subsequent to the date of
deconsolidation. If the Bank and the Issuer had deconsolidated as of
December 31, 1997 (i.e., the close of the prior Mafco Group taxable year), the
Bank and the Issuer would have had approximately $970 million of regular net
operating loss carryforwards available to offset the taxable income of the Bank
and the Issuer subsequent to the date of deconsolidation. As a result of the
deconsolidation of the Bank and the Issuer from the Mafco Group due to the
Golden State Acquisition, and the anticipated use by the Mafco Group of
additional regular net operating loss carryforwards available to offset the
taxable income of the Mafco Group for the taxable year ending December 31, 1998,
the net operating loss carryforwards of the Bank and the Issuer will decrease.
Similarly, if for any reason the Bank and the Issuer were to deconsolidate from
the consolidated group for which Golden State is the common parent (the "Golden
State Group"), only the amount of the net operating loss carryovers of the Bank
and the Issuer, not utilized by the Golden State Group up to the end of the
taxable year in which the deconsolidation took place, would be available to
offset the taxable income of the Bank and the Issuer subsequent to the date of
deconsolidation. If for any reason the Bank were to deconsolidate from the
Issuer, with the Issuer remaining a member of the Golden State Group, the net
operating loss carryovers of the Bank not utilized by the Golden State Group,
until the close of the taxable year in which the deconsolidation took place
would be available to offset the taxable income of the Bank subsequent to the
date of deconsolidation, but would no longer be available to offset the taxable
income of the Issuer subsequent to the date of deconsolidation. It cannot be
predicted to what extent the Golden State Group will utilize the net operating
loss carryovers of the Issuer and/or the Bank in the future or the amount, if
any, of net operating loss carryforwards that the Issuer or the Bank may have
upon deconsolidation. The net operating loss carryovers are subject to review
and potential disallowance, in whole or in part, by the IRS. Any disallowance of
the Bank's net operating loss carryovers may increase the amounts that the Bank
would be required to pay to FNH or the Issuer under the Tax Sharing Agreement
and that FNH or the Issuer would be required to pay to the Golden State Group,
and would therefore decrease the earnings of the Bank available for distribution
to Issuer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--FNH--Provision for Federal and State Income Taxes."
Under federal income tax law, the Issuer and the Bank are subject to
several liability with respect to the consolidated federal income tax
liabilities of the Golden State Group for any taxable period during which the
Issuer or the Bank is, as the case may be, a member of such group. Therefore,
the Issuer or the Bank may be required to pay the Golden State Group's
consolidated federal tax liability notwithstanding prior payments made under the
Tax Sharing Agreement by FNH or the Issuer or the Bank to Golden State. Golden
State has agreed, however, under the Tax Sharing Agreement, to indemnify the
Issuer and the Bank for any such federal income tax liability (and certain state
and local tax liabilities) of Golden State or any of its subsidiaries (other
than the Issuer and the Bank) that the Issuer or the Bank is actually required
to pay.
TAXATION OF THE BANK
As a result of the Small Business Job Protection Act of 1996 (the "Act"),
which provided for the repeal of the Section 593 reserve method of accounting
for bad debts by thrift institutions which are treated as large banks, the Bank
will generally be required to take into income the balance of its post-1987 bad
debt reserves over a six year period beginning in 1996 subject to a two year
deferral if certain residential loan tests are satisfied. As of December 31,
1997, the Bank and Golden State had remaining post-1987 bad debt reserves
totaling $116 million and $48 million, respectively, that are subject to
recapture into income, all of which has been provided for in
33
<PAGE>
deferred tax liabilities. Consequently, the Bank may be required to make
payments to the Issuer under the Tax Sharing Agreement if the Bank has
insufficient expenses and losses to offset such income.
In addition, the Act further provided that base year bad debt reserves are
not recaptured into income unless certain events occur. The base year reserves
are generally the balance of tax bad debt reserves as of December 31, 1987,
reduced proportionately for reductions in the Bank's loan portfolio since that
date. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," a deferred tax liability has not been
recognized for the base year reserves of the Bank or Golden State. At
December 31, 1997, the amount of the base year reserves were approximately
$152 million and $188 million for the Bank and Golden State (including CENFED
and RedFed), respectively. The amount of unrecognized deferred tax liability at
December 31, 1997 was approximately $53 million and $66 million for the Bank and
Golden State, respectively.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to the Issuer, as the sole owner of the Bank's
common stock, and to holders of the Bank Preferred Stock, in excess of the
Bank's accumulated earnings and profits, as well as certain distributions in
dissolution or in redemption of stock, may cause the Bank to recognize a portion
of its base year reserves as income. Accordingly, the Bank may be required to
make payments to the Issuer under the Tax Sharing Agreement. Likewise, the
Issuer may be required to make payments to Golden State under the Tax Sharing
Agreement if the Issuer has insufficient expenses and losses to offset such
income. See "--Tax Sharing Agreement; Availability of Net Operating Loss
Carryovers."
LACK OF A PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued on August 6, 1998 to a small number of institutional investors
and are eligible for trading in the Private Offering, Resale and Trading through
Automated Linkages (PORTAL) Market, the National Association of Securities
Dealers' screenbased, automated market for trading of securities eligible for
resale under Rule 144A. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, the trading market for the remaining untendered Old Notes
could be adversely affected. There is no existing trading market for the New
Notes, and there can be no assurance regarding the future development of a
market for the New Notes, or the ability of holders of the New Notes to sell
their New Notes or the price at which such holders may be able to sell their New
Notes. Although the Initial Purchasers have informed the Issuer that they
currently intend to make a market in the New Notes, they are not obligated to do
so, and any such market-making may be discontinued at any time without notice.
As a result, the market price of the New Notes could be adversely affected. The
Issuer does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market.
CONTROL BY MACANDREWS & FORBES
The Issuer is indirectly wholly owned by Golden State. Golden State is
34.7% indirectly owned through MacAndrews & Forbes by Ronald O. Perelman and
13.2% indirectly owned by Hunter's Glen, a limited partnership controlled by
Gerald J. Ford, the Chairman of the Board, Chief Executive Officer and a
director of the Bank. See "Ownership of the Common Stock." In addition, the
board of directors of Golden State is composed of 15 directors, with ten
directors initially designated by MacAndrews & Forbes. As a result,
MacAndrews & Forbes may be able to direct and control the policies of the Issuer
and its subsidiaries, including mergers, sales of assets and similar
transactions. See "Certain Relationships and Related Transactions--Relationship
with MacAndrews & Forbes."
34
<PAGE>
USE OF PROCEEDS
The Issuer will not receive any proceeds from the Exchange Offer. The net
proceeds of the Offering, which were approximately $1,965.3 million, were used
together with the Bank Dividend to fund the Refinancing Transactions. As part of
the Refinancing Transactions, Golden State Holdings repaid a portion of the
three issues of FNH Notes (as defined herein) and funded the Parent Holdings
Defeasance. The FNH 12 1/4% Senior Notes mature on May 15, 2001 and bear
interest at the rate of 12 1/4% per annum. The FNH 9 1/8% Senior Subordinated
Notes mature on January 15, 2003 and bear interest at the rate of 9 1/8% per
annum. The FNH 10 5/8% Senior Subordinated Notes mature on October 1, 2003 and
bear interest at the rate of 10 5/8% per annum. The Parent Holdings Notes mature
on April 15, 2003 and bear interest at the rate of 12 1/2% per annum. Dividends
on the Bank Preferred Stock are noncumulative and are payable, (i) in the case
of the 11 1/2% Preferred Stock, at an annual rate of 11 1/2% per share and
(ii) in the case of the 10 5/8% Preferred Stock, at an annual rate of 10 5/8%
per share, if, when and as declared by the Board of Directors of the Bank. See
"Business--The Issuer--Sources of Funds."
THE GOLDEN STATE ACQUISITION
The Merger Agreement
On February 4, 1998, Parent Holdings entered into the Merger Agreement with
FNH, First Gibraltar Holdings, Hunter's Glen, Golden State and Golden State
Financial. The Merger Agreement provided for, among other things, the FNH Asset
Transfer, the merger of Parent Holdings with and into Golden State in the Golden
State Merger and the merger of FNH with and into Golden State Financial in the
FNH Merger. On September 11, 1998, pursuant to or as contemplated by the Merger
Agreement, FNH contributed all of its assets (including all of the outstanding
common stock of Cal Fed) to Golden State Holdings in the FNH Asset Transfer, and
immediately following the Holding Company Mergers, Glendale Federal merged with
and into Cal Fed in the Subsidiary Bank Merger. The Holding Company Mergers and
the Subsidiary Bank Merger are referred to herein collectively as the "Mergers."
Pursuant to the Merger Agreement, First Gibraltar Holdings and Hunter's
Glen received at the closing of the Holding Company Mergers, in consideration of
their interests as stockholders of Parent Holdings and FNH, 56,722,988 shares of
common stock, par value $1.00 per share, of Golden State ("Golden State Common
Stock"), that constitute, in the aggregate, 47.9% of the common stock of the
combined company outstanding, immediately after giving effect to the Holding
Company Mergers.
In addition, the Merger Agreement provides that First Gibraltar Holdings
and Hunter's Glen will be entitled to receive contingent merger consideration,
through the issuance by Golden State of additional shares of Golden State Common
Stock ("Contingent Shares") to First Gibraltar Holdings and Hunter's Glen, based
on (i) the use by the combined company of certain potential tax benefits
resulting from certain net operating loss carryforwards of the consolidated
group of which Parent Holdings is a part, and the realization of certain other
potential tax assets and liabilities of Golden State and Parent Holdings and
(ii) Cal Fed's net after-tax recovery in certain specified litigation, including
a percentage of the net after-tax recovery, if any, in Cal Fed's goodwill
litigation against the United States (following payment by Cal Fed of all
amounts due on May 29, 1998, to the holders of its contingent litigation
recovery participation interests (the "CALGZs") and its secondary contingent
litigation recovery participation interests (the "CALGLs") and the retention by
the combined company of certain amounts of such recovery as provided in the
Merger Agreement). The Merger Agreement provides generally that the amount of
the net after-tax recovery, if any, resulting from Cal Fed's goodwill lawsuit
which will be excluded in determining the number of Contingent Shares issuable
in respect thereof will be based on the 15% of the value of the net after-tax
recovery in Glendale Federal's goodwill lawsuit against the United States (the
"Glendale Goodwill Litigation") to be excluded for purposes of determining the
number of shares of Golden State Common Stock issuable upon exercise of the
Litigation Tracking WarrantsTM, adjusted to reflect the pro forma ownership
interest of First Gibraltar Holdings and Hunter's Glen in the combined company
at the time of consummation of the Holding Company Mergers. The Litigation
Tracking WarrantsTM, which were distributed by Golden State to its stockholders
on May 29, 1998, represent in the aggregate the right to receive upon exercise
thereof Golden State Common Stock having an aggregate market value equal to 85%
of the net after-tax recovery, if any, in the
35
<PAGE>
Glendale Goodwill Litigation. The parties to the Merger Agreement have amended
the Merger Agreement (the "Merger Agreement Amendment") to provide that in the
calculation of the tax benefits, the deductions arising from the Refinancing
Transactions will be excluded. The Merger Agreement Amendment also provides that
the federal net tax benefits will include any federal income tax savings
resulting from the utilization of any tax attributes of the consolidated group
of which Mafco Holdings is the common parent in connection with the Florida
Branch Sale.
The number of Contingent Shares cannot be determined at the present time,
as such number depends upon factors that are not subject to determination at
this time. These factors include, among other things, the net value to the
combined company of certain contingent assets and liabilities of Golden State
and Parent Holdings (including potential recoveries in the Glendale Goodwill
Litigation, the California Federal Litigation (as defined herein) and certain
other litigation to which affiliates of Parent Holdings are parties, and
potential tax benefits resulting from certain net operating loss carryforwards
of the consolidated group of which Parent Holdings formerly was a member and
other contingent tax assets and liabilities of Golden State and Parent Holdings)
and the market price of the common stock of the combined company at such times
as issuance of Contingent Shares would be required under the Merger Agreement.
The board of directors of Golden State, as the surviving corporation in the
Golden State Merger, is composed of 15 directors, with five directors designated
by Golden State and the remaining ten directors designated by Parent Holdings.
Litigation Management Agreement
In connection with the execution of the Merger Agreement, Golden State,
Glendale Federal and Cal Fed entered into a litigation management agreement (the
"Litigation Management Agreement") with Stephen J. Trafton, Chairman, President
and Chief Executive Officer of Golden State, and Richard A. Fink, Vice Chairman
of Golden State. Pursuant to the Litigation Management Agreement, which became
effective at the closing of the Mergers, Messrs. Trafton and Fink, subject to
the provisions of the Litigation Management Agreement, manage Glendale Federal's
and Cal Fed's respective goodwill lawsuits against the United States. See
"Certain Relationships and Related Transactions--Litigation Management
Agreement."
Certain Litigation
Following the public announcement on February 5, 1998 of the Merger
Agreement and the proposed Mergers, several separate purported class action
lawsuits (collectively, the "Delaware Litigation") were filed by certain
stockholders of Golden State naming Golden State, its individual directors and,
in certain cases, FNH and MacAndrews & Forbes as defendants. The Delaware
Litigation was consolidated into one action in the Court of Chancery in Delaware
captioned In re Golden State Bancorp Inc. Shareholders Litigation, Consolidated
C.A. No. 16175NC. The plaintiffs in the Delaware Litigation have alleged, among
other things, that the individual members of Golden State's board of directors
have breached their fiduciary duties to Golden State's stockholders by entering
into the Merger Agreement. The plaintiffs are seeking, on behalf of themselves
and all similarly situated stockholders of Golden State, among other things, (i)
class certification, (ii) an order enjoining, preliminarily and permanently, the
Mergers, or, in the event the Mergers are consummated prior to the entry of a
final order, rescission of the Mergers and/or damages, including rescissory
damages, and (iii) costs and disbursements, including attorneys' fees. In
addition, several purported class action complaints alleging substantially
similar claims, and seeking substantially similar relief, have been filed in Los
Angeles Superior Court in the State of California. The plaintiffs in such
actions have agreed to a stay of such actions pending disposition of the
Delaware Litigation. A settlement in principle has been reached among counsel
for the parties in both the Delaware Litigation and the California litigation,
subject to court approval and other conditions. The terms of the proposed
settlement provided, among other things, that Golden State supply certain
additional information to shareholders in the proxy statement disseminated in
connection with the special meeting of Golden State shareholders held on August
17, 1998 and such information was included. Defendants have agreed, in
connection with the contemplated settlement, not to oppose an award of
attorney's fees to plaintiffs' counsel in an amount provided for in the
agreement. Such amount is not material to Golden State.
36
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
FNH at June 30, 1998 and the capitalization of the Issuer on a consolidated
basis at such date as adjusted to give effect to the Golden State Acquisition,
the Refinancing Transactions and the Escrow Corp. Merger. The following table
should be read in conjunction with "Pro Forma Financial Data" and the
Consolidated Financial Statements of FNH and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
GOLDEN CONSOLIDATED
STATE REFINANCING CAPITALIZATION
ACQUISITION TRANSACTIONS OF THE ISSUER,
FNH ADJUSTMENTS ADJUSTMENTS CAPITALIZATION AS ADJUSTED
----------- ----------- ------------ -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits.................................. $16,044,288 $11,568,606 (a) $ -- $ -- $27,612,894
----------- ----------- ---------- ------ -----------
----------- ----------- ---------- ------ -----------
Borrowings:
Securities sold under agreements to
repurchase............................ $ 2,861,604 $ 175,551 (a) $ -- $ -- $ 3,037,155
Other borrowings (primarily FHLB
advances)............................. 11,206,252 5,694,487 (a) -- -- 16,900,739
----------- ----------- ---------- ------ -----------
Total................................. $14,067,856 $ 5,870,038 $ -- $ -- $19,937,894
----------- ----------- ---------- ------ -----------
----------- ----------- ---------- ------ -----------
Long-term notes:
Notes, net.............................. $ -- $ -- $1,993,919 (b) $ -- $ 1,993,919
FNH 12 1/4% Senior Notes................ 200,000 -- (200,000)(c) -- --
FNH 9 1/8% Senior Subordinated Notes.... 140,000 -- (140,000)(c) -- --
FNH 10 5/8% Senior Subordinated Notes... 575,000 -- (575,000)(c) -- --
Other notes............................. 155,035 -- -- -- 155,035
----------- ----------- ---------- ------ -----------
Total long-term notes................. 1,070,035 -- 1,078,919 -- 2,148,954
----------- ----------- ---------- ------ -----------
Minority interest......................... 986,296 -- (486,458)(c) -- 499,838
----------- ----------- ---------- ------ -----------
Stockholder's equity:
Class A common stock (par value $1.00
per share; 800 shares authorized,
issued and outstanding)............... 1 -- -- (1) --
Class B common stock (par value $1.00
per share; 200 shares authorized,
issued and outstanding)............... -- -- -- -- --
Common stock, $1.00 par value per share,
1,000 shares authorized, issued and
outstanding........................... -- -- -- 1 1
Preferred stock, Series E, $1.00 par
value per share (8,050,000 shares
authorized; 4,621,982 shares issued
and outstanding)...................... -- 4,622 (a) -- -- 4,622
Additional paid-in capital.............. 32,677 1,169,935 (a) -- -- 1,202,612
Net unrealized holding gain (loss) on
securities available for sale......... 28,101 (1,612)(a) -- -- 26,489
Retained earnings....................... 1,077,572 -- (a) (628,796)(d) -- 448,776
----------- ----------- ---------- ------ -----------
Total stockholder's equity............ 1,138,351 1,172,945 (628,796) -- 1,682,500
----------- ----------- ---------- ------ -----------
Total capitalization.................. $ 3,194,682 $ 1,172,945 $ (36,335) $ -- $ 4,331,292
----------- ----------- ---------- ------ -----------
----------- ----------- ---------- ------ -----------
</TABLE>
- ------------------
(a) Represents deposits, borrowed funds (including accrued interest payable on
all borrowings) and equity accounts of Glendale Federal to be assumed by the
Issuer at their approximate respective fair values at June 30, 1998.
(b) Represents the issuance of the Notes, net of original issue discount.
(c) Assumes that all of the FNH Notes and Bank Preferred Stock are tendered in
the Debt Tender Offers and the Bank Preferred Stock Tender Offers or that
any Bank Preferred Stock not acquired in the Bank Preferred Stock Tender
Offers is subsequently redeemed by the Issuer.
(d) Represents (i) a dividend to be made to Parent Holdings, representing the
principal amount of the Parent Holdings Notes, (ii) the after-tax expenses
related to the write-off of the deferred issuance costs on the outstanding
FNH Notes, and (iii) the after-tax expenses related to the Debt Tender
Offers, the Bank Preferred Stock Tender Offers and the Parent Holdings
Defeasance.
37
<PAGE>
THE REFINANCING TRANSACTIONS
On August 6, 1998, the proceeds of the Offering were deposited with the
Escrow Agent pursuant to an escrow agreement. On September 14, 1998, such funds
were released from escrow, with approximately $552.2 million used to finance the
Parent Holdings Defeasance and the balance delivered to the Issuer. Concurrently
with such release, Golden State Financial, as the successor obligor following
the Golden State Acquisition, gave a 30-day notice of redemption for all of the
outstanding $455 million aggregate principal amount of the Parent Holdings Notes
and irrevocably deposited in trust money or government obligations in an amount
sufficient to pay the redemption price therefor, together with any accrued and
unpaid interest to the date of redemption, for the purpose of defeasing the
Parent Holdings Notes (the "Parent Holdings Defeasance"). The Parent Holdings
Defeasance constituted "covenant defeasance" for purposes of the indenture
governing the Parent Holdings Notes (the "Parent Holdings Notes Indenture"). As
a result, Golden State Financial and its subsidiaries, including Golden State
Holdings, are not required to comply with substantially all of the covenants and
other obligations under the Parent Holdings Notes Indenture. All of the
outstanding Parent Holdings Notes were redeemed on October 14, 1998.
On September 14, 1998, Golden State Holdings commenced the Debt Tender
Offers for all of its $200 million aggregate principal amount of 12 1/4% Senior
Notes Due 2001 (the "FNH 12 1/4% Senior Notes"), its $140 million aggregate
principal amount of 9 1/8% Senior Subordinated Notes Due 2003 (the "FNH 9 1/8%
Senior Subordinated Notes") and its $575 million aggregate principal amount of
10 5/8% Senior Subordinated Notes Due 2003 (the "FNH 10 5/8% Senior Subordinated
Notes" and, together with the FNH 12 1/4% Senior Notes and the FNH 9 1/8% Senior
Subordinated Notes, the "FNH Notes"). Prior to commencing the Debt Tender
Offers, the Issuer solicited and obtained the consent of the requisite holders
of each series of the FNH Notes to certain amendments (the "Amendments") to the
applicable indentures governing the FNH Notes (collectively, the "FNH
Indentures"), and executed supplemental indentures to effect the Amendments. The
Amendments eliminated certain restrictive covenants contained in the FNH
Indentures. For a description of the current terms of the FNH Notes, see
"Business--The Issuer--Sources of Funds--FNH 12 1/4% Senior Notes," "--FNH
9 1/8% Senior Subordinated Notes" and "--FNH 10 5/8% Senior Subordinated Notes."
On September 17, 1998, Golden State Holdings purchased $137,445,000 aggregate
principal amount of the FNH 12 1/4% Senior Notes, $109,555,000 aggregate
principal amount of the FNH 9 1/8% Senior Subordinated Notes and $488,820,000
aggregate principal amount of the FNH 10 5/8% Senior Subordinated Notes tendered
by Salomon Smith Barney Inc. in the FNH Debt Tender Offers. The Debt Tender
Offers expired on October , 1998, and approximately $ million principal
amount of FNH Notes were purchased pursuant thereto for an aggregate purchase
price of approximately $ million.
On August 17, 1998, FNH commenced cash offers to purchase (the "Bank
Preferred Stock Tender Offers") all of the Bank's 11 1/2% Noncumulative
Perpetual Preferred Stock, Series C, par value $100 per share (the "11 1/2%
Preferred Stock"), having an aggregate liquidation preference of approximately
$300.7 million, and all of the Bank's 10 5/8% Noncumulative Perpetual Preferred
Stock, Series B, par value $100 per share (the "10 5/8% Preferred Stock" and,
together with the 11 1/2% Preferred Stock, the "Bank Preferred Stock"), having
an aggregate liquidation preference of approximately $172.5 million. For a
description of the terms of the Bank Preferred Stock, see "Business--The
Issuer--Sources of Funds--11 1/2% Preferred Stock--Minority Interest" and
"--10 5/8% Preferred Stock--Minority Interest."
The Bank Preferred Stock Tender Offer expired on September 14, 1998 and
222,721 shares of the 10 5/8% Preferred Stock, constituting approximately 13% of
the shares of 10 5/8% Preferred Stock outstanding, and 995,437 shares of the
11 1/2% Preferred Stock, constituting approximately 33% of the shares of 11 1/2%
Preferred Stock outstanding, were purchased by the Issuer (which assured FNH's
payment obligations) pursuant thereto for an aggregate purchase price of
approximately $135.8 million.
The $ million principal amount of FNH 12 1/4% Senior Notes that remain
outstanding rank pari passu with the Notes and the $ million principal amount
of FNH 9 1/8% Senior Subordinated Notes or FNH 10 5/8% Senior Subordinated Notes
that remain outstanding after the consummation of the Debt Tender Offers are
subordinated in right of payment to the Notes.
The Issuer may from time to time continue to purchase Bank Preferred Stock
in one or more open market or privately negotiated transactions. The Issuer
expects to purchase the outstanding Bank Preferred Stock not
38
<PAGE>
acquired in the Bank Preferred Stock Tender Offers or such other transactions
once it becomes redeemable (April 1, 1999 in the case of the 10 5/8% Preferred
Stock and September 1, 1999 in the case of the 11 1/2% Preferred Stock).
As a result of the Refinancing Transactions (assuming that (i) 100% of the
FNH Notes are acquired in the Debt Tender Offers and (ii) all outstanding Bank
Preferred Stock is acquired in the Bank Preferred Stock Tender Offers or is
subsequently purchased by the Issuer), (i) the interest expense at FNH,
(ii) the interest expense at Parent Holdings (now Golden State) and (iii) the
preferred stock dividend requirement of the Bank will be reduced as follows (in
thousands):
<TABLE>
<CAPTION>
PRE-TAX AFTER-TAX
-------- ---------
<S> <C> <C>
Old Debt and Bank Preferred Stock:
FNH Notes..................................................................... $ 98,369 $ 56,907
Parent Holdings Notes......................................................... 56,875 32,902
Bank Preferred Stock.......................................................... 52,912 52,912
-------- ---------
208,156 142,721
New Debt:
Notes......................................................................... 140,910 81,516
-------- ---------
Annual Savings................................................................ $ 67,246 $ 61,205
-------- ---------
-------- ---------
</TABLE>
The pro forma statements of income of the Issuer included elsewhere in this
Prospectus do not include the reduction in interest expense relative to the
Parent Holdings Notes, which is expected to increase annual pre-tax earnings at
Parent Holdings by approximately $56.9 million. Prior to the Parent Holdings
Defeasance, such interest expense had been financed by dividends from the Bank
to FNH and from FNH to Parent Holdings. Annual interest expense of approximately
$32.1 million (on a pre-tax basis) is included in pro forma earnings for the
portion of the Notes that was used to refinance the Parent Holdings Notes.
As a result of the Refinancing Transactions, the average life of the Notes
is longer than the average life of the debt that was refinanced. As a result of
the reduction in the consolidated Parent Holdings annual debt service, there is
a greater opportunity for accumulation of retained earnings at the Bank level.
Furthermore, the Debt Tender Offers and the Parent Holdings Defeasance
eliminated all of the restrictive covenants contained in the FNH Indentures and
the Parent Holdings Notes Indenture which would otherwise have precluded the
assumption by Golden State Holdings of the Notes and otherwise limit certain
activities of the Issuer and its subsidiaries, including the Bank. As a result
of the Refinancing Transactions, the Issuer and its subsidiaries, including the
Bank, have greater financial and operating flexibility.
39
<PAGE>
The following table illustrates the sources and uses of funds in the
Refinancing Transactions (assuming that (i) 100% of the FNH Notes are acquired
in the Debt Tender Offers and (ii) all outstanding Bank Preferred Stock is
acquired in the Bank Preferred Stock Tender Offers or is subsequently purchased
by the Issuer) (in thousands):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Sale of the Notes............................................................... $1,993,919
Bank Dividend(a)................................................................ 122,923
----------
$2,116,842
----------
----------
USES OF FUNDS:
Debt Tender Offers:
FNH 12 1/4% Senior Notes...................................................... $ 200,000
FNH 9 1/8% Senior Subordinated Notes.......................................... 140,000
FNH 10 5/8% Senior Subordinated Notes......................................... 575,000
Bank Preferred Stock Tender Offers:
11 1/2% Preferred Stock....................................................... 300,730
10 5/8% Preferred Stock....................................................... 172,500
Parent Holdings Defeasance...................................................... 455,000
----------
1,843,230
Expenses of the Refinancing Transactions........................................ 273,612
----------
$2,116,842
----------
----------
</TABLE>
- ------------------
(a) Alternatively, the Issuer may borrow up to $200 million under a new
short-term senior unsecured credit facility, which borrowings are expected
to be repaid by the Issuer from payments received from the Bank under the
Tax Sharing Agreement. The Bank Dividend will be reduced by the amount
borrowed, if any, under such new credit facility. See "Certain Relationships
and Related Transactions--Tax Sharing Agreement."
The Issuer financed the Debt Tender Offers, the Bank Preferred Stock Tender
Offers and the Parent Holdings Defeasance with the net proceeds of the Offering
and the Bank Dividend of $ million. The Offering, the Bank Dividend, the Debt
Tender Offers, the Bank Preferred Stock Tender Offers and the Parent Holdings
Defeasance are referred to collectively herein as the "Refinancing
Transactions."
40
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Golden State
Acquisition, the CENFED Merger, the RedFed Merger and the Refinancing
Transactions (assuming that (i) 100% of the FNH Notes are acquired in the Debt
Tender Offers and (ii) all outstanding Bank Preferred Stock is acquired in the
Bank Preferred Stock Tender Offers or is subsequently purchased by the Issuer).
The following pro forma financial data as of and for the six months ended
June 30, 1998 are based on (i) the historical consolidated balance sheet of FNH
giving effect to the Golden State Acquisition, the RedFed Merger and the
Refinancing Transactions as if such transactions occurred on June 30, 1998, and
(ii) the historical consolidated statement of income of FNH for the six months
ended June 30, 1998 giving effect to the Golden State Acquisition, the CENFED
Merger, the RedFed Merger and the Refinancing Transactions as if such
transactions occurred on January 1, 1997. The following pro forma financial data
for the year ended December 31, 1997 is based on the historical consolidated
statement of income of FNH for the year ended December 31, 1997 giving effect to
the Golden State Acquisition, the CENFED Merger, the RedFed Merger and the
Refinancing Transactions as if such transactions occurred on January 1, 1997.
However, for purposes of computing the purchase price, the daily volume weighted
average price of Golden State common stock and the Litigation Tracking
Warrants(Trademark) for the three days ended September 10, 1998 was used, as
such prices are considered to provide more relevant information to investors.
See Note B. For purposes of pro forma presentation, Glendale Federal's
consolidated statements of operations have been recast to conform to the
calendar year end used by FNH. The pro forma adjustments are based on available
information and upon certain assumptions that management believes are reasonable
under the circumstances. The Golden State Acquisition, the CENFED Merger and the
RedFed Merger are accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price has been allocated to the assets
and liabilities acquired based on preliminary estimates of fair value. The
actual fair value is determined as of the consummation of the Golden State
Acquisition. The pro forma financial data do not necessarily reflect the results
of operations or the financial position of the Issuer that actually would have
resulted had the Golden State Acquisition, the CENFED Merger, the RedFed Merger
and the Refinancing Transactions occurred at the dates indicated, or project the
results of operations or financial position of the Issuer for any future date or
period.
The pro forma financial data should be read in conjunction with the
Consolidated Financial Statements of FNH and the notes thereto, and the
Consolidated Financial Statements of Glendale Federal and the notes thereto,
included elsewhere in this Prospectus. See "Selected Historical Financial Data."
41
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOLDEN STATE PRO FORMA REFINANCING
GLENDALE ACQUISITION BEFORE TRANSACTIONS
FNH FEDERAL ADJUSTMENTS REFINANCING ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) REDFED(1) (NOTE D) TRANSACTIONS (NOTE G) COMBINED
------------ ------------ ------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due from
banks................... $ 345,921 $ 289,978 $ 71,197 $ -- $ 707,096 $ (45,002) $ 662,094
Federal funds sold and
assets purchased under
resale agreements....... -- 172,000 -- -- 172,000 -- 172,000
Other investments......... 879,071 128,308 7,997 -- 1,015,376 -- 1,015,376
Loans receivable, net..... 20,351,922 13,774,580 910,718 6,807 35,044,027 -- 35,044,027
Mortgage-backed
securities, net......... 9,180,282 2,375,363 10,242 6,962 11,572,849 -- 11,572,849
Real estate held for sale
or investment........... -- 6,327 -- -- 6,327 -- 6,327
Real estate acquired in
settlement of loans..... 64,892 37,393 6,716 -- 109,001 -- 109,001
Investment in capital
stock of FHLB, at
cost.................... 540,127 300,339 9,734 -- 850,200 -- 850,200
Mortgage servicing
assets ................. 669,056 243,314 -- 54,243 966,613 -- 966,613
Goodwill and other
intangible assets....... 656,177 180,463 48,767 61,875 947,282 -- 947,282
Other assets.............. 1,348,509 587,331 28,054 184,446 2,148,340 (28,847) 2,158,076
28,625
9,958
------------ ------------ ----------- -------- ----------- ---------- -----------
$ 34,035,957 $ 18,095,396 $ 1,093,425 $314,333 $53,539,111 $ (35,266) $53,503,845
------------ ------------ ----------- -------- ----------- ---------- -----------
------------ ------------ ----------- -------- ----------- ---------- -----------
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDER'S EQUITY
Deposits.................. $ 16,044,288 $ 10,701,157 $ 864,861 $ 2,588 $27,612,894 $ -- $27,612,894
Securities sold under
agreements to
repurchase.............. 2,861,604 175,551 -- -- 3,037,155 -- 3,037,155
Borrowings from the FHLB.. 10,993,707 5,613,458 70,079 1,194 16,678,438 -- 16,678,438
Other borrowings.......... 1,282,580 70 8,693 993 1,292,336 (915,000) 2,371,255
2,000,000
(6,081)
Other liabilities......... 729,131 326,761 1,226 563,578 1,620,696 (12,159) 1,621,765
13,228
Minority interest......... 986,296 -- -- -- 986,296 (486,458) 499,838
Stockholder's equity...... 1,138,351 1,278,399 148,566 (254,020) 2,311,296 (134,600) 1,682,500
(494,196)
------------ ------------ ----------- -------- ----------- ---------- -----------
$ 34,035,957 $ 18,095,396 $ 1,093,425 $314,333 $53,539,111 $ (35,266) $53,503,845
------------ ------------ ----------- -------- ----------- ---------- -----------
------------ ------------ ----------- -------- ----------- ---------- -----------
</TABLE>
- ------------------
(1) Represents the RedFed Merger, accounted for as a purchase, together with
related pro forma purchase accounting adjustments.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
42
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOLDEN STATE PRO FORMA REFINANCING
GLENDALE ACQUISITION BEFORE TRANSACTIONS
FNH FEDERAL CENFED AND ADJUSTMENTS REFINANCING ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) REDFED(1) (NOTE D) TRANSACTIONS (NOTE G) COMBINED
------------ ------------ ------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $1,091,523 $581,626 $85,568 $ (5,129) $1,753,588 $ (1,238) $1,752,350
Interest expense.......... 752,596 353,826 49,745 (1,616) 1,154,551 (49,185) 1,176,639
70,455
818
---------- -------- ------- -------- ---------- -------- ----------
Net interest income..... 338,927 227,800 35,823 (3,513) 599,037 (23,326) 575,711
Provision for loan
losses.................. 20,000 (3,721) 804 -- 17,083 -- 17,083
---------- -------- ------- -------- ---------- -------- ----------
Net interest income
after provision for
loan losses........... 318,927 231,521 35,019 (3,513) 581,954 (23,326) 558,628
Other income:
Fee income.............. 71,363 48,357 5,002 (4,068) 120,654 -- 120,654
Gain (loss) on sale of
loans, net............ 36,124 796 -- -- 36,920 -- 36,920
Gain on sale of
mortgage-backed
securities, net....... -- 4,430 725 -- 5,155 -- 5,155
Other income, net....... 62,685 209 158 -- 63,052 -- 63,052
---------- -------- ------- -------- ---------- -------- ----------
Total other income.... 170,172 53,792 5,885 (4,068) 225,781 -- 225,781
Other expenses:
Compensation and
employee benefits..... 127,620 70,449 18,333 -- 216,402 -- 216,402
Occupancy expense,
net................... 41,406 16,887 2,606 -- 60,899 -- 60,899
Regulatory insurance.... 5,054 4,015 586 -- 9,655 -- 9,655
Advertising and
promotion............. 9,914 10,434 385 -- 20,733 -- 20,733
Furniture, fixtures and
equipment............. -- 8,109 -- -- 8,109 -- 8,109
Other general and
administrative
expenses.............. 99,611 40,288 8,518 -- 148,417 (3,336) 147,835
2,754
---------- -------- ------- -------- ---------- -------- ----------
Total general and
administrative
expenses............ 283,605 150,182 30,428 -- 464,215 (582) 463,633
Restructuring charges... -- 4,452 3,761 -- 8,213 -- 8,213
Legal expense--goodwill
lawsuit............... -- 9,068 -- -- 9,068 -- 9,068
Operations of real
estate held for sale
or investment......... -- 46 -- -- 46 -- 46
Operations of real
estate acquired in
settlement of loans... (5,138) (4,329) 2,415 -- (7,052) -- (7,052)
Amortization of goodwill
and other intangible
assets................ 23,229 5,052 4,880 2,063 35,224 -- 35,224
---------- -------- ------- -------- ---------- -------- ----------
Total other expense... 301,696 164,471 41,484 2,063 509,714 (582) 509,132
Earnings (loss) before
income tax provision
(benefit)............... 187,403 120,842 (580) (9,644) 298,021 (22,744) 275,277
Income tax provision
(benefit)............... (221,134) 49,195 (120) 56,415 (2) (115,644) (9,552)(4) (125,196)
---------- -------- ------- -------- ---------- -------- ----------
Earnings (loss) before
minority interest....... 408,537 71,647 (460) (66,059) 413,665 (13,192) 400,473
Minority interest......... 45,614 -- -- (6,666)(3) 38,948 (26,456)(5) 12,492
---------- -------- ------- -------- ---------- -------- ----------
Net earnings (loss)..... $ 362,923 $ 71,647 $ (460) $(59,393) $ 374,717 $ 13,264 (6) $ 387,981(7)
---------- -------- ------- -------- ---------- -------- ----------
---------- -------- ------- -------- ---------- -------- ----------
Memo Item:
Common dividends necessary
for debt service on the
Parent Holdings Notes... $ 28,438 -- -- -- $ 28,438 $(28,438) --
Effective tax rate........ 12.78% N/A N/A N/A 42.15% -- 42.15%
</TABLE>
(Footnotes on next page)
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
43
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME--(CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(Footnotes from previous page)
- ------------------
(1) Represents the CENFED Merger and/or the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting adjustments.
(2) The adjustment to income tax expense includes adjustments for nondeductible
goodwill amortization and to adjust FNH's historical effective tax rate to
42%.
(3) Reflects a 42% effective tax rate related to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma refinancing adjustments.
(5) Represents historical dividends paid related to the Bank Preferred Stock. On
July 24, 1997, Glendale Federal was reorganized into a holding company
structure which resulted in Glendale Federal becoming a wholly owned
subsidiary of Golden State. As part of the reorganization Golden State
issued its preferred stock in exchange for the Glendale Federal preferred
stock with substantially the same terms. Therefore, preferred stock
dividends declared by Glendale Federal after the reorganization have not
been reported.
(6) Does not reflect the interest expense savings of approximately $28.4
million (pre-tax) for the six months ended June 30, 1998 relating to the
Parent Holdings Notes. In addition, does not reflect the extraordinary loss
that will be realized as a result of the Refinancing Transactions. See Note
G to the Unaudited Pro Forma Financial Statements.
(7) Pro forma combined net earnings for the six months ended June 30, 1998
includes the recognition of a $250 million tax benefit, representing a
reduction in the valuation allowance established against FNH's deferred tax
asset. If this $250 million tax benefit is not considered, net earnings for
the six months ended June 30, 1998 would be as follows (in thousands):
<TABLE>
<S> <C>
FNH (Historical).................................................................. $112,923
Pro Forma before Refinancing Transactions......................................... 124,717
Pro Forma Combined................................................................ 137,981
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
44
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOLDEN
STATE PRO FORMA REFINANCING
GLENDALE CENFED ACQUISITION BEFORE TRANSACTIONS
FNH FEDERAL AND ADJUSTMENTS REFINANCING ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) REDFED(1) (NOTE D) TRANSACTIONS (NOTE G) COMBINED
------------ ------------ --------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $2,127,490 $1,121,021 $236,033 $ (10,256) $3,474,288 $ (2,475) $3,471,813
Interest expense.......... 1,440,804 711,807 147,953 (3,231) 2,297,333 (98,369) 2,341,510
140,910
1,636
---------- ---------- --------- --------- ---------- -------- ----------
Net interest income..... 686,686 409,214 88,080 (7,025) 1,176,955 (46,652) 1,130,303
Provision for loan
losses.................. 79,800 12,015 7,139 -- 98,954 -- 98,954
---------- ---------- --------- --------- ---------- -------- ----------
Net interest income
after provision for
loan losses........... 606,886 397,199 80,941 (7,025) 1,078,001 (46,652) 1,031,349
Other income:
Fee income.............. 143,919 96,867 13,904 (8,136) 246,554 -- 246,554
Gain (loss) on sale of
loans, net............ 24,721 (363) 16 -- 24,374 -- 24,374
Gain on sale of
mortgage-backed
securities, net....... -- (226) 2,029 -- 1,803 -- 1,803
Other income, net....... 171,054 1,217 1,249 -- 173,520 -- 173,520
---------- ---------- --------- --------- ---------- -------- ----------
Total other income.... 339,694 97,495 17,198 (8,136) 446,251 -- 446,251
Other expenses:
Compensation and
employee benefits..... 256,448 124,693 29,450 -- 410,591 -- 410,591
Occupancy expense,
net................... 81,914 33,468 12,832 -- 128,214 -- 128,214
Regulatory insurance.... 10,680 8,949 2,433 -- 22,062 -- 22,062
Advertising and
promotion............. 20,186 22,708 2,146 -- 45,040 -- 45,040
Furniture, fixtures and
equipment............. -- 13,649 -- -- 13,649 -- 13,649
Other general and
administrative
expenses.............. 233,642 71,221 9,719 -- 314,582 (6,672) 313,417
5,507
---------- ---------- --------- --------- ---------- -------- ----------
Total general and
administrative
expenses............ 602,870 274,688 56,580 -- 934,138 (1,165) 932,973
SAIF special
assessment............ -- (3,153) -- -- (3,153) -- (3,153)
Legal expense--goodwill
lawsuit............... -- 28,517 -- -- 28,517 -- 28,517
Operations of real
estate held for
investment............ -- (387) -- -- (387) -- (387)
Operations of real
estate acquired in
settlement of loans... (3,304) 4,021 2,745 -- 3,462 -- 3,462
Restructuring charges... -- 2,487 397 -- 2,884 -- 2,884
Amortization of goodwill
and other intangible
assets................ 49,153 7,056 9,733 4,125 70,067 -- 70,067
---------- ---------- --------- --------- ---------- -------- ----------
Total other expense... 648,719 313,229 69,455 4,125 1,035,528 (1,165) 1,034,363
Earnings (loss) before
income tax provision
(benefit)............... 297,861 181,465 28,684 (19,286) 488,724 (45,487) 443,237
Income tax provision
(benefit)............... 47,148 76,851 10,063 92,230 (2) 226,292 (19,105)(4) 207,187
---------- ---------- --------- --------- ---------- -------- ----------
Earnings (loss) before
minority interest....... 250,713 104,614 18,621 (111,516) 262,432 (26,382) 236,050
Minority interest......... 89,344 -- -- (12,331)(3) 77,013 (52,912)(5) 24,101
---------- ---------- --------- --------- ---------- -------- ----------
Net earnings (loss)....... $ 161,369 $ 104,614 $ 18,621 $ (99,185) $ 185,419 $ 26,530 (6) $ 211,949
---------- ---------- --------- --------- ---------- -------- ----------
---------- ---------- --------- --------- ---------- -------- ----------
Memo Item:
Common dividends necessary
for debt service on the
Parent Holdings Notes... $ 56,875 -- -- -- $ 56,875 $(56,875) --
Effective tax rate........ 12.78% N/A N/A N/A 42.15% N/A 42.15%
</TABLE>
(Footnotes on next page)
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
45
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(Footnotes from previous page)
- ------------------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as a
purchase, together with related pro forma purchase accounting adjustments.
(2) The adjustment to income tax expense includes adjustments for nondeductible
goodwill amortization and to adjust FNH's historical effective tax rate to
42%.
(3) Reflects a 42% effective tax rate related to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma refinancing adjustments.
(5) Represents historical dividends paid related to the Bank Preferred Stock. On
July 24, 1997, Glendale Federal was reorganized into a holding company
structure which resulted in Glendale Federal becoming a wholly owned
subsidiary of Golden State. As part of the reorganization Golden State
issued its preferred stock in exchange for the Glendale Federal preferred
stock with substantially the same terms. Therefore, preferred stock
dividends declared by Glendale Federal after the reorganization have not
been reported.
(6) Does not reflect the interest expense savings of approximately
$56.9 million (pre-tax) for the year ended December 31, 1997 relating to the
Parent Holdings Notes. In addition, does not reflect the extraordinary loss
that will be realized as a result of the Refinancing Transactions. See
Note G to the Unaudited Pro Forma Financial Statements.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
46
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A: BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Balance Sheet combines the
historical consolidated balance sheets of Glendale Federal and FNH as of
June 30, 1998, as if the Golden State Acquisition, the RedFed Merger and the
Refinancing Transactions were consummated on June 30, 1998. The Unaudited Pro
Forma Condensed Combined Statement of Income for the six months ended June 30,
1998 combines the historical consolidated statements of income of Glendale
Federal and FNH for the six months ended June 30, 1998, as if the Golden State
Acquisition, the RedFed Merger, the CENFED Merger and the Refinancing
Transactions were consummated on January 1, 1997. The Unaudited Pro Forma
Condensed Combined Statement of Income for the year ended December 31, 1997
combines the historical statements of income of Glendale Federal and FNH as if
the Golden State Acquisition, the RedFed Merger, the CENFED Merger and the
Refinancing Transactions were consummated on January 1, 1997. Certain items in
the unaudited pro forma condensed combined financial statements related to FNH
have been reclassified to conform to the Glendale Federal presentation.
The Golden State Acquisition will be accounted for using the "purchase"
method of accounting. Glendale Federal is treated as the acquired corporation
for financial reporting purposes. Glendale Federal's assets, liabilities, and
other items will be adjusted to their estimated fair value at the closing date
of the Golden State Acquisition and combined with the historical book values of
the assets and liabilities of FNH. Applicable income tax effects of such
adjustments are included as a component of the combined entity's deferred tax
asset/liability. The difference between the estimated fair value of the assets,
liabilities and other items, adjusted as discussed above, and the purchase
price, is recorded as goodwill.
For purposes of the Unaudited Pro Forma Condensed Combined Financial
Statements, estimates relating to the fair value of certain assets, liabilities
and other items have been made as of June 30, 1998. However, for purposes of
computing the purchase price, the daily volume weighted average price of Golden
State common stock and the Litigation Tracking Warrants(Trademark) for the three
days ended September 10, 1998 was used, as such prices are considered to provide
more relevant information to investors. See Note B. Actual adjustments will be
made on the basis of actual assets, liabilities and other items as of the date
of the respective mergers on the basis of appraisals and evaluations made as of
that time and, therefore, actual fair value amounts are expected to differ from
those reflected in the Unaudited Pro Forma Condensed Combined Financial
Statements.
It should be noted that management's expectations of cost savings and other
operating efficiencies are not reflected in the Unaudited Pro Forma Condensed
Combined Financial Statements. Further, it should be noted that net interest
income may increase or decrease from historical levels based upon changes in the
shape of the yield curve and current market conditions. The pro forma financial
data do not necessarily reflect the results of operations or the financial
position of the Issuer that actually would have resulted had the Golden State
Acquisition, the CENFED Merger, the RedFed Merger and the Refinancing
Transactions occurred at the dates indicated, or project the results of
operations or financial position of the Issuer for any future date or period.
NOTE B: PURCHASE PRICE
The terms of the Merger Agreement call for the existing Golden State
stockholders to own 58% of the common stock of the combined entity outstanding,
immediately after giving effect to the Golden State Acquisition, on a
fully-diluted basis (without giving effect to shares issuable pursuant to the
Litigation Tracking Warrants(Trademark) or the issuance of Contingent Shares).
The Merger Agreement also provides for the contingent issuance to First
Gibraltar Holdings and Hunter's Glen of additional shares of Golden State Common
Stock in connection with (i) the use by Golden State of certain tax benefits of
Parent Holdings and the realization of certain other potential tax benefits and
liabilities of Golden State and Parent Holdings and (ii) the receipt by the
47
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE B: PURCHASE PRICE--(CONTINUED)
combined company of a net after-tax recovery in certain litigation, including a
portion of the net recovery, if any, in the California Federal Goodwill
Litigation against the United States government.
Using the daily volume weighted average price of $18.875 and $4.776 for the
fully diluted Golden State common stock and Litigation Tracking
Warrants(Trademark), respectively, for the three days ended September 10, 1998,
Golden State's fully diluted outstanding shares, as of June 30, 1998, applying
the treasury method under Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," as required by the Merger Agreement, would be as follows:
<TABLE>
<S> <C>
Golden State
Common shares outstanding as of June 30, 1998.................................................... 55,485,151
Treasury shares to be issued as part of RedFed Merger............................................ 4,565,534
Shares issuable pursuant to outstanding Series A Preferred Stock convertible to common stock
(i)........................................................................................... 11,099,721
Shares issuable pursuant to outstanding 5 Year Warrants on common stock (ii)..................... 1,278
Shares issuable pursuant to outstanding 7 Year Warrants on common stock (iii).................... 5,305,443
Shares issuable pursuant to outstanding Stock Options on common stock (iv)....................... 581,900
-----------
Total--fully diluted outstanding shares............................................................ 77,039,027
-----------
-----------
</TABLE>
- ------------------
(i) Based on 4,617,484 shares, each convertible into 2.404 shares of Golden
State Common Stock.
(ii) Warrants convertible at an exchange rate of 10 warrants for one share of
Golden State Common Stock.
(iii) 10,769,807 warrants with $12.00 exercise price per warrant.
(iv) Based on 2,778,508 stock options with a weighted average exercise price
per share of Golden State Common Stock of $15.111.
<TABLE>
<S> <C>
Purchase Price:
Number of Golden State fully diluted outstanding shares........................................... 77,039,027
Price per share................................................................................... x $18.875
----------
Purchase price................................................................................. $1,454,112
----------
----------
</TABLE>
NOTE C: PURCHASE ACCOUNTING ADJUSTMENTS
<TABLE>
<S> <C>
Golden State stockholders' equity, giving effect to the RedFed Merger............................... $1,375,497
Goodwill due to the Golden State Acquisition (Note D)............................................... 61,875
Fair value adjustments, net of taxes (Note D)....................................................... 36,677
Golden State Acquisition costs, net of taxes (Note E)............................................... (84,867)
Goodwill litigation proceeds participation (Note F)................................................. 64,930
----------
Total purchase price.............................................................................. $1,454,112
----------
----------
</TABLE>
48
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE D: PURCHASE ACCOUNTING ADJUSTMENTS
The estimated purchase accounting adjustments relating to the Golden State
Acquisition are detailed below:
<TABLE>
<CAPTION>
INTEREST- MORTGAGE INTEREST-
EARNING SERVICING OTHER BEARING OTHER STOCKHOLDER'S
ASSETS ASSETS GOODWILL ASSETS LIABILITIES LIABILITIES EQUITY
--------- -------- -------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase price in excess of
Golden State's net
stockholders' equity,
giving effect to the RedFed
Merger..................... $ -- $ -- $ 78,615 $ -- $ -- $ -- $ 78,615
Fair value adjustments, net
of taxes................... 13,769 54,243 (36,677) -- 4,775 26,560 --
Golden State Acquisition
costs, net of taxes
(Note E)................... -- -- 84,867 41,433 -- 126,300 --
Other integration costs, net
of taxes (Note E).......... -- -- -- 31,065 -- 73,700 (42,635)
Value of Golden State
Holdings' retained
participation in the
Glendale Goodwill
Litigation after issuance
of the Litigation Tracking
Warrants(Trademark)
(Note F)................... -- -- (64,930) 111,948 -- 47,018 --
Dividend of tax benefits to
First Gibraltar Holdings as
a result of deconsolidation
caused by the Golden State
Acquisition................ -- -- -- -- -- 290,000 (290,000)
--------- -------- -------- -------- ------- --------- ---------
$ 13,769 $54,243 $ 61,875 $184,446 $ 4,775 $ 563,578 $(254,020)
--------- -------- -------- -------- ------- --------- ---------
--------- -------- -------- -------- ------- --------- ---------
Increase/(decrease) in
pre-tax earnings for: TOTAL
---------
Six months ended June 30,
1998....................... $ (5,129) $(4,068) $ (2,063) $ -- $ 1,616 $ -- $ (9,644)
---------
---------
Year ended December 31,
1997....................... $ (10,256) $(8,136) $ (4,125) $ -- $ 3,231 $ -- $ (19,286)
---------
---------
</TABLE>
<TABLE>
<CAPTION>
INCREASE/(DECREASE) IN PRE-TAX EARNINGS
---------------------------------------
SIX MONTHS
ENDED
AMOUNT JUNE 30, 1998
-------- -------------
<S> <C> <C>
Interest-earning assets:
Loans receivable, net...................................... $ 6,807 $(4,144)
Mortgage-backed securities................................. 6,962 (985)
-------- -------
$ 13,769 $(5,129)
-------- -------
-------- -------
Interest-bearing liabilities
Deposits................................................... $ 2,588 $ 599
Borrowings from the FHLB................................... 1,194 520
Other borrowings........................................... 993 497
-------- -------
$ 4,775 $ 1,616
-------- -------
-------- -------
<CAPTION>
YEAR
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Interest-earning assets:
Loans receivable, net...................................... $ (8,287)
Mortgage-backed securities................................. (1,969)
---------
$ (10,256)
---------
---------
Interest-bearing liabilities
Deposits................................................... $ 1,198
Borrowings from the FHLB................................... 1,040
Other borrowings........................................... 993
---------
$ 3,231
---------
---------
</TABLE>
49
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE D: PURCHASE ACCOUNTING ADJUSTMENTS--(CONTINUED)
Premiums relating to mortgage-backed securities and loans receivable are
amortized to interest income using an interest method over the weighted average
life of the related asset. The premium on mortgage servicing assets is amortized
in proportion to, and over the period of, estimated net servicing income.
Goodwill is amortized on a straight line basis over fifteen years. Premiums
relating to deposits and borrowings are amortized to interest expense using an
interest method over the weighted average life of the related liability.
NOTE E: MERGER AND INTEGRATION COSTS
The table below reflects the Issuer's current estimate, for purposes of pro
forma presentation, of the aggregate merger and integration costs, net of taxes,
expected to be incurred in connection with the Golden State Acquisition. While a
portion of these costs may be required to be recognized in the combined entity's
results of operations as incurred, the current estimate of these costs has been
reflected in the pro forma condensed combined statement of financial condition
to disclose the effect of these activities on the Issuer's pro forma condensed
combined financial position.
<TABLE>
<CAPTION>
RELATED
GROSS TAX NET
COSTS BENEFIT COSTS
-------- ------- --------
<S> <C> <C> <C>
Merger costs:
Severance costs.............................................................. $ 55,000 $23,183 $ 31,817
Contract termination costs................................................... 23,100 9,737 13,363
Investment banking, legal and other professional fees........................ 40,000 5,058 34,942
Benefit plan termination costs............................................... 5,000 2,107 2,893
Branch consolidation costs................................................... 3,200 1,348 1,852
-------- ------- --------
Subtotal--merger costs included in the allocation of the purchase price... 126,300 41,433 84,867
-------- ------- --------
Other integration costs:
Conversion costs............................................................. 27,900 11,760 16,140
Branch consolidation costs................................................... 9,600 4,046 5,554
Transition staffing expenses................................................. 17,000 7,166 9,834
Officer benefits............................................................. 10,000 4,215 5,785
Other costs.................................................................. 9,200 3,878 5,322
-------- ------- --------
Subtotal--other integration costs reflected as an adjustment to
stockholders' equity.................................................... 73,700 31,065 42,635
-------- ------- --------
Total merger and integration costs............................................. $200,000 $72,498 $127,502
-------- ------- --------
-------- ------- --------
</TABLE>
The Issuer's cost estimates are forward looking statements. While the costs
represent management's current estimate of merger and integration costs that
will be incurred, the ultimate level and timing of recognition of such costs
will be based on the final merger and integration plan to be completed in the
coming months; the types and amounts of actual costs incurred could vary
materially from these estimates if future developments differ from the
underlying assumptions used by management in determining its current estimate of
these costs.
50
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE F: LITIGATION TRACKING WARRANTS(TRADEMARK)
Represents the estimated fair value of the 15% interest in the after-tax
recovery, if any, in the Glendale Goodwill Litigation to be excluded in
calculating the number of shares issuable upon exercise of the Litigation
Tracking Warrants(Trademark), as follows:
<TABLE>
<S> <C>
Fully diluted Litigation Tracking Warrants(Trademark) outstanding as of June 30, 1998.............. 77,039,027
Daily volume weighted average price of Litigation Tracking Warrants(Trademark) for the three days
ended September 10, 1998......................................................................... $ 4.776
-----------
Market value of Litigation Tracking Warrants(Trademark)............................................ $ 367,938
Percent of Goodwill Litigation owned by Litigation Tracking Warrants(Trademark) holders............ 85%
-----------
Total market value of Glendale Goodwill Litigation................................................. $ 432,869
Percent of Glendale Goodwill Litigation owned by Golden State Holdings............................. 15%
-----------
Estimated fair value of Glendale Goodwill Litigation owned by Golden State Holdings................ $ 64,930
-----------
-----------
</TABLE>
The amount of the litigation proceeds reflected above is provided for
illustrative purposes only. Such amount does not necessarily represent
management's evaluation of the likely outcome of the Glendale Goodwill
Litigation.
NOTE G: REFINANCING TRANSACTIONS ADJUSTMENTS
In connection with the Refinancing Transactions, Golden State Holdings
commenced cash tender offers for the following issues of debt and preferred
stock and, following such tender offers, will redeem any debt or preferred stock
which is not tendered or otherwise purchased in open market or privately
negotiated transactions:
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
--------------------------------------------------------
BALANCE 6/30/98 SIX MONTHS ENDED 6/30/98 YEAR ENDED 12/31/97
----------------------- -------------------------- --------------------------
PRINCIPAL/ DEFERRED INTEREST AMORTIZATION INTEREST AMORTIZATION
LIQUIDATION ISSUANCE EXPENSE/ OF DEFERRED EXPENSE/ OF DEFERRED
PREFERENCE COSTS DIVIDEND ISSUANCE COSTS DIVIDEND ISSUANCE COSTS
----------- -------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
FNH 12 1/4% Senior Notes............. $ 200,000 $ 9,704 $ 12,250 $1,482 $ 24,500 $2,964
FNH 9 1/8% Senior Subordinated
Notes.............................. 140,000 4,457 6,388 426 12,775 852
FNH 10 5/8% Senior Subordinated
Notes.............................. 575,000 14,686 30,547 1,428 61,094 2,856
--------- -------- -------- ------ -------- ------
Total Debt Reduction................. $ 915,000 $ 28,847 $ 49,185 $3,336 $ 98,369 $6,672
--------- -------- -------- ------ -------- ------
--------- -------- -------- ------ -------- ------
11 1/2% Preferred Stock.............. $ 300,730 $ 17,292 $ 34,584
10 5/8% Preferred Stock.............. 172,500 9,164 18,328
plus: Accrued and Unpaid
Dividends....................... 13,228 -- --
--------- -------- --------
Total Preferred Stock Reduction
(Minority Interest)................ $ 486,458 $ 26,456 $ 52,912
--------- -------- --------
--------- -------- --------
</TABLE>
The deferred issuance costs reflected above, net of tax of approximately
$12,159, will be written off as part of the Refinancing Transactions. These
items and the tender premiums paid will be reflected as an extraordinary
item--early extinguishment of debt on Golden State Holdings' financial
statements in an amount totalling approximately $134,600 on an after-tax basis.
51
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE G: REFINANCING TRANSACTIONS ADJUSTMENTS--(CONTINUED)
The following debt was issued:
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
------------------------------------------------------
SIX MONTHS ENDED 6/30/98 YEAR ENDED 12/31/97
-------------------------- -------------------------
DEFERRED AMORTIZATION AMORTIZATION
ISSUANCE INTEREST OF DEFERRED INTEREST OF DEFERRED
PRINCIPAL COSTS EXPENSE ISSUANCE COSTS EXPENSE ISSUANCE COSTS
---------- -------- ------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total Notes in multiple-tranche
transaction; 7.0455% aggregate
yield, net of original issue
discount of $6,081................. $1,993,919 $ 28,625 $70,455 $2,754 $140,910 $5,507
</TABLE>
The use of proceeds from the Refinancing Transactions is estimated as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Sale of the Notes.................................................. $ 1,993,919
Tender Offers:
FNH 12 1/4% Senior Notes......................................... $200,000
FNH 9 1/8% Senior Subordinated Notes............................. 140,000
FNH 10 5/8% Senior Subordinated Notes............................ 575,000
11 1/2% Preferred Stock.......................................... 300,730
10 5/8% Preferred Stock.......................................... 172,500 (1,388,230)
--------
Redemption and Defeasance:
Parent Holdings Notes............................................ (455,000)
Tender and Make-Whole Premiums, Fees and Other Expenses (net of
taxes)........................................................ (195,691)
-----------
Net cash payment to be made from Golden State Holdings (from the
Bank Dividend)................................................... $ (45,002)
-----------
-----------
</TABLE>
At the time the Notes were issued, a dividend was paid to Parent Holdings
totalling $494,196, representing the principal amount of the Parent Holdings
Notes and the after-tax expenses related to the redemption of such notes.
At an assumed rate of 5.5%, the net cash payment made by FNH of $45,002
will reduce earnings by approximately $1,238 and $2,475 for the six months ended
June 30, 1998 and the year ended December 31, 1997, respectively.
The hedging transaction effected under the Rate Lock Agreements (as defined
herein) resulted in a net loss of approximately $9,958, which will be deferred
and amortized over the life of the related Fixed Rate Notes through interest
expense. This amortization will reduce pre-tax earnings by approximately $818
and $1,636 for the six months ended June 30, 1998 and the year ended December
31, 1997, respectively. See "Certain Relationships and Related
Transactions--Rate Lock Agreements."
There can be no assurance that all of the outstanding FNH Notes will be
tendered to and purchased in the Debt Tender Offers. The Issuer does not expect
that all of the Bank Preferred Stock will be purchased in the Bank Preferred
Stock Tender Offers. The Issuer expects to purchase any outstanding Bank
Preferred Stock not acquired in the Bank Preferred Stock Tender Offers in open
market or privately negotiated transactions or once it becomes redeemable
(April 1, 1999 in the case of the 10 5/8% Preferred Stock and September 1, 1999
in the case of the
52
<PAGE>
GOLDEN STATE HOLDINGS
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS AND THE YEAR
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE G: REFINANCING TRANSACTIONS ADJUSTMENTS--(CONTINUED)
11 1/2% Preferred Stock). The pro forma financial results assume that 100% of
the outstanding principal amount of the FNH Notes and all of the Bank Preferred
Stock is tendered and purchased in the Refinancing Transactions or, in the case
of the Bank Preferred Stock, subsequently purchased. As shown below, results
will vary if less than 100% of the FNH Notes or Bank Preferred Stock is
purchased and assuming that excess proceeds from the Refinancing Transactions
are invested at 5.5% per annum.
<TABLE>
<CAPTION>
% PURCHASED
- ------------------ REFINANCING TRANSACTIONS ADJUSTMENTS
BANK ------------------------------------------
FNH PREFERRED FOR SIX MONTHS FOR YEAR ENDED
NOTES STOCK ENDED JUNE 30, 1998 DECEMBER 31, 1997
- ----- --------- -------------------- -----------------
<S> <C> <C> <C>
100% 100% $ 13,264 $26,530
95% 80% 9,067 18,135
90% 75% 7,490 14,981
80% 65% 4,308 8,618
</TABLE>
NOTE H: INTEREST COVERAGE
If 100% of the outstanding principal amount of the FNH Notes and all of the
Bank Preferred Stock is tendered and purchased in the Refinancing Transactions,
the Issuer's pro forma interest coverage ratio (calculated as the amount
available for debt service divided by interest expense on the Notes) on a cash
basis and a GAAP (as defined herein) basis would be as follows for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
GAAP CASH GAAP CASH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pre-Tax Income................................................... $275,296 $275,296 $443,237 $443,237
Add: Goodwill Amortization....................................... -- 35,224 -- 70,067
Add: Interest Expense on the Notes............................... 70,455 70,455 140,910 140,910
Less: Dividends on the REIT Preferred Stock (pre-tax)............ (22,813) (22,813) (45,625) (45,625)
-------- -------- -------- --------
Available for Debt Service....................................... $322,938 $358,162 $538,522 $608,589
-------- -------- -------- --------
-------- -------- -------- --------
Interest Coverage Ratio.......................................... 4.6x 5.1x 3.8x 4.3x
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
53
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
FNH
Prior to the Golden State Acquisition, FNH was a holding company whose only
significant asset was all of the common stock of the Bank. As such, FNH's
principal business operations were conducted by the Bank and its subsidiaries.
The selected historical financial data for FNH presented under the captions
"Selected Operating Data" and "Selected Financial Data" have been derived from
the Consolidated Financial Statements of FNH.
The following data should be read in conjunction with the Consolidated
Financial Statements of FNH and the notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--FNH."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------------------
1998 1997(1) 1997(1) 1996(2) 1995 1994(3) 1993(4)
---------- ---------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income..................... $1,076,961 $1,040,588 $2,102,700 $1,233,799 $1,075,845 $293,139 $ 95,264
Interest expense.................... 752,596 706,056 1,440,804 807,800 734,815 199,845 74,728
Net interest income................. 324,365 334,532 661,896 425,999 341,030 93,294 20,536
Provision for loan losses........... 20,000 39,900 79,800 39,600 37,000 6,226 1,402
Noninterest income.................. 184,734 161,287 364,484 653,378 150,973 41,158 190,876
Noninterest expense................. 301,696 324,475 648,719 490,569 332,553 96,298 63,392
Income before income taxes,
extraordinary item and minority
interest.......................... 187,403 131,444 297,861 549,208 122,450 31,928 146,618
Income tax expense (benefit)(5) (221,134) 21,891 47,148 (73,131) (57,185) 2,558 2,500
Income before extraordinary item
and minority interest............. 408,537 109,553 250,713 622,339 179,635 29,370 144,118
Extraordinary item: (loss) gain on
early extinguishment of FHLB
advances, net..................... -- -- -- (1,586) 1,967 1,376 --
Income before minority interest..... 408,537 109,553 250,713 620,753 181,602 30,746 144,118
Minority interest(6)................ 45,614 42,993 89,344 43,230 34,584 -- --
Net income.......................... 362,923 66,560 161,369 577,523 147,018 30,746 144,118
SELECTED PERFORMANCE RATIOS
Return on average assets(7)......... 2.25% 0.44% 0.52% 3.37% 1.00% 0.69% 7.84%
Return on average common
equity(8)......................... 76.84 15.25 19.11 72.71 39.33 16.05 69.41
Average equity to average assets.... 2.95 2.92 2.83 4.85 2.54 3.90 11.31
Yield on interest-earning
assets(9)......................... 7.41 7.55 7.53 7.76 7.71 6.85 5.42
Cost of interest-bearing
liabilities(10)................... 5.18 5.17 5.16 5.15 5.35 4.83 4.70
Net interest margin(11)............. 2.19 2.38 2.37 2.68 2.44 2.18 1.14
Efficiency ratio of the Bank(12).... 48.46 53.40 51.16 54.88 63.47 N/A N/A
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES, MINORITY INTEREST AND
PREFERRED STOCK DIVIDENDS(13)
Excluding interest on deposits...... 1.32x 1.21x 1.24x 2.13x 1.27x 1.32x 9.59x
Including interest on deposits...... 1.18 1.11 1.13 1.58 1.11 1.16 3.02
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------ ------------------------------------------------------------------
1998 1997(1) 1996(2) 1995 1994(3) 1993(4)
------------ ----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for
sale(14)......................... $ 783,029 $ 813,085 $ 542,019 $ 348,561 $ 45,000 $ --
Securities held to maturity(14).... 58,557 58,299 4,272 1,455 411,859 15,118
Mortgage-backed securities
available for sale............... 8,037,170 5,076,598 1,598,652 1,477,514 -- --
Mortgage-backed securities held to
maturity(14)..................... 1,143,112 1,337,877 1,621,662 1,524,488 3,153,812 341,224
Loans receivable, net.............. 18,626,425 19,424,410 10,212,583 8,829,974 9,966,886 29,244
Covered assets, net................ -- -- -- 39,349 311,603 592,593
Total assets....................... 34,035,957 31,347,079 16,618,168 14,666,781 14,683,559 1,125,222
Deposits........................... 16,044,288 16,202,605 8,501,883 10,241,628 9,196,656 431,788
Securities sold under agreements to
repurchase....................... 2,861,604 1,842,442 1,583,387 969,510 1,883,490 119,144
Borrowings......................... 12,276,287 10,769,594 4,902,696 2,392,862 2,808,979 440,792
Total liabilities.................. 31,911,310 29,517,116 15,389,575 13,903,635 14,029,957 1,012,328
Minority interest.................. 986,296 986,456 309,376 300,730 300,730 --
Stockholders' equity............... 1,138,351 843,507 919,217 462,416 352,872 112,894
REGULATORY CAPITAL RATIOS OF THE
BANK
Tangible capital................... 5.46% 5.65% 7.17% 5.84% 5.50% 9.50%
Core capital....................... 5.46 5.65 7.17 5.84 5.50 9.50
Risk-based capital:
Core capital..................... 10.37 10.14 11.50 9.14 8.86 67.71
Total capital.................... 12.15 11.93 13.62 11.34 11.01 68.97
SELECTED OTHER DATA
Number of full service customer
facilities....................... 225 225 116 160 156 4
Loans serviced for others(15)...... $ 48,037,154 $47,933,469 $44,034,194 $27,900,528 $ 7,475,119 $ 327,449
Approximate number of
employees........................ 5,486 5,235 3,547 3,619 3,573 317
Non-performing assets as a
percentage of the Bank's total
assets........................... 0.67% 0.87% 1.36% 1.50% 1.49% 0.98%
</TABLE>
- ------------------
(1) On January 3, 1997, the Bank acquired assets with fair values totalling
approximately $14.2 billion and liabilities (including deposit liabilities)
with fair value totalling approximately $12.9 billion in the Cal Fed
Acquisition. In addition, on May 31, 1997, the Bank consummated the
Weyerhaeuser Purchase, acquiring a $3.2 billion loan servicing portfolio.
Noninterest income for the year ended December 31, 1997 includes pre-tax
gains of $14.0 million on the sale of MSRs, $25 million on the sale of ACS
stock, and $3.6 million on the sale of deposits. Noninterest expense for
the year ended December 31, 1997, includes a $29.0 million provision for
professional fees and unreimbursable costs related to the foreclosure of
1-4 unit residential loans serviced for others.
(2) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
$14.1 billion loan servicing portfolio. On February 1, 1996, the Bank
acquired SFFed, with assets at fair values totalling approximately
$4 billion and liabilities (including deposit liabilities) with fair values
totalling approximately $3.8 billion. During the year ended December 31,
1996, the Bank closed the Branch Sales, with associated deposit accounts
totalling $4.6 billion. Noninterest income for the year ended December 31,
1996 includes pre-tax gains of $363.3 million related to the Branch Sales.
Noninterest expense for the year ended December 31, 1996 includes a pre-tax
charge of $60.1 million for the Special SAIF Assessment.
(Footnotes continued on next page)
55
<PAGE>
(Footnotes continued from previous page)
(3) On October 3, 1994, effective immediately following the close of business
on September 30, 1994, the Bank acquired assets with fair values totalling
approximately $14.1 billion and liabilities (including deposit liabilities)
with fair values totalling approximately $13.4 billion from Old FNB (as
defined herein).
(4) During the first quarter of 1993, FNH sold certain assets, liabilities, and
substantially all of its branch operations located in Texas, including
$829 million of loans and 130 branches with $6.9 billion in deposits, in
the BAC Sale (as defined herein). A net gain of $141 million was recorded
in connection with this sale.
(5) Income tax expense of $2.5 million was recorded in the first quarter of
1993 representing AMT (as defined herein) expense related to the gain
recognized on the BAC Sale (see Footnote 4). Income tax expense recorded in
1994 after the FN Acquisition represents federal AMT reduced, to the extent
of 90%, by net operating loss carryovers, and state tax at an assumed rate
of 8%. Income tax benefit for 1996 and 1995 includes the recognition of a
deferred tax benefit of $125 million and $69 million, respectively, offset
by federal AMT tax reduced, to the extent of 90%, by net operating loss
carryovers and state tax generally at an assumed rate of 8%. Income tax
expense for 1997 represents federal AMT reduced, to the extent of 90%, by
net operating loss carryovers, and state tax at an assumed rate of 11%.
Income tax expense for the six months ended June 30, 1998 includes a
$250 million reduction of the valuation allowance related to FNH's deferred
tax asset, offset by federal AMT reduced, to the extent of 90%, by net
operating loss carryovers, and state tax at an assumed rate of 11%.
(6) Represents dividends on the REIT Preferred Stock, net of related tax
benefit and the Bank Preferred Stock. The REIT Preferred Stock was issued
on January 31, 1997. Minority interest for the six months ended June 30,
1998 also includes a 20% minority interest in Auto One.
(7) Return on average assets represents net income as a percentage of average
assets for the periods presented. For the periods ended June 30, 1998 and
1997, return on average assets is annualized.
(8) Return on average common equity represents net income available to common
stockholders as a percentage of average common equity for the periods
presented. For the periods ended June 30, 1998 and 1997, return on average
common equity is annualized.
(9) Yield on interest-earning assets represents interest income as a percentage
of average interest-earning assets. For the periods ended June 30, 1998 and
1997, yield on interest-earning assets is annualized.
(10) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the periods ended
June 30, 1998 and 1997, cost of interest-bearing liabilities is annualized.
(11) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the periods ended June 30, 1998 and
1997, net interest margin is annualized.
(12) Efficiency ratio represents noninterest expense reduced by goodwill
amortization as a percentage of net interest income plus noninterest income
(adjusted for non-recurring and expected non-recurring items). The
efficiency ratio is not meaningful to FNH's operations in 1993 and 1994 due
to the limited nature of such operations during those periods. See
Footnotes 3 and 4.
(13) Earnings used in computing the ratio of earnings to combined fixed charges,
minority interest and preferred stock dividends consist of income before
income taxes, extraordinary item and minority interest. Fixed charges
consist of interest expense on borrowings, the interest component of lease
expense and, where indicated, interest expense on deposits.
(14) Fluctuation in securities and mortgage-backed securities held to maturity
and securities and mortgage-backed securities available for sale from
December 31, 1994 to December 31, 1995 resulted from the reclassification
of substantially all securities and mortgage-backed securities (except for
mortgage-backed securities resulting from the securitization with recourse
of certain of the Bank's loans) from held to maturity to securities
available for sale on December 29, 1995.
(15) Includes loans serviced by the Bank, and its subsidiaries, excluding loans
serviced for the Bank by FNMC.
56
<PAGE>
GLENDALE FEDERAL
The selected historical financial data for Glendale Federal presented under
the captions "Selected Operating Data" and "Selected Financial Data" have been
derived from the Consolidated Financial Statements of Glendale Federal.
The following data should be read in conjunction with the Consolidated
Financial Statements of Glendale Federal and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income.................................... $1,157,945 $1,072,956 $1,080,035 $1,086,658 $ 989,945
Interest expense................................... 717,321 693,972 746,970 768,939 678,664
---------- ---------- ---------- ---------- ---------
Net interest income.............................. 440,624 378,984 333,065 317,719 311,281
Provision for loan losses.......................... (1,727) 25,204 40,350 66,150 139,726
---------- ---------- ---------- ---------- ---------
Net interest income after provision for loan
losses......................................... 442,351 353,780 292,715 251,569 171,555
Other income
Fee income....................................... 98,076 90,696 69,977 69,311 60,513
Gain (loss) on sale of loans, net................ 605 (291) (690) 146 665
Gain (loss) on sale of mortgage-backed
securities, net................................ 4,562 (1,804) (34,222) (11,725) 1,099
Gain on sale of banking operations............... -- -- -- 73,713 --
Other income (loss), net......................... 1,643 62 (707) 3,001 (1,936)
---------- ---------- ---------- ---------- ---------
Total other income............................. 104,886 88,663 34,358 134,446 60,341
Other expenses
Compensation and employee benefits............... 135,966 114,270 101,502 105,218 126,037
Occupancy expense, net........................... 34,215 31,777 29,698 31,433 37,691
Regulatory insurance............................. 7,843 16,317 27,491 29,077 38,233
Other general and administrative expenses........ 115,665 100,860 88,244 77,744 89,701
---------- ---------- ---------- ---------- ---------
Total general and administrative expenses...... 293,689 263,224 246,935 243,472 291,662
SAIF special assessment.......................... -- 55,519 -- -- --
Legal expense--goodwill lawsuit.................. 19,045 24,058 1,929 369 304
Acquisition and restructuring costs.............. 6,939 -- -- -- --
Operations of real estate held for sale or
investment..................................... (664) 935 1,242 (31) 2,690
Operations of real estate acquired in settlement
of loans....................................... (3,111) 6,623 8,426 15,034 24,089
Amortization of goodwill and other intangible
assets......................................... 9,151 5,530 5,147 1,724 9,764
Write-off of assets held for Florida
disposition.................................... -- -- -- -- 136,209
---------- ---------- ---------- ---------- ---------
Total other expenses........................... 325,049 355,889 263,679 260,568 464,718
Earnings (loss) before income tax provision
(benefit) and extraordinary items................ 222,188 86,554 63,394 125,447 (232,822)
Income tax provision (benefit)..................... 93,113 36,131 21,342 52,146 (10,171)
---------- ---------- ---------- ---------- ---------
Earnings (loss) before extraordinary items......... 129,075 50,423 42,052 73,301 (222,651)
Extraordinary items, net........................... -- -- -- 1,755 14,092
Net earnings (loss)............................ $ 129,075 $ 50,423 $ 42,052 $ 75,056 $(208,559)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Earnings (loss) applicable to common shareholder:
Net earnings (loss).............................. $ 129,075 $ 50,423 $ 42,052 $ 75,056 $(208,559)
Dividends declared on preferred stock(1)......... (10,108) (10,841) (16,156) (17,668) (13,759)
Premium on exchange of preferred stock for common
stock.......................................... -- (4,173) (9,443) -- --
---------- ---------- ---------- ---------- ---------
Earnings (loss) applicable to common
shareholder.................................... $ 118,967 $ 35,409 $ 16,453 $ 57,388 $(222,318)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SELECTED PERFORMANCE RATIOS
Return on average assets........................... 0.78% 0.33% 0.28% 0.46% (1.19)%
Return on average equity........................... 11.65 5.14 4.45 8.26 (22.18)
Efficiency ratio(2)................................ 54.52 56.04 61.27 62.91 78.45
</TABLE>
- ------------------
(1) On July 24, 1997, Glendale Federal was reorganized into a holding company
structure which resulted in Glendale Federal becoming a wholly owned
subsidiary of Golden State. As part of the reorganization Golden State
issued its preferred stock in exchange for the Glendale Federal preferred
stock with substantially the same terms.
(2) Defined as total general and administrative expenses divided by the sum of
net interest income before provision for loan losses plus fee income.
57
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due from banks............................. $ 289,978 $ 221,557 $ 153,608 $ 139,697 $ 164,576
Federal funds sold and assets purchased under resale
agreements................................................ 172,000 632,000 433,000 296,000 315,961
Other investments........................................... 128,308 31,799 18,877 42,326 166,040
Loans receivable, net....................................... 13,774,580 11,905,093 10,727,909 9,899,297 9,595,780
Mortgage-backed securities, net............................. 2,375,363 2,279,534 2,240,790 4,723,457 5,363,779
Real estate held for sale or
investment................................................ 6,327 8,689 12,072 13,303 16,995
Real estate acquired in settlement of loans................. 37,393 61,500 78,249 105,730 146,835
Investment in capital stock of FHLB, at cost................ 300,339 259,587 192,842 185,799 139,678
Mortgage servicing assets................................... 243,314 284,472 127,399 99,122 68,719
Goodwill and other intangible assets........................ 180,463 99,533 59,216 63,538 47,781
Assets held for Florida disposition,
net....................................................... -- -- -- -- 257,363
Other assets................................................ 587,331 434,495 412,602 475,977 519,524
----------- ----------- ----------- ----------- -----------
$18,095,396 $16,218,259 $14,456,564 $16,044,246 $16,803,031
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits.................................................... $10,701,157 $ 9,356,909 $ 8,723,976 $ 8,734,880 $10,919,806
Securities sold under agreements to repurchase.............. 175,551 768,682 758,050 2,695,176 2,306,274
Borrowings from the FHLB.................................... 5,613,458 4,788,000 3,838,000 3,495,000 2,443,428
Other borrowings............................................ 70 10,782 10,599 28,883 96,890
Other liabilities........................................... 326,761 281,812 168,488 148,460 158,419
Stockholder's equity(1)..................................... 1,278,399 1,012,074 957,451 941,847 878,214
----------- ----------- ----------- ----------- -----------
$18,095,396 $16,218,259 $14,456,564 $16,044,246 $16,803,031
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
REGULATORY CAPITAL RATIOS
Tangible capital............................................ 6.02% 5.67% 6.29% 5.44% 4.28%
Core capital................................................ 6.02% 5.67% 6.29% 5.44% 4.65%
Risk-based capital.......................................... 11.54% 11.17% 11.93% 11.15% 9.61%
SELECTED OTHER DATA
Common shares outstanding................................... 57,754,480 50,348,509 46,729,698 40,719,718 37,737,434
Interest rate spread........................................ 2.90% 2.68% 2.41% 1.83% 2.13%
Ratio of non-performing assets to total assets.............. 0.74% 1.26% 1.90% 2.22% 3.94%
Average equity to average assets............................ 6.68% 6.45% 6.24% 5.52% 5.34%
Number of full service customer facilities.................. 195 166 150 148 217
</TABLE>
- ------------------
(1) For periods presented prior to June 30, 1998, Glendale Federal was a
publicly held company. On July 24, 1997, Glendale Federal was reorganized
into a holding company structure which resulted in Glendale Federal becoming
a wholly owned subsidiary of Golden State.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of FNH and of Glendale Federal and the notes
thereto included elsewhere in this Prospectus. The following discussion includes
historical information relating to FNH, including the effect of the Cal Fed
Acquisition for the period since consummation on January 3, 1997. Golden State
Holdings acquired all of the assets and liabilities of FNH in the FNH Asset
Transfer that was consummated on September 11, 1998 as part of the Golden State
Acquisition.
FNH
GENERAL
FNH is a diversified financial services company whose principal business,
through the Bank, consists of (i) operating retail deposit branches to serve
consumers in California and, to a lesser extent, in Florida and Nevada, (ii)
originating and/or purchasing, on a nationwide basis, 1-4 unit residential loans
and, to a lesser extent, certain commercial real estate and consumer loans, for
investment and (iii) mortgage banking activities, including originating and
servicing 1-4 unit residential loans for others. Revenues are derived primarily
from interest earned on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments, and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist of
interest on customer deposit accounts, interest on short-term and long-term
borrowings, provisions for losses, general and administrative expenses
consisting of compensation and benefits, occupancy and equipment, advertising
and marketing, loan expenses, professional fees, data processing and other
general and administrative expenses.
The following is a description of the significant acquisitions and
dispositions which have occurred since the FN Acquisition. Each of the
acquisitions was recorded using the purchase method of accounting. Under this
method of accounting, the purchase price of the acquisition is allocated to the
assets and liabilities acquired based on their fair market values as of the date
of the acquisition.
The Cal Fed Acquisition
On January 3, 1997, FNH acquired Old Cal Fed and Old California Federal for
approximately $1.2 billion in cash and the issuance of the CALGLs. At
December 31, 1996, Old California Federal had approximately $14.1 billion in
assets, $8.9 billion in deposits and operated 119 branches in California and
Nevada. Upon consummation of the Cal Fed Acquisition, the Bank merged with Old
California Federal, with Old California Federal surviving.
As a result of the Cal Fed Acquisition, FNH gained a substantial presence
in Southern California. In order to realize economies of scale and cost
reduction opportunities presented by the Cal Fed Acquisition, FNH began to
consolidate or eliminate duplicative back office operations and administrative
and management functions. FNH presently estimates that, as a result of these
measures, it saved approximately $68 million in noninterest expense during the
first twelve months of operations following the Cal Fed Acquisition as compared
to operating Old California Federal on a stand-alone basis.
As a result of the Cal Fed Acquisition, the Bank became obligated with
respect to the following outstanding debt securities of Old California Federal:
(i) $50 million of the 10.668% Subordinated Notes (as defined herein),
(ii) $2.6 million of the 6 1/2% Convertible Subordinated Debentures (as defined
herein) and (iii) $4.3 million of the 10% Subordinated Debentures Due 2003 (as
defined herein). See "Business--The Issuer--Sources of Funds."
Impact of Other Acquisitions and Dispositions
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a 1-4 unit residential loan servicing portfolio of approximately
$11.4 billion, including a subservicing portfolio of $1.8 billion, and certain
assets and liabilities for approximately $178 million. FNH's consolidated
statement of income for the year ended December 31, 1995 includes the results of
operations of the acquired mortgage servicing operation for the period from
March 1, 1995 through December 31, 1995.
59
<PAGE>
In April, August and December 1995, FNH acquired seven retail branches with
approximately $513 million in deposits located in California (the "Branch
Purchases"). The weighted average deposit premium paid in connection with the
Branch Purchases was 3.78%. The results of operations of the acquired retail
deposit operations are included in FNH's consolidated statement of income for
the year ended December 31, 1995 from the date each of the transactions was
consummated.
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase, acquiring a
loan servicing portfolio of approximately $11.1 billion (including a
subservicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations for approximately $100 million and the assumption of certain
indebtedness secured by the acquired loan portfolio totalling approximately
$274 million. FNH's consolidated statement of income for the year ended
December 31, 1995 includes the results of operations of the acquired mortgage
servicing operations for the period from October 3, 1995 through December 31,
1995.
On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
loan servicing portfolio of approximately $14.1 billion (including a
subservicing portfolio of $2.4 billion), a master servicing portfolio of
$2.7 billion, LMUSA's real estate acquired through loan foreclosures in
connection with its servicing operations and LMUSA's trade names for
approximately $160.0 million, subject to certain adjustments, and the assumption
of certain of LMUSA's obligations secured by its mortgage servicing operations.
FNH's consolidated statement of income for the year ended December 31, 1996
includes the results of operations of the acquired mortgage servicing operations
for the period from February 1, 1996 through December 31, 1996.
On February 1, 1996, FNH consummated the SFFed Acquisition involving assets
totalling $4.0 billion and retail deposits totalling $2.7 billion. FNH's
consolidated statement of income for the year ended December 31, 1996 includes
the results of operations of the acquired operations of SFFed for the period
from February 1, 1996 through December 31, 1996.
On June 1, 1996, FNH consummated the Home Federal Acquisition, involving
approximately $717 million in assets and $632 million in deposits. FNH's
consolidated statement of income for the year ended December 31, 1996 includes
the results of operations of the acquired operations of HFFC for the period from
June 1, 1996 through December 31, 1996.
During the first half of 1996, FNH closed the Branch Sales with associated
deposit accounts totalling $4.6 billion, resulting in pre-tax gains totalling
$363.3 million, which represented an average premium of 7.96% of the
approximately $4.6 billion of deposits sold. FNH's consolidated statement of
income for the year ended December 31, 1996 includes the results of operations
of those branches sold in the Branch Sales for the period prior to sale.
On May 9, 1997, FNH consummated the sale of deposit accounts and retail
banking assets comprised of cash on hand, loans on deposits and facilities
totalling $21.7 million to Humbolt Bank (the "Garberville Branch Sale"). The
Garberville Branch Sale was effected at a gross purchase price representing a
deposit premium of 4.5%, resulting in a net gain on sale of $1.1 million.
On May 31, 1997, FNMC consummated the Weyerhaeuser Purchase, acquiring a
1-4 unit residential mortgage loan servicing portfolio of approximately
$3.2 billion for $37.1 million. FNH's consolidated statement of income for the
year ended December 31, 1997 includes the results of operations of the acquired
1-4 unit residential loan servicing operations for the period from June 1, 1997
through December 31, 1997.
On September 1, 1997, FNH consummated the Auto One Acquisition. No loans
were purchased in this transaction. Auto One primarily engages in indirect
sub-prime auto financing activities, providing loan processing, funding and loan
servicing for over 800 franchised automobile dealers. Auto One is a licensed
lender in 47 states. Auto One is headquartered in Dallas, Texas, and operates as
a subsidiary of the Bank.
On September 30, 1997, FNH sold MSRs for approximately 52,000 loans with an
unpaid principal balance of approximately $2.3 billion in the Servicing Sale. A
pre-tax gain of $14.0 million was recorded in connection with this transaction.
60
<PAGE>
On December 12, 1997, FNH closed the Texas Branch Sale (as defined herein),
which included the sale of retail deposits totalling $57.6 million at a gross
price representing a deposit premium of 4.1%. The Texas Branch Sale resulted in
a net pre-tax gain on sale of $2.5 million.
On February 4, 1998, FNH consummated the GSAC Acquisition. The aggregate
consideration paid in connection with the GSAC Acquisition was approximately
$13.6 million and a 20% interest in the common stock of Auto One.
On February 4, 1998, Parent Holdings and Hunter's Glen entered into the
Merger Agreement with Golden State, pursuant to which Parent Holdings, Hunter's
Glen and Golden State agreed to the Golden State Acquisition. On September 11,
1998, the Golden State Acquisition was consummated. See "The Golden State
Acquisition."
On September 11, 1998, FNH consummated the sale of its Florida bank
franchise (consisting of 24 branches with deposits of $1.4 billion) to Union
Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the
"Florida Branch Sale"). FNH expects to record a pre-tax gain of approximately
$108 million in connection with the Florida Branch Sale, representing a deposit
premium of approximately 7.5%. It is not expected that there will be any
material impact on the financial condition or ongoing result of operations as a
result of the Florida Branch Sale.
Accounting Changes
On June 28, 1996, the FASB (as defined herein) issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" ("SFAS No. 127"). SFAS
No. 127 defers for one year the effective date (i) of paragraph 15 of SFAS
No. 125 and (ii) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase
agreement, dollar-roll, securities lending and similar transactions. SFAS
No. 127 provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if it is
not possible to determine whether a transaction occurring during calendar-year
1997 is part of a repurchase agreement, dollar-roll, securities lending, or
similar transaction, then paragraphs 9-12 of SFAS No. 125 should be applied to
that transfer. FNH adopted SFAS No. 125, as amended by SFAS No. 127, on
January 1, 1997. Such adoption did not have a material impact on FNH's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement has no impact on the financial
condition or results of operations of FNH, but does impact FNH's disclosure
requirements. FNH has adopted this statement effective October 1, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to
61
<PAGE>
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. This statement is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement need
not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. This statement has no impact on the financial
condition or results of operations of FNH, but will require changes in FNH's
disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements
No. 87, 88 and 106. SFAS No. 132 revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as they were when FASB Statements No. 87,
Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, were issued. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of disclosures
for earlier periods provided for comparative purposes, if available. It is not
expected that FNH will experience any material revision in its disclosures when
SFAS No. 132 is adopted.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes standards for derivative instruments and for
hedging activities, and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Under SFAS No. 133, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. SFAS
No. 133 applies to all entities and amends FASB Statement No. 107, Disclosures
About Fair Values of Financial Instruments, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, Accounting for Futures
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this statement. Earlier application of all of the provisions of SFAS No. 133
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. SFAS No. 133 should not be applied
retroactively to financial statements of prior periods. Management has not yet
completed its analysis of SFAS No. 133 and is unable to determine the effect, if
any, implementation may have on FNH's consolidated financial statements.
62
<PAGE>
RESULTS OF OPERATIONS
The period-to-period comparisons set forth below, including the changes in
magnitude of the various items between periods, have been affected by the
acquisitions and dispositions described above and consummated during the periods
involved.
The following table sets forth, for the periods and at the dates indicated,
information regarding FNH's consolidated average balance sheets, together with
the total dollar amounts of interest income and interest expense and the
weighted average interest rates for the periods presented. Average balances are
calculated on a daily basis. The information presented represents the historical
activity of FNH.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
-----------------------------------
AVERAGE
BALANCE INTEREST AVERAGE RATE
------- -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets(1):
Securities and interest-bearing deposits in banks(2)......................... $ 1,016 $ 32 6.18%
Mortgage-backed securities available for sale................................ 5,716 178 6.25
Mortgage-backed securities held to maturity.................................. 1,236 47 7.67
Loans held for sale, net..................................................... 1,641 58 7.10
Loans receivable, net........................................................ 19,462 762 7.82
------- ------ ----
Total interest-earning assets................................................ 29,071 1,077 7.41%
------ ----
Noninterest-earning assets..................................................... 3,208
-------
Total assets................................................................. $32,279
-------
-------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits..................................................................... $16,206 355 4.42%
Securities sold under agreements to repurchase............................... 2,028 57 5.59
Borrowings(3)................................................................ 11,039 341 6.22
------- ------ ----
Total interest-bearing liabilities........................................... 29,273 753 5.18%
------ ----
Noninterest-bearing liabilities................................................ 1,068
Minority interest.............................................................. 985
Stockholders' equity........................................................... 953
-------
Total liabilities, minority interest and stockholders' equity................ $32,279
-------
-------
Net interest income............................................................ $ 324
------
------
Interest rate spread........................................................... 2.23%
----
----
Net interest margin............................................................ 2.19%
----
----
Average equity to average assets............................................... 2.95%
----
----
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
-----------------------------------
AVERAGE
BALANCE INTEREST AVERAGE RATE
------- -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets(1):
Securities and interest-bearing deposits in banks(2)......................... $ 1,005 $ 30 5.97%
Mortgage-backed securities available for sale................................ 3,953 134 6.80
Mortgage-backed securities held to maturity.................................. 1,549 59 7.60
Loans held for sale, net..................................................... 1,066 37 7.05
Loans receivable, net........................................................ 19,997 780 7.80
------- ------ ----
Total interest-earning assets................................................ 27,570 1,040 7.55%
------- ------ ----
Noninterest-earning assets..................................................... 2,934
-------
Total assets................................................................... $30,504
-------
-------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits..................................................................... $16,845 375 4.49%
Securities sold under agreements to repurchase............................... 2,548 73 5.68
Borrowings(3)................................................................ 8,134 258 6.41
------- ------ ----
Total interest-bearing liabilities........................................... 27,527 706 5.17%
------ ----
Noninterest-bearing liabilities................................................ 1,193
Minority interest.............................................................. 894
Stockholders' equity........................................................... 890
-------
Total liabilities, minority interest and stockholders' equity................ $30,504
-------
-------
Net interest income............................................................ $ 334
------
------
Interest rate spread........................................................... 2.38%
----
----
Net interest margin............................................................ 2.38%
----
----
Average equity to average assets............................................... 2.92%
----
----
</TABLE>
- ------------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
64
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets(1):
Securities and interest-bearing
deposits in banks(2).............. $1,015 $ 62 6.11% $ 566 $ 35 6.15% $ 435 $ 28 6.42%
Mortgage-backed securities available
for sale(3)....................... 4,485 298 6.64 1,697 116 6.83 -- -- --
Mortgage-backed securities held to
maturity(3)....................... 1,482 113 7.65 1,766 135 7.65 2,985 213 7.14
Loans held for sale................. 1,068 77 7.15 855 62 7.20 290 24 8.35
Loans receivable, net............... 19,859 1,553 7.82 10,994 885 8.05 10,072 800 7.94
Covered assets, net................. -- -- -- 26 1 5.41 165 11 6.67
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning assets....... 27,909 2,103 7.53% 15,904 1,234 7.76% 13,947 1,076 7.71%
------ ----- ------ ----- ------ -----
Noninterest-earning assets.......... 2,847 1,210 751
------- ------- -------
Total assets...................... $30,756 $17,114 $14,698
------- ------- -------
------- ------- -------
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits............................ $16,728 $ 747 4.47% $9,360 $ 419 4.48 $9,959 $ 447 4.49%
Securities sold under agreements to
repurchase........................ 2,512 141 5.52 2,109 120 5.70 1,577 105 6.66
Borrowings(4)....................... 8,702 553 6.36 4,220 269 6.38 2,210 183 8.26
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities....................... 27,942 1,441 5.16% 15,689 808 5.15% 13,746 735 5.35%
------ ----- ------ ----- ------ -----
Noninterest-bearing liabilities..... 1,011 286 277
Minority interest................... 932 309 301
Stockholders' equity................ 871 830 374
------- ------- -------
Total liabilities, minority interest
and stockholders' equity.......... $30,756 $17,114 $14,698
------- ------- -------
------- ------- -------
Net interest income................... $ 662 $ 426 $ 341
------ ------ ------
------ ------ ------
Interest rate spread.................. 2.37% 2.61% 2.36%
----- ----- -----
----- ----- -----
Net interest margin................... 2.37% 2.68% 2.44%
----- ----- -----
----- ----- -----
Average equity to average assets...... 2.83% 4.85% 2.54%
----- ----- -----
----- ----- -----
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities purchased
under agreements to resell.
(3) Substantially all securities held to maturity (except for mortgage-backed
securities resulting from the securitization with recourse of certain of the
Bank's loans) were reclassified to securities available for sale on
December 29, 1995. The average balance of such securities for three days in
1995 is not material and is therefore not presented. Average balances
presented for 1996 and 1997 represent the original amortized cost of the
securities without the effect of unrealized gains and losses recorded as a
result of the available for sale classification.
(4) Interest and average rate include the impact of interest rate swaps.
The following table presents certain information regarding changes in
interest income and interest expense of FNH during the periods indicated. The
dollar amount of interest income and interest expense fluctuates depending upon
changes in the respective interest rates and upon changes in the respective
amounts (volume) of FNH's interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average outstanding balances multiplied by the prior period's
rate) and (ii) changes in rate (changes in average interest rate multiplied by
the prior period's volume). Changes attributable to both volume and rate have
been allocated proportionately.
65
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 VS. 1997
--------------------------
INCREASE (DECREASE) DUE TO
--------------------------
VOLUME RATE NET
------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks.............................. $ -- $ 2 $ 2
Mortgage-backed securities available for sale.................................. 54 (10) 44
Mortgage-backed securities held to maturity.................................... (13) 1 (12)
Loans held for sale............................................................ 21 -- 21
Loans receivable, net.......................................................... (20) 2 (18)
---- ---- ----
Total....................................................................... 42 (5) 37
---- ---- ----
INTEREST EXPENSE:
Deposits....................................................................... (14) (6) (20)
Securities sold under agreements to repurchase................................. (15) (1) (16)
Borrowings..................................................................... 90 (7) 83
---- ---- ----
Total....................................................................... 61 (14) 47
---- ---- ----
Change in net interest income............................................. $(19) $ 9 $(10)
---- ---- ----
---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------- --------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- ---- ------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks....... $ 28 $ (1) $ 27 $ 8 $ (1) $ 7
Mortgage-backed securities available for sale........... 185 (3) 182 116 -- 116
Mortgage-backed securities held to maturity............. (22) -- (22) (94) 16 (78)
Loans held for sale..................................... 15 -- 15 41 (3) 38
Loans receivable, net................................... 692 (24) 668 74 11 85
Covered assets, net..................................... (1) -- (1) (8) (2) (10)
---- ---- ---- ---- ---- ----
Total................................................ 897 (28) 869 137 21 158
---- ---- ---- ---- ---- ----
INTEREST EXPENSE:
Deposits................................................ 329 (1) 328 (27) (1) (28)
Securities sold under agreements to repurchase.......... 24 (3) 21 26 (11) 15
Borrowings.............................................. 285 (1) 284 115 (29) 86
---- ---- ---- ---- ---- ----
Total................................................ 638 (5) 633 114 (41) 73
---- ---- ---- ---- ---- ----
Change in net interest income...................... $259 $(23) $236 $ 23 $ 62 $ 85
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
The volume variances in total interest income and total interest expense
for the six months ended June 30, 1998 compared to the corresponding period in
1997 are largely due to increased purchases of mortgage-backed securities funded
with FHLB advances. The positive total rate variance of $9 million is primarily
attributed to the lower cost of funds on deposits and lower interest rates paid
on new borrowings, partially offset by the comparatively lower market rates on
mortgage-backed securities purchased in 1998 and 1997, and prepayments of higher
rate interest-earning assets.
The volume variances in total interest income and total interest expense
for the year ended December 31, 1997 compared to the corresponding period in
1996 were largely due to the additional $17.0 billion in interest-earning assets
acquired and $16.9 billion in interest-bearing liabilities assumed in the Cal
Fed Acquisition and the 1996 Acquisitions, as well as the assumption of the FNH
10 5/8% Senior Subordinated Notes. The negative total rate variance of
$23 million was primarily attributable to assets from the Cal Fed Acquisition
generally having a lower yield than the rest of the portfolio, the assumption of
the FNH 10 5/8% Senior Subordinated Notes, the issuance of the FNH 9 1/8% Senior
Subordinated Notes and the impact of the additional wholesale borrowings used to
finance the Branch Sales.
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The volume variances in total interest income and total interest expense
between the year ended December 31, 1995 to the corresponding period in 1996
were largely due to the additional $4.2 billion in interest-earning assets
acquired and $4.4 billion in interest-bearing liabilities assumed in the 1996
Acquisitions. The overall volume change in net interest income was positive
primarily due to the 1996 Acquisitions and Branch Sales. The positive total rate
variance of $62 million was primarily attributable to increasing rates on
adjustable-rate assets and the decrease in overall market rates on
interest-bearing liabilities between the two periods, offset slightly by the
impact of the additional wholesale borrowings used to finance the Branch Sales.
During the year ended December 31, 1996, deposits totalling $4.6 billion with a
weighted average rate of 4.59% were sold and replaced with $4.1 billion of FHLB
advance borrowings and securities sold under agreements to repurchase with a
weighted average rate of 5.45%.
SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997
Net Income. FNH reported net income for the six months ended June 30, 1998
of $362.9 million compared with net income of $66.6 million for the
corresponding period in 1997. Net income for the six months ended June 30, 1998
includes a $250 million reduction of the valuation allowance related to FNH's
deferred tax asset. Without consideration of this $250 million tax benefit, net
income for the six months ended June 30, 1998 would be $112.9 million, $46
million or 70% higher than the same period in 1997.
Net interest income was $324.4 million for the six months ended June 30,
1998, compared to $334.5 million during the same period in 1997. The decrease in
1998 over 1997 is primarily due to a reduction in the net interest margin
resulting from prepayments of higher rate interest-earning assets being replaced
with interest-earning assets having comparatively lower rates, reflecting the
relatively low level of interest rates in 1997 and 1998 and management's steps
to limit interest rate risk.
Interest Income. Total interest income was $1.1 billion for the six months
ended June 30, 1998, an increase of $36.4 million from the six months ended
June 30, 1997. Total interest-earning assets for the six months ended June 30,
1998 averaged $29.1 billion, compared to $27.6 billion for the corresponding
period in 1997. The yield on total interest-earning assets during the six months
ended June 30, 1998 decreased to 7.41% from 7.55% for the six months ended
June 30, 1997, primarily due to the lower market rates on new mortgage-backed
securities purchased in 1998 and 1997 and prepayments of higher rate
interest-earning assets.
FNH earned $761.3 million of interest income on loans receivable for the
six months ended June 30, 1998, a decrease of $18.3 million from the six months
ended June 30, 1997. The average balance of loans receivable was $19.5 billion
for the six months ended June 30, 1998, compared to $20.0 billion for the same
period in 1997. The weighted average rate on loans receivable increased to 7.82%
for the six months ended June 30, 1998 from 7.80% for the six months ended
June 30, 1997. The decline in the average volume is primarily due to an increase
in prepayments.
FNH earned $58.2 million of interest income on loans held for sale for the
three months ended June 30, 1998, an increase of $20.6 million from the six
months ended June 30, 1997. The average balance of loans held for sale was
$1.6 billion for the six months ended June 30, 1998, an increase of $575
million from the comparable period in 1997, primarily due to increased
originations and longer holding periods for jumbo loans during the six months
ended June 30, 1998. The weighted average yield on loans held for sale increased
to 7.10% for the six months ended June 30, 1998 from 7.05% for the six months
ended June 30, 1997, primarily due to a higher percentage of comparatively
higher fixed-rate portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was
$178.5 million for the six months ended June 30, 1998, an increase of
$44.1 million from the six months ended June 30, 1997. The average portfolio
balances increased $1.8 billion, to $5.7 billion, during the six months ended
June 30, 1998 compared to the same period in 1997. The weighted average yield on
these assets decreased from 6.80% for the six months ended June 30, 1997 to
6.25% for the six months ended June 30, 1998. The increase in the volume and
decrease in the weighted average yield is primarily due to the purchases of
$4.1 billion of mortgage-backed securities during the six months ended June 30,
1998 and $.9 billion during the last six months of 1997 at comparatively lower
market rates, as well as prepayments of higher rate mortgage-backed securities
since June 30, 1997.
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Interest income on mortgage-backed securities held to maturity was
$47.4 million for the six months ended June 30, 1998, a decrease of $11.4
million from the six months ended June 30, 1997. The average portfolio
balance decreased $313 million, to $1.2 billion,during the six months ended
June 30, 1998, primarily attributed to an increase in principal payments.
There was no material variance between the six months ended June 30, 1998
and the six months ended June 30, 1997 with respect to interest income from
securities and interest-bearing deposits in banks.
Interest Expense. Total interest expense was $752.6 million for the six
months ended June 30, 1998, an increase of $46.5 million from the six months
ended June 30, 1997. The increase is primarily the result of increased
borrowings on FHLB advances and a slightly higher cost of funds, partially
offset by a decline in the average balance of deposits resulting from net
deposit run-off.
Interest expense on customer deposits, including Brokered Deposits (as
defined herein), was $355.2 million for the six months ended June 30, 1998, a
decrease of $19.6 million from the six months ended June 30, 1997. The average
balance of customer deposits outstanding decreased from $16.8 billion to $16.2
billion for the six months ended June 30, 1997 and 1998, respectively. The
decrease in the average balance is primarily due to net deposit run-off,
anticipated following the Cal Fed Acquisition. The overall weighted average cost
of deposits was 4.42% for the six months ended June 30, 1998 and 4.49% for the
six months ended June 30, 1997, primarily due to higher average balances of
lower rate custodial transaction accounts in 1998.
Interest expense on securities sold under agreements to repurchase totalled
$57.0 million for the six months ended June 30, 1998, a decrease of
$15.7 million from the six months ended June 30, 1997. The average balance of
such borrowings for six months ended June 30, 1998 and 1997 was $2.0 billion and
$2.5 billion, respectively. The decrease in the average balance is primarily
attributed to maturities refinanced with FHLB advances at more favorable rates.
The weighted average interest rate on these instruments increased to 5.59%
during the six months ended June 30, 1998 from 5.68% for the six months ended
June 30, 1997, primarily due to a decrease in rates on new borrowings compared
to such borrowings during 1997.
Interest expense on borrowings totalled $340.3 million for the six months
ended June 30, 1998, an increase of $81.9 million from the six months ended
June 30, 1997. The increase is primarily attributed to the increase in FHLB
advances used to fund the purchases of mortgage-backed securities and replace
reverse repurchase agreements which matured. The average balance outstanding for
the six months ended June 30, 1998 and 1997 was $11.0 billion and $8.1 billion,
respectively. The weighted average interest rate on these instruments decreased
to 6.22% during the six months ended June 30, 1998 from 6.41% for the six months
ended June 30, 1997, primarily due to the lower rates in effect as a result of
the flatter yield curve at June 30, 1998 compared to June 30, 1997.
Net Interest Income. Net interest income was $324.4 million for the six
months ended June 30, 1998, a decrease of $10.2 million from the six months
ended June 30, 1997. The interest rate spread decreased to 2.23% for the six
months ended June 30, 1998 from 2.38% for the six months ended June 30, 1997,
primarily as a result of prepayments of higher rate interest-earning assets
being replaced with interest-earning assets having comparatively lower yields,
reflecting the flattening of the yield curve during the second half of 1997 and
year to date in 1998.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and dividends on
FHLB stock, was $184.7 million for the six months ended June 30, 1998, an
increase of $23.4 million from the six months ended June 30, 1997. Income for
the six months ended June 30, 1998 reflects a $24.8 million increase in gain on
sales of loans attributed to early payoffs of commercial loans with unamortized
discounts and gains from residential loan sales during the six months ended
June 30, 1998 compared to the same period in 1997.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$71.4 million for the six months ended June 30, 1998, compared to $75.0 million
for the six months ended June 30, 1997. The single-family residential loan
servicing portfolio, excluding loans serviced for the Bank, decreased from
$47.4 billion at June 30, 1997 to $46.8 billion at June 30, 1998. During the six
months ended June 30, 1998, FNH sold $4.5 billion in single-family mortgage
loans originated for sale as part of its ongoing mortgage banking operations
compared to $3.0 billion of such sales for the corresponding period in 1997.
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<PAGE>
Gain on sales of loans was $36.1 million for the six months ended June 30,
1998, compared to $11.4 million for the six months ended June 30, 1997. The
increase in 1998 is primarily attributed to early payoffs of commercial loans
with unamortized discounts and additional gains from residential loan sales.
Dividends on FHLB stock were $14.6 million for the six months ended
June 30, 1998, an increase of $2.6 million from the six months ended June 30,
1997, representing an increase in the amount of such stock owned by the Bank,
primarily as a result of an increase in borrowings on FHLB advances.
There were no material variances between the six months ended June 30, 1998
and the comparable period in 1997 with respect to customer banking fees, gain
(loss) on sales of assets and other noninterest income.
Noninterest Expense. Total noninterest expense was $301.7 million for the
six months ended June 30, 1998, a decrease of $22.8 million from the six months
ended June 30, 1997. The variance between the two periods is primarily
attributed to 1997 transition expenses (primarily reflected in other noninterest
expense) related to the Cal Fed Acquisition and a $19.0 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for others (reflected as loan expense and professional fees) also recorded
during the six months ended June 30, 1997.
Provision for Income Tax. During the six months ended June 30, 1998 and
1997, FNH recorded an income tax benefit of $221.1 million and income tax
expense of $21.9 million, respectively. Based on resolutions of federal income
tax audits and favorable future earnings expectations, management changed its
judgment about the realizability of FNH's deferred tax asset and reduced its
valuation allowance by $250 million in addition to the amount used to offset
income during the period. For the six months ended June 30, 1998 and 1997, FNH's
valuation allowance was reduced by $330.2 million and $62.8 million,
respectively. FNH's effective Federal tax rate was (131)% and 2% during the six
months ended June 30, 1998 and 1997, respectively, while its statutory Federal
tax rate was 35% during both periods. The difference between the effective and
statutory rates was primarily the result of the reductions in the deferred tax
asset valuation allowance. FNH's effective state tax rate was 13% and 15% during
the six months ended June 30, 1998 and 1997, respectively. It is expected that,
beginning July 1, 1998, FNH's effective tax rate for future periods will be 42%.
Minority Interest. Dividends on the REIT Preferred Stock totalling
$22.8 million and $19.1 million were declared and paid during the six months
ended June 30, 1998 and 1997, respectively. Minority interest relative to the
REIT Preferred Stock is reflected on the consolidated statements of income net
of the income tax benefit of $2.9 million and $2.4 million for the six months
ended June 30, 1998 and 1997, respectively, which will inure to FNH as a result
of the deductibility of such dividends for income tax purposes. Dividends on the
Bank Preferred Stock of $26.5 million and $26.3 million were also recorded
during the six months ended June 30, 1998 and 1997, respectively. Minority
interest for the six months ended June 30, 1998 also includes $.8 million
representing that portion of Auto One's loss attributable to the 20% interest in
the common stock of Auto One that was issued as part of the GSAC Acquisition.
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
Net Income. FNH reported net income for the year ended December 31, 1997
of $161.4 million compared with net income of $577.5 million in 1996. Net income
for the year ended December 31, 1997 included pre-tax gains of $25.0 million
from the sale of the remaining ACS stock, $14.0 million on the sale of mortgage
servicing rights and $3.6 million on the sales of branches, partially offset by
a $29.0 million provision for professional fees and additional unreimbursable
costs related to the foreclosure of 1-4 unit residential mortgage loans serviced
for others. Net income for the year ended December 31, 1996 included $363.3
million in pre-tax gains on sales of branches, $40.4 million in pre-tax gains
from the sale of ACS stock, $25.6 million in pre-tax income recognized in
connection with the termination of the Assistance Agreement (as defined herein)
and the recognition of a $125.0 million deferred tax benefit, partially offset
by a $60.1 million charge for the Special SAIF Assessment. Excluding
non-recurring and expected non-recurring items, net income for the years ended
December 31, 1997 and 1996 totalled $160.5 million and $146.7 million,
respectively.
Interest Income. Total interest income was $2.1 billion for the year ended
December 31, 1997, an increase of $869 million from the year ended December 31,
1996. The interest-earning assets acquired in the Cal Fed Acquisition and the
1996 Acquisitions resulted in total interest-earning assets for the year of 1997
averaging
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<PAGE>
$27.9 billion, compared to $15.9 billion for the corresponding period in 1996.
The weighted average yield on total interest-earning assets during the year
ended December 31, 1997 decreased to 7.53% compared to 7.76% for the year ended
December 31, 1996, primarily due to assets from the Cal Fed Acquisition
generally having a lower yield than the rest of the portfolio.
FNH earned $1.6 billion of interest income on loans receivable for the year
ended December 31, 1997, an increase of $668 million from the year ended
December 31, 1996. The loans acquired in the Cal Fed Acquisition and the 1996
Acquisitions contributed most of the additional interest income in 1997 and
resulted in an increase in the average balance of loans receivable to
$19.9 billion for the year ended December 31, 1997 from $11.0 billion for the
year ended December 31, 1996. The weighted average yield on loans receivable
decreased to 7.82% for the year ended December 31, 1997 from 8.05% for the
comparable period in 1996, due primarily to the addition of $10.1 billion in
loans from the Cal Fed Acquisition generally having a lower yield than the rest
of the portfolio.
In addition, FNH earned $77 million of interest income on loans held for
sale for the year ended December 31, 1997, an increase of $15 million from the
year ended December 31, 1996. The average balance of loans held for sale was
$1.1 billion for the year ended December 31, 1997, an increase of $213 million
from the comparable period in 1996, due primarily to increased originations. The
weighted average yield on loans held for sale decreased slightly to 7.15% for
the year ended December 31, 1997 from 7.20% for the year ended December 31,
1996, primarily due to the portfolio consisting of a higher percentage of
lower-rate adjustable rate loans in 1997 compared to a predominantly fixed-rate
portfolio in 1996.
Interest income on mortgage-backed securities available for sale was
$298 million for the year ended December 31, 1997, an increase of $182 million
from the year ended December 31, 1996. The average portfolio balances increased
$2.8 billion, to $4.5 billion, during the year ended December 31, 1997 compared
to the same period in 1996. The weighted average yield on these assets decreased
from 6.83% for the year ended December 31, 1996 to 6.64% for the year ended
December 31, 1997. The increase in the volume and decrease in the weighted
average yield was primarily due to the acquisition of $2.0 billion in
mortgage-backed securities from the Cal Fed Acquisition and the purchase of
$2.6 billion in other mortgage-backed securities during 1997.
Interest income on mortgage-backed securities held to maturity was
$113 million for the year ended December 31, 1997, a decrease of $22 million
from the year ended December 31, 1996. The average portfolio balance decreased
$284 million, to $1.5 billion, during the year ended December 31, 1997 compared
to the same period in 1996.
There was no interest income from Covered Assets (as defined herein) for
the year ended December 31, 1997, as a result of the disposal of all remaining
Covered Assets in August 1996.
Interest income from securities and interest-bearing deposits in banks was
$62 million for the year ended December 31, 1997, an increase of $27 million
from the year ended December 31, 1996. The average portfolio balance increased
to $1.0 billion, an increase of $449 million from the year ended December 31,
1996, primarily due to the assets acquired in the Cal Fed Acquisition and
purchases of short-term investment securities made by FNH during 1997 to meet
liquidity needs. The weighted average yield on these assets decreased to 6.11%
for the year ended December 31, 1997 from 6.15% for the year ended December 31,
1996, primarily due to a shift in the mix to lower-rate interest-bearing
deposits acquired in the Cal Fed Acquisition, along with a decline in yields
earned on interest-bearing deposits in other banks.
Interest Expense. Total interest expense was $1.4 billion for the year
ended December 31, 1997, an increase of $633 million from the year ended
December 31, 1996. The increase was the result of additional interest-bearing
liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the
assumption of the FNH 10 5/8% Senior Subordinated Notes, the issuance of the FNH
9 1/8% Senior Subordinated Notes and incrementally higher rates paid on the
additional borrowings used to replace the retail deposits sold in the Branch
Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$747 million for the year ended December 31, 1997, an increase of $328 million
from the year ended December 31, 1996. The average balance of customer deposits
outstanding increased from $9.4 billion to $16.7 billion for the years ended
December 31, 1996 and 1997, respectively, primarily due to $9.0 billion in
deposits assumed in the Cal Fed Acquisition. The overall
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weighted average cost of deposits was 4.47% for the year ended December 31, 1997
and 4.48% for the year ended December 31, 1996.
Interest expense on securities sold under agreements to repurchase totalled
$141 million for the year ended December 31, 1997, an increase of $21 million
from the year ended December 31, 1996. The average balance of such borrowings
for the years ended December 31, 1997 and 1996 was $2.5 billion and $2.1
billion, respectively. The increase in the average balance was primarily
attributable to $1.1 billion of such liabilities assumed in the Cal Fed
Acquisition and the 1996 Acquisitions, partially offset by maturities and
payoffs that were refinanced with FHLB advances and deposits acquired in the Cal
Fed and Home Federal Acquisitions. The weighted average interest rate on these
instruments decreased to 5.52% during the year ended December 31, 1997 from
5.70% for the year ended December 31, 1996, primarily due to a decrease in rates
on new borrowings compared to such borrowings during 1996.
Interest expense on borrowings totalled $553 million for the year ended
December 31, 1997, an increase of $284 million from the year ended December 31,
1996. The increase was attributable to the net effect of borrowings assumed in
the Cal Fed Acquisition and the 1996 Acquisitions, the assumption of the FNH
10 5/8% Senior Subordinated Notes, the issuance of the FNH 9 1/8% Senior
Subordinated Notes and additional borrowings to replace deposits sold in the
Branch Sales, partially offset by the impact of a slight decrease in the rates
paid on such borrowings. The average balance of borrowings outstanding for the
years ended December 31, 1997 and 1996 was $8.7 billion and $4.2 billion,
respectively. The weighted average interest rate on these borrowings decreased
to 6.36% during the year ended December 31, 1997 from 6.38% for the year ended
December 31, 1996, primarily due to the shorter average maturity of the
portfolio during the year ended December 31, 1997 compared to the corresponding
period in 1996, partially offset by the higher rates paid on the FNH 10 5/8%
Senior Subordinated Notes and the FNH 9 1/8% Senior Subordinated Notes.
Net Interest Income. Net interest income was $662 million for the year
ended December 31, 1997, an increase of $236 million from the year ended
December 31, 1996. The interest rate spread decreased to 2.37% for the year
ended December 31, 1997 from 2.61% for the year ended December 31, 1996.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the sales of
branches and on sales of residential mortgage loans and MSRs, was $364 million
for the year ended December 31, 1997, a decrease of $289 million from the year
ended December 31, 1996. Income for the year ended December 31, 1997 included a
$14.0 million gain from the Servicing Sale, a $25.0 million gain from the sale
of the remaining ACS stock and a $3.6 million gain on the sales of branches. The
activities in 1996 included (i) gains on the Branch Sales of $363.3 million,
(ii) gain from the sale of ACS stock of $40.4 million, (iii) income recognized
in connection with the termination of the Assistance Agreement of
$25.6 million, and (iv) gain from the sale of consumer loans of $7.5 million.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$144 million for the year ended December 31, 1997, compared to $124 million for
the year ended December 31, 1996. This increase was primarily due to the
addition of the mortgage servicing portfolios acquired in the Cal Fed
Acquisition, the 1996 Acquisitions, the LMUSA 1996 Purchase and the Weyerhaeuser
Purchase, as well as MSRs originated through the increased origination capacity
provided by the Cal Fed Acquisition, partially offset by portfolio paydowns. The
single-family residential loan servicing portfolio, excluding loans serviced for
the Bank, increased from $43.1 billion at December 31, 1996 to $46.6 billion at
December 31, 1997. During the year ended December 31, 1997, FNH sold
$5.5 billion in single-family mortgage loans originated for sale as part of its
ongoing mortgage banking operations compared to $4.9 billion of such sales for
the corresponding period in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $100 million for the year ended December 31,
1997, compared to $45 million for the year ended December 31, 1996. The increase
was primarily attributable to the impact of increased revenues from the retail
banking operations acquired in the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by the impact of the Branch Sales.
Management fees totalled $6 million for the year ended December 31, 1997,
compared to $10 million for the year ended December 31, 1996. The decrease was
attributable principally to the reduced number of commercial
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<PAGE>
real estate assets under management for others as a result of an increase in
dispositions of assets and contracts which have expired.
Gain on sales of loans was $25 million for the year ended December 31,
1997, compared to a gain of $18 million for the year ended December 31, 1996.
The increase was primarily attributed to early pay-offs of commercial loans with
unamortized discounts, partially offset by a $7.5 million gain from the sale of
$298.0 million of consumer loans during 1996.
Gain on sales of assets was $38 million for the years ended December 31,
1997 and 1996. The gain in 1997 was primarily attributable to a $14.0 million
gain related to the Servicing Sale and a $25.0 million gain on the sale of the
Bank's remaining shares of ACS stock. The gain in 1996 was primarily the result
of a $40.4 million gain from the sale of ACS stock, partially offset by a
permanent impairment in the mortgage-backed securities available-for-sale
portfolio.
Gain on sale of branches was $4 million for the year ended December 31,
1997, attributable primarily to the Texas Branch Sale. For information on the
1996 gain on Branch Sales, see "Business--The Issuer--Background."
Gain from the termination of the Assistance Agreement was $25.6 million for
the year ended December 31, 1996.
Dividends on FHLB stock were $25 million for the year ended December 31,
1997, an increase of $13 million from the year ended December 31, 1996,
representing an increase in the amount of such stock owned by Cal Fed, primarily
as a consequence of the Cal Fed Acquisition.
Other noninterest income was $23 million for the year ended December 31,
1997, an increase of $5 million from the year ended December 31, 1996. The
increase was primarily attributable to a settlement received related to the
condemnation of a building, an increase in disbursement float interest income
and the recognition of a previously deferred gain on sale of certain retail
operations, partially offset by the favorable outcome of an arbitration hearing
during the year ended December 31, 1996, related to the FN Acquisition.
Noninterest Expense. Total noninterest expense was $649 million for the
year ended December 31, 1997, an increase of $158 million from the year ended
December 31, 1996. The increase was principally due to the growth of FNH through
the Cal Fed Acquisition and the 1996 Acquisitions and a $29.0 million provision
recorded in 1997 for professional fees and unreimbursable costs related to the
foreclosure of single-family loans serviced for others, partially offset by a
$60.1 million charge recorded in 1996 for the Special SAIF Assessment.
Total compensation and employee benefits expense was $256 million for the
year ended December 31, 1997, an increase of $52 million from the year ended
December 31, 1996. The increase in expense was primarily attributable to the
presence of 1,688 additional employees at December 31, 1997 compared to
December 31, 1996 as a result of the Cal Fed Acquisition, partially offset by a
reduction in expense from December 31, 1996 to December 31, 1997 of $23.3
million related to a management incentive plan ("Incentive Plan") between FNH
and certain executive officers of the Bank. FNH has no employees of its own.
Occupancy and equipment expense was $82 million for the year ended
December 31, 1997, an increase of $30 million from the year ended December 31,
1996, attributable primarily to the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by operations sold in the Branch Sales.
SAIF deposit insurance premiums decreased $70 million, to $11 million, for
the year ended December 31, 1997 compared to the corresponding period in 1996,
due to a decrease in the quarterly assessment rate from 23 cents to 6.42 cents
per $100 of deposits, partially offset by an increase in the deposit assessment
base as a result of the net impact of the Cal Fed Acquisition, the 1996
Acquisitions and the Branch Sales. In addition, the year ended December 31, 1996
included a $60.1 million charge for the Special SAIF Assessment.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Reduction Act") was enacted. The Reduction Act
provided for a special assessment (the "Special SAIF Assessment"), which was
levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic deposits
held as of March 31, 1995. As a result of the Reduction Act, SAIF deposit
insurance premiums included a $60.1 million pre-tax charge for the Special SAIF
Assessment for the year ended December 31, 1996. The
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portion of the assessment related to deposits sold in Ohio, New York, New Jersey
and Michigan was borne, pursuant to each sales contract, by the respective
purchasers and, accordingly, such amounts were not included in the expense
recorded by FNH.
Loan expense, including foreclosure costs and loan servicing expenses, was
$60 million for the year ended December 31, 1997, an increase of $29 million
from the year ended December 31, 1996. The increase includes a $25.0 million
provision for unreimbursable costs related to the foreclosure of single family
loans serviced for others. The increase was also attributed to additional
expenses associated with the higher volume of loans serviced, and higher outside
appraisal fees, inspection fees and provision for loss on Federal Housing
Administration and Veterans Administration loans serviced.
Marketing expense was $20 million for the year ended December 31, 1997, an
increase of $9 million from the year ended December 31, 1996, attributed
primarily to the Cal Fed Acquisition and the 1996 Acquisitions, partially offset
by reduced nationwide marketing efforts as a result of the Branch Sales.
Professional fees increased $30 million, to $49 million, for the year ended
December 31, 1997 compared to the corresponding period in 1996. This increase
included additional legal, consulting and audit expenses related to the Cal Fed
Acquisition and the 1996 Acquisitions, as well as $4.0 million in higher fees
paid to professional firms in connection with the foreclosure of loans serviced
for others.
Data processing expense was $12 million for the year ended December 31,
1997, an increase of $2 million from the year ended December 31, 1996,
attributed primarily to the Cal Fed Acquisition.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $3 million for the year ended December 31, 1997 compared to a net
gain of $7 million for the same period in 1996. The change was primarily
attributable to an increase in post-foreclosure write-downs of residential and
commercial foreclosed real estate.
Amortization of intangible assets increased to $49 million for the year
ended December 31, 1997 from $9 million for the corresponding period in 1996,
primarily due to the amortization of additional intangible assets recorded in
connection with the Cal Fed Acquisition and the 1996 Acquisitions.
Other noninterest expense was $112 million for the year ended December 31,
1997, an increase of $33 million from the year ended December 31, 1996,
primarily due to amortization of deferred issuance costs related to the 10 5/8%
Notes and an increase in provisions for telecommunications, postage, office
supplies, insurance, retail branch and subservicing losses, OTS assessments and
travel expenses, all of which are attributable primarily to the Cal Fed
Acquisition and the 1996 Acquisitions.
Provision for Income Tax. During the year ended December 31, 1997 and
1996, FNH recorded income tax expense of $47.1 million and income tax benefit of
$73.1 million, respectively. FNH's effective federal income tax rate was 2% and
(20)% during the year ended December 31, 1997 and 1996, respectively, while its
statutory federal income tax rate was 35% during both periods. The difference
between the effective and statutory rates was primarily the result of the
utilization of net operating loss carryforwards for both periods and the
recognition of a $125 million deferred tax benefit in the second quarter of
1996. FNH's effective state income tax rate, before extraordinary item and
minority interest, increased to 14% from 7% during the year ended December 31,
1997 compared to the corresponding period in 1996, primarily as a result of
FNH's increased presence in California where the state tax rate is generally
higher than in other states and nondeductible goodwill amortization from the Cal
Fed Acquisition and the 1996 Acquisitions.
Extraordinary Item. During the year ended December 31, 1996, FNH
repurchased $44 million aggregate principal amount of the 11.20% Senior Notes
(as defined herein), resulting in a loss of $1.6 million, net of income taxes.
Minority Interest. Dividends on the REIT Preferred Stock totalling
$41.9 million were declared and paid during the year ended December 31, 1997.
Minority interest relative to the REIT Preferred Stock is reflected on the
consolidated statement of income net of the income tax benefit of $5.3 million
which will inure to FNH as a result of the deductibility of such dividends for
income tax purposes. Dividends on the Bank Preferred Stock of $52.7 million and
$43.2 million were also recorded during the years ended December 31, 1997 and
1996, respectively.
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YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Net Income. FNH reported net income of $578 million for the year ended
December 31, 1996, compared with net income of $147 million in 1995. Net income
for the year ended December 31, 1996 included $363.3 million in pre-tax gains on
sales of branches, $40.4 million in pre-tax gains from the sale of ACS stock,
$25.6 million in pre-tax gain recognized in connection with the termination of
the Assistance Agreement and the recognition of a $125.0 million deferred tax
benefit, partially offset by a $60.1 million charge for the Special SAIF
Assessment. Net income, excluding the aforementioned items, Incentive Plan
charges and extraordinary loss on early extinguishment of debt, totalled
$146.7 million for the year ended December 31, 1996.
Interest Income. Total interest income was $1.2 billion for the year ended
December 31, 1996, an increase of $158 million from the year ended December 31,
1995. The interest-earning assets acquired in the 1996 Acquisitions resulted in
total interest-earning assets for 1996 averaging $15.9 billion, compared to
$13.9 billion for 1995. In addition, the weighted average yields on total
interest-earning assets during 1996 increased to 7.76% from the 7.71% weighted
average yield on total interest-earning assets during 1995.
FNH earned $885 million of interest income on loans receivable for the year
ended December 31, 1996, an increase of $85 million from the year ended
December 31, 1995. The loans acquired in the 1996 Acquisitions contributed most
of the increased interest income in 1996, and resulted in an increase in the
average balance of loans receivable to $11.0 billion from $10.1 billion for the
year ended December 31, 1995. The weighted average yield on loans receivable
increased to 8.05% for the year ended December 31, 1996 from 7.94% for 1995 due
to upward rate adjustments on adjustable rate 1-4 unit residential loans.
FNH earned $62 million of interest income on loans held for sale for the
year ended December 31, 1996, an increase of $38 million from the year ended
December 31, 1995. The increased income was the net effect of a higher average
volume of loans held for sale due to increased originations from the operations
acquired in the Maryland Acquisition and the LMUSA Purchases, partially offset
by a decrease in the weighted average rate of such loans. The average balance of
loans held for sale was $855 million for the year ended December 31, 1996, an
increase of $565 million from 1995. The weighted average yield on loans held for
sale decreased to 7.20% for the year ended December 31, 1996 from 8.35% during
1995 due to generally decreasing market rates during the period and the
portfolio consisting of a higher percentage of comparatively lower-rate
adjustable rate loans in 1996 compared to a higher fixed rate portfolio in 1995.
Interest income on mortgage-backed securities available for sale was
$116 million for the year ended December 31, 1996. The average balance of
mortgage-backed securities available for sale was $1.7 billion with a weighted
average yield of 6.83% for the year ended December 31, 1996.
Interest income on mortgage-backed securities held to maturity was
$135 million for the year ended December 31, 1996, a decrease of $78 million
from the year ended December 31, 1995. The average balance of mortgage-backed
securities held to maturity decreased to $1.8 billion during the year ended
December 31, 1996, compared to $3.0 billion during 1995. The weighted average
yield on mortgage-backed securities held to maturity increased to 7.65% during
1996 from 7.14% during 1995, primarily due to the upward rate adjustments of
adjustable rate mortgage-backed securities.
Interest income from Covered Assets declined $10 million, to $1 million,
for the year ended December 31, 1996. The decline is due to a reduction in the
average volume of Covered Assets (which were acquired by the FDIC as part of the
FDIC Purchase (as defined herein) in June 1995) and the termination of the
related Assistance Agreement in August 1996.
Interest income from securities (other than those discussed above),
including the available-for-sale portfolio and securities held to maturity, and
interest-bearing deposits in other banks was $35 million for the year ended
December 31, 1996, an increase of $7 million from the year ended December 31,
1995. The average portfolio balances during the years ended December 31, 1996
and 1995 increased to $566 million from $435 million, respectively, primarily
due to assets acquired in the 1996 Acquisitions. The weighted average yield on
these assets decreased to 6.15% during 1996 from 6.42% during 1995, primarily
due to an overall decline in market interest rates.
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Interest Expense. Total interest expense was $808 million for the year
ended December 31, 1996, an increase of $73 million from the year ended
December 31, 1995. The increase was the result of additional interest-bearing
liabilities assumed in the 1996 Acquisitions, the issuance of the FNH 9 1/8%
Senior Subordinated Notes and incrementally higher rates paid on the additional
borrowings incurred to replace the retail deposits sold in the Branch Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$419 million for the year ended December 31, 1996, a decrease of $28 million
from the year ended December 31, 1995. The average balance of customer deposits
outstanding decreased from $10.0 billion to $9.4 billion for the years ended
December 31, 1995 and 1996, respectively. The overall weighted average cost of
deposits decreased from 4.49% for the year ended December 31, 1995 to 4.48% for
the year ended December 31, 1996, due principally to the impact of higher
average balances of lower rate custodial transaction accounts related to the
additional MSRs acquired in the Maryland Acquisition and the LMUSA Purchases,
partially offset by slight increases in the market rates of interest paid for
Brokered Deposits.
Interest expense on securities sold under agreements to repurchase totalled
$120 million for the year ended December 31, 1996, an increase of $15 million
from the year ended December 31, 1995. The average balance of such borrowings
for the year ended December 31, 1996 and 1995 was $2.1 billion and $1.6
billion, respectively. The increase was attributable to $.8 billion of such
liabilities acquired in the 1996 Acquisitions together with $1.5 billion in
additional short-term borrowings to fund the Branch Sales during 1996, partially
offset by maturities and payoffs that were refinanced with deposits acquired
from the Home Federal Acquisition and FHLB advances. The weighted average
interest rate on these borrowings decreased to 5.70% in 1996 from 6.66% for
1995, primarily due to the impact of decreases in overall market interest rates.
Interest expense on borrowings totalled $269 million for the year ended
December 31, 1996, an increase of $86 million from the year ended December 31,
1995. The increase was attributable to the net effect of a volume increase for
borrowings assumed in the 1996 Acquisitions, the issuance of the FNH 9 1/8%
Senior Subordinated Notes and additional borrowings to replace the deposits sold
in the Branch Sales, partially offset by the impact of decreases in the rates
paid on such borrowings largely due to the shorter weighted average maturity of
the borrowings at December 31, 1996 compared to December 31, 1995. The average
balance outstanding for the year ended December 31, 1996 and 1995 was $4.2
billion and $2.2 billion, respectively. The weighted average interest rate
on these borrowings decreased to 6.38% during the year ended December 31, 1996
from 8.26% for the year ended December 31, 1995, primarily due to the impact of
decreases in overall market interest rates and the shorter average maturity of
the portfolio.
Net Interest Income. Net interest income was $426 million for the year
ended December 31, 1996, an increase of $85 million from the year ended
December 31, 1995. The interest rate spread increased to 2.61% for the year
ended December 31, 1996 from 2.36% for the year ended December 31, 1995.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the Branch
Sales and on sales of loans and loan servicing rights, was $653 million for the
year ended December 31, 1996, an increase of $502 million from the year ended
December 31, 1995. This increase included (i) gains on sales of branches of
$363.3 million, (ii) gain from the sale of ACS stock of $40.4 million and
(iii) gains recognized in connection with the termination of the Assistance
Agreement of $25.6 million.
Loan servicing fees, net of amortization of MSRs, were $124 million for the
year ended December 31, 1996, compared to $70 million for the year ended
December 31, 1995. This increase was due to the addition of the mortgage
servicing portfolios acquired in the Maryland Acquisition, the LMUSA Purchases
and the 1996 Acquisitions, as well as MSRs originated through the increased
origination capacity provided by these acquisitions. The 1-4 unit residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$7.4 billion at January 1, 1995 to $27.0 billion at January 1, 1996 and to
$43.1 billion at December 31, 1996. During the year ended December 31, 1996, FNH
sold $4.9 billion in 1-4 unit residential loans originated for sale as part of
its ongoing mortgage banking operations compared to $1.2 billion of such sales
for 1995.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $45 million for the year ended
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December 31, 1996, compared to $47 million for the year ended December 31, 1995.
The decrease was attributable to the impact of decreased revenues associated
with the Branch Sales, partially offset by the increased revenues from the
retail banking operations acquired in the Branch Purchases and the 1996
Acquisitions.
Management fees totaled $10 million for the year ended December 31, 1996
compared to $15 million for the year ended December 31, 1995. The decrease was
attributable principally to a reduction in the amount of assets under management
as a result of the expiration of contracts with the Resolution Trust Corporation
and other third parties.
Gain on sales of branches was $363.3 million for the year ended
December 31, 1996. See Note 3 to the Notes to Consolidated Financial Statements
of FNH contained elsewhere in this Prospectus for additional information
regarding the Branch Sales.
Gain on sales of loans was $18 million for the year ended December 31,
1996. The increase was attributable in part to a gain of $7.5 million on the
sale of $298.0 million of consumer loans during the first quarter of 1996. In
addition, FNH experienced increased gains on sales of 1-4 unit residential loans
due to the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment to Statement No. 65"
("SFAS No. 122") on April 1, 1995. See "--Mortgage Banking Operations."
Gain on sales of assets was $38 million for the year ended December 31,
1996. The gain was primarily the result of a $40.4 million gain from the sale of
ACS stock, partially offset by a writedown recorded on certain collateralized
mortgage obligations ("CMOs") in the mortgage-backed securities
available-for-sale portfolio determined to have a permanent impairment in value.
Dividends on FHLB stock were $12 million for the year ended December 31,
1996, an increase of $5 million from the year ended December 31, 1995. The
increase was primarily attributable to the 1996 Acquisitions and an increase in
FHLB advances as a result of the Branch Sales.
Gain from the termination of the Assistance Agreement was $26 million for
the year ended December 31, 1996.
Other noninterest income was $18 million for the year ended December 31,
1996, an increase of $7 million from the year ended December 31, 1995. The
increase was primarily attributable to a $3 million increase in disbursement
float interest income and $2 million of interest received related to the
favorable outcome of an arbitration hearing.
Noninterest Expense. Total noninterest expense was $491 million for the
year ended December 31, 1996, an increase of $158 million from the year ended
December 31, 1995. The increase was principally due to additional compensation,
loan expense, deposit insurance premiums and other noninterest expenses which
were primarily related to the growth of FNH through the various acquisitions in
1995 and the first half of 1996 and the Special SAIF Assessment.
Total compensation and employee benefits expense was $205 million for the
year ended December 31, 1996, an increase of $51 million from the year ended
December 31, 1995, primarily attributable to $35.6 million of Incentive Plan
accruals. The number of full time employees decreased to 3,547 for the year
ended December 31, 1996, compared to 3,619 for the year ended December 31, 1995.
This decrease was primarily due to the net impact of a reduction in employees as
a result of the Branch Sales and FNH's cost reduction program, partially offset
by employee additions in the mortgage banking operations related to the
servicing portfolios acquired in the LMUSA Purchases and an increase in retail
banking employees attributed to the 1996 Acquisitions.
Occupancy and equipment expense was $52 million for the year ended
December 31, 1996, an increase of $2 million from the year ended December 31,
1995, attributed primarily to increased expenses resulting from the Maryland and
1996 Acquisitions and the LMUSA Purchases, partially offset by the net effect of
operations sold in the Branch Sales.
SAIF deposit insurance premiums increased $59 million, to $81 million, for
the year ended December 31, 1996. The increase was primarily due to the
$60 million Special SAIF Assessment.
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Loan expense was $31 million for the year ended December 31, 1996, an
increase of $19 million from the year ended December 31, 1995. The increase
related to additional expenses associated with the higher volume of loans
serviced due to the LMUSA Purchases, the Maryland Acquisition and increased loan
production. Such expenses included subservicing fees paid on acquired servicing
portfolios prior to conversion to FNMC's systems and increased pass-through
interest expense for loan payoffs in serviced loan pools. In addition, such
expenses also included outside appraisal fees, inspection fees, and provision
for losses on loans insured by the Federal Housing Administration or guaranteed
by the Veterans Administration.
Professional fees increased $8 million, to $19 million, for the year ended
December 31, 1996. This increase included additional expenses related to the
loan servicing portfolios acquired in the LMUSA Purchases, as well as additional
accruals for various legal and litigation expenses.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $7 million for the year ended December 31, 1996 compared to a net
gain of $1 million for the same period in 1995. The change was attributable to a
higher volume of sales in 1996 at comparatively higher prices to carrying
values.
Amortization of intangible assets increased to $9 million for the year
ended December 31, 1996 from $1 million for 1995, primarily due to the
amortization of $132.1 million in goodwill recorded in connection with the 1996
Acquisitions.
Other noninterest expense was $79 million for the year ended December 31,
1996, an increase of $18 million from the year ended December 31, 1995,
principally due to increased telecommunications, postage, office supplies,
insurance, OTS assessments and travel expenses, all of which are attributed
primarily to the increased loan servicing activity that resulted from the
Maryland Acquisition and the LMUSA Purchases.
Provision for Income Taxes. During the years ended December 31, 1996 and
1995, FNH recorded income tax benefit of $73.1 million and $57.2 million,
respectively. Based on a favorable earnings trend since the consummation of the
FN Acquisition and future earnings expectations, management changed its judgment
of FNH's ability to realize its deferred tax assets and recognized a deferred
tax benefit (i.e., a reduction in the valuation allowance) of $69 million in the
fourth quarter of 1995 and an additional $125 million in the second quarter of
1996. Management believes that the realization of such asset is more likely than
not, based on the expectation that FNH will generate the necessary amount of
taxable income in future periods. Included in tax expense for the year ended
December 31, 1995 is the reversal of 1993 and 1994 over-accruals of federal
taxes totalling $1.7 million. FNH's effective federal income tax rates before
extraordinary items and minority interest were (20)% and (56)% during the years
ended December 31, 1996 and 1995, respectively, while its statutory federal
income tax rate was 35% during both periods. The difference between the
effective and statutory rates was primarily the result of the utilization of net
operating loss carryforwards for both periods, the reversal of 1993 and 1994
over accruals for the year ended December 31, 1995 and the recognition of a
$125 million and $69 million deferred tax benefit in 1996 and 1995,
respectively. FNH's effective state income tax rates before extraordinary items
and minority interest were approximately 7% and 9% during the years ended
December 31, 1996 and 1995, respectively.
Extraordinary Item. During the year ended December 31, 1996, FNH
repurchased $44 million aggregate principal amount of the $50 million in 11.20%
Senior Notes assumed in the SFFed Acquisition, resulting in a loss of $1.6
million, net of income taxes. During the year ended December 31, 1995, FNH
recorded a gain of $2.0 million on the early extinguishment of $250 million in
FHLB advances, net of income taxes.
Minority Interest. Dividends on the 11 1/2% Preferred Stock of $34.6
million were paid during the year ended December 31, 1996.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the six months ended June 30, 1998 and 1997, FNH recorded an income
tax benefit of $221.1 million and income tax expense of $21.9 million,
respectively. Based on resolutions of federal income tax audits and favorable
future earnings expectations, management changed its judgment about the
realizability of FNH's deferred tax asset and reduced its valuation allowance by
$250 million in addition to the amount used to offset income during the period.
For the six months ended June 30, 1998 and 1997, FNH's valuation allowance was
reduced by $330.2 million and $62.8 million, respectively. FNH's effective
Federal tax rate was (131)% and
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2% during the six months ended June 30, 1998 and 1997, respectively, while its
statutory Federal tax rate was 35% during both periods. The difference between
the effective and statutory rates was primarily the result of the reductions in
the deferred tax asset valuation allowance. FNH's effective state tax rate was
13% and 15% during the six months ended June 30, 1998 and 1997, respectively. It
is expected that, beginning July 1, 1998, FNH's effective tax rate for future
periods will be 42%.
During the years ended December 31, 1997, 1996 and 1995, FNH recorded
income tax expense (benefit), excluding the tax effects associated with
extraordinary items and minority interest in 1997, 1996 and 1995, of
$47.1 million, $(73.1) million, and $(57.2) million, respectively. FNH's
effective income tax rates were 16%, (13)%, and (47)%, in 1997, 1996 and 1995,
respectively. FNH's federal statutory income tax rate was 35% in each of 1997,
1996, and 1995. The difference between effective and statutory rates was
primarily the result of offsetting certain deductions and losses with the
receipt of non-taxable FSLIC/RF (as defined herein) assistance payments and, in
1996 and 1995, the recognition of a deferred tax benefit totalling $125 million
and $69 million, respectively.
For federal income tax purposes, FNH is included in the Mafco Group and
accordingly, its federal taxable income and loss will be included in the
consolidated federal income tax return filed by Mafco Holdings.
Prior to the Golden State Acquisition, FNH, Mafco Holdings and the Bank
were parties to the Tax Sharing Agreement, which was subsequently amended in
connection with the Golden State Acquisition, pursuant to which (i) the Bank
paid to FNH amounts equal to the income taxes that the Bank would have been
required to pay if it were to file a return separately from the Mafco Group and
(ii) FNH paid to Mafco Holdings amounts equal to the income taxes that FNH would
be required to pay if it were to file a consolidated return on behalf of itself
and the Bank separately from the Mafco Group. The Tax Sharing Agreement allowed
the Bank to take into account, in determining its liability to FNH, any net
operating loss carryovers that it would have been entitled to utilize if it had
filed separate returns for each year since the formation of the Bank. The Tax
Sharing Agreement also allowed FNH to take into account, in determining its
liability to Mafco Holdings, any net operating loss carryovers that it would
have been entitled to utilize if it had filed a consolidated return on behalf of
itself and the Bank for each year since the formation of the Bank. Accordingly,
pursuant to the Tax Sharing Agreement, the benefits of any net operating loss
carryovers generated by the Bank since its formation are retained by the Bank
and FNH.
As a result of the transfer of assets, including the stock of the Bank, by
FNH to Golden State Holdings as part of the Golden State Acquisition, the Issuer
succeeded to the tax attributes of FNH. In addition, pursuant to an amendment to
the Tax Sharing Agreement dated as of September 11, 1998, and in accordance with
the Merger Agreement, for any taxable period ending after the Golden State
Acquisition, (i) Golden State replaced Mafco Holdings under the Tax Sharing
Agreement and assumed all of the rights and obligations of Mafco Holdings under
the Tax Sharing Agreement with respect to such taxable periods; (ii) the Issuer
replaced FNH under the Tax Sharing Agreement and assumed all of the rights and
obligations of FNH under the Tax Sharing Agreement with respect to such taxable
periods; and (iii) the Bank continues to be bound by the Tax Sharing Agreement.
The Bank has generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact that,
under applicable federal income tax law, certain financial assistance received
by the Bank pursuant to the Assistance Agreement was excluded from the taxable
income of the Bank. In addition to such tax-free financial assistance, the Bank
had been entitled to its normal operating deductions, including interest expense
and certain losses relating to its loan portfolio. As a result, the Bank
generated significant net operating losses for federal income tax purposes even
though its operations were profitable. Furthermore, under the reorganization
provisions of the Code (as defined herein), the Bank succeeded to certain net
operating loss carryovers of the Texas Closed Branches (as defined herein).
At December 31, 1997, if FNH had filed a consolidated tax return on behalf
of itself (as the common parent) and its subsidiaries for each year since the
formation of the Bank, it would have had approximately $2.0 billion of regular
net operating losses and approximately $789 million of AMT tax net operating
losses, both of which FNH would have been entitled to utilize. A portion of such
losses, to the extent not previously used to offset income, would expire in the
year 2004 and in each year thereafter, and would fully expire in 2010. Under
applicable tax law, only 90% of a corporation's alternative minimum taxable
income may be offset by carryovers from other years. Thus, 10% of the
alternative minimum taxable income earned by the Bank in the current period will
be
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subject to federal income tax at an effective rate of 20%. Under the Tax Sharing
Agreement, FNH has eliminated a significant portion of the amounts that it
otherwise would be required to pay to Mafco in respect of federal income tax.
Payments made by FNH under the Tax Sharing Agreement with the Mafco Group during
the years ended December 31, 1997, 1996 and 1995 totalled $18.6 million,
$14.1 million and $3.1 million, respectively. Such payments may increase
significantly at the time that the net operating losses described above are
either used in full to offset income or expire.
If for any reason the Bank and the Issuer were to deconsolidate from the
group, only the amount of the net operating loss carryovers of the Bank and the
Issuer not utilized by the group (up to the end of the taxable year of the group
in which the deconsolidation took place) would be available to offset the
taxable income of the Bank and the Issuer subsequent to the date of
deconsolidation. If the Bank and the Issuer had deconsolidated as of
December 31, 1997 (i.e., the close of the prior Mafco Group taxable year), the
Bank and the Issuer would have had approximately $970 million of regular net
operating loss carryforwards available to offset the taxable income of the Bank
and the Issuer subsequent to the date of deconsolidation. As a result of the
deconsolidation of the Bank and the Issuer from the Mafco Group due to the
Golden State Acquisition, and the anticipated use by the Mafco Group of
additional regular net operating loss carryforwards available to offset the
taxable income of the Mafco Group for the taxable year ending December 31, 1998,
the net operating loss carryforwards of the Bank and the Issuer will decrease.
Similarly, if for any reason the Bank and the Issuer were to deconsolidate after
the Golden State Acquisition from the Golden State Group, only the amount of the
net operating loss carryovers of the Bank and the Issuer, not utilized by the
Golden State Group up to the end of the taxable year in which the
deconsolidation took place, would be available to offset the taxable income of
the Bank and the Issuer subsequent to the date of deconsolidation. If for any
reason the Bank were to deconsolidate from the Issuer, with the Issuer remaining
a member of the Golden State Group, the net operating loss carryovers of the
Bank not utilized by the Golden State Group, until the close of the taxable year
in which the deconsolidation took place would be available to offset the taxable
income of the Bank subsequent to the date of deconsolidation, but would no
longer be available to offset the taxable income of the Issuer subsequent to the
date of deconsolidation. It cannot be predicted to what extent the Golden State
Group will utilize the net operating loss carryovers of the Issuer and/or the
Bank in the future or the amount, if any, of net operating loss carryforwards
that the Issuer or the Bank may have upon deconsolidation. The net operating
loss carryovers are subject to review and potential disallowance, in whole or in
part, by the IRS. Any disallowance of the Bank's net operating loss carryovers
may increase the amounts that the Bank would be required to pay to FNH or the
Issuer under the Tax Sharing Agreement and that FNH or the Issuer would be
required to pay to the Golden State Group and would therefore decrease the
earnings of the Bank available for distribution to the Issuer.
Under federal income tax law, the Issuer and the Bank are subject to
several liability with respect to the consolidated federal income tax
liabilities of the Golden State Group for any taxable period during which the
Issuer or the Bank is a member of such group. Therefore, the Issuer or the Bank
may be required to pay the Golden State Group's consolidated federal tax
liability notwithstanding prior payments made under the Tax Sharing Agreement by
FNH or the Issuer or the Bank to Golden State. Golden State has agreed, however,
under the Tax Sharing Agreement, to indemnify the Issuer and the Bank for any
such federal income tax liability (and certain state and local tax liabilities)
of Golden State or any of its subsidiaries (other than the Issuer and the Bank)
that the Issuer or the Bank is actually required to pay.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act"), was enacted into law generally effective for years beginning after 1995.
One provision of the Act repealed the Section 593 reserve method of accounting
for bad debts by thrift institutions which are treated as large banks. Another
provision of the Act requires FNH to take into income the balance of its
post-1987 bad debt reserves over a six year period beginning in 1996 subject to
a two-year deferral if certain residential loan tests are satisfied. As of
December 31, 1995, FNH had approximately $279 million of post-1987 bad debts
reserves that are subject to recapture. FNH had fully provided for the tax
related to this recapture.
In accordance with SFAS No. 109, "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of FNH. The
base year reserves are generally the balance of the tax bad debt reserve as of
December 31, 1987 reduced proportionately for reductions in FNH's loan portfolio
since that date. At December 31, 1997, the amount of those reserves was
approximately $152 million. The amount of the unrecognized deferred tax
liability at December 31, 1997 was approximately $53 million. Pursuant to the
Act, circumstances that
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may require an accrual of this unrecorded tax liability are a failure to meet
the definition of a "bank" for federal income tax purposes, dividend payments in
excess of tax earnings and profits, and other distributions, dissolution,
liquidation or redemption of stock, excluding preferred stock meeting certain
conditions.
FNH is subject to taxation in certain states in which it operates,
including California. For California franchise tax purposes, savings
institutions are taxed as "financial corporations." Financial corporations are
taxed at the general corporate franchise tax rate plus an "in lieu" rate based
on their statutory exemption from local business and personal property taxes.
California has not adopted conforming federal tax law changes to the computation
of the bad debt deduction.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to FNH, as the sole owner of the Bank's common
stock, and to holders of the Bank Preferred Stock, in each case in excess of the
Bank's accumulated earnings and profits, as well as certain distributions in
dissolution or in redemption or liquidation of stock, may cause the Bank to
recognize a portion of its tax bad debt reserves as income, and accordingly,
could cause the Bank to make payments to FNH under the Tax Sharing Agreement. As
a result, FNH may be required to make payments to Mafco Holdings under the Tax
Sharing Agreement if FNH has insufficient expenses and losses to offset such
income. See "--Provision for Federal and State Income Taxes." The Bank does not
expect to generate substantial amounts of federal taxable income (after taking
into account its net operating loss carryovers) from any recapture of its bad
debt reserve. Accordingly, the recapture of its bad debt reserve as a result of
distributions to stockholders, or of the redemption of stock, would not be
expected to have a material adverse effect on the Bank.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. FNH charges current earnings with a provision for
estimated credit losses on loans receivable. The provision considers both
specifically identified problem loans as well as credit risks not specifically
identified in the loan portfolio. FNH established provisions for loan losses of
$20.0 million and $39.9 million during the six months ended June 30, 1998 and
1997, respectively. The decrease in the provision for loan losses during the six
months ended June 30, 1998 compared to the same period in 1997 is the result of
management's evaluation of the adequacy of the allowance based on, among other
things, past loan loss experience and known and inherent risks in the portfolio,
evidenced in part by the continued decline in FNH's level of non-performing
assets. FNH established provisions for loan losses of $80 million, $40 million
and $37 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in the provision for losses from 1995 through 1997 is
due to the increased loan production activity (primarily 1-4 unit residential)
and loans acquired through acquisitions in 1996 and 1997. In addition,
management's periodic evaluation of the adequacy of the allowance for loan
losses considers potential adverse situations that may affect the borrower's
ability to repay, the estimated value of underlying collateral, and current and
prospective economic conditions. The allowance for loan losses is increased by
provisions for loan losses and allowances on acquired loans, while it is
decreased by charge-offs (net of recoveries).
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to influence
the net interest spread is referred to as asset and liability management. The
objective of FNH's asset and liability management is to maximize the net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs and capital
planning.
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FNH, through the Bank, actively pursues investment and funding strategies
to minimize the sensitivity of its earnings to interest rate fluctuations. FNH
measures the interest rate sensitivity of its balance sheet through gap and
duration analysis, as well as net interest income and market value simulation,
and, after taking into consideration both the variability of rates and the
maturities of various instruments, evaluates strategies which may reduce the
sensitivity of its earnings to interest rate and market value fluctuations. An
important decision is the selection of interest-bearing liabilities and the
generation of interest-earning assets which best match relative to interest rate
changes. In order to reduce interest rate risk by increasing the percentage of
interest sensitive assets, FNH has continued its emphasis on the origination of
ARM products for its portfolio. Where possible, FNH seeks to originate real
estate loans that reprice frequently and that on the whole adjust in accordance
with the repricing of its liabilities. At June 30, 1998, approximately 91% of
FNH's real estate loan portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates as
marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, FNH's net interest margin would most likely be negatively impacted
in this situation. Certain ARMs now offered by FNH have a fixed monthly payment
for a given period, with any changes as a result of market interest rates
reflected in the unpaid principal balance through negative amortization.
As a result of the FN and Cal Fed Acquisitions, FNH acquired the rights and
assumed obligations related to certain interest rate swap agreements that were
entered into to hedge certain FHLB advances. Under the terms of these
agreements, FNH pays a variable rate based on LIBOR and receives fixed rates.
FNH had no interest rate swap agreements outstanding at June 30, 1998. During
the six months ended June 30, 1998, and during 1997, 1996 and 1995, FNH's net
interest margin increased (decreased) by $2.1 million, $.6 million, $.6 million
and $(12.9) million, respectively, as a result of these interest rate swap
agreements, largely due to the amortization of the premium assigned to these
agreements in the FN and Cal Fed Acquisitions.
Gains and losses on early termination of these interest rate swap
agreements would be included in the carrying amount of the FHLB advances and
amortized over the remaining terms of such advances. The requirements that must
be satisfied in order to account for the swap agreements in this manner are as
follows: (1) the FHLB advances must expose FNH to interest rate risk, and
(2) at the inception of the hedge and throughout the hedge period, high
correlation of changes in the market value of the swaps and the fair value of
the FHLB advances must be probable so that the results of the swaps will
substantially offset the effects of interest rate changes on the FHLB advances.
If these requirements are not met, the swaps would be considered speculative and
marked to market with changes in market value reflected in noninterest income.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on interest-
bearing liabilities. Net interest income is also dependent on the relative
balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds interest rate sensitive liabilities, while the opposite
results in a negative gap. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), as of June 30, 1998. Prepayment rates are assumed in each period
on substantially all of FNH's loan portfolio based upon expected loan
prepayments. Repricing mechanisms on FNH's assets are subject to limitations
such as caps on the amount that interest rates and payments on its loans may
adjust and, accordingly, such assets may not respond in the same manner or to
the same extent to changes in interest rates as FNH's liabilities. In addition,
the interest rate sensitivity of FNH's assets and liabilities illustrated in the
table would
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vary substantially if different assumptions were used or if actual experience
differed from the assumptions set forth. FNH's estimated interest rate
sensitivity gap at June 30, 1998 is as follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
------- ------- ------ ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing deposits in
other banks and short-term investment
securities(1)(2)....................................... $ 96 $ -- $ -- $ -- $ 96
Securities available for sale(3).......................... 783 -- -- -- 783
Mortgage-backed securities available for sale(3).......... 8,037 -- -- -- 8,037
Mortgage-backed securities held to maturity(1)(4)......... 1,135 2 -- -- 1,137
Loans held for sale, net(3)(5)............................ 1,707 -- -- -- 1,707
Loans receivable, net(1)(6)............................... 14,891 3,263 757 -- 18,911
Investment in FHLB........................................ 540 -- -- -- 540
------- ------- ---- ------- -------
Total interest-earning assets............................. 27,189 3,265 757 -- 31,211
Noninterest-earning assets.................................. -- -- -- 2,825 2,825
------- ------- ---- ------- -------
$27,189 $ 3,265 $757 $ 2,825 $34,036
------- ------- ---- ------- -------
------- ------- ---- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits(7)............................................... $14,395 $ 1,641 $ 8 $ -- $16,044
Securities sold under agreements to repurchase(1)......... 2,862 -- -- -- 2,862
FHLB advances(1).......................................... 4,208 6,784 2 -- 10,994
Other borrowings(1)....................................... 238 351 693 -- 1,282
------- ------- ---- ------- -------
Total interest-bearing liabilities........................ 21,703 8,776 703 -- 31,182
Noninterest-bearing liabilities............................. -- -- -- 730 730
Minority interest........................................... -- -- -- 986 986
Stockholders' equity........................................ -- -- -- 1,138 1,138
------- ------- ---- ------- -------
$21,703 $ 8,776 $703 $ 2,854 $34,036
------- ------- ---- ------- -------
------- ------- ---- ------- -------
Gap......................................................... $ 5,486 $(5,511) $ 54 $ 29
------- ------- ---- -------
------- ------- ---- -------
Cumulative gap.............................................. $ 5,486 $ (25) $ 29 $ 29
------- ------- ---- -------
------- ------- ---- -------
Gap as a percentage of total assets......................... 16.1 % (16.2)% 0.2 % 0.1 %
------- ------- ---- -------
------- ------- ---- -------
Cumulative gap as a percentage of total assets.............. 16.1% (0.1)% 0.1 % 0.1 %
------- ------- ---- -------
------- ------- ---- -------
</TABLE>
- ------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of June 30, 1998. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from FNH's prepayment estimates.
(2) Consists of $59 million of securities held to maturity, $2 million of
interest-bearing deposits in other banks and $35 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $6 million.
(5) Excludes non-performing loans of $18 million.
(6) Excludes allowance for loan losses of $421 million and non-performing loans
of $136 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are reflected
as maturing in the year of contractual maturity or first repricing date.
Money market deposit accounts, demand deposit accounts and passbook accounts
are reflected as maturing within one year.
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At June 30, 1998, interest-earning assets of FNH exceeded interest-bearing
liabilities by approximately $29 million. At December 31, 1997, interest-earning
assets of FNH exceeded interest-bearing liabilities by approximately $154
million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods, and
thus only partially depicts the dynamics of FNH's sensitivity to interest rate
changes. Since it is measured at a single point in time, this analysis may not
fully describe the complexity of relationships between product features and
pricing, market rates and future management of the balance sheet mix. FNH
utilizes computer modeling, under various interest rate scenarios, to provide a
dynamic view of the effects of the changes in rates, spreads, and yield curve
shifts on net interest income.
FNH's risk management policies are established by the Asset/Liability
Management Committee ("ALCO") of the Bank. ALCO meets monthly to formulate the
Bank's investment and risk management strategies. The basic responsibilities of
ALCO include management of net interest income and market value of portfolio
equity, management of liquidity to provide adequate funding, and the
establishment of asset product priorities by formulating performance evaluation
criteria, risk evaluation techniques and a system to standardize the analysis
and reporting of originations, competitive trends, profitability and risk. On a
quarterly basis, the Board of Directors of the Bank is apprised of ALCO
strategies adopted and their impact on operations, and, at least annually, the
Board of Directors of the Bank reviews the Bank's interest rate risk management
policy statements.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the "Special
Report"), which provided all entities an opportunity to reassess their ability
and intent to hold securities to maturity and allowed a one-time
reclassification of securities from held-to-maturity to available-for-sale
without "tainting" the remaining held-to-maturity securities. On December 29,
1995, the Bank reclassified substantially all of its securities and
mortgage-backed securities from held-to-maturity to available-for-sale. The
impact on the gap schedule of reclassifying securities from the held-to-maturity
portfolio to the available-for-sale portfolio was to shorten the maturity and
interest rate sensitivity of such assets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ALCO, which includes senior management representatives of the Bank,
monitors and considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in net portfolio value ("NPV") and net interest
income. A primary purpose of FNH's asset and liability management is to manage
interest rate risk to effectively invest FNH's capital and to preserve the value
created by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
FNH's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors of the Bank and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine FNH's
change in NPV and net interest income in the event of hypothetical changes in
interest rates, and interest rate sensitivity gap analysis is used to determine
the repricing characteristics of FNH's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, FNH has
developed strategies to manage its liquidity, shorten its effective maturities
of certain interest-earning assets, and increase the interest rate sensitivity
of its asset base. Management has sought to decrease the average maturity of its
assets by emphasizing the origination of adjustable-rate residential mortgage
loans and consumer loans, which are retained by FNH for its portfolio. In
addition, long-term, fixed-rate single-family residential mortgage loans are
underwritten according to guidelines of FHLMC, GNMA and the FNMA (each as
defined herein), and are either swapped with the FHLMC, GNMA and the FNMA in
exchange for mortgage-backed securities secured by such loans which are then
sold, or are sold directly for cash in the secondary market.
Interest rate sensitivity analysis is used to measure FNH's interest rate
risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
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changes in market interest rates. NPV represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained increase or decrease in the market interest rates of one
hundred to four hundred basis points. The Bank's Board of Directors has adopted
an interest rate risk policy which establishes maximum decreases in the NPV of
15%, 30%, 45% and 60% in the event of a sudden and sustained increase or
decrease in market interest rates of one hundred, two hundred, three hundred and
four hundred basis points, respectively. The following table presents FNH's
projected change in NPV for the various rate shock levels at December 31, 1997.
All market risk sensitive instruments presented in this table are held to
maturity or available for sale. FNH has no trading securities.
<TABLE>
<CAPTION>
MARKET VALUE OF PERCENT CHANGE
PORTFOLIO ACTUAL BOARD
CHANGE IN INTEREST RATES EQUITY CHANGE ACTUAL LIMIT
- ---------------------------------------------------------------------- --------------- ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
400 basis point rise.................................................. $ 1,163 $(605) (34.2)% (60)%
300 basis point rise.................................................. 1,492 (276) (15.6) (45)
200 basis point rise.................................................. 1,744 (24) (1.4) (30)
100 basis point rise.................................................. 1,833 65 3.7 (15)
Base Scenario......................................................... 1,768 -- -- --
100 basis point decline............................................... 1,613 (155) (8.8) (15)
200 basis point decline............................................... 1,562 (206) (11.7) (30)
300 basis point decline............................................... 1,581 (187) (10.6) (45)
400 basis point decline............................................... 1,570 (198) (11.2) (60)
</TABLE>
The preceeding table indicates that at December 31, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, FNH's NPV,
including minority interest, would be expected to decrease, and that in the
event of a sudden and sustained decrease in the prevailing market interest
rates, FNH's NPV would be expected to experience little change. At December 31,
1997, FNH's estimated changes in NPV were within the targets established by the
Board of Directors of the Bank.
The fair market value of portfolio equity decreases in a rising interest
rate environment because FNH's interest-bearing liabilities generally reprice
faster than its interest-earning assets, and certain interest-earning assets are
subject to periodic caps. The reduction in value of the net interest-earning
assets is partially offset by an increase in value of MSRs that appreciate in
value as rates rise. In a declining interest rate environment, the reduction in
value of MSRs generally outweighs the increase in value of the rest of the
portfolio resulting from the repricing differences of interest-earning assets
and interest-bearing liabilities.
NPV is calculated by FNH pursuant to guidelines established by the OTS. The
calculation is based on the net present value of estimated discounted cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources as of December 31, 1997,
with adjustments made to reflect the shift in the Treasury yield curve as
appropriate.
The computation of prospective effects of hypothetical interest rate
changes is based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV. Certain assets, such as adjustable-rate loans, which
represent one of FNH's primary loan products, have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In addition, the proportion of adjustable-rate loans in FNH's portfolio could
decrease in future periods if market interest rates remain at or decrease below
current levels due to refinance activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the NPV. Finally, the ability of many
borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of interest rate increases.
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<PAGE>
In addition, FNH uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. See "--Asset and Liability Management."
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government securities and other specified securities to
deposits and borrowings due within one year. Effective November 24, 1997, the
OTS established a minimum liquidity requirement for the Bank of 4.00%, a
reduction from 5.00%, which had been in effect prior to that date in 1997 and
1996. The Bank has been in compliance with the liquidity regulations during 1998
and 1997.
A major source of FNH's funding is expected to be the Bank's retail deposit
branch network, which management believes will be sufficient to meet its
long-term liquidity needs. The ability of FNH to retain and attract new deposits
is dependent upon the variety and effectiveness of its customer account
products, customer service and convenience, and rates paid to customers. FNH
also obtains funds from the repayment and maturities of loans and
mortgage-backed securities, while additional funds can be obtained from a
variety of sources including customer and Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other secured
and unsecured borrowings. It is anticipated that FHLB advances and securities
sold under agreements to repurchase will continue to be important sources of
funding, and management expects there to be adequate collateral for such funding
requirements.
FNH's primary uses of funds are the origination or purchase of loans, the
purchase of mortgage-backed securities, the funding of maturing certificates of
deposit, demand deposit withdrawals, the repayment of borrowings, and the
payment of dividends with respect to the REIT Preferred Stock and the Bank
Preferred Stock. Certificates of deposit scheduled to mature during the twelve
months ending June 30, 1999 aggregate $8.3 billion. FNH may renew these
certificates, attract new replacement deposits, replace such funds with other
borrowings, or it may elect to reduce the size of the balance sheet. In
addition, at June 30, 1998, FNH had securities sold under agreements to
repurchase, FHLB advances and other borrowings aggregating $7.3 billion maturing
within twelve months. FNH may elect to pay off such debt or to replace such
borrowings with additional FHLB advances or other borrowings at prevailing
rates.
During 1994, the Bank issued 3,007,300 shares of the 11 1/2% Preferred
Stock. Cash dividends on the 11 1/2% Preferred Stock are noncumulative and are
payable at an annual rate of 11 1/2% if, when, and as declared by the Board of
Directors of the Bank. The payment of dividends by the Bank is subject to
certain federal laws applicable to savings associations. Dividends on the
11 1/2% Preferred Stock totalling $17.3 million and $34.6 million were declared
and paid during the six months ended June 30, 1998 and year ended December 31,
1997, respectively.
In the FN Acquisition, FNH assumed $92.1 million of Old FNB's 10%
Subordinated Debentures Due 2006 (as defined herein) which have an annual
interest cost of $9.2 million. In the SFFed Acquisition, FNH assumed
$50 million of the 11.20% Senior Notes. On September 12, 1996, FNH repurchased
$44 million aggregate principal amount of the 11.20% Senior Notes at a price of
approximately 116.45% of the principal amount, plus the accrued interest
thereon. The $6.0 million of 11.20% Senior Notes that remain outstanding have an
annual interest cost of $0.7 million.
In the Cal Fed Acquisition, FNH assumed certain indebtedness and the
10 5/8% Preferred Stock, which have an annual interest/dividend cost of
$5.9 million and $18.3 million, respectively. Cash dividends on the 10 5/8%
Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8%,
if, when, and as declared by the Board of Directors of the Bank. Similar to the
11 1/2% Preferred Stock, the payment of dividends by the Bank is subject to
certain federal laws applicable to savings associations. Dividends on the
10 5/8% Preferred Stock totalling $9.2 million and $18.3 million were paid
during the six months ended June 30, 1998 and year ended December 31, 1997,
respectively.
At December 31, 1997, FNH had $25 million of FNH Preferred Stock (as
defined herein) which has an annual dividend cost of approximately
$2.5 million, not including dividends paid in kind. The FNH Preferred Stock was
redeemed in March 1998.
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The dividends, net of taxes, on the REIT Preferred Stock were $19.9
million and $36.6 million for the six months ended June 30, 1998 and year
ended December 31, 1997, respectively.
As a result of the Golden State Acquisition and the Escrow Corp. Merger,
the Issuer assumed the obligations of FNH under the FNH Notes and the
obligations of Escrow Corp. under the Notes, which have an annual interest cost
of $140.9 million.
As presented in the unaudited consolidated statements of cash flows of FNH
included elsewhere in this Prospectus, the sources of liquidity vary between
periods. The primary sources of funds during the six months ended June 30, 1998
were net loan repayments of $725.3 million, proceeds from sales of loans of
$4.5 billion, $11.8 billion in additional borrowings, a $1.0 billion net
increase in securities sold under agreements to repurchase and $1.9 billion in
proceeds from principal payments and maturities of securities and mortgage-
backed securities available for sale and held to maturity. The primary uses of
funds were $10.3 billion in principal payments on borrowings, $4.6 billion in
purchases of securities and mortgage-backed securities available for sale,
$4.8 billion in originations of loans, $157.9 million from a net decrease in
deposits and $82.4 million in dividend payments.
Net cash used in operating activities for the year ended December 31, 1997
totalled $383.4 million, a decrease of $899.3 million from the year ended
December 31, 1996. The decrease was principally due to the increase in purchases
and originations of loans held for sale.
Net cash provided by operating activities for the year ended December 31,
1996 totalled $515.9 million, an increase of $908.1 million from the year ended
December 31, 1995. The increase was principally due to the increase in proceeds
from the sale of loans held for sale. Substantially all loan production in 1996
was sold in the secondary market, whereas variable rate loans originated during
the first nine months of 1995 were retained by FNH.
Net cash used in operating activities for the year ended December 31, 1995
totalled $392.2 million, an increase of $352.5 million from the year ended
December 31, 1994. The increase is principally due to the increase in loans held
for sale due to the additional production capacity from the Maryland Acquisition
and the LMUSA 1995 Purchase.
Net cash used in investing activities for the year ended December 31, 1997
totalled $1.0 billion, a decrease of $3.2 billion from the year ended
December 31, 1996. Cash flows used in investing activities included
$198.3 million for acquisitions, purchases of securities of $1.4 billion and
purchases of $2.6 billion in mortgage-backed securities. Cash flows provided by
investing activities included a net decrease in loans receivable of
$514.4 million, principal payments on mortgage-backed securities totalling
$1.4 billion and proceeds from maturities of securities of $1.0 billion.
Net cash provided by investing activities for the year ended December 31,
1996 totalled $2.2 billion, an increase of $.4 billion from the year ended
December 31, 1995. Cash flows provided by investing activities included a net
decrease in loans receivable of $1.5 billion, principal payments on
mortgage-backed securities totalling $863.1 million and proceeds from maturities
of securities of $243.8 million. Cash flows used in investing activities
included a net $52.4 million from acquisitions, purchases of securities of
$507.3 million and purchases of $149.7 million in mortgage-backed securities.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included
$272.3 million from the FDIC Purchase and other dispositions of the Covered
Assets, principal payments on mortgage-backed securities totalling
$570.9 million and proceeds from maturities of securities of $344.5 million.
Proceeds from sales of loans receivable, including loans sold to Granite (as
defined herein) pursuant to the Put Agreement (as defined herein) of
$199.5 million, totalled $431.2 million. Proceeds from the Branch Purchases
provided $501.4 million. Cash flows used in investing activities included
$214.7 million for the Maryland Acquisition and LMUSA 1995 Purchase and
purchases of securities of $162.8 million.
Net cash provided by financing activities for the year ended December 31,
1997 totalled $1.6 billion. Cash flows provided by financing activities included
additional borrowings of $19.6 billion, proceeds of $482.4 million from the
issuance of the REIT Preferred Stock and proceeds from the First Nationwide
Escrow Merger (as defined herein) of $603.3 million. Cash flows used in
financing activities included principal payments on borrowings totalling
$17.5 billion and a decrease in deposits of $1.2 billion. Additionally,
redemption of
86
<PAGE>
preferred stock totalled $142.3 million and dividends on preferred and common
stock, including dividends paid to minority stockholders, totalled $171.2
million.
Net cash used in financing activities for the year ended December 31, 1996
totalled $2.7 billion. Principal payments on borrowings totalled $8.5 billion,
funding of the Branch Sales totalled $4.6 billion and the net decrease in
securities sold under agreements to repurchase totalled $202.2 million.
Additionally, redemption of class C common stock totalled $124.7 million and
dividends on common and preferred stock of FNH as well as the 11 1/2% Preferred
Stock totalled $110.8 million. Cash flows provided by financing activities
included additional borrowings of $10.7 billion and proceeds from the issuance
of FNH Preferred Stock of $144.2 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9 billion
and the net decrease in securities sold under agreements to repurchase totalled
$913.1 million. Additionally, dividends on and redemption of FNH's class C
common stock totalled $29.2 million and $60.8 million, respectively, and
dividends on the 11 1/2% Preferred Stock totalled $34.6 million. Cash flows
provided by financing activities included increases in deposits (other than the
Branch Purchases) of $542.6 million and additional borrowings of $6.2 billion.
The Issuer's only source of cash to pay the interest on and principal of
its long-term debt, including the Notes and the outstanding FNH Notes, is
expected to be distributions from the Bank. The annual interest expense on the
Notes is approximately $140.9 million. Although the Issuer expects that
distributions from the Bank will be sufficient to pay interest when due,
distributions from the Bank may not be sufficient to pay the principal amount of
the Notes at maturity or prior to maturity upon the occurrence of an Event of
Default or to redeem or repurchase the Notes upon a Change of Control. In
addition, the Issuer may use such distributions to make dividends, distributions
or other payments. In addition, there can be no assurance that the earnings from
the Bank will be sufficient to make distributions to the Issuer to enable it to
pay interest on the Notes when due or principal of the Notes at maturity or that
such distributions will be permitted by the terms of any debt instruments of the
Issuer's subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank, including the REIT Preferred Stock and the Bank
Preferred Stock, or under applicable federal thrift laws.
The Issuer anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. See
"Regulation--Regulation of the Bank." In addition to cash and cash equivalents
of $383.4 million at June 30, 1998, the Issuer has substantial additional
borrowing capacity with the FHLB and other sources.
The terms of the Bank Preferred Stock provide that the Bank may not declare
or pay any dividends or other distributions (other than in shares of common
stock of the Bank or other classes of equity securities of the Bank ranking
junior to the Bank Preferred Stock, as the case may be (collectively, "Bank
Junior Stock"), with respect to any Bank Junior Stock or repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of any Bank Junior Stock (including the common stock to be held by
the Issuer) through a sinking fund or otherwise, unless and until: (i) the Bank
has paid full dividends on the Bank Preferred Stock, for the four most recent
dividend periods or funds have been paid over to the dividend disbursing agent
of the Bank for payment of such dividends, and (ii) the Bank has declared a cash
dividend on the Bank Preferred Stock, at the annual dividend rate for the
current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent of the Bank for the payment of a cash dividend for
such current dividend period.
The Issuer currently anticipates that, in order to pay the principal amount
of the Notes upon the occurrence of an Event of Default or to redeem or
repurchase the Notes upon a Change of Control Put Event or, in the event that
earnings from the Bank are not sufficient to make distributions to the Issuer to
enable it to pay the principal amount of the Notes at maturity, the Issuer may
be required to adopt one or more alternatives, such as borrowing funds, selling
its equity securities or equity securities or assets of the Bank, or seeking
capital contributions or loans from its affiliates. None of the affiliates of
the Issuer is required to make any capital contributions or other payments to
the Issuer with respect to the Issuer's obligations on the Notes. There can be
no assurance that any of the foregoing actions could be effected on satisfactory
terms, that any of the foregoing actions would enable the Issuer to pay the
principal amount of the Notes or that any of such actions would be permitted by
the terms of the Indenture or any other debt instruments of the Issuer or the
Issuer's subsidiaries then in effect, by the terms of the Bank Preferred Stock,
or under applicable federal thrift laws or regulations. See "Risk
Factors--Ability to Pay Principal on the Notes."
87
<PAGE>
As a holding company, any right of the Issuer and its creditors to
participate in the assets of any of the Issuer's subsidiaries, including the
Bank, upon any liquidation or reorganization of any such subsidiary will be
subject to the prior claims of that subsidiary's creditors, including the Bank's
depositors and trade creditors (except to the extent that the Issuer may itself
be a creditor of such subsidiary). Accordingly, the Notes will be effectively
subordinated to (i) all existing and future liabilities, including deposits,
indebtedness and trade payable, of the Issuer's subsidiaries, including the
Bank, and (ii) all preferred stock issued by the Bank, including the Bank
Preferred Stock not purchased by Golden State Holdings in the Bank Preferred
Stock Tender Offers. At June 30, 1998, after giving effect to the Golden State
Acquisition, the outstanding interest-bearing liabilities, including deposits,
of such subsidiaries would have been approximately $47.7 billion, the other
liabilities of such subsidiaries, including trade payable and accrued expenses,
would have been approximately $1.6 billion.
IMPACT OF INFLATION AND CHANGING PRICES
Prevailing interest rates have a more significant impact on FNH's
performance than does the general level of inflation. While interest rates may
bear some relationship to the general level of inflation (particularly in the
long run), over short periods of time interest rates may not necessarily move in
the same direction or change in the same magnitude as the general level of
inflation. As a result, the business of FNH is generally not affected by
inflation in the short run, but may be affected by inflation in the long run.
PROBLEM AND POTENTIAL PROBLEM ASSETS
Loans collectively reviewed for impairment by FNH include all 1-4 unit
residential loans and performing multi-family and commercial real estate loans
under $500,000, excluding loans which have entered the workout process.
FNH considers a loan to be impaired when, based upon current information
and events, it believes it is probable that FNH will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Any
insignificant delay (i.e., 60 days or less) or insignificant shortfall in amount
of payments will not cause a loan to be considered impaired. In determining
impairment, FNH considers large non-homogeneous loans including non-performing
loans, troubled debt restructurings, and performing loans which exhibit, among
other characteristics, high loan-to-value ("LTV") ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. FNH bases the measurement of collateral-dependent
impaired loans on the fair value of the loan's collateral. The amount, if any,
by which the recorded investment of the loan exceeds the measure of the impaired
loan's value is recognized by recording a valuation allowance.
At June 30, 1998, the carrying value of loans that are considered to be
impaired totalled $97.2 million (of which $20.3 million were on non-performing
status). The average recorded investment in impaired loans during the six months
ended June 30, 1998 was approximately $98.7 million. For the six months ended
June 30, 1998, FNH recognized interest income on those impaired loans of
$4.4 million, which included $.7 million of interest income recognized using the
cash basis method of income recognition.
88
<PAGE>
The following table presents the amounts, net of specific allowances for
loan losses and purchase accounting adjustments, of FNH's non-performing loans,
foreclosed real estate, repossessed assets, troubled debt restructurings and
impaired loans as of the dates indicated. These categories are not mutually
exclusive; certain loans are included in more than one classification.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------
NON-PERFORMING IMPAIRED RESTRUCTURED
-------------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential.................................................. $133 $ -- $ 2
5+ unit residential................................................... 10 40 21
Commercial and other.................................................. 10 56 21
Land.................................................................. -- -- --
Construction.......................................................... 1 1 --
---- ---- ----
Total real estate.................................................. 154 97 44
Non-real estate......................................................... 6 -- --
---- ---- ----
Total loans, net................................................... 160 $ 97(b) $ 44(c)
---- ----
---- ----
Foreclosed real estate, net............................................. 65
Repossessed assets...................................................... 2
----
Total non-performing assets........................................ $227(a)
----
----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
NON-PERFORMING IMPAIRED RESTRUCTURED NON-PERFORMING IMPAIRED RESTRUCTURED
-------------- -------- ------------ -------------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential........ $165 $ -- $ 2 $146 $ -- $ 3
5+ unit residential......... 12 43 43 13 47 55
Commercial and other........ 6 67 26 9 54 28
Land........................ -- -- -- -- -- 1
Construction................ 2 -- -- 1 1 --
---- ---- ---- ---- ---- ----
Total real estate........ 185 110 71 169 102 87
Non-real estate............... 7 -- -- 3 -- --
---- ---- ---- ---- ---- ----
Total loans.............. 192 $110(b) $ 71(c) 172 $102(b) $ 87(c)
---- ---- ---- ----
---- ---- ---- ----
Foreclosed real estate, net... 77 52
Repossessed assets.......... 3 --
---- ----
Total non-performing
assets................. $272(a) $224
---- ----
---- ----
</TABLE>
- ------------------
(a) Includes loans securitized with recourse on non-performing status of
$5.7 million and $5.2 million at June 30, 1998 and December 31, 1997,
respectively, and loans held for sale on non-performing status of
$18.4 million and $1.2 million at June 30, 1998 and December 31, 1997.
(b) Includes $20.3 million, $18.6 million and $22.6 million of loans on
non-performing status at June 30, 1998, December 31, 1997 and 1996,
respectively. Also includes $19.2 million, $17.5 million and $18.3 million
of loans classified as troubled debt restructurings at June 30, 1998,
December 31, 1997 and 1996, respectively.
(c) Includes non-performing loans of $1.1 million, $2.1 million and $2.4
million at June 30, 1998, December 31, 1997 and 1996, respectively. At
June 30, 1998, December 31, 1997 and 1996, $.3 million, $1.7 million and
$2.4 million, respectively, of these non-performing troubled debt
restructurings were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
June 30, 1998, December 31, 1997 or 1996.
89
<PAGE>
FNH's non-performing assets decreased to $227 million at June 30, 1998,
from $272 million at December 31, 1997. Non-performing assets as a percentage of
the Bank's total assets decreased to .67% at June 30, 1998, from .87% at
December 31, 1997. Non-performing assets at December 31, 1997 included
$91.3 million of non-performing loans and $32.6 million of foreclosed real
estate which were acquired in the Cal Fed Acquisition and the 1996 Acquisitions.
FNH's non-performing assets, consisting of nonaccrual loans, net of purchase
accounting adjustments, repossessed assets and foreclosed real estate, net,
increased slightly to $272 million at December 31, 1997, compared with
$224 million at December 31, 1996. On the other hand, non-performing assets as a
percentage of the Bank's total assets decreased to .87% at December 31, 1997,
from 1.36% of total assets at December 31, 1996. The decrease in the Bank's
non-performing assets as a percentage of total assets is due to the level of the
Bank's non-performing assets increasing less than the significant increase in
total assets over such time period.
FNH, through the Bank, manages its credit risk by regularly assessing the
current and estimated future performance of the real estate markets in which it
operates. FNH continues to place a high degree of emphasis on the management of
its asset portfolio. FNH has three distinct asset management functions:
performing loan asset management, problem loan asset management and credit
review. These three functions are charged with the responsibility of reducing
the risk profile within the residential, commercial and multi-family asset
portfolios by applying asset management and risk evaluation techniques that are
consistent with FNH's portfolio management strategy and regulatory requirements.
In addition to these asset management functions, FNH has a specialized credit
risk management group that is charged with the development of credit policies
and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 1998:
<TABLE>
<CAPTION>
TOTAL
NON-PERFORMING FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
LOANS, NET(2) NET(2) ASSETS CONCENTRATION
-------------- ------------ -------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Region:
California.............................. $ 89 $ 39 $128 58.52%
Northeast(1)............................ 28 12 40 18.16
Other regions........................... 37 14 51 23.32
---- ---- ---- -------
Total................................ $154 $ 65 $219 100.00%
---- ---- ---- -------
---- ---- ---- -------
</TABLE>
- ------------------
(1) Includes Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments and specific allowances for losses.
At June 30, 1998, FNH's largest non-performing asset was approximately
$4.6 million, and it had three non-performing assets over $2 million in size
with balances averaging approximately $4.0 million. FNH has 1,358 non-performing
assets below $2 million in size, including 1,266 non-performing 1-4 unit
residential assets.
90
<PAGE>
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates non-performing
real estate loans, net of purchase accounting adjustments and specific
allowances for losses, by collateral type, interest rate type and state
concentration as of December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL TOTAL
RESIDENTIAL RESIDENTIAL AND OTHER NONACCRUAL
----------------- ----------------- ----------------- REAL ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- ---------------------------- -------- ----- -------- ----- -------- ----- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.................. $ 91 $ 7 $ 9 $ 1 $ 7 $ 1 $ 116 62.7%
New York.................... 16 4 1 -- -- -- 21 11.4
Hawaii...................... 8 1 -- -- -- -- 9 4.9
Florida..................... 6 3 -- -- -- -- 9 4.9
New Jersey.................. 5 1 -- -- -- -- 6 3.2
Ohio........................ 2 1 -- -- -- -- 3 1.6
Illinois.................... 2 1 -- -- -- -- 3 1.6
Connecticut................. 3 -- -- -- -- -- 3 1.6
Texas....................... 1 1 -- -- -- -- 2 1.1
Other states(1)............. 8 4 1 -- -- -- 13 7.0
---- --- ---- --- ---- --- ----- -----
Total..................... $142 $23 $ 11 $ 1 $ 7 $ 1 $ 185 100.0%
---- --- ---- --- ---- --- ----- -----
---- --- ---- --- ---- --- ----- -----
</TABLE>
- ------------------
(1) There are 27 states, Puerto Rico and the District of Columbia, of which no
one state had non-performing loans in excess of 1% of the total.
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments and specific
allowances for losses, by collateral type, interest rate type and state
concentration as of December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL TOTAL
RESIDENTIAL RESIDENTIAL AND OTHER TROUBLED
----------------- ----------------- ----------------- DEBT % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED RESTRUCTURED TOTAL
- --------------------------- -------- ----- -------- ----- -------- ----- ------------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California................. $-- $ 2 $ 22 $ 3 $ 11 $ 2 $ 40 55.3%
New York................... -- -- 3 11 -- 12 26 37.9
Other states(1)............ -- -- -- 4 -- 1 5 6.8
-- --- ---- --- ---- --- ---- -----
Total.................... $-- $ 2 $ 25 $18 $ 11 $15 $ 71 100.0%
-- --- ---- --- ---- --- ---- -----
-- --- ---- --- ---- --- ---- -----
</TABLE>
- ------------------
(1) There are five states of which no one state had troubled debt restructured
loans in excess of 1% of the total.
91
<PAGE>
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments and specific allowances for losses, by
collateral type, interest rate type and state concentration as of December 31,
1997:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER
----------------- ----------------- TOTAL % OF
STATE VARIABLE FIXED VARIABLE FIXED IMPAIRED TOTAL
----- -------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California...................................... $ 35 $ 2 $ 47 $ 6 $ 90 81.9%
New York........................................ 3 1 2 -- 6 5.8
Illinois........................................ -- -- 5 -- 5 4.4
Hawaii.......................................... -- -- 4 -- 4 3.3
Florida......................................... 1 -- 2 -- 3 2.3
Arizona......................................... -- -- -- 1 1 1.0
Other states(1)................................. 1 -- -- -- 1 1.3
---- --- ---- --- ---- -----
Total......................................... $ 40 $ 3 $ 60 $ 7 $110 100.0%
---- --- ---- --- ---- -----
---- --- ---- --- ---- -----
</TABLE>
- ------------------
(1) There are four states of which no one state had impaired loans in excess of
1% of the total.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1997, 1996 and 1995 and the six
months ended June 30, 1998:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
----------- -------------- --------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance--December 31, 1994............................ $ 111 $ 83 $ 9 $ 203
Provision for loan losses........................... 31 3 3 37
Charge-offs......................................... (27) (1) (5) (33)
Recoveries.......................................... 1 -- 2 3
----- ------ ----- -----
Balance--December 31, 1995............................ 116 85 9 210
Purchases and acquisitions, net..................... 6 32 1 39
Provision for loan losses........................... 34 2 4 40
Charge-offs......................................... (35) (4) (6) (45)
Recoveries.......................................... 2 -- 1 3
----- ------ ----- -----
Balance--December 31, 1996............................ 123 115 9 247
Purchases and acquisitions, net..................... 55 79 10 144
Provision for loan losses........................... 60 12 8 80
Charge-offs......................................... (38) (8) (10) (56)
Recoveries.......................................... 2 -- 2 4
----- ------ ----- -----
Balance--December 31, 1997............................ 202 198 19 419
Provision for loan losses........................... 12 5 3 20
Charge-offs......................................... (13) (3) (4) (20)
Recoveries.......................................... 1 -- 1 2
----- ------ ----- -----
Balance--June 30, 1998................................ $ 202 $ 200 $ 19 $ 421
----- ------ ----- -----
----- ------ ----- -----
</TABLE>
92
<PAGE>
The ratio of allowance for loan losses to non-performing loans at June 30,
1998 and December 31, 1997, 1996 and 1995 was 262.0%, 217.8%, 143.2% and 122.8%,
respectively. The increase in the ratio is primarily attributed to the Cal Fed
Acquisition and the expiration of the Put Agreement.
MORTGAGE BANKING OPERATIONS
Since 1994, FNH, through the Bank's wholly owned mortgage bank subsidiary,
FNMC, has significantly expanded its mortgage banking operations. During May
1997 and January 1998, FNMC acquired mortgage servicing assets of $3.2 billion
and $3.6 billion, respectively, as a result of four bulk servicing acquisitions.
The balance in the servicing portfolio has remained relatively flat as a result
of the net effect of a 1997 servicing sale of loans with an unpaid principal
balance of $2.3 billion and the higher prepayments on the underlying loans
serviced, offset by the bulk purchases in 1997 and 1998, the acquisition of
additional 1-4 unit residential loan servicing portfolios in the Cal Fed
Acquisition and the originated servicing. The 1-4 unit residential loans
serviced for others totalled $46.8 billion at June 30, 1998, a decrease of
$.7 billion and $.6 billion from December 31, 1997 and June 30, 1997,
respectively. During the six months ended June 30, 1998, FNH, through FNMC,
originated $4.8 billion and sold (generally with servicing retained)
$4.5 billion of 1-4 unit residential loans. Gross revenues from mortgage loan
servicing activities for the six months ended June 30, 1998 totalled
$118.8 million, a decrease of $3.6 million from the six months ended June 30,
1997.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of MSRs, and generally will result
in a reduction in the market value of MSRs and in FNH's servicing fee income. To
reduce the sensitivity of its earnings to interest rate and market value
fluctuations, FNH hedged the change in value of its MSRs based on changes in
interest rates ("MSR Hedge").
At June 30, 1998, FNH, through FNMC, was a party to several interest rate
floor contracts maturing from October 2001 through January 2003. FNH paid
counterparties a premium in exchange for cash payments in the event that the
10-year constant maturity U.S. treasury rate falls below negotiated strike
prices. At June 30, 1998, the notional amount of the interest rate floors was
$1.4 billion and the strike prices were between 5.5% and 6.5%. In addition, FNH,
through FNMC, was a party to principal-only swap agreements related to
principal-only securities and prepayment-linked swap agreements with a remaining
notional amount of $107.4 million and $1.2 billion, respectively. The estimated
market values of interest rate floor contracts and swaps designated as hedges
against MSRs at June 30, 1998 were $28.6 million and $21.3 million,
respectively.
The premium paid by the Bank on the interest rate floor contracts is
amortized against the carrying value of MSRs based on the option decay rate.
Amounts received or paid under the principal-only swap agreements are included
in the carrying value of MSRs. Gains and losses on early termination of these
hedges would be included in the carrying amount of the related MSRs and
amortized over the remaining terms of the assets. Two requirements must be met
in order to use these hedge accounting methods: (i) MSRs must expose the Bank to
interest rate risk, and (ii) at the inception of the hedge and throughout the
hedge period, high correlation of changes in the market value of the interest
floor contracts and the principal-only swaps and the fair value of the MSRs must
be probable so that the results of the interest floor contracts and the
principal-only swaps will substantially offset the effects of interest rate
changes on the MSRs. If these requirements are not met, the interest floor
contracts and the principal-only swaps would be considered speculative and
marked to market with changes in market value reflected in current earnings.
In accounting for its mortgage loan sales prior to April 1, 1995, a gain or
loss was recognized by the Bank based on the sum of three components: (i) the
difference between the cash proceeds of the loan sales and the Bank's book value
of the loans; (ii) the "excess servicing," if any; less (iii) provisions for
estimated losses to be incurred from limited recourse obligations, if any.
Excess servicing results in a capitalized asset that is amortized as an offset
to servicing fee income using the interest method over the estimated remaining
lives of the loans sold.
Effective April 1, 1995, the Bank adopted SFAS No. 122, which requires
that, when a mortgage loan is sold and MSRs are retained, a portion of the cost
of originating a mortgage loan be allocated to the MSRs based on its fair market
value. This cost of originating the loan is capitalized and amortized over the
period of estimated future net servicing income. The net gains on sales of
1-4 unit residential loans during the six months ended
93
<PAGE>
June 30, 1998, totaled $19.6 million and included amounts related to the
capitalization of originated and excess MSRs of $102 million. The net gains on
sales of 1-4 unit residential loans during the year ended December 31, 1997
totalled $24.7 million and included amounts related to the capitalization of
originated and excess MSRs of $120.5 million.
The following is a summary of activity in MSRs and the MSR Hedge for the
year ended December 31, 1997 and the six months ended June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
TOTAL MSR
MSRS MSR HEDGE BALANCE
-------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996.................................... $420,187 $ 3,505 $423,692
Additions--Cal Fed Acquisition................................ 44,497 -- 44,497
Additions--Weyerhaeuser Purchase.............................. 41,949 -- 41,949
Originated servicing.......................................... 120,465 -- 120,465
Additions--other.............................................. 27,939 -- 27,939
Sale--Servicing Sale.......................................... (16,792) -- (16,792)
Sales--Other.................................................. (4) -- (4)
Premium paid on interest rate floor contracts................. -- 7,088 7,088
Payments received under interest rate floor contracts......... -- (471) (471)
Net received under principal-only swap agreements............. -- (1,378) (1,378)
Amortization.................................................. (106,972) (3,310) (110,282)
Balance at December 31, 1997.................................... 531,269 5,434 536,703
Additions--bulk purchases..................................... 57,136 -- 57,136
Originated servicing.......................................... 102,029 -- 102,029
Additions--other.............................................. 21,087 -- 21,087
Additions to MSR Hedge........................................ -- 13,478 13,478
Payments received under interest rate floor contracts......... -- (6,338) (6,338)
Net payments made under principal-only swap agreements........ -- 381 381
Net payments made under futures contracts..................... -- 1,654 1,654
Amortization.................................................. (54,213) (2,861) (57,074)
-------- -------- --------
Balance at June 30, 1998........................................ $657,308 $ 11,748 $669,056
-------- -------- --------
-------- -------- --------
</TABLE>
Capitalized mortgage servicing rights are amortized in proportion to, and
over the period of, estimated future net servicing income. SFAS No. 125 requires
enterprises to measure the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their current
fair value. At June 30, 1998 and December 31, 1997, no allowance for impairment
of the mortgage servicing rights was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must be
at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 4%, recently amended
from 3% which had been in effect prior to March 1998. Core capital generally is
the sum of tangible capital plus certain qualifying intangibles. Under the
risk-based capital requirement, a savings association must have total capital
(core capital plus supplementary capital) equal to at least 8% of risk-weighted
assets (which equals assets plus the credit risk equivalent of certain
off-balance sheet items, each multiplied by the appropriate risk weight).
Supplementary capital, which may not exceed 100% of core capital for purposes of
the risk-based requirements, includes, among other things, certain permanent
capital instruments such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. The capital requirements are viewed as minimum standards by the OTS, and
most associations are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, depending upon their particular circumstances.
The
94
<PAGE>
Bank is not subject to any such individual minimum regulatory capital
requirement. These capital requirements are applicable to the Bank but not to
FNH.
At June 30, 1998, the Bank's regulatory capital levels exceeded the minimum
regulatory capital requirements, with tangible, core and risk-based capital
ratios of 5.46%, 5.46% and 12.15%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1998:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank at June 30, 1998.................... $ 2,565 $ 2,565 $ 2,565
Minority interest--REIT Preferred Stock.............................. 500 500 500
Unrealized holding gain on securities available for sale, net........ (28) (28) (28)
Non-qualifying MSRs.................................................. (67) (67) (67)
Non-allowable capital:
REIT Preferred Stock in excess of 25% of Tier 1 capital............ (53) (53) (53)
Intangible assets.................................................. (656) (656) (656)
Goodwill Litigation Asset (as defined herein)...................... (100) (100) (100)
Investment in subsidiaries......................................... (54) (54) (54)
Excess deferred tax asset.......................................... (319) (319) (319)
Supplemental capital:
Qualifying subordinated debt debentures............................ -- -- 94
General loan loss allowance........................................ -- -- 218
Assets required to be deducted:
Low level recourse deduction....................................... -- -- (2)
Land loans with more than 80% LTV ratio............................ -- -- (3)
-------- ------- --------
Regulatory capital of the Bank....................................... 1,788 1,788 2,095
Minimum regulatory capital requirement............................... 492 1,311 1,380
-------- ------- --------
Excess above minimum capital requirement............................. $ 1,296 $ 477 $ 715
-------- ------- --------
-------- ------- --------
Regulatory capital of the Bank....................................... 5.46% 5.46% 12.15%
Minimum regulatory capital requirement............................... 1.50 4.00 8.00
-------- ------- --------
Excess above minimum capital requirement............................. 3.96% 1.46% 4.15%
-------- ------- --------
-------- ------- --------
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $32.8 billion. Risk-weighted assets used for the risk-based capital
ratio amounted to $17.2 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other things,
define specific capital categories based on an association's capital ratios. The
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Associations categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the association either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire association. Once an
association becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital ratio
of at least 10.00%. An association is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of
95
<PAGE>
2.00% or less. At June 30, 1998, the Bank's capital levels were sufficient for
it to be considered "well capitalized:"
<TABLE>
<CAPTION>
RISK-BASED
LEVERAGE -----------------------
CAPITAL TIER 1 TOTAL CAPITAL
-------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank........................................ 5.46% 10.37% 12.15%
Well capitalized ratio................................................ 5.00 6.00 10.00
---- ------ -----
Excess above well capitalized ratio................................... 0.46% 4.37% 2.15%
---- ------ -----
---- ------ -----
</TABLE>
Management expects that the Bank will remain a "well capitalized"
association under applicable OTS regulations upon consummation of the Golden
State Acquisition and the Refinancing Transactions.
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To the
extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At June 30, 1998, $319 million of
the net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such amount
has been excluded from regulatory capital at June 30, 1998.
YEAR 2000
During the year ended December 31, 1997, the Bank finalized its plan to
address issues related to required changes in computer systems for the year 2000
("Year 2000"). Issues arise because computer systems and related software may
have been designed to recognize only dates that relate to the 20th century.
Accordingly, if no changes are implemented, some computer systems would
interpret "1/1/00" as January 1, 1900 instead of January 1, 2000. Additionally,
some equipment, being controlled by microprocessor chips, may not deal
appropriately with a year "00."
The Bank has developed and is currently executing a comprehensive plan to
make its computer systems, applications and facilities Year 2000 ready. The plan
covers four stages including (i) inventory, (ii) assessment, (iii) remediation
and (iv) testing and certification. At year end 1997, the Bank had completed
virtually all of the inventory and assessment stages for its Bank-owned systems
and applications. The remediation or renovation process is currently underway
and the Bank is utilizing both internal and external resosurces to reprogram, or
replace where necessary, and test the software for Year 2000 modifications. The
remediation process is targeted for completion by year-end 1998, while testing
and certification of these systems and applications are currently targeted for
completion by March 31, 1999. The Bank is currently assessing risks related to
the potential failure of material third parties to be ready for Year 2000.
It is currently expected that costs related to Year 2000 will total
approximately $15.8 million over the years 1997 to 2000. Of this, $5.2 million
has been incurred since the inception of the Year 2000 project through June 30,
1998. Historically, cost estimates and actual expenses for Year 2000 are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
(IN MILLIONS)
<S> <C> <C>
Cost Estimates...................................................... $ 1.2 $ 3.8
Actual Expenditures................................................. 1.2 3.8
</TABLE>
It is estimated that expenditures for Year 2000 will total $8.8 million for
calendar year 1998.
On the total Year 2000 project costs, $6.4 million are incremental third
party expenses, which will be funded through operating cash flows. However, an
increase in reprogramming costs would adversely affect this cost estimate.
Expenditures in 1998 represent 18% of the total Information and Technology
Services unit's ("ITS") budget. No ITS projects have been deferred as a result
of Year 2000 efforts. Rather, incremental resources including consultants,
contractors, software utilities and hardware were obtained from outside the Bank
to supplement existing staff. The Bank is currently unaware of any asserted or
unasserted claims of breach of contract or warranty, and, at present, does not
anticipate any assertion of such claims in the future.
96
<PAGE>
The Bank has initiated communications with its critical external
relationships to determine the extent to which the Bank may be vulnerable to
such parties' failure to remediate their own Year 2000 issues. From its critical
service providers, the Bank has obtained written statements indicating they will
be Year 2000-ready. However, through the testing and certification stage, the
Bank will continue to assess and attempt to mitigate its risks with respect to
the failure of these entities to be Year 2000-ready. The effect, if any, on the
Bank's results of operations from the failure of such parties to be Year
2000-ready is not reasonably estimable.
It is expected that, by December 31, 1998, all issues related to Year 2000
will be addressed, either by programming changes to the Bank's custom software,
by programming changes implemented by third party vendors to purchased systems,
or through the upgrading or purchase of Year 2000 compliant hardware and
equipment. Extensive testing is expected to occur during 1999. Year 2000 is the
highest priority project within the ITS unit of the Bank. Management believes
there is no material risk that the Bank will fail to address Year 2000 issues in
a timely manner, and little possibility of material changes in its estimates of
reserves, allowances for capitalized software costs, litigation and deferred
revenue.
In light of normal ongoing field visits by regulatory examiners, there is
little chance of enforcement action on FNH's or the Bank's Year 2000 project.
FNH does not anticipate material loan losses or acceleration of prepayments due
to Year 2000.
FNH and the Bank are currently developing a contingency plan, which will be
completed by December 31, 1998, to address a plan of action in the unlikely
event FNH or its vendors and/or business partners are not ready for Year 2000.
97
<PAGE>
GLENDALE FEDERAL
OVERVIEW
Earnings Performance
Glendale Federal recorded net earnings of $129.1 million in fiscal 1998,
compared to net earnings of $50.4 million in fiscal 1997 and $42.1 million in
fiscal 1996.
Net earnings for fiscal 1998 included legal expenses for Glendale Federal's
goodwill litigation of $19.0 million ($11.0 million after-tax), and acquisition
and restructuring costs of $6.9 million ($4.0 million after-tax) related to the
acquisitions of CenFed Bank and RedFed and the distribution of the Litigation
Tracking Warrants(Trademark) described below. See "--Business--Glendale
Federal--Legal Proceedings," "--Goodwill Litigation Tracking
Warrants(Trademark)," "--Acquisitions" and "--Results of Operations--Legal
Expenses--Goodwill Lawsuit."
Net earnings for fiscal 1997 included a special assessment by the FDIC of
$55.5 million ($31.9 million after-tax) to recapitalize the SAIF and legal
expenses for Glendale Federal's goodwill litigation of $24.1 million
($13.8 million after-tax). See "--SAIF Special Assessment."
Net earnings for fiscal 1996 included a loss of $28.2 million ($19.7
million after-tax) on the sale of $1.7 billion of collateralized mortgage
obligations ("CMOs"). See "--Sale of CMO Investment Portfolio." Also included in
results of operations for fiscal 1996 is an after-tax loss of $1.7 million on
the sale of Glendale Federal's former headquarters facility and legal expenses
for the goodwill litigation of $1.9 million ($1.3 million after-tax).
During fiscal 1997 and 1996, Glendale Federal exchanged 1.2 million shares
and 2.2 million shares, respectively, of its preferred stock for 3.1 million
shares and 5.9 million shares, respectively, of common stock of Glendale
Federal. These exchanges were made at a premium above the stated conversion rate
of 2.404 shares of Glendale Federal's common stock for each share of its
preferred stock. See Notes 3 and 18 of the Notes to Consolidated Financial
Statements of Glendale Federal included elsewhere in this Prospectus for
additional information on these transactions.
Excluding the after-tax impact of the non-operating items mentioned above
and the effect of the preferred stock conversions during fiscal 1997 and 1996,
adjusted net earnings for fiscal 1998 were $144.1 million, compared to adjusted
net earnings for fiscal 1997 and 1996 of $96.2 million and $64.8 million,
respectively.
The 50% improvement in adjusted net earnings in fiscal 1998 over fiscal
1997 reflects higher net interest income, lower credit-related costs, increases
in other fees and service charges and reduced FDIC insurance premiums, partially
offset by decreases in loan servicing income, increases in general and
administrative expenses due to expansion of Glendale Federal's business lines,
recent acquisitions and franchise expansion, and increases in the amortization
of goodwill and other intangible assets due to acquisitions.
Glendale Federal's interest rate spread was 2.90% at June 30, 1998, as
compared with 2.68% and 2.41% at June 30, 1997 and 1996, respectively. Glendale
Federal's interest rate spread continued to improve in fiscal 1998 primarily due
to a decline in Glendale Federal's cost of funds. The decrease in the cost of
funds from 4.87% at June 30, 1997 to 4.60% at June 30, 1998 reflects a decline
in deposit costs due to a continuing shift in the mix of deposits from
higher-cost certificates of deposit to lower-cost checking and other daily
access accounts obtained through internally developed growth and the CenFed Bank
acquisition. Checking accounts comprised 17.0% of total deposits at June 30,
1998, compared with 12.8% at June 30, 1997.
See "--Results of Operations--Net Interest Income" for additional
discussion of Glendale Federal's interest rate spread and the impact possible
future interest rate changes could have on Glendale Federal's net interest
income.
See Note 1 of the Notes to Consolidated Financial Statements of Glendale
Federal included elsewhere in this Prospectus for information on current
accounting pronouncements and their impact on Glendale Federal's consolidated
financial statements.
98
<PAGE>
Goodwill Litigation Tracking Warrants(Trademark)
On October 28, 1997, Golden State announced plans to distribute Litigation
Tracking Warrants(Trademark) (the "Litigation Tracking Warrants(Trademark)" or
"LTW(Trademark)s") to its security holders representing the right to receive,
upon exercise of the LTW(Trademark)s, Golden State common stock equal in value
to 85% of the net after-tax proceeds, if any, from Glendale Federal's pending
goodwill lawsuit against the United States government (the "Glendale Goodwill
Litigation"). The LTW(Trademark)s would be exercisable after notification by
Golden State of its receipt of proceeds from a final judgment in or settlement
of the litigation. The LTW(Trademark)s would expire 60 days after such
notification is given.
In a special meeting on April 23, 1998, Golden State shareholders approved
certain corporate changes necessary to issue the LTW(Trademark)s, including an
increase in the total number of authorized shares of common stock from
100 million shares to 250 million shares and amendments to certain terms of
Golden State's Noncumulative Convertible Preferred Stock, Series A (the "Series
A Preferred Stock"). Following the shareholder meeting on that date, Golden
State's Board of Directors declared a distribution of its LTW(Trademark)s for
May 29, 1998, to holders of the common stock of Golden State of record on
May 7, 1998, on the basis of one LTW(Trademark) for each share held as of the
close of business on that date. The Board of Directors also reserved additional
LTW(Trademark)s for future issuance in connection with conversions or exercises
of Golden State's outstanding Series A Preferred Stock, its two outstanding
classes of common stock purchase warrants and employee stock options. The total
number of LTW(Trademark)s issued to holders of common stock on May 29, 1998 and
reserved for such future issuances is approximately 85.8 million. The
distribution of the LTW(Trademark)s will not affect Golden State's diluted
shares outstanding prior to the time they become exercisable because the amount
of the proceeds from the Glendale Goodwill Litigation and the number of shares
of common stock to be issued cannot be determined until the LTW(Trademark)s
become exercisable.
The LTW(Trademark)s have traded on the NASDAQ National Market System since
June 1, 1998 under the ticker symbol "GSBNZ."
Acquisitions
On April 21, 1998, Golden State acquired CENFED, the parent company of
CenFed Bank in a tax-free stock-for-stock merger. Pursuant to the terms of the
transaction, Golden State issued 7,390,557 shares of its common stock resulting
in a total purchase price of $211.1 million. Under the purchase method of
accounting, the goodwill recorded in this transaction will be amortized over
15 years using the straight-line method. At April 21, 1998, CenFed Bank operated
18 branches and had $1.9 billion in assets, including $1.4 billion of loans
receivable, net, and $354 million of mortgage-backed securities, net. CENFED's
liabilities at April 21, 1998 included $1.4 billion of deposits and
$385.1 million of borrowings. The merger of CenFed Bank with Glendale Federal
was completed on May 8, 1998.
On July 11, 1998, Golden State acquired RedFed and its federal savings bank
subsidiary, Redlands Federal Bank, in a tax-free, stock-for-stock merger.
Pursuant to the terms of the transaction, Golden State issued 5,221,995 shares
of its common stock resulting in a total recorded purchase price of $158.3
million. The transaction will be accounted for as a purchase. The goodwill of
$628 million arising from this transaction will be amortized over 15 years using
the straight-line method. At July 11, 1998, RedFed operated 15 banking offices
and had $1.0 billion in assets, including $893.7 million of loans receivable,
net. RedFed's liabilities at July 11, 1998 included $864.1 million of deposits
and $78.7 million of borrowings.
SAIF Special Assessment
On September 30, 1996, President Clinton signed legislation providing for
the Special SAIF Assessment. Pursuant to the new law, a one-time fee was payable
by all SAIF-insured institutions at the rate of $0.657 per $100 of deposits held
by such institutions at March 31, 1995. In the quarter ended September 30, 1996,
Glendale Federal recorded a pre-tax accrual of $58.7 million for this
assessment. In the fourth quarter ended June 30, 1997, Glendale Federal reversed
$3.2 million of this accrual to reflect the actual assessment for fiscal 1997 of
$55.5 million. The recapitalization of the SAIF has resulted in lower deposit
insurance premiums beginning with the third quarter of fiscal 1997.
99
<PAGE>
Sale of CMO Investment Portfolio
During fiscal 1996, Glendale Federal sold $1.7 billion of its fixed-rate
CMO investments (the "CMO Sale") and recorded a pre-tax loss of $28.2 million.
Glendale Federal's decision to sell most of its CMO portfolio was part of a
strategic realignment of Glendale Federal's mortgage-backed securiites portfolio
in which $2.8 billion of mortgage-backed securities were reclassified from "held
to maturity" to "available for sale" during the quarter ended December 31, 1995,
in compliance with the implementation guidance for SFAS No. 115. The
reclassification included Glendale Federal's $1.8 billion fixed-rate CMO
portfolio and $1.0 billion of its adjustable-rate pass-through securities
portfolio. The realignment of Glendale Federal's mortgage-backed securities
portfolio provided Glendale Federal with additional flexibility to manage its
interest rate risk exposure.
Capital
Glendale Federal's core capital, Tier 1 risk-based capital and total
risk-based capital ratios at June 30, 1998 were 6.02%, 10.57% and 11.54%,
respectively, placing Glendale Federal in the "well-capitalized" category as
defined by federal regulations, which require 5% core, 6% Tier 1 risk-based and
10% total risk-based capital to assets ratios to qualify for that designation.
BALANCE SHEET ANALYSIS
Glendale Federal's asset size and composition have been determined
principally by seeking to balance liquidity, yield, risk and regulatory capital
requirements. Consolidated assets of Glendale Federal increased by
$1.9 billion, to $18.1 billion, in the twelve months ended June 30, 1998,
primarily due to the acquisition of CenFed Bank in April 1998 and the purchase
of single-family residential loans in the secondary market.
Consolidated liabilities of Glendale Federal increased by $1.6 billion, to
$16.8 billion, in the twelve months ended June 30, 1998. This was mainly
attributable to the purchase of $1.4 billion of deposits and $385.1 million of
borrowings relating to the acquisition of CenFed Bank.
Mortgage-Backed and Other Debt and Equity Securities
Mortgage-backed securities held to maturity decreased by $248.2 million, to
$914.6 million, in the twelve months ended June 30, 1998, primarily due to
principal payments received of $245.6 million.
Mortgage-backed securities available for sale increased by $344.1 million,
to $1.5 billion, in the twelve months ended June 30, 1998, primarily due to
purchases of $588.7 million of mortgage-backed securities issued by various
federal agencies, and $356.0 million of mortgage-backed securities acquired in
the CENFED Merger, of which $231.8 million were pass-through securities. These
increases were partially offset by principal payments received of
$457.3 million and sales of $124.8 million.
Other debt and equity securities available for sale increased by
$98.3 million, to $126.1 million, in the twelve months ended June 30, 1998,
primarily due to $96.9 million of municipal debt securities and $20.0 million of
U.S. Government debt securities acquired in the CENFED Merger, offset by
maturities of $6.5 million and sales of $2.0 million.
Loans Receivable
Loans receivable held for investment increased by $1.9 billion, to
$13.7 billion, in the twelve months ended June 30, 1998. The increase was
primarily due to $1.4 billion of loans acquired as part of the CENFED Merger,
loans purchased for investment totaling $2.7 billion and loans originated for
investment, net of refinances, of $755.6 million, partially offset by principal
repayments of $2.9 billion and loans transferred to real estate acquired in
settlement of loans ("REO") of $96.4 million. The loan purchases consisted
primarily of $663.5 million of single-family residential, adjustable-rate
mortgage loans and $2.0 billion of single-family residential, fixed-rate
mortgage loans that were purchased in the secondary market.
Loans receivable held for sale increased by $12.9 million, to $31.9
million, in the twelve months ended June 30, 1998, primarily due to the effect
of increased fixed-rate loan origination activity during fiscal 1998 compared to
fiscal 1997. See Note 2 of the Notes to Consolidated Financial Statements of
Glendale Federal included elsewhere in this Prospectus for additional
information on the transfer of loans from Glendale Federal's held for investment
portfolio.
100
<PAGE>
As of June 30, 1998, commitments of Glendale Federal to purchase loans in
the secondary market totaled $75.0 million and were comprised entirely of
commitments to purchase fixed-rate loans. At that date, commitments of Glendale
Federal to originate loans and sell loans and mortgage-backed securities totaled
$97.4 million and $122.8 million, respectively, and Glendale Federal's
commitments on outstanding letters of credit totaled $4.8 million.
New commitments under lines of credit that were purchased or generated
through Glendale Federal's consumer and commercial lending programs are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Consumer loans....................................................... $173,771 $168,335 $70,718
Commercial loans..................................................... 285,630 251,749 7,560
-------- -------- -------
$459,401 $420,084 $78,278
-------- -------- -------
-------- -------- -------
</TABLE>
The new commitments under consumer lines of credit during fiscal 1998 and
1997 included $2.4 million and $17.6 million, related to the acquisitions of
Cenfed Bank and TransWorld Bancorp ("TransWorld"), respectively. The new
commitments under commercial lines of credit during fiscal 1998 included $9.0
million related to the acquisition of CenFed Bank. The new commitments under
commercial lines of credit during fiscal 1997 included $92.9 million purchased
in the TransWorld and OneCentral Bank ("OneCentral") acquisitions, and $80
million of agricultural loan commitments, of which $50 million were purchased in
December 1996.
The following table summarizes the outstanding commitments and related
outstanding principal balances on lines of credit under Glendale Federal's
consumer and commercial lending programs (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Consumer loans:
Credit limit balance.......................................................... $459,702 $309,013
Outstanding principal balance................................................. 114,880 71,847
Commercial loans:
Credit limit balance.......................................................... 436,034 213,332
Outstanding principal balance................................................. 203,620 88,927
</TABLE>
101
<PAGE>
Loan originations by property type (including the refinanced portion of
Glendale Federal's loans) and loans purchased in the secondary market are
summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Originations:
Permanent Loans:
Single-family 1-4 units........... $1,493 35.1% $ 726 23.0% $ 778 26.9%
Multi-family 5-36 units........... 15 0.4 22 0.7 26 0.9
Multi-family 37 or more units..... -- -- 9 0.3 6 0.2
Non-residential................... 23 0.5 8 0.3 13 0.4
Land.............................. 6 0.1 -- -- 1 --
Construction Loans:
Single-family 1-4 units........... -- -- 4 0.1 16 0.7
Multi-family 5-36 units........... -- -- 3 0.1 5 0.2
Commercial loans.................. 54 1.3 30 1.0 1 --
Consumer loans.................... 13 0.3 16 0.5 21 0.7
------ ------ ------ ------ ------ ------
Total........................... 1,604 37.7 818 26.0 867 30.0
------ ------ ------ ------ ------ ------
Secondary Market Purchases
(1-4 units):
Adjustable........................ 663 15.6 1,136 36.0 2,024 70.0
Fixed............................. 1,985 46.7 1,198 38.0 -- --
------ ------ ------ ------ ------ ------
Total........................... 2,648 62.3 2,334 74.0 2,024 70.0
------ ------ ------ ------ ------ ------
Total Originations and Secondary Market
Purchases............................ $4,252 100.0% $3,152 100.0% $2,891 100.0%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
Term loan originations for fiscal 1998 increased by $786 million or 96%, to
$1.6 billion, compared to fiscal 1997. This increase was primarily due to an
increase of $786 million, to $1.2 billion, in fixed-rate mortgage lending
resulting from a decline in long term interest rates and an improvement in the
California housing market. Fixed-rate originations were 75% of total
originations in fiscal 1998, compared to 40% in fiscal 1997. Loans refinanced
totaled $421.7 million, or 26% of total originations, for the year ended June
30, 1998, compared to $86.6 million, or 11% of total originations, for the year
ended June 30, 1997.
Term loan originations for fiscal 1997 declined 6% from fiscal 1996
primarily due to a decline in refinancing activity.
Multi-family residential and non-residential real estate loans have
primarily been made to finance the disposition of REO and real estate held for
sale or investment ("REI") properties or to refinance maturing loans. The
single-family residential and multi-family residential construction loans
originated in the prior fiscal years represent outstanding commitments made
before Glendale Federal's construction lending program was terminated during
fiscal 1997.
102
<PAGE>
Non-Performing Assets ("NPAs") and Restructured Loans
The following table summarizes Glendale Federal's NPAs and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------
1998 1997
------------------------ ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL ASSETS AMOUNT TOTAL ASSETS
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Non-accrual loans.................................... $ 95,994 0.53% $140,295 0.86%
REO and other repossessed assets..................... 38,275 0.21 64,663 0.40
-------- ---- -------- ----
Total NPAs........................................... $134,269 0.74% $204,958 1.26%
-------- ---- -------- ----
-------- ---- -------- ----
Restructured loans................................... $ 21,465 0.12% $ 31,064 0.19%
-------- ---- -------- ----
-------- ---- -------- ----
</TABLE>
The following table summarizes NPA and restructured loan activity in fiscal
1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ JUNE 30,
1997 REIN- SALES/ 1998
BALANCE ADDITIONS FORECLOSURES WRITE-DOWNS STATEMENTS OTHER BALANCE
-------- --------- ------------ ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans:
Single-family 1-4 units........ $ 82,989 $ 131,987 $(64,853) $ -- $(50,286) $ (29,649) $ 70,188
Multi-family 5-36 units........ 21,087 20,130 (18,015) (900) (5,056) (9,631) 7,615
Multi-family 37 or more
units....................... 3,121 93 -- -- -- (2,797) 417
Non-residential................ 30,672 27,490 (14,254) (2,899) (5,070) (21,435) 14,504
Commercial..................... 859 9,350 -- (134) (4,578) (3,669) 1,828
Consumer....................... 1,567 836 -- (35) (5) (921) 1,442
-------- --------- -------- ------- -------- --------- --------
Total..................... $140,295 $ 189,886 $(97,122) $(3,968) $(64,995) $ (68,102) $ 95,994
-------- --------- -------- ------- -------- --------- --------
-------- --------- -------- ------- -------- --------- --------
REO and Other Repossessed Assets:
Single-family 1-4 units........ $ 34,116 $ 7,553 $ 52,653 $(1,019) $ -- $ (70,297) $ 23,006
Multi-family 5-36 units........ 8,414 1,449 13,882 (917) -- (19,741) 3,087
Multi-family 37 or more
units....................... 1,933 -- -- -- -- (1,933) --
Non-residential................ 20,169 2,324 13,063 (1,289) -- (22,085) 12,182
Consumer....................... 31 -- -- -- -- (31) --
-------- --------- -------- ------- -------- --------- --------
Total..................... $ 64,663 $ 11,326 $ 79,598 $(3,225) $ -- $(114,087) $ 38,275
-------- --------- -------- ------- -------- --------- --------
-------- --------- -------- ------- -------- --------- --------
Total NPAs:
Single-family 1-4 units........ $117,105 $ 139,540 $(12,200) $(1,019) $(50,286) $ (99,946) $ 93,194
Multi-family 5-36 units........ 29,501 21,579 (4,133) (1,817) (5,056) (29,372) 10,702
Multi-family 37 or more
units....................... 5,054 93 -- -- -- (4,730) 417
Non-residential................ 50,841 29,814 (1,191) (4,188) (5,070) (43,520) 26,686
Commercial..................... 859 9,350 -- (134) (4,578) (3,669) 1,828
Consumer....................... 1,598 836 -- (35) (5) (952) 1,442
-------- --------- -------- ------- -------- --------- --------
Total..................... $204,958 $ 201,212 $(17,524) $(7,193) $(64,995) $(182,189) $134,269
-------- --------- -------- ------- -------- --------- --------
-------- --------- -------- ------- -------- --------- --------
Restructured Loans:
Single-family 1-4 units........ $ 2,168 $ 1,219 $ -- $ -- $ -- $ (1,249) $ 2,138
Multi-family 5-36 units........ 3,676 3,353 -- -- -- (1,955) 5,074
Multi-family 37 or more
units....................... 18,331 4,696 -- -- -- (16,245) 6,782
Non-residential................ 6,889 751 -- -- -- (169) 7,471
-------- --------- -------- ------- -------- --------- --------
Total..................... $ 31,064 $ 10,019 $ -- $ -- $ -- $ (19,618) $ 21,465
-------- --------- -------- ------- -------- --------- --------
-------- --------- -------- ------- -------- --------- --------
</TABLE>
103
<PAGE>
NPAs decreased $70.7 million, or 34%, in the twelve months ended June 30,
1998, reflecting $114.1 million in sales of REO through Glendale Federal's
regular liquidation process, the payoffs/sales/other of $68.1 million in
non-accrual loans, the reinstatement to accrual status of $65.0 million in
non-accrual loans, and $24.7 million in write-downs (including those related to
foreclosures), partially offset by NPA additions of $201.2 million, of which
$18.3 million resulted from the CenFed Bank acquisition. For the twelve months
ended June 30, 1998, 69% of NPA additions were loans secured by, and REO
consisting of, single-family residences. During October 1997, Glendale Federal's
largest non-accrual loan in the amount of $11.3 million and secured by a
shopping center, was repaid in full, and Glendale Federal's largest REO in the
amount of $13.4 million and consisting of land acquired for development, was
sold, for a combined reduction in NPAs of $24.7 million.
The $9.6 million decrease in restructured loans for the twelve months ended
June 30, 1998 was primarily due to the payoff in November 1997 of Glendale
Federal's largest restructured loan in the amount of $16.1 million, partially
offset by $10.0 million of new restructured loans transferred from non-accrual
status.
Total delinquent loans decreased by $31.0 million, to $184.3 million, in
the twelve months ended June 30, 1998. This decrease was attributable primarily
to the single-family residential, multi-family (5-36 units) residential and
non-residential portfolios, in which delinquent loans declined by $9.4 million,
$12.2 million and $9.3 million, to $136.8 million, $17.5 million and $19.1
million, respectively. At June 30, 1998, single-family residential, multi-family
(5-36 units) residential and non-residential loans comprised 74%, 9% and 10%,
respectively, of total delinquent loans.
Allowance For Loan Losses
Glendale Federal's determination of the level and the allocation of the
allowance for loan losses and, correspondingly, the provisions for such losses,
was based on various judgments, assumptions and projections regarding a number
of factors, including, but not limited to, current and forecasted economic and
market conditions, loan portfolio composition, historical loan loss experience,
industry experience and asset classifications. Glendale Federal's asset
classification process, in accordance with applicable regulations, provided for
the classification of assets into the categories of satisfactory, special
mention, substandard, doubtful or loss. The allowance for loan losses was
adjusted quarterly to reflect management's current assessment of the effect of
these considerations on estimated inherent loan losses. While management used
all information available to it to estimate inherent losses on loans, future
changes to the allowance may become necessary based on changes in loan
performance, economic and market conditions. The OTS, as part of its examination
process, periodically reviewed Glendale Federal's allowance for loan losses. The
OTS may require the Bank to make changes to the allowance based on its
examiners' judgments and the information available to them at the time of their
examination.
The following table sets forth the allocation of Glendale Federal's
allowance for loan losses at June 30, 1998 and 1997 by property type (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
GROSS LOAN ALLOWANCE GROSS LOAN ALLOWANCE
PORTFOLIO TO LOAN PORTFOLIO TO LOAN
ALLOWANCE BALANCE BALANCE ALLOWANCE BALANCE BALANCE
--------- ----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units............ $ 48,568 $10,355,638 0.47% $ 52,579 $ 8,821,828 0.60%
Multi-family:
5-36 units....................... 31,087 1,504,858 2.07 43,852 1,477,549 2.97
37 or more units................. 11,724 313,575 3.74 16,496 345,052 4.78
Non-residential.................... 30,988 1,358,880 2.28 35,280 1,207,013 2.92
Commercial......................... 11,749 290,515 4.04 7,552 160,061 4.72
Consumer........................... 22,366 150,050 14.91 8,000 120,685 6.63
--------- ----------- --------- -----------
$ 156,482 $13,973,516 1.12% $ 163,759 $12,132,188 1.35%
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The allocation of the allowance to the above categories is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category. The reallocation of the allowance
104
<PAGE>
among the different portfolios (see tables below) reflects management's current
assessment of the shifting of the relative risks of loss inherent in the
different portfolios.
Specific valuation allowances for impaired loans totaled $13.4 million and
$14.0 million at June 30, 1998 and 1997, respectively, and were included in the
allowance for loan losses. Specific valuation allowances were provided when
management determined that, for a specific loan, default appeared probable and
the amount of the expected loss was measurable. The balances of impaired loans
with related specific valuation allowances at June 30, 1998 and 1997 totaled
$54.4 million and $78.7 million, respectively. Impaired loans not having related
specific valuation allowances at June 30, 1998 and 1997 totaled $55.6 million
and $64.1 million, respectively.
The allowance for loan losses declined by $7.3 million, to $156.5 million,
in fiscal 1998. The decrease in the allowance during this period reflected
improving NPA and delinquency trends, reduced levels of charge-offs, a reduced
number of high-risk, large, and multiple loan borrower relationships and an
overall improvement in the performance of the total loan portfolio, partially
offset by growth in the loan portfolio through whole loan purchases and the
addition of $16.9 million of allowance obtained in the acquisition of CenFed
Bank. The improvement in credit quality was significant, reflecting the lowest
level of NPAs since fiscal 1988, and the lowest level of charge-offs since March
1989. The increase in the allowance allocation to consumer loans reflected
growth in that portfolio and in the outstanding commitments on consumer lines of
credit, and Glendale Federal's limited experience to date in managing the credit
performance of this new line of business. The ratios of allowance to non-accrual
loans and total gross loans at June 30, 1998 were 163.0% and 1.1%, respectively,
compared to 116.7% and 1.4%, respectively, at June 30, 1997.
A summary of activity in the allowance for loan losses by property type
during fiscal 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
JUNE 30, PROVISION DUE TO JUNE 30,
1997 (REALLOCATION) CHARGE-OFFS RECOVERIES ACQUISITIONS 1998
-------- -------------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units.. $ 52,579 $ 992 $ (11,243) $ 272 $ 5,968 $ 48,568
Multi-family:
5-36 units.............. 43,852 (6,526) (6,239) -- -- 31,087
37 or more units........ 16,496 (4,507) (551) 286 -- 11,724
Non-residential........... 35,280 (10,393) (5,619) 799 10,921 30,988
Commercial................ 7,552 1,848 (1,992) 4,341 -- 11,749
Consumer.................. 8,000 16,859 (3,408) 901 14 22,366
-------- -------- --------- ------ -------- --------
$163,759 $ (1,727) $ (29,052) $6,599 $ 16,903 $156,482
-------- -------- --------- ------ -------- --------
-------- -------- --------- ------ -------- --------
</TABLE>
A summary of activity in the allowance for loan losses by property type
during fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
JUNE 30, DUE TO JUNE 30,
1996 ADDITIONS CHARGE-OFFS RECOVERIES ACQUISITIONS 1997
-------- --------- ----------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units...... $ 56,833 $21,352 $ (25,773) $ 167 $ -- $ 52,579
Multi-family:
5-36 units................. 48,628 5,972 (10,756) 8 -- 43,852
37 or more units........... 26,062 (3,954) (5,860) 248 -- 16,496
Non-residential.............. 47,260 (362) (12,996) 1,159 219 35,280
Commercial................... 4,699 (4,511) (68) 3,575 3,857 7,552
Consumer..................... 3,274 6,707 (3,043) 1,062 -- 8,000
-------- ------- --------- ------- ------- --------
$186,756 $25,204 $ (58,496) $ 6,219 $ 4,076 $163,759
-------- ------- --------- ------- ------- --------
-------- ------- --------- ------- ------- --------
</TABLE>
The provision for loan losses declined by $26.9 million, to a credit of
$1.7 million, in fiscal 1998, compared to fiscal 1997, reflecting management's
assessment that there was a decreased risk of loss inherent in the loan
portfolio, as evidenced by decreases in NPAs and delinquent loans. The negative
balances shown in the
105
<PAGE>
"Provision/(Reallocation)" column in the above tables represent the reallocation
of the allowance among the different portfolios and reflected management's
assessment of the shifting of the relative risks of loss inherent in the
different portfolios.
If the recent economic improvements in Glendale Federal's principal market
areas do not continue or if economic conditions in these areas deteriorate,
Glendale Federal's loans could be adversely impacted, resulting in increases in
NPAs and higher charge-offs. Such increased NPAs and charge-offs could require
an increase in the provision for loan losses and a corresponding increase in the
allowance for loan losses, which could reduce net earnings.
Mortgage Loan Servicing Activities
Glendale Federal serviced mortgage loans for other loan investors in
exchange for servicing fees. Glendale Federal entered into agreements to service
loans for others primarily through the purchase of servicing rights from other
servicers, and to a lesser extent, through the sale of loans it originated while
retaining the right to service the loans. These purchases and the value of the
servicing rights arising from the sale of loans with servicing rights retained
are recorded on Glendale Federal's statement of financial condition as mortgage
servicing assets ("MSA").
MSA, net of valuation allowances, decreased by $41.2 million, to $243.3
million, during fiscal 1998, primarily due to the amortization of MSA of $49.2
million and an increase to the valuation allowance of $6.1 million. These
factors were partially offset by MSA additions of $8.3 million and $4.9 million,
related to the CenFed Bank acquisition and the sale of loans with servicing
rights retained, respectively.
The valuation of MSA is significantly affected by market prepayment
expectations of the loans underlying the MSA. If prepayment expectations
increase from the levels as of June 30, 1998, recognition of valuation
allowances relating to the value of Glendale Federal's MSA and acceleration of
the rate of amortization of that asset may be necessary, depending upon the
frequency, magnitude and duration of such increases. A decrease in long-term
interest rates in the range of 50 to 100 basis points from the June 30, 1998
levels could result in impairment to Glendale Federal's MSA (before the recorded
valuation allowance of $10.2 million at June 30, 1998) in the range of $35.0
million to $73.7 million. If interest rates continue to decline or remain at
current levels for a protracted period of time, the resulting higher actual and
expected prepayments could have an adverse impact on Glendale Federal's
operating results.
106
<PAGE>
The following table summarizes Glendale Federal's mortgage loan servicing
portfolio:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Principal balance (in billions)....................................... $ 25.3 $ 29.6
Number of loans....................................................... 212,970 240,629
Weighted average interest rate........................................ 7.64% 7.66%
Weighted average service fee (in basis points)........................ 31.9 32.1
Weighted average remaining term (in months)........................... 261 310
Percent delinquent 30 days or more.................................... 0.98% 1.11%
</TABLE>
Liability Composition
Glendale Federal's ratios of deposits and borrowings to total
interest-earning liabilities were 65% and 35%, respectively, at June 30, 1998,
compared to ratios of 63% and 37%, respectively, at June 30, 1997. Glendale
Federal's ratios of deposits and borrowings to total interest-earning
liabilities were 63% and 37%, respectively, at June 30, 1997, compared to ratios
of 65% and 35%, respectively, at June 30, 1996. Glendale Federal continues to
emphasize the attraction of retail deposits, especially low-cost demand
deposits. The ratio of deposits to borrowings is, from time to time, impacted by
Glendale Federal's ability to fund asset growth with concurrent growth in retail
deposits. However, Glendale Federal expects to replace borrowings with retail
deposits over time through a combination of retail sales efforts and
acquisitions of deposits. See the deposit composition table following for
additional information.
Deposits
Glendale Federal used retail deposits as its core source of funds for
lending and asset purchase purposes and as a customer base for providing
additional financial services. Glendale Federal's total deposits increased by
$1.3 billion, to $10.7 billion, in fiscal 1998. Included in fiscal 1998's net
deposit inflows in daily access and certificates were $373.4 million and
$1.1 billion, respectively, of deposits purchased in the acquisition of CenFed
Bank.
Glendale Federal's deposit composition at June 30, 1998 and 1997 was as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
1998 1997
------------------------- ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Checking........................................... $ 1,815,761 17.0% $1,198,011 12.8%
Savings............................................ 477,199 4.5 452,225 4.8
Money market....................................... 2,379,249 22.2 2,119,553 22.7
----------- ------ ---------- ------
Total daily access............................ 4,672,209 43.7 3,769,789 40.3
----------- ------ ---------- ------
Short-term certificates (1 year or less)........... 2,494,525 23.3 2,703,538 28.9
Long-term certificates (over 1 year)............... 3,199,049 29.9 2,700,906 28.9
Jumbo and brokered certificates.................... 335,374 3.1 182,676 1.9
----------- ------ ---------- ------
Total certificates............................ 6,028,948 56.3 5,587,120 59.7
----------- ------ ---------- ------
Total deposits................................ $10,701,157 100.0% $9,356,909 100.0%
----------- ------ ---------- ------
----------- ------ ---------- ------
</TABLE>
Checking accounts increased by $617.8 million, or 52%, to $1.8 billion
during fiscal 1998. The increase was comprised of a $355.6 million increase in
retail and business checking accounts and a $262.2 million increase in custodial
checking accounts in which borrower payments on loans serviced by Glendale
Federal are deposited prior to disbursement to investors, taxing authorities or
insurance companies. Jumbo and brokered certificates of deposit increased by
$152.7 million, or 84%, to $335.4 million during fiscal 1998, primarily due to
the addition of $100 million from the State of California.
107
<PAGE>
Borrowings
Total borrowings increased by $221.6 million, to $5.8 billion, during the
year ended June 30, 1998, primarily due to the addition of mainly fixed-rate
FHLB borrowings assumed as part of the April 1998 acquisition of CenFed Bank, of
which $189.0 million was outstanding at June 30, 1998.
Securities sold under agreements to repurchase, which have typically had a
one-month maturity, decreased by $593.1 million, to $175.6 million, during
fiscal 1998 and were replaced with a combination of retail deposits and
longer-term, fixed-rate FHLB borrowings.
FHLB borrowings increased by $825.5 million, to $5.6 billion, during fiscal
1998. Adjustable-rate FHLB borrowings decreased by $264.0 million, to
$2.6 billion, while fixed-rate FHLB borrowings increased by $1.1 billion, to
$3.0 billion. Included in the fixed-rate category are $1.0 billion of advances,
with a weighted average rate of 5.19%, that have a stated maturity of five
years, but which the FHLB has the option to call $700.0 million after one year,
$200.0 million after two years and $100.0 million after three years ("callable
advances"). Glendale Federal took down these callable advances to take advantage
of the substantial rate discount at which these advances were offered as
compared with prevailing straight fixed-rate advance rates and rates on other
alternative borrowings. As of June 30, 1998, all of the adjustable-rate FHLB
borrowings of $2.6 billion and $604.0 million of the fixed-rate FHLB borrowings
(excluding the aforementioned $700.0 million of advances that are callable in
fiscal 1999) were due within one year.
Stockholders' Equity
Stockholders' equity increased by $266.3 million, to $1.3 billion, during
fiscal 1998, primarily due to the issuance to Golden State Financial of
7.4 million shares of common stock, with a value of $193.9 million, in
connection with Glendale Federal's acquisition of CenFed Bank, net earnings of
$129.1 million, and proceeds of $28.9 million received from the issuance of
common stock related to the exercise of stock options. These factors were
partially offset by dividends paid to Golden State and Golden State Financial
which totalled $85.1 million. As of June 30, 1998, there were 57.8 million
shares of common stock issued and outstanding. See Note 18 of the Notes to
Consolidated Financial Statements of Glendale Federal included elsewhere in this
Prospectus for additional information on Glendale Federal's stockholders'
equity.
108
<PAGE>
Regulatory Capital
The following table compares Glendale Federal's regulatory capital at
June 30, 1998 to its minimum regulatory capital requirements at that date
(dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL AT AS A % CAPITAL AS A % EXCESS
JUNE 30, 1998 OF ASSETS REQUIRED OF ASSETS CAPITAL
------------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Glendale Federal Bank's capital in accordance
with generally accepted accounting
principles................................. $ 1,278,399
Adjustments for tangible and core capital:
Net unrealized holding loss on available
for sale securities..................... 1,612
Goodwill and other intangible assets....... (180,463)
Disallowed mortgage servicing.............. (10,788)
Disallowed capitalized software............ (10,094)
Investments in and advances to
non-includable subsidiaries............. (782)
-----------
Total tangible capital....................... $ 1,077,884 6.02% $268,427 1.50% $809,457
Adjustment for core capital.................. --
-----------
Total core capital........................... $ 1,077,884 6.02% $536,854* 3.00%* $541,030*
Adjustments for risk-based capital:
Allowance for general loan losses**........ 127,705
Equity risk investments required to be
deducted................................ (17,735)
Low level recourse deduction............... (10,738)
-----------
Total risk-based capital..................... $ 1,177,116 11.54% $816,080* 8.00%* $361,036*
-----------
-----------
</TABLE>
- ------------------
* Under the standards for "well capitalized" institutions established pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the corresponding amounts for core capital are $894,756, 5.00%
and $183,128, respectively, and the corresponding amounts for risk-based
capital are $1,020,099, 10.00% and $157,017, respectively.
** Limited to 1.25% of risk-weighted assets.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
Glendale Federal's primary sources of funds have consisted of retail
deposits, borrowings from the FHLB, principal repayments on loans and
mortgage-backed securities and sales of assets under agreements to repurchase.
Glendale Federal also has obtained funds from its operations. Each of Glendale
Federal's sources of liquidity was subject to various uncertainties beyond the
control of Glendale Federal. Scheduled loan payments are a relatively stable
source of funds, while loan and mortgage-backed security prepayments and deposit
flows may vary widely in reaction to changes in interest rates and other market
conditions. As a measure of protection against these uncertainties, Glendale
Federal generally had back-up sources of funds available to it. At June 30,
1998, funds estimated to be available from these sources totaled approximately
$4.4 billion and consisted primarily of funds from the repurchase agreement
markets.
During the twelve months ended June 30, 1998, Glendale Federal's cash and
cash equivalents decreased by $391.6 million, to $462.0 million. Glendale
Federal experienced a net cash outflow from financing activities of
$339.4 million, primarily due to the repayments of FHLB advances of $3.5 billion
and the maturities of short-term borrowings of $717.2 million, partially offset
by the proceeds from FHLB advances of $4.0 billion. Glendale Federal's investing
activities during the period resulted in a net cash outflow of $280.3 million,
principally due to the purchases of loans and mortgage-backed securities
totaling $3.3 billion, and term loan originations of $720.1 million, partially
offset by principal payments on loans and mortgage-backed securities of
109
<PAGE>
$3.6 billion and the proceeds from the sale of mortgage-backed securities of
$124.8 million. Glendale Federal experienced positive cash flows from operating
activities during the period of $228.2 million.
During the month of June 1998, Glendale Federal's average liquidity ratio
was 4.38%. The current minimum regulatory requirement for this ratio is 4.00%.
Asset and Liability Management
Savings institutions are subject to interest rate risk to the degree that
their interest-bearing liabilities, consisting principally of deposits, FHLB
advances and other borrowings, mature or reprice at different frequencies, or on
different bases, than their interest-earning assets, which consist predominantly
of intermediate or long-term real estate loans and mortgage-backed securities.
Interest rate risk is increased by the difference in aggregate amounts of
interest-earning assets and interest-bearing liabilities. Institutions that
invest in mortgage-backed assets are subject to prepayment risk as the duration
and value of such assets are impacted by changes in actual prepayments from
projections made at the time of origination or purchase.
Glendale Federal's Asset/Liability Management Committee ("ALCO") was
responsible for implementing the interest rate risk management policy adopted by
Glendale Federal. Among other things, Glendale Federal's policy statement set
forth the limits established by the Board of Directors on acceptable changes in
net interest income and net portfolio value resulting from specified changes in
interest rates. ALCO reviewed, among other things, economic conditions, the
interest rate outlook, the demand for loans, the availability of deposits and
Glendale Federal's current operating results, liquidity, capital and interest
rate risk exposure. Based on such reviews, ALCO formulated strategies that were
intended to implement the objectives set forth in Glendale Federal's annual
business plan while prudently managing interest rate risk.
During fiscal 1998, Glendale Federal continued or undertook various
strategies to mitigate the adverse earnings impact of a declining and flattening
yield curve. Foremost among these strategies was Glendale Federal's focus on
shifting the mix of its deposits base towards checking and other daily access
accounts and reducing its reliance on higher costing term certificate of deposit
funding. For fiscal 1998, checking account balances grew by $617.8 million to
$1.8 billion, or 17%, of total deposits at June 30, 1998 as compared to
$1.2 billion, or 13%, of total deposits as of June 30, 1997. Total daily access
account balances grew by nearly $902.4 million to $4.7 billion, or 43.7%, of
total deposits at June 30, 1998 as compared to $3.8 billion, or 40.3%, of total
deposits as of June 30, 1997. The shifting deposit mix helped reduce Glendale
Federal's cost of deposits by 31 basis points, to 4.06%, at June 30, 1998.
Additionally, Glendale Federal increased its investment in fixed-rate loans by
$2.0 billion to $5.2 billion, or 37%, of its gross loan portfolio at June 30,
1998 from 26% of the portfolio at June 30, 1997. These strategies, combined with
other funding strategies and the generation of prime rate-based business and
consumer loans, helped increase Glendale Federal's interest rate spread to 2.90%
at June 30, 1998 from 2.68% at June 30, 1997, a period of generally declining
interest rates and a flattening of the yield curve. The earnings and capital
growth resulting from these strategies positively impacted Glendale Federal's
ability to manage its interest rate risk and to deploy its capital prudently in
support of its lines of business.
Glendale Federal actively monitored the impact of changes in interest rates
on its net interest income. For this purpose, Glendale Federal utilized various
dynamic computer simulation models to measure the sensitivity of its net
interest income and earnings forecasts to changes in market rates and possible
offsetting changes in Glendale Federal's business strategies. Based on such
analyses, Glendale Federal developed and implemented short- and long-term
strategies to mitigate the effects of adverse operating environments.
The OTS measures interest rate risk through a somewhat similar computer
simulation model described in its Thrift Bulletin No. 13, "Interest Rate Risk
Exposure: Guidelines on Director and Officer Responsibilities" ("TB 13") as
shown below. Under TB 13, institutions are required to establish limits on the
sensitivity of their net interest income and net portfolio value to changes in
interest rates. Unlike Glendale Federal's analyses, under TB 13 changes in
interest rates are defined to consist solely of instantaneous and sustained
movements in interest rates in 100 basis point increments and no possible
adjustments to a company's business strategies to reflect the
110
<PAGE>
assumed changes in interest rates are permitted to be taken into account.
Following are the estimated impacts of a parallel shift in interest rates as
calculated by Glendale Federal:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
PERCENTAGE CHANGE IN PERCENTAGE CHANGE IN
----------------------------- -----------------------------
CHANGE IN INTEREST RATES NET INTEREST NET PORTFOLIO NET INTEREST NET PORTFOLIO
(IN BASIS POINTS) INCOME(1) VALUE(2) INCOME(1) VALUE(2)
------------------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
+200.............................. -2% -24% -3% -22%
+100.............................. 0% -11% -1% -9%
-100.............................. 1% 2% 2% 9%
-200.............................. 2% 7% 3% 17%
</TABLE>
- ------------------
(1) The percentage change in this column represents net interest income for
12 months in a stable interest rate environment versus the net interest
income in the various rate scenarios.
(2) The percentage change in this column represents the Net Portfolio Value of
Glendale Federal in a stable interest rate environment versus the Net
Portfolio Value in the various rate scenarios. The OTS defines "Net
Portfolio Value" as the present value of expected net cash flows from
existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cash flows from
existing off-balance sheet contracts.
The Maturity and Rate Sensitivity Analysis table in "Business--Asset
Liability Management and Market Risks" set forth the projected maturities as
adjusted for projected prepayments and "repricing mechanisms" (provisions for
changes in the interest rates of assets and liabilities), of Glendale Federal's
major asset and liability categories as of June 30, 1998 used to calculate
Glendale Federal's total and one-year GAP at that date.
The one-year GAP (as defined herein) measures the estimated difference
between the amounts of interest-earning assets and interest-bearing liabilities
maturing or repricing within one year, based on assumptions as to the expected
repayment of assets and liabilities. In its management of interest rate risk,
Glendale Federal relied primarily on the aforementioned dynamic computer
simulation models to determine its interest rate risk position rather than the
static one-year GAP position. See "Business--Glendale Federal--Asset and
Liability Management and Market Risk."
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Interest-earning assets maturing or repricing within one year..................... $ 10,919 $ 11,640
Interest-bearing liabilities maturing or repricing within one year................ 9,984 9,282
-------- --------
One-year maturity GAP............................................................. $ 935 $ 2,358
-------- --------
One-year maturity GAP as a percent of total assets................................ 5.2% 14.5%
-------- --------
-------- --------
</TABLE>
A positive one-year GAP tends, in general, to assist Glendale Federal in
rising interest rate markets. However, Glendale Federal remains subject to
possible interest rate spread compression, which would adversely impact Glendale
Federal's net interest income, if interest rates rise. This is primarily due to
the lag in the repricing of the indices to which Glendale Federal's
adjustable-rate loans and mortgage-backed securities are tied, as well as the
repricing frequencies and periodic interest rate caps on such adjustable-rate
loans and mortgage-backed securities, and to an increase in the cost of Glendale
Federal's liabilities which are subject to monthly repricing. The amount of such
interest rate spread compression would depend upon the frequency, severity and
duration of such interest rate fluctuations.
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RESULTS OF OPERATIONS
Net Interest Income
The following table provides information on net interest income for the
past three fiscal years, setting forth average balances of interest-earning
assets and interest-bearing liabilities, the interest income earned and interest
expense recorded thereon and the resulting average yield-cost ratios (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
---------------------------------- ---------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCES INCOME/ YIELD BALANCES INCOME/ YIELD BALANCES INCOME/ YIELD
(1) EXPENSE COST (1) EXPENSE COST (1) EXPENSE COST
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net(2)............ $12,382,205 $ 950,265 7.67% $11,341,678 $ 861,858 7.60% $10,268,121 $ 803,432 7.82%
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
Mortgage-backed
securities, held
to maturity....... 1,050,597 71,012 6.76 N/A N/A N/A N/A N/A N/A
Mortgage-backed
securities,
available for
sale(3)........... 1,259,371 78,737 6.25 N/A N/A N/A N/A N/A N/A
----------- ---------- ----------- ---------- ----------- ----------
Total mortgage-
backed securities,
net(4)............ 2,309,968 149,749 6.48 2,243,784 149,551 6.67 3,423,747 216,812 6.33
----------- ---------- ----------- ---------- ----------- ----------
Total loans and
mortgage-backed
securities........ 14,692,173 1,100,014 7.49 13,585,462 1,011,409 7.44 13,691,868 1,020,244 7.45
----------- ---------- ----------- ---------- ----------- ----------
Federal funds sold
and assets
purchased under
resale
agreements........ 613,074 35,504 5.79 665,738 37,237 5.59 674,159 39,347 5.84
----------- ---------- ----------- ---------- ----------- ----------
Other debt and
equity securities
available sale
(3)............... 44,225 2,308 5.22 N/A N/A N/A N/A N/A N/A
Other
investments(5).... 281,547 20,119 7.15 N/A N/A N/A N/A N/A N/A
----------- ---------- ----------- ---------- ----------- ----------
Total other
investments
(4)(6)............ 325,772 22,427 6.88 273,471 24,310 8.89 208,057 20,444 9.83
----------- ---------- ----------- ---------- ----------- ----------
Total
investments..... 938,846 57,931 6.17 939,209 61,547 6.55 882,216 59,791 6.78
----------- ---------- ----------- ---------- ----------- ----------
Total interest-
earning assets.. 15,631,019 1,157,945 7.41 14,524,671 1,072,956 7.39 14,574,084 1,080,035 7.41
---------- ---------- ----------
All other assets.... 955,391 677,837 578,912
----------- ----------- -----------
Total assets...... $16,586,410 $15,202,508 $15,152,996
----------- ----------- -----------
----------- ----------- -----------
(Table continued on next page)
</TABLE>
112
<PAGE>
(Table continued from previous page)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
---------------------------------- ---------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCES INCOME/ YIELD BALANCES INCOME/ YIELD BALANCES INCOME/ YIELD
(1) EXPENSE COST (1) EXPENSE COST (1) EXPENSE COST
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Interest-bearing
liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits... $ 1,052,029 $ -- 0.00% $ 551,196 $ -- 0.00% $ 315,804 $ -- 0.00%
Interest-bearing
demand deposits... 460,973 4,610 1.00 404,295 4,099 1.01 390,488 4,290 1.10
Savings............. 446,704 9,192 2.06 458,070 9,848 2.15 520,129 11,381 2.19
Money market........ 2,228,241 88,484 3.97 1,924,309 84,149 4.37 1,520,194 69,257 4.56
----------- ---------- ----------- ---------- ----------- ----------
Total daily access.. 4,187,947 102,286 2.44 3,337,870 98,096 2.94 2,746,615 84,928 3.09
Certificates........ 5,606,265 306,014 5.46 5,621,222 307,086 5.46 6,085,586 348,906 5.73
----------- ---------- ----------- ---------- ----------- ----------
Total deposits...... 9,794,212 408,300 4.17 8,959,092 405,182 4.52 8,832,201 433,834 4.91
----------- ---------- ----------- ---------- ----------- ----------
Securities sold
under agreements
to repurchase..... 660,467 37,591 5.69 335,809 18,642 5.55 1,869,194 108,839 5.82
FHLB and other
borrowings........ 4,755,832 271,430 5.71 4,738,502 270,148 5.70 3,376,056 204,297 6.05
----------- ---------- ----------- ---------- ----------- ----------
Total borrowings.. 5,416,299 309,021 5.71 5,074,311 288,790 5.69 5,245,250 313,136 5.97
----------- ---------- ----------- ---------- ----------- ----------
Total interest-
bearing
liabilities..... 15,210,511 717,321 4.72 14,033,403 693,972 4.95 14,077,451 746,970 5.31
---------- ---------- ----------
All other
liabilities......... 268,191 188,772 130,297
Stockholder's equity.. 1,107,708 980,333 945,248
----------- ----------- -----------
Total liabilities
and stockholder's
equity............ $16,586,410 $15,202,508 $15,152,996
----------- ----------- -----------
----------- ----------- -----------
Difference between
average interest-
earning assets and
interest-bearing
liabilities......... $ 420,508 $ 491,268 $ 496,633
----------- ----------- -----------
----------- ----------- -----------
Net interest income... $ 440,624 $ 378,984 $ 333,065
---------- ---------- ----------
---------- ---------- ----------
Yield-cost spread..... 2.69% 2.44% 2.10%
----- ----- -----
----- ----- -----
Effective net
spread(7)........... 2.82% 2.61% 2.29%
----- ----- -----
----- ----- -----
</TABLE>
- ------------------
(1) Average balances are primarily computed on daily balances during the period.
When such balances are not available, average balances are computed on a
monthly basis. Average balances include the effect of discounts and premiums
on loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees and the effects of hedging
transactions.
(2) Non-accrual loans are included in the average balances for the periods, but
interest on such loans is not recognized during the periods the loans are
non-accrual and is therefore excluded from interest income.
(3) The yields on available for sale securities are based upon historical
amortized cost balances without the effects of fair value adjustments.
(4) Prior to fiscal 1998 Glendale Federal aggregated income from all securities
(held to maturity and available for sale).
(5) Includes certificates of deposit and investment in capital stock of FHLB for
fiscal 1998.
(6) Includes certificates of deposit, other debt and equity securities, and
investment in capital stock of FHLB for fiscal 1997 and 1996.
(7) The effective net spread for a period is net interest income divided by
average interest-earning assets.
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<PAGE>
The following rate/volume analysis depicts the increase (decrease) in net
interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the preceding
year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
1998 VERSUS 1997 1997 VERSUS 1996
CHANGES DUE TO CHANGES DUE TO
-------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net.................... $ 80,341 $ 8,066 $ 88,407 $ 81,639 $(23,213) $ 58,426
Mortgage-backed securities, net.......... 4,437 (4,239) 198 (78,333) 11,072 (67,261)
-------- -------- -------- -------- -------- --------
Total loans and mortgage-backed
securities.......................... 84,778 3,827 88,605 3,306 (12,141) (8,835)
Federal funds sold and assets purchased
under resale agreement ............... (3,025) 1,292 (1,733) (476) (1,634) (2,110)
Other investments........................ 4,176 (6,059) (1,883) 5,964 (2,098) 3,866
-------- -------- -------- -------- -------- --------
Total investments..................... 1,151 (4,767) (3,616) 5,488 (3,732) 1,756
-------- -------- -------- -------- -------- --------
Total interest income................. 85,929 (940) 84,989 8,794 (15,873) (7,079)
Interest expense:
Deposits--daily access................... 22,526 (18,336) 4,190 17,469 (4,301) 13,168
Deposits--certificates................... (1,072) -- (1,072) (25,855) (15,965) (41,820)
-------- -------- -------- -------- -------- --------
Total deposits........................ 21,454 (18,336) 3,118 (8,386) (20,266) (28,652)
Securities sold under agreements to
repurchase............................ 18,467 482 18,949 (85,370) (4,827) (90,197)
FHLB and other borrowings................ 1,111 171 1,282 78,481 (12,630) 65,851
-------- -------- -------- -------- -------- --------
Total borrowings...................... 19,578 653 20,231 (6,889) (17,457) (24,346)
-------- -------- -------- -------- -------- --------
Total interest expense................ 41,032 (17,683) 23,349 (15,275) (37,723) (52,998)
-------- -------- -------- -------- -------- --------
Net interest income........................ $ 44,897 $ 16,743 $ 61,640 $ 24,069 $ 21,850 $ 45,919
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
Note: The change in interest not due solely to volume or rate has been allocated
in proportion to the absolute dollar amounts of the change in each.
Net interest income increased by $61.6 million, to $440.6 million, in
fiscal 1998 compared to fiscal 1997. This was attributable to an increase in
average interest-earning assets and to an improvement in the yield-cost spread.
Average interest-earning assets increased by $1.1 billion during fiscal 1998 and
yielded $85.9 million in interest income, while average interest-bearing
liabilities increased by $1.2 billion and contributed $41.0 million in interest
expense, with the net impact of these volume changes resulting in an increase of
$44.9 million to net interest income. The increase in average interest-earning
assets was principally attributable to a $1.0 billion increase in average loans
receivable. The increase in average interest-bearing liabilities primarily
resulted from a $500.8 million increase in the average balance of
non-interest-bearing demand deposits, as well as increases of $324.7 million and
$303.9 million in the average balances of securities sold under agreements to
repurchase and money market accounts.
The yield-cost spread increased by 25 basis points, to 2.69%, in fiscal
1998 as compared to fiscal 1997, contributing $16.7 million to the increase in
net interest income. The increase in the yield-cost spread was primarily due to
a decrease in Glendale Federal's cost of funds of 23 basis points, to 4.72%,
that was attributable to a 35 basis point decrease in the cost of deposits, to
4.17%, partially offset by a 2 basis point increase in the cost of borrowings,
to 5.71%. The decrease in the cost of funds reflects a decline in deposit costs
due to a continuing shift in the mix of deposits from higher-cost certificates
of deposit to lower-cost checking and other daily access accounts, and to the
addition of lower-costing checking and daily access accounts obtained in recent
acquisitions.
Interest income on loans receivable increased by $88.4 million, to $950.3
million, in fiscal 1998 compared to last year, primarily due to portfolio
growth. The average balance of loans receivable, net, increased by $1.0 billion,
to $12.4 billion, during the year ended June 30, 1998, contributing
$80.3 million to the increase. This
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<PAGE>
increase was due to Glendale Federal's purchases in the secondary market of
$824.1 million of fixed-rate loans with a weighted average yield of 8.02% and
$767.9 million of adjustable rate loans with a weighted average yield of 7.43%
during the last nine months of fiscal 1997. During the twelve months ended
June 30, 1998, Glendale Federal purchased in the secondary market $2.0 billion
of fixed-rate loans with a weighted average yield of 7.22% and $663.5 million of
adjustable-rate loans with a weighted average yield of 7.32%. Further
contributing to the growth in the loan portfolio was the purchase of
$1.4 billion in loans with a weighted average yield of 8.48% in the April 1998
acquisition of CenFed Bank, and the purchase of $135.8 million in loans with a
weighted average yield of 10.26% in the May 1997 TransWorld acquisition. The
growth in the loan portfolio was enhanced by an increase in portfolio yield of 7
basis points, to 7.67%, which contributed $8.1 million to the increase in
interest income. The increase in portfolio yield was primarily due to the impact
of the aforementioned higher yielding fixed-rate purchases in the secondary
market during the last nine months of fiscal 1997, the higher yielding loans
acquired from CenFed Bank and TransWorld, and to the favorable effect of a
declining level of non-accrual loans.
Glendale Federal did not recognize income on non-accrual loans during the
period they were considered non-accrual, but their balances are included in the
asset base for yield calculation purposes. The average balances of non-accrual
loans in the twelve months ended June 30, 1998 and 1997, respectively, were
$114.5 million and $236.8 million. The impact of non-accrual loans was to reduce
Glendale Federal's loan yield by 4 and 7 basis points, respectively, in the
twelve months ended June 30, 1998 and 1997.
Interest expense on daily access deposits increased by $4.2 million, to
$102.3 million, in fiscal 1998, compared to fiscal 1997. The average balance in
daily access accounts increased by $850.1 million, or 25%, to $4.2 billion,
during the year ended June 30, 1998, compared to the year ended June 30, 1997.
This growth in average balance contributed $22.5 million to the increase in
interest expense. The growth in average daily access account balances was due to
internally developed account growth, the addition of custodial checking accounts
in October 1997 arising from Glendale Federal's purchase of servicing rights
relating to $11.5 billion of mortgage loans in the fourth quarter of fiscal
1997, and the addition of daily access accounts related to acquisitions. The
average cost of daily access accounts declined by 50 basis points, to 2.44%, in
the year ended June 30, 1998. The decrease in the average cost of daily access
accounts, which contributed $18.3 million to the reduction in interest expense
during the year ended June 30, 1998, was due to the generation and acquisition
of low cost deposits, consisting primarily of checking accounts.
Interest expense on borrowings increased by $20.2 million, to
$309.0 million, in fiscal 1998 compared to fiscal 1997, primarily due to a
corresponding increase of $342.0 million, or 7%, to $5.4 billion, in the average
balance of borrowings in fiscal 1998 compared to fiscal 1997. The growth in the
average balances of borrowings contributed $19.6 million to the increase in
interest expense during fiscal 1998.
Net interest income increased by $45.9 million to $379.0 million in fiscal
1997, compared to fiscal 1996, because of favorable volume changes and an
improvement in the yield-cost spread. Volume changes, which contributed $24.1
million to the increase in net interest income, were primarily related to
changes in the mixes of both deposits and borrowings which resulted in a
reduction to interest expense of $15.3 million. On the asset side, an increase
in Glendale Federal's investment of FHLB stock and a shift in the mix from
mortgage-backed securities to loans receivable increased interest income by
$8.8 million.
The yield-cost spread increased by 34 basis points, to 2.44%, in the twelve
months ended June 30, 1997, compared to the same period in fiscal 1996,
primarily due to a decrease in Glendale Federal's cost of funds of 36 basis
points to 4.95%. The decrease in Glendale Federal's cost of funds during the
year ended June 30, 1997, compared to last year, was primarily due to a change
in the mix of deposits from higher-cost certificates of deposit to lower-cost
daily access accounts, the replacement of maturing higher-cost FHLB advances
with lower-cost advances and to lower interest rates prevailing during the
period compared to last year.
Interest income on loans receivable increased by $58.4 million, to
$861.9 million, in fiscal 1997, compared to fiscal 1996, primarily due to
portfolio growth. The average balance of loans receivable, net, increased by
$1.1 billion, to $11.3 billion, during the year ended June 30, 1997,
contributing $81.6 million to the growth. This was due to Glendale Federal's
purchases, in the secondary market, of $2.3 billion of loans during fiscal 1997.
The effect of growth in the loan portfolio was offset by a decrease in portfolio
yield of 22 basis points. The decrease in portfolio yield was due to the effects
of the aforementioned lower interest rate environment on Glendale Federal's
portfolio of adjustable-rate loans. The effect of declining interest rates was
partially offset by
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<PAGE>
the effect of a declining level of non-accrual loans as Glendale Federal does
not recognize income on these assets during the period they are non-accrual,
while their balances are included in the asset base for yield calculation
purposes. The average balance of non-accrual loans in fiscal 1997 and 1996 was
$236.8 million and $302.3 million, respectively. The impact of non-accrual loans
on the yield on loans and mortgage-backed securities was a reduction in yield of
7 basis points in fiscal 1997 versus a reduction of 12 basis points in fiscal
1996.
Interest income on mortgage backed securities decreased by $67.3 million,
to $149.6 million, in fiscal 1997, compared to fiscal 1996, primarily due to the
sale of $1.7 billion of lower-yielding CMOs in the second and third quarters of
fiscal 1996. Partially offsetting the effect of portfolio reductions, was an
increase in the yield on mortgage-backed securities of 34 basis points to 6.67%
in the remaining portfolio of mortgage-backed securities.
Interest income on federal funds sold and assets purchased under resale
agreements decreased by $2.1 million, to $37.2 million, in fiscal 1997, compared
to last year, primarily due to the lower interest rate environment prevailing in
fiscal 1997, compared to fiscal 1996. The yield on federal funds sold and
securities purchased under resale agreements decreased by 25 basis points to
5.59% during the year ended June 30, 1997, compared to last year, reflecting a
reduction by the Federal Reserve Board of the federal funds rates late in fiscal
1996.
Interest income on other investments increased by $3.9 million to
$24.3 million in fiscal 1997, compared to fiscal 1996, primarily due to an
increase in the average portfolio balance of $65.4 million. During the year,
Glendale Federal increased its investment in FHLB stock by $66.7 million to
obtain additional borrowings from the FHLB in compliance with the FHLB's
requirements. These purchases of FHLB stock contributed $5.0 million to the
increased interest income.
Interest expense on daily access deposits increased by $13.2 million, to
$98.1 million, in fiscal 1997, compared to fiscal 1996, primarily due to a
$591.3 million, or 22% increase in the average balance in daily access accounts
during the year ended June 30, 1997, compared to the year ended June 30, 1996.
This growth in average balance contributed $17.5 million to the increase in
interest expense. The growth in average daily access account balances was due to
the addition of $322.1 million of daily access accounts related to the
acquisitions of TransWorld and OneCentral, and to internally-developed account
growth. The increase in interest expense was offset by a 15 basis point
reduction in the average cost of daily access accounts. The decrease in average
cost was due to the low cost of deposits acquired from TransWorld and
OneCentral, and to the lower interest rates prevailing during the year ended
June 30, 1997, compared to fiscal 1996.
Interest expense on certificate accounts decreased by $41.8 million, to
$307.1 million, in fiscal 1997, compared to fiscal 1996, due to the combined
effects of decreasing average balances and to the lower interest rate
environment prevailing during the year ended June 30, 1997 compared to fiscal
1996. Average balances in certificate accounts decreased by $464.4 million, or
8%, due to management's efforts to change the mix of deposits toward daily
access accounts. This decrease contributed $25.9 million to the reduction in
interest expense on certificate accounts. The average cost of certificate
accounts decreased by 27 basis points to 5.46% due to both the lower interest
rate environment prevailing during the year ended June 30, 1997 compared to
fiscal 1996, and to growth in daily access deposits allowing management to price
certificate accounts less aggressively, while maintaining approximately the same
retail-wholesale funding mix.
Interest expense on borrowings decreased by $24.3 million to
$288.8 million in fiscal 1997, compared to fiscal 1996, primarily due to the
replacement of maturing higher-cost FHLB borrowings with lower-cost FHLB
borrowings, and to the decline in the interest rate environment. The cost of
borrowings decreased 28 basis points to 5.69% during fiscal 1997 compared to
fiscal 1996. Contributing to the decrease in interest expense was a
$170.9 million decrease in the average balance of borrowings compared to fiscal
1996.
Provision For Loan Losses
Glendale Federal recorded a net credit for loan losses of $1.7 million in
fiscal 1998, compared to provision for loan losses of $25.2 million in fiscal
1997, and $40.4 million in fiscal 1996. The significant reduction in the
provision was primarily due to declining NPAs and delinquent loans, lower net
charge-offs and management's assessment that there is a decreased risk of loss
inherent in Glendale Federal's real estate loan portfolio, partially offset by
the increased risk of loss inherent in its consumer and business loan
portfolios. NPAs at June 30, 1998
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totaled $134.3 million, which represents a 34% decline from the $205.0 million
of NPAs recorded at June 30, 1997. Net charge-offs to the allowance for loan
losses totaled $22.5 million in fiscal 1998, compared to $52.3 million in fiscal
1997 and $62.7 million in fiscal 1996.
The ratios of allowance to non-accrual loans and total gross loans at
June 30, 1998, were 163.0% and 1.1%, respectively, compared to 116.7% and 1.4%,
respectively, at June 30, 1997. Glendale Federal's determination of the level
and the allocation of the allowance for loan losses and, correspondingly, the
provisions for such losses, is based on various judgments, assumptions and
projections regarding a number of factors, including, but not limited to,
current and forecasted economic and market conditions, loan portfolio
composition, historical loan loss experience, industry experience and asset
classifications.
Loan Servicing Income, Net
Loan servicing income, net, decreased by $5.2 million or 16%, to $28.6
million, in fiscal 1998, compared to fiscal 1997. Due to Glendale Federal's
purchases of servicing rights during fiscal 1997, gross servicing fees earned
increased by $14.5 million, or 22%, to $79.6 million, in fiscal 1998 compared to
fiscal 1997. However, the amortization of MSA increased by $21.9 million or 80%,
to $49.2 million during the same period. The disproportionate increase in the
amortization of MSA compared to the servicing fees earned, was primarily due to
the servicing fee rates on the purchased servicing rights relating to
approximately $11.5 billion of predominantly fixed-rate mortgage loans being
less than those associated with a standard fixed-rate package, and to a lesser
extent, to increased prepayment experience and market prepayment expectations
attributable to the decline in interest rates and the flattening of the yield
curve. The lower servicing fee rates associated with this purchase are offset,
from an overall earnings perspective, by an increase in net interest income. The
increase in net interest income results from the reduction in the cost of funds
attributable to Glendale Federal keeping the custodial deposit balances
associated with this servicing during the holding period between collection of
borrower payments and remittance to investors, taxing authorities or insurance
companies. Glendale Federal generally pays interest, at rates dictated by
various states' regulations, on borrower funds held for purposes of paying
property taxes and hazard insurance premiums. Such rates range up to 5%.
Glendale Federal does not pay interest on the principal and interest portions of
borrower payments that it remits to the investors.
Loan servicing income, net, increased by $9.6 million or 40%, to
$33.8 million, in fiscal 1997, compared to fiscal 1996. This increase was
attributable to increased servicing fees earned resulting from recent purchases
of MSA, partially offset by the corresponding increase in the amortization of
MSA.
Other Fees And Service Charges
Other fees and service charges increased by $12.6 million or 22%, to $69.5
million, in fiscal 1998 compared to fiscal 1997. This increase, which reflects
the continuing growth in the number of transaction accounts, was due primarily
to increases in loan and deposit fee income and income from ATM transactions
which totaled $52.5 million in fiscal 1998, compared to $38.3 million in fiscal
1997.
Other fees and service charges increased by $11.1 million or 24%, to
$56.9 million, in fiscal 1997, compared to fiscal 1996. This increase was due
primarily to increases in deposit fee income and ATM fees of $7.6 million and
$1.7 million, respectively, related to growth in the number of transaction
accounts, and an increase in commissions and brokerage fees of $1.9 million
related to higher sales from Glendale Federal's securities brokerage subsidiary.
Gain (Loss) on Sale of Mortgage-Backed Securities
Glendale Federal recorded a $4.6 million net gain on sale of
mortgage-backed securities in fiscal 1998, primarily due to the reduction of the
estimated recourse liability for future losses related to loans sold in prior
years subject to credit loss recourse provisions.
Glendale Federal recorded a loss on sale of mortgage-backed securities, net
of $1.8 million in fiscal 1997, primarily due to provisions for loss related to
loans sold in prior years subject to recourse obligations.
Loss on sale of mortgage-backed securities, net, of $34.2 million in fiscal
1996 primarily reflected the previously discussed $28.2 million loss on the CMO
Sale and $6.6 million of recourse related losses, including
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fees for recourse removal transactions. See "--Overview--Sale of CMO Investment
Portfolio" for additional discussion regarding the CMO Sale.
General and Administrative Expenses
General and administrative expenses increased by $30.5 million, or 12%, to
$293.7 million in fiscal 1998, compared with $263.2 million in fiscal 1997. The
increase primarily reflected costs associated with Glendale Federal's new
business lines, franchise growth, recent acquisitions, including CenFed Bank,and
Year 2000 compliance costs, partially offset by reduced regulatory insurance
premiums. Operating expenses directly related to the new business lines,
franchise growth, acquisitions and Year 2000 compliance costs approximated
$42.9 million in fiscal 1998, as compared with $12.2 million in fiscal 1997.
Excluding these factors, general and administrative expenses for fiscal 1998
were essentially unchanged from fiscal 1997.
General and administrative expenses increased as Glendale Federal continued
to expand its business lines, broaden the reach of its branch franchise,
maintain a higher level of marketing activity and upgrade Glendale Federal's
operational capabilities. The targeted benefits resulting from the expansion of
its business lines and branch franchise, namely increased net interest margin
and higher fee income, have lagged behind the increase in expenditures
attributable to the timing of the investment in new business lines, network
expansion and marketing, and the increase in revenues that was intended to
result from this investment.
Glendale Federal has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by Year 2000
data processing hardware and software failures due to processing errors arising
from processing errors involving calculations using the Year 2000 date.
Enhancements to Glendale Federal's mainframe systems have been implemented with
completion of all mission critical repairs having been scheduled for November
1998. Glendale Federal has initiated renovation of its non-mainframe systems,
with completion of all but one mission critical system having been scheduled for
December 1998 and the one remaining mission critical system was to be completed
in February 1999. Glendale Federal halted further implementation of its own Year
2000 efforts as of August 20, 1998 after receiving both shareholder and
regulatory approvals for the Mergers. Future Year 2000 compliance will depend
upon the ongoing systems that will be maintained by Cal Fed. Expenses related to
the Year 2000 enhancements amounted to $10.0 million in fiscal 1998, compared to
$0.3 million in fiscal 1997. Glendale Federal expected to incur approximately
$37 million on this project, including $2 million to $3 million on software and
hardware expenditures, on its program to modify, redevelop or replace its
computer applications to try to make them "Year 2000" compliant. Year 2000
compliance failures could result in additional expense to Glendale Federal and
significant disruption of its business.
As a result of the reduced assessment from the FDIC following the SAIF
recapitalization in fiscal 1997, regulatory insurance in fiscal 1998 decreased
by $8.5 million or 52%, to $7.8 million, compared to fiscal 1997.
General and administrative expenses increased by $16.3 million to
$263.2 million in fiscal 1997, compared with $246.9 million in fiscal 1996. The
increase primarily reflected costs associated with Glendale Federal's new
business lines, new branches and, to a lesser degree, the acquisitions of
TransWorld and OneCentral, partially offset by reduced regulatory insurance
premiums.
Legal Expense--Goodwill Lawsuit
Legal expenses related to Glendale Federal's trial in the Court of Federal
Claims to determine damages in its breach of contract suit against the federal
government were $19.0 million in fiscal 1998, compared to $24.1 million and
$1.9 million, respectively, in fiscal 1997 and 1996. The most intensive phase of
the damages trial was completed in early April 1998. Costs will be incurred
during any appeals process. However, these costs are expected to be at a
significantly lower rate per quarter. See "--Business--Glendale Federal--Legal
Proceedings" for further discussion.
Acquisition and Restructuring Costs
Glendale Federal incurred acquisition and restructuring costs of
$6.9 million during the twelve months ended June 30, 1998. Costs related to the
CenFed Bank and RedFed acquisitions totaled $3.8 million and costs related to
the distribution of the Litigation Tracking Warrants(Trademark) totaled
$3.1 million during fiscal 1998.
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REO Operations
Operations of REO resulted in income of $3.1 million in fiscal 1998, as
compared to losses of $6.6 million and $8.4 million in fiscal 1997 and 1996,
respectively. The $9.7 million improvement in fiscal 1998 compared to fiscal
1997 resulted from a $2.7 million increase in gains on sale of REO (after market
valuation adjustments), a $3.3 million reduction in specific provisions to
adjust the REO portfolio to current fair value, a $2.2 million decrease in
operating expenses, and a $1.5 million decrease in the general valuation
allowance provision.
Losses in fiscal 1997 were primarily due to $7.5 million in provisions to
adjust the REO portfolio to current fair value and $6.2 million of operating
expenses. These expenses were partially offset by gains realized on the sale of
REO (after market valuation adjustments) of $7.2 million. Losses in fiscal 1996
were primarily due to $12.1 million in provisions to adjust the REO portfolio to
current fair value and $7.2 million of operating expenses. These expenses were
partially offset by gains realized on the sale of REO (after market valuation
adjustments) of $10.9 million, of which $2.1 million was recognized in the
September 1995 quarter in connection with the August 1995 sale of
underperforming loans and REO.
The declining trend in losses in REO operations mirrored the trend in the
level of new REOs and a shift in the composition of the REO inventory from
multi-family residential and non-residential properties to smaller balance
single-family residential properties.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill totaled $9.2 million, $5.5 million and $5.1
million in fiscal 1998, 1997 and 1996, respectively. The increase in fiscal
1998, as compared to fiscal 1997, reflected the impact of a full year of
goodwill amortization resulting from the TransWorld and OneCentral acquisitions
completed in the second half of fiscal 1997, as well as additional goodwill
amortization arising from the Cenfed Bank acquisition in the fourth quarter of
fiscal 1998. The increase in fiscal 1997, as compared to fiscal 1996, reflected
the impact of the amortization of the goodwill of $45.8 million relating to the
acquisitions of TransWorld and OneCentral in the second half of fiscal 1997.
Income Tax Provision
Glendale Federal recorded income tax provisions of $93.1 million, $36.1
million and $21.3 million in fiscal 1998, 1997 and 1996, respectively. The
effective tax rate is higher than the federal statutory rate, primarily due to
state taxes and the effect of nondeductible goodwill. Changes in the effective
rates are discussed in Note 14 of the Notes to Consolidated Financial Statements
of Glendale Federal included elsewhere in this Prospectus.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on , 1998; provided, however, that if the Issuer, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $250,000,000 aggregate principal amount
of the Old Floating Rate Notes was outstanding, $350,000,000 aggregate principal
amount of the Old 2001 Notes was outstanding, $600,000,000 aggregate principal
amount of the Old 2003 Notes was outstanding and $800,000,000 aggregate
principal amount of the Old 2005 Notes was outstanding. This Prospectus,
together with the Letter of Transmittal, is first being sent on or about
, 1998, to all holders of Old Notes known to the Issuer. The Issuer's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth below under "--Certain Conditions to
the Exchange Offer."
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer and may be accepted for exchange by the Company. Any Old
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Issuer expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not therefore accepted for
exchange, upon the occurrence of any of the events specified below under
"--Certain Conditions to the Exchange Offer." The Issuer will give oral or
written notice of any extension, amendment, non-acceptance or termination to the
holders of the Old Notes as promptly as practicable, such notice in the case of
any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
Following consummation of the Exchange Offer, the Issuer may, in its sole
discretion, commence one or more additional exchange offers to those holders of
Old Notes who did not exchange their Old Notes for New Notes in the Exchange
Offer on terms which may differ from those contained in the Registration
Agreement. This Prospectus, as it may be amended or supplemented from time to
time, may be used by the Company in connection with any such additional exchange
offers. Such additional exchange offers will take place from time to time until
all outstanding Old Notes have been exchanged for New Notes pursuant to the
terms and conditions contained herein.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit either (i) a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to The Bank of New York, as Exchange
Agent, at the address set forth below under "--Exchange Agent" on or prior to
the Expiration Date, or (ii) if such Old Notes are tendered pursuant to the
procedures for book-entry transfer set forth below, a holder tendering Old Notes
may transmit an Agent's Message (as defined herein) to the Exchange Agent in
lieu of the Letter of Transmittal on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent
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along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, along with the Letter of Transmittal or an Agent's
Message, as the case may be, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. The term "Agent's Message" means a message,
transmitted to the Book-Entry Transfer Facility and received by the Exchange
Agent and forming a part of the Book-Entry Confirmation, which states that the
Book-Entry Transfer Facility has received an express acknowledgment from the
tendering Participant (as defined herein) that such Participant has received and
agrees to be bound by the Letter of Transmittal and the Issuer may enforce the
Letter of Transmittal against such Participant. THE METHOD OF DELIVERY OF OLD
NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE ISSUER.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Issuer in its
sole discretion, duly executed by, the registered Holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Issuer in its sole discretion, which determination shall be final and
binding. The Issuer reserves the absolute right to reject any and all tenders of
any particular Old Notes not properly tendered or to not accept any particular
Old Notes which acceptance might, in the judgment of the Issuer or its counsel,
be unlawful. The Issuer also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the Issuer
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such reasonable period of time as the Issuer shall determine.
Neither the Issuer, the Exchange Agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect to any
tender of Old Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to so
act must be submitted.
By tendering, each holder will represent to the Issuer that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such
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New Notes, whether or not such person is the holder, and that neither the holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a holder that
is not a broker-dealer, each such holder, by tendering, will also represent to
the Issuer that such holder is not engaged in, or intends to engage in, a
distribution of the New Notes. If any holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Issuer, or
is engaged in or intends to engage in or has an arrangement or understanding
with any person to participate in a distribution of such New Notes to be
acquired pursuant to the Exchange Offer, such holder or any such other person
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes of the
Exchange Offer, the Issuer shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if the Issuer has given oral or written
notice thereof to the Exchange Agent, with written confirmation of any oral
notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. Interest on the New Notes will accrue from August 6, 1998,
the date of original issuance of the Old Notes. If the Exchange Offer is not
consummated by March 15, 1999, the interest rate on the Old Notes from and
including such date until but excluding the date of consummation of the Exchange
Offer will increase by 0.5%. Payments of such interest, if any, on Old Notes in
exchange for which New Notes were issued will be made to the persons who, at the
close of business on the record date next preceding the interest payment date,
are registered holders of such Old Notes if such record date occurs prior to
such exchange, or are registered holders of the New Notes if such record date
occurs on or after the date of such exchange, even if Notes are cancelled after
the record date and on or before the interest payment date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount than
the holder desired to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry procedures described
below, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through
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book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees, or an
Agent's Message in lieu of a Letter of Transmittal, and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Issuer, whose determination shall be final and binding
on all parties. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes
which have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
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CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuer shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order of decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Issuer to accept for exchange or exchange some or all of the
Old Notes pursuant to the Exchange Offer; or any statute, rule, regulation,
order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgment of
the Issuer might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the reasonable judgment of
the Issuer, might result in the holders of New Notes having obligations
with respect to resales and transfers of New Notes which are greater than
those described in the interpretation of the Commission referred to on the
cover page of this Prospectus, or would otherwise make it inadvisable to
proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Issuer to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Issuer and its subsidiaries taken as a whole that, in the
reasonable judgment of the Issuer, is or may be adverse to the Issuer, or
the Issuer shall have become aware of facts that, in the reasonable
judgment of the Issuer, have or may have adverse significance with respect
to the value of the Old Notes or the New Notes; which in the reasonable
judgment of the Issuer in any case, and regardless of the circumstances
(including any action by the Issuer) giving rise to any event described
above, makes it inadvisable to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any such
condition or may be waived by the Issuer in whole or in part at any time and
from time to time in its sole discretion. The failure by the Issuer at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indentures under the Trust Indenture Act of 1939 (the
"TIA").
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EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal and Agent's Messages should
be directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal or Agent's Message and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery:
The Bank of New York The Bank of New York
101 Barclay Street, Floor 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section Ground Floor
New York, New York 10286
Attention: Reorganization
Section
</TABLE>
By Facsimile:
(Eligible Institutions Only)
(212) 815-6339
Confirm by Telephone:
(212) 815-5789
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Issuer will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuer and are estimated in the aggregate to be
$1,500,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Issuer to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indentures regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate that
it will register Old Notes under the Securities Act. See "Description of the
Notes--Registration Rights." Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Issuer believes that New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold or otherwise transferred by
holders thereof (other than any such holder which is an
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"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the Issuer does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes and has no arrangement or understanding to participate
in a distribution of New Notes. If any holder is an affiliate of the Issuer, is
engaged in or intends to engage in or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." In addition, to
comply with state securities laws, the New Notes may not be offered or sold in
any state unless they have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied
with. The offer and sale of the New Notes to "qualified institutional buyers"
(as such term is defined under Rule 144A of the Securities Act) is generally
exempt from registration or qualification under the state securities laws. The
Issuer currently does not intend to register or qualify the sale of the New
Notes in any state where an exemption from registration or qualification is
required and not available.
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BUSINESS
THE ISSUER
GENERAL
Golden State Holdings is the direct parent of, and owns all of the common
stock of, the Bank. Golden State Holdings was formed to acquire all of the
assets of FNH (including all of the common stock of the Bank) as part of the
Golden State Acquisition. Prior to the Golden State Acquisition, FNH was a
holding company chartered under the laws of the State of Delaware whose only
significant asset was all of the common stock of the Bank. As such, the
principal business operations of FNH were, and the principal business operations
of Golden State Holdings are, conducted by the Bank and its subsidiaries.
References in "Business" to "Golden State Holdings" refers to (i) Golden State
Holdings after the Golden State Acquisition and (ii) FNH prior to the Golden
State Acquisition.
Golden State Holdings' operations are significantly influenced by general
economic conditions in the markets and geographic areas in which the Bank
conducts its business, the monetary and fiscal policies of the federal
government and the regulatory policies of certain governmental agencies. Deposit
balances and the cost of borrowings are influenced by interest rates on
competing investments and general market interest rates. Golden State Holdings'
operations are also impacted by market interest rates on loans, the supply of
and demand for housing, and the availability of funds.
THE BANK
Cal Fed, which is headquartered in San Francisco, California, is a
diversified financial services company whose principal business consists of
(i) operating retail deposit branches to serve consumers in California and, to a
lesser extent, in Nevada, (ii) originating and/or purchasing, on a nationwide
basis, 1-4 unit residential loans and, to a lesser extent, certain commercial
real estate and consumer loans, for investment and (iii) conducting mortgage
banking activities, including originating and servicing 1-4 unit residential
loans for others. Recently, with its entry into the non-prime automobile finance
business, Cal Fed broadened its complement of consumer lending products. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings. As of June 30, 1998, Cal Fed had approximately $34.0 billion
in assets and approximately $16.0 billion in deposits and operated retail branch
offices at 225 locations in three states.
BACKGROUND
On February 1, 1993, First Gibraltar Bank, FSB, the predecessor to the Bank
("First Gibraltar") sold to Bank of America Texas, N.A. and BankAmerica
Corporation (collectively, "BankAmerica") certain assets, liabilities and
substantially all of the branch operations of First Gibraltar located in Texas
consisting of approximately $829 million of loans and 130 branches with
approximately $6.9 billion in deposits (the "BAC Sale"). A gain of $141 million
was recorded in connection with this sale. Concurrently with the BAC Sale, First
Gibraltar changed its name to First Madison Bank, FSB ("First Madison").
Following the BAC Sale, and through September 1994, First Madison's
principal business was the performance of its obligations under an assistance
agreement ("Assistance Agreement") entered into with the FSLIC Resolution Fund
(the "FSLIC/RF") at the time of First Gibraltar's acquisition of five insolvent
Texas thrifts (the "Texas Closed Branches") and the funding of assets subject to
the Assistance Agreement ("Covered Assets"). Subsequent to the BAC Sale, First
Madison also managed four retail branches in Texas and supplemented its retail
deposit base with wholesale funds from Brokered Deposits (as defined herein) and
FHLB advances.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for $726.5 million. Effective on October 1, 1994, First
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Madison changed its name from "First Madison Bank, FSB" to "First Nationwide
Bank, A Federal Savings Bank." Since October 1994, FNH has made several
acquisitions and has divested certain operations.
In December 1994, the Bank's wholly-owned mortgage bank operating
subsidiary, FNMC, entered into a series of agreements with Standard Federal
Savings Association ("StanFed"), to acquire certain of StanFed's mortgage
servicing assets and assume certain of StanFed's mortgage servicing liabilities
for approximately $178 million (the "Maryland Acquisition"). As a result of the
Maryland Acquisition, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $11.4 billion (including $1.8 billion of mortgage
servicing rights that are owned by third parties who have subcontracted the
servicing function to FNMC (a "sub-servicing portfolio")) and certain other
assets and liabilities. The transaction was consummated on February 28, 1995. In
connection with the Maryland Acquisition, FNMC moved its mortgage servicing
operations to Maryland from its former location in Sacramento, California.
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a 1-4 unit residential loan servicing portfolio of approximately $11.1 billion
(including a sub-servicing portfolio of $3.1 billion), a $2.9 billion master
servicing portfolio in which FNMC monitors the performance and consolidates the
reporting and remittances of multiple servicers for various investors (a "master
servicing portfolio") and other assets for $100.9 million, and the assumption of
certain indebtedness secured by the acquired loan portfolio (the "LMUSA 1995
Purchase"). On January 31, 1996, FNMC purchased LMUSA's remaining $14.1 billion
loan servicing portfolio (including a sub-servicing portfolio of $2.4 billion),
a master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real
estate, $46.8 million in net other servicing receivables, $2.6 million in
mortgage loans, and $6.2 million in net other assets (including $1.4 million in
cash and cash equivalents) for a purchase price of approximately $160.9 million
(the "LMUSA 1996 Purchase" and together with the LMUSA 1995 Purchase, the "LMUSA
Purchases").
During the first six months of 1996, FNH consummated the sale of its retail
branches in Ohio (the "Ohio Branch Sale"), New York and New Jersey (the
"Northeast Branch Sales") and Michigan (the "Michigan Branch Sale", and together
with the Ohio Branch Sale and the Northeast Branch Sale, the "Branch Sales") at
prices which represented an average premium of 7.96% of the approximately
$4.6 billion of deposits sold. FNH recorded a pre-tax gain of $363.3 million in
connection with the Branch Sales.
On February 1, 1996, FNH acquired SFFed Corp. ("SFFed"), a savings and loan
holding company, and its wholly owned federal savings association, San Francisco
Federal Savings and Loan Association ("San Francisco Federal"), (the "SFFed
Acquisition"), for approximately $264.2 million. San Francisco Federal operated
35 branches in the Northern California area and at February 1, 1996, had
approximately $4.0 billion in assets and approximately $2.7 billion in deposits.
On June 1, 1996, FNH acquired Home Federal Financial Corporation ("HFFC")
and its wholly owned federally chartered savings association subsidiary, Home
Federal Savings and Loan Association of San Francisco ("Home Federal"), (the
"Home Federal Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million. At June 1, 1996, HFFC had
approximately $717 million in assets and $632 million in deposits.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the "Old
Cal Fed Merger Agreement") among FNH, Old Cal Fed and Old California Federal,
First Nationwide merged with and into Old California Federal and Old Cal Fed was
liquidated. The aggregate consideration paid under the Old Cal Fed Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
litigation interests. Old California Federal, at December 31, 1996, had total
assets of approximately $14.1 billion and deposits of $8.9 billion, and operated
119 branches in California and Nevada. Effective with the merger, First
Nationwide's name changed to California Federal Bank, A Federal Savings Bank.
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("First Nationwide Escrow"), an
affiliate of FNH, was merged with and into FNH, pursuant to a merger agreement
by and between FNH and First Nationwide Escrow (the "First Nationwide Escrow
Merger"). In connection therewith, FNH acquired the net proceeds from the
issuance of First Nationwide Escrow's $575 million of Senior Subordinated Notes
due 2003 and assumed First Nationwide Escrow's obligations under
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<PAGE>
the FNH 10 5/8% Senior Subordinated Notes and indenture. See "Certain
Relationships and Related Transactions--First Nationwide Escrow Merger and
Issuance of First Nationwide Escrow Preferred Stock."
FNH financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of the FNH 10 5/8% Senior
Subordinated Notes, (ii) net proceeds of $145 million from a newly formed
Delaware corporation, all the common stock of which is owned by Gerald J. Ford,
the Chairman of the Board, Chief Executive Officer and a director of the Bank
("Special Purpose Corp."), in exchange for $150 million aggregate liquidation
value of FNH's Cumulative Perpetual Preferred Stock ("FNH Preferred Stock") and
(iii) existing cash. In connection with the Cal Fed Acquisition, FNH made a
capital contribution to the Bank on January 3, 1997 of approximately
$685 million.
In November 1996, the Bank formed California Federal Preferred Capital
Corporation ("Preferred Capital Corp.") for the purpose of acquiring, holding
and managing real estate mortgage assets. All of Preferred Capital Corp.'s
common stock is owned by the Bank. Preferred Capital Corp. entered into a
subservicing agreement with FNMC pursuant to which FNMC services Preferred
Capital Corp.'s mortgage assets. On January 31, 1997, Preferred Capital Corp.
issued to the public $500 million of its 9 1/8% Noncumulative Exchangeable
Preferred Stock (the "REIT Preferred Stock"). Preferred Capital Corp. used the
proceeds from such offering to acquire mortgage assets from the Bank.
Effective May 31, 1997, FNMC acquired a residential mortgage loan servicing
portfolio of approximately $3.2 billion from WMC Mortgage Corporation (the
"Weyerhaeuser Purchase") for $37.1 million, of which $.7 million remains payable
at December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--FNH--Mortgage Banking Operations."
On September 1, 1997, FNH acquired Auto One Acceptance Corporation ("Auto
One") in a purchase transaction (the "Auto One Acquisition"). Auto One primarily
engages in indirect non-prime auto financing activities, providing loan
processing, funding and loan servicing for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered
in Dallas, Texas, and operates as a subsidiary of the Bank.
On September 30, 1997, FNMC sold servicing rights for 51,626 loans with an
unpaid principal balance of approximately $2.3 billion, recognizing a pre-tax
gain of $14.0 million (the "Servicing Sale").
On December 12, 1997, FNH sold its retail deposits and all related retail
banking facilities in the state of Texas (consisting of three branches) with
deposits of $57.6 million at a gross price representing a deposit premium of
4.1% (the "Texas Branch Sale"). FNH recorded a pre-tax gain of $2.5 million in
connection with the Texas Branch Sale.
On February 3, 1998, FNH entered into an agreement with Gulf States
Acceptance Company, a Delaware limited partnership ("GSAC") and its general
partner, Gulf States Financial Services, Inc., a Texas corporation, pursuant to
which Auto One acquired 100% of the partnership interests in GSAC and GSAC was
liquidated and its assets and liabilities were transferred to Auto One (the
"GSAC Acquisition"). The aggregate consideration paid in connection with the
GSAC Acquisition, which was completed on February 4, 1998, was approximately
$13.6 million plus a 20% interest in the common stock of Auto One.
On February 4, 1998, Parent Holdings, First Gibraltar Holdings, and
Hunter's Glen entered into the Merger Agreement with Golden State and Glendale
Federal pursuant to which Parent Holdings, Hunter's Glen and Golden State agreed
to a tax-free exchange of shares in the Golden State Merger, to be accounted for
under the purchase method of accounting. In connection with the execution of the
Merger Agreement, Golden State, Glendale Federal, the Bank, Stephen J. Trafton,
Chairman of the Board, President and Chief Executive Officer of Golden State and
Richard A. Fink, Vice Chairman of Golden State, entered into the Litigation
Management Agreement pursuant to which, among other things, Messrs. Trafton and
Fink will oversee and manage the California Federal Litigation and continue to
oversee and manage similar litigation being prosecuted by Glendale Federal,
following the consummation of the Golden State Merger. See "The Golden State
Acquisition."
On September 11, 1998, FNH consummated the sale of its 24 branch banking
offices in Florida to Union Planters Florida. As of June 30, 1998, the 24
Florida branch offices of FNH had total deposits of $1.4 billion. FNH expects to
record a pre-tax gain of approximately $108 million in connection with the
Florida Branch Sale,
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representing a deposit premium of approximately 7.5%. It is not expected that
there will be any material impact on the financial condition or ongoing results
of operations as a result of the Florida Branch Sale.
BUSINESS STRATEGY
The Bank will continue to execute its business plan to increase
profitability, grow earnings, and diversify the sources of fee revenue while
preserving credit quality. Key elements of the business plan include:
o Cal Fed will continue its transition toward a more "bank-like"
institution. In particular, the traditional savings bank activities of
the Bank will be supplemented and expanded by the following initiatives:
-- Continuing to market demand deposit and transaction accounts as the
primary account relationship. The corollary reduction in emphasis on
certificates of deposits will contribute to a lower overall cost of
funds. Transaction account relationships also tend to generate greater
fee income.
-- Offering a broader range of retail products. Mutual funds, insurance
and annuity products, mortgage and home equity loans are currently
available to Bank customers. The Bank has only recently begun a
concerted marketing effort to realize the opportunity to sell more
products and services to its customers.
-- Expanding small business lending. The Bank generally ranks as one of
the top four depository institutions in most of the markets it serves.
This high profile positions the Bank to compete very effectively to
provide services to small businesses. Local, small business lending
generates wider margins than commercial lending.
o Cal Fed will continue to enhance operating efficiency by, among other
things, further expanding its customer base, increasing transaction
volumes and reducing costs through consolidation of administrative and
managerial functions. Management has achieved substantial progress in
reducing the Bank's efficiency ratio, which represents the ratio of
noninterest expense to net interest income and noninterest income
(excluding certain non-recurring items and goodwill amortization), from
63.47% for the year ended December 31, 1995 to 48.46% for the six months
ended June 30, 1998.
o FNMC will continue to increase noninterest income and obtain incremental
efficiencies in its mortgage banking operations. In particular, FNMC will
seek to maintain the expected level of servicing of just over one million
mortgage loans in its Frederick, Maryland facility after the Golden State
Acquisition.
o The Bank will continue to focus on risk management by seeking to protect
the credit quality of its assets through, among other things, continuing
to originate primarily residential loans in accordance with the Bank's
carefully developed underwriting standards, which have resulted in
non-performing assets of 0.67% of the Bank's total assets at June 30,
1998. Non-performing assets as a percentage of total assets of the Bank
was 0.87% and 1.36% at December 31, 1997 and 1996, respectively. The
ratio for Glendale Federal at June 30, 1998 and December 31, 1997 was
0.74% and 0.95%, respectively.
o The Bank will retain the best practices of both merger partners.
California Federal contributes an efficient back office operation, a
large-scale mortgage banking business, and proven merger integration
skills. Glendale Federal offers complementary attributes including
consumer marketing skills, a growing small business lending practice, and
an attractive retail mortgage origination network.
o The Bank will mitigate interest rate risk by adding primarily ARMs to its
loan portfolio.
o The Bank will continue to evaluate external growth and revenue
diversification through selective acquisitions which are consistent with
its business strategy. This growth may include acquisitions of businesses
that management believes offer the potential for higher growth and margin
expansion, such as non-prime automobile and non-prime mortgage loan
origination. Since the acquisition of First Nationwide in 1994, the
Bank's business strategy has been executed through three types of
transactions, as the information set forth in the tables below
illustrates:
-- Acquisitions which complement the Bank's geographic and business line
strategies, such as the Golden State Acquisition;
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-- Divestitures of branches outside the Bank's primary geographic region;
and
-- Expansion of the Bank's mortgage servicing operations.
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include general
and regional economic conditions, competition and changes in the regulatory
framework affecting the Bank and interest rates. Accordingly, no assurance can
be given that any of the Bank's strategies will prove to be effective or that
the Bank's goals will be achieved. See "Risk Factors."
LENDING ACTIVITIES
The Bank's principal lending activity has been the origination of
adjustable and fixed rate mortgage loans secured by residential real estate. To
a lesser extent, the Bank also originates consumer loans consisting principally
of adjustable rate home equity lines of credit. Prior to 1997, the commercial
lending activity of the Bank had been limited to restructuring and refinancing
existing portfolio loans, and multi-family loans originated under its affordable
housing program. The Bank commenced the origination of commercial loans on a
limited basis during 1997. The Bank also participates in a number of other
affordable housing programs and initiatives.
The Bank's 1-4 unit residential loans are originated by FNMC. In April
1995, FNH concluded that the costs of operating retail offices outweighed the
benefits and, accordingly, closed substantially all of its retail real estate
loan production offices. Residential 1-4 unit loans continue to be originated
through the Bank's wholesale origination offices (wherein loans are acquired
from independent loan brokers) and the Bank's retail branches. The Bank
originates ARM loans on 1-4 unit residential real estate which, in the case of
ARMs originated prior to September 30, 1995 and after December 31, 1996, have
generally been held for investment, and fixed rate 1-4 unit residential loans,
which are generally held for sale to the secondary mortgage market. From
September 30, 1995 through December 31, 1996, substantially all of the ARMs
originated were sold in the secondary market to provide funds for the
acquisition and divestiture activity occurring during the period. On October 2,
1995, FNH acquired the correspondent loan purchase operation of LMUSA as well as
contracts to administer various housing bond and other private mortgage lending
programs.
The Bank generates consumer loan applications at its retail branches. In
addition, the Bank conducts direct-mail solicitations, principally of its
existing customers, for both secured and, to a much lesser extent, unsecured
revolving loans. All consumer loan processing, servicing and collection
operations were moved from a facility in Oak Brook, Illinois to Sacramento,
California during the second quarter of 1997.
The following table reflects, for the periods indicated, activity related
to loans receivable, excluding loans held for sale:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------
JUNE 30, 1998 1997 1996
------------------ ----------------------- -----------------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 19,942 $10,605 $ 9,174
Originations......................................... 1,584 1,024 284
Purchases:
1996 Acquisitions.................................. -- -- 3,235
Cal Fed Acquisition................................ -- 10,060 --
Sales................................................ (3) (21) (123)
Foreclosures......................................... (63) (178) (109)
Payments, payoffs and other.......................... (2,315) (1,548) (1,856)
-------- ------- -------
Balance at end of period............................. $ 19,145 $19,942 $10,605
-------- ------- -------
-------- ------- -------
</TABLE>
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Interest Rates, Terms and Fees
The Bank offers a variety of ARM products, generally with the objectives of
(i) matching, as closely as possible, the interest rate sensitivity of its
interest-earning assets with the interest rate sensitivity of its
interest-bearing liabilities and (ii) maintaining a relatively stable net
interest margin in varied interest rate environments. In response to consumer
demand, and in order to diversify its loan portfolio and help to control its
future interest rate risk, the Bank's loan portfolio includes several ARM
products which vary as to (i) the frequency and amount of periodic interest rate
changes and (ii) the minimum and maximum rates applied to a particular loan.
ARMs have the advantage of reducing the lending institution's sensitivity to
interest rate fluctuations. However, they also present certain risks not
associated with traditional fixed rate mortgages, such as adjustments in
interest rates which could cause payment increases that some borrowers might be
unable to service.
The Bank attempts to mitigate the credit risks associated with mortgage
lending activities by the use of carefully developed underwriting standards.
Substantially all 1-4 unit residential loans originated are underwritten to
conform with standards adopted by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"),
the Government National Mortgage Association ("GNMA"), or other secondary market
investors. Accordingly, the Bank's underwriting standards include LTV ratios and
maximum loan amounts for both fixed rate loans and ARMs that closely mirror
secondary mortgage market requirements. Generally, where these standards differ,
specific strong compensating factors are required. With respect to ARMs, the
Bank underwrites the borrower's ability to pay at the maximum second year
payment rate, consistent with secondary market requirements.
In addition to the interest earned on its loans, the Bank charges fees for
loan originations, loan prepayments and modifications, late payments, changes of
property ownership and other similar services. The amount of this fee income
varies with the volume of loan originations, prepayments, the general economic
conditions affecting the portfolio and other competitive factors affecting the
mortgage market.
Generally, late charges are assessed when payments are delinquent. On loans
secured by residential real estate, these charges are generally limited to 4% to
6% of the overdue payment of principal and interest and cannot be imposed until
the payment is more than 15 days late, in accordance with the contractual terms
of the loans and regulatory requirements in effect when the loans were made.
Composition of Loan Portfolio
The composition of the Bank's loan portfolio, excluding loans held for sale
and Covered Assets, is set forth in the following table, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
AT JUNE 30, 1998 1997 1996 1995 1994 1993
---------------- ------- ------- ------ ------ ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential......................... $ 13,554 $14,071 $ 6,118 $5,423 $5,612 $ 19
5+ unit residential.......................... 2,753 3,035 2,164 1,854 2,178 --
Commercial and other......................... 1,945 2,146 1,978 1,716 2,015 10
Land......................................... 4 5 11 9 15 --
Construction................................. 2 1 6 -- 8 --
-------- ------- ------- ------ ------ ----
Total real estate loans................... 18,258 19,258 10,277 9,002 9,828 29
-------- ------- ------- ------ ------ ----
Equity-line and consumer loans................. 877 676 298 170 492 5
Commercial loans............................... 10 8 30 2 1 --
-------- ------- ------- ------ ------ ----
Total loans receivable.................... 19,145 19,942 10,605 9,174 10,321 34
-------- ------- ------- ------ ------ ----
Less:
Unearned discounts and loan fees............. (54) (46) (5) (19) -- 3
Allowance for loan losses.................... 421 419 247 210 203 2
Nonaccretable discount on purchased loans.... 47 20 -- -- -- --
Purchase accounting adjustments, net......... 105 125 150 153 151 --
-------- ------- ------- ------ ------ ----
Loans receivable, net..................... $ 18,626 $19,424 $10,213 $8,830 $9,967 $ 29
-------- ------- ------- ------ ------ ----
-------- ------- ------- ------ ------ ----
</TABLE>
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The following table presents the Bank's real estate loan portfolio
(excluding loans held for sale), by collateral type, interest rate type and
state concentration at December 31, 1997:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL REAL
----------------- ---------------- ---------------- ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- ------------------------------------ -------- ------ -------- ----- -------- ----- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.......................... $ 10,299 $ 869 $2,241 $ 147 $1,750 $ 89 $ 15,395 79.94%
New York............................ 332 73 176 20 28 22 651 3.38
Florida............................. 405 79 61 10 21 8 584 3.04
Nevada.............................. 182 15 86 4 19 2 308 1.60
Illinois............................ 112 56 25 3 32 5 233 1.21
Texas............................... 129 59 -- 2 1 4 195 1.01
Other states(1)..................... 1,158 303 218 42 157 14 1,892 9.82
-------- ------ ------ ----- ------ ----- -------- -------
Total.......................... $ 12,617 $1,454 $2,807 $ 228 $2,008 $ 144 $ 19,258 100.00%
-------- ------ ------ ----- ------ ----- -------- -------
-------- ------ ------ ----- ------ ----- -------- -------
</TABLE>
- ------------------
(1) Real estate loans involving property located in 44 states, Puerto Rico and
the District of Columbia; not more than 1.0% of the total amount of such
loans are located in any one state.
The following table summarizes the Bank's loan portfolio, excluding loans
held for sale, at December 31, 1997, based upon various contractually scheduled
principal payments allocated to the indicated maturity categories. This table
does not reflect expected prepayments.
<TABLE>
<CAPTION>
DUE OVER ONE
WITHIN BUT WITHIN OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential
Fixed rate................................................... $ 2 $ 1,320 $ 132 $ 1,454
Variable rate................................................ -- 12,032 585 12,617
5+ unit residential
Fixed rate................................................... 12 42 174 228
Variable rate................................................ 178 580 2,049 2,807
Commercial and other
Fixed rate...................................................... 9 64 71 144
Variable rate................................................... 227 841 940 2,008
---- -------- ------ --------
Total........................................................ 428 14,879 3,951 19,258
---- -------- ------ --------
Commercial and consumer loans:
Fixed rate...................................................... 27 248 33 308
Variable rate................................................... 35 66 275 376
---- -------- ------ --------
Total........................................................ 62 314 308 684
---- -------- ------ --------
Total loans receivable....................................... $490 $ 15,193 $4,259 $ 19,942
---- -------- ------ --------
---- -------- ------ --------
</TABLE>
1-4 Unit Residential Lending
The Bank currently offers three primary 1-4 unit residential ARM programs,
and a variety of 1-4 unit fixed rate programs with maturities ranging from 15 to
30 years. Adjustable rate programs include loans which: (i) provide for monthly
interest rate adjustments, after the third or sixth month from inception of the
loan, based on the FHLB 11th District Cost of Funds, (ii) provide for annual
rate adjustments based upon the weekly average yield on U.S. Treasury Securities
adjusted to a constant maturity of one year, or (iii) provide for semi-annual
rate adjustments based on the weekly average of the secondary market rates on
six-month negotiable certificates of deposit. Some ARMs offer an option to
convert to a fixed rate after the first year through the fifth year of the loan
term. A variety of features are incorporated into ARM loans to protect borrowers
from unlimited adjustments in interest rates and payments. All ARMs have
lifetime caps which limit the amount of rate increases over the life of the
loan. ARMs whose rates adjust annually have rate caps which limit the amount
that rates can change to two percentage points per year. Loans which adjust
monthly based upon the FHLB 11th District Cost of Funds limit payment changes to
no more than 7.5% of the payment amount per year. This may lead to monthly
payments which are less than the amount necessary to amortize the loan to
maturity at the interest rate in effect for any particular month. In the event
that the monthly payment is not sufficient to pay interest accruing on the loan
during the month, this deficiency is added to the loan's principal balance
(i.e., negative amortization). The total outstanding principal balance for a
particular loan is generally not allowed to exceed 125% of the original loan
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<PAGE>
amount as a result of negative amortization. If the loan reaches its maximum
amount, the loan payment is recalculated to the payment sufficient to repay the
unpaid principal balance in full at the maturity date. As of December 31, 1997,
the Bank's capitalized interest relative to such 1-4 unit residential loans was
approximately $20.3 million. This amount represents approximately .42% of the
approximately $4.8 billion of 1-4 unit residential ARMs that have the potential
to experience negative amortization. The Bank also originates 15 and 30 year
fully amortizing 1-4 unit fixed rate residential loans under a variety of fixed
rate programs, primarily for resale in the secondary mortgage market. When 1-4
unit residential loans are sold, FNMC normally retains the servicing of the
loan. See "--Mortgage Banking Operations" for a further discussion of these
activities.
The Bank has recently begun to originate hybrid ARM loans which have fixed
interest rates for periods ranging from three years to ten years. At the end of
the fixed rate period, these loans convert to ARMs that are subject to periodic
and lifetime rate caps.
Multi-family, Commercial and Other Real Estate Lending
While the Bank has always originated multi-family, commercial and other
real estate loans as they relate to affordable housing programs, it began to
originate other commercial real estate loans during 1997 on a limited basis.
FNH's loan portfolio includes loans principally acquired through acquisitions
which are secured by multi-family residential, commercial, industrial and
unimproved real estate. The Bank's variable rate multi-family and commercial
real estate loans have a maximum amortized loan term of 30 years with some loans
having balloon payments due in one to 15 years. ARMs primarily adjust with the
FHLB 11th District Cost of Funds or the six-month Treasury Bill indices with a
monthly or semi-annual rate adjustment. The terms and characteristics of the
ARMs originated for multi-family and commercial real estate lending purposes are
similar to those for residential lending. As such, many of the same risks and
protections related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real estate
loans is allowed to increase the outstanding principal balance to 110% of the
original loan amount. If the loan reaches 110% of the original loan amount, all
future interest rate increases will increase the monthly payment to amortize the
loan over the remaining life of the loan. At December 31, 1997, the Bank's
capitalized interest relative to such loans was approximately $1.5 million,
which represents approximately .06% of the $2.7 billion of multi-family and
commercial real estate loans that have the potential to experience negative
amortization.
Real estate loans secured by multi-family and commercial property represent
a significant portion of the Bank's portfolio. Management periodically reviews
the multi-family and commercial real estate loan portfolio. At December 31, 1997
and 1996, the multi-family and commercial real estate loan portfolio totalled
$5.2 billion and $4.1 billion, respectively. Included in the multi-family and
commercial real estate loan portfolio at December 31, 1997 are $28.9 million of
loans with credit enhancement wherein the lead participant subordinated its
minority interest in a pool of loans to the Bank's interest in the corresponding
pool of loans. No loans are subject to be repurchased by the seller in the event
such loans become 90 days delinquent.
The Bank's potential for loss on the multi-family and commercial loan
portfolio acquired from Old FNB and, to a lesser extent, the 1-4 unit
residential loan portfolio acquired from Old FNB, was mitigated by the terms of
the Non-Performing Asset Sale Agreement (the "Put Agreement") entered into by
the Bank with Granite Management and Disposition, Inc. ("Granite"), an affiliate
of Old FNB, in connection with the FN Acquisition. The Put Agreement expired on
November 30, 1996, at which time it had been fully utilized by the Bank. The
aggregate purchase price of assets which were put to Granite, representing the
outstanding principal balance, accrued interest and certain other expenses, was
$500 million, including assets put to Granite by Old FNB from January 1 through
October 1, 1994.
A portion of the Bank's MSRs, which are rights to service mortgages held by
others, were acquired from Old FNB and Old California Federal which had sold
multi-family and commercial real estate loans subject to certain recourse
provisions. These recourse liabilities were assumed by the Bank in the FN and
Cal Fed Acquisitions and at December 31, 1997, the balance of such loans sold
with recourse totalled $653 million.
Consumer Lending
The Bank's consumer loan originations are primarily concentrated in two
areas, one of which is home equity lending. The portfolio correlates closely to
retail deposit branch distribution. At June 30, 1998, the home equity portfolio
totalled $331 million, or 38%, of the total consumer loan portfolio of
$869 million. The portfolio is geographically dispersed and correlates closely
to retail deposit branch distribution.
The Bank offers an adjustable, prime interest rate-based home equity line
of credit on owner-occupied residential properties. In determining the amount of
credit to be extended, all loans secured by the collateral
134
<PAGE>
properties are aggregated and compared to the appraised value of the properties.
The Bank's policy is to extend credit up to a maximum combined LTV ratio of 80%.
The second concentration of consumer loan origination is in non-prime auto
lending, which the Bank recently commenced with the Auto One Acquisition. Auto
One has been involved in the non-prime auto lending business for over ten years,
and has an established servicing platform for such loans. At June 30, 1998, the
Bank's non-prime auto loan portfolio totalled $417 million, which loans were
purchased in bulk from a third party or from independent automobile dealers
after the consummation of the Auto One Acquisition. These purchased loans have
fixed interest rates, with terms to maturity based upon the mileage on the
collateral vehicle, up to a maximum of 60 months. Approximately 70% of Auto
One's current production is collateralized with vehicles two years old or newer.
Underwriting on loans purchased from dealers is performed by Auto One personnel
prior to the purchase.
Other consumer loan products include: fixed rate home equity installment
loans; adjustable prime rate-based home equity loans which, while secured, are
based on repayment ability and credit history; auto and boat loans; unsecured
lines of credit; overdraft protection; and loans secured by certificates of
deposit.
Loans Held for Sale
Activity related to loans held for sale for the years ended December 31,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Balance at beginning of period............................................................... $ 825 $ 1,203
Purchases and originations................................................................... 7,871 4,985
Sales........................................................................................ (5,511) (5,157)
Other........................................................................................ (1,702) (206)
------- -------
Balance at end of period..................................................................... $ 1,483 $ 825
------- -------
------- -------
</TABLE>
Loans held for sale are carried at the lower of cost or market value.
Substantially all ARMs originated from September 30, 1995 through December 31,
1996 were sold or held for sale in the secondary market in anticipation of the
1996 Acquisitions, the Branch Sales and the Cal Fed Acquisition. Prior to and
since that time, most ARMs originated were held by the Bank for investment.
Origination of 1-4 Unit Residential Loans
The Bank originates 1-4 unit residential loans principally through the
efforts of wholesale origination offices through which loans are purchased from
independent loan brokers and, to a lesser degree, staff loan agents. To promote
continuity of customer service, help meet credit needs and to increase
opportunities to sell customer deposit and other financial services offered by
the Bank and its subsidiaries, loan inquiries from retail branch customers and
"walk-in" applicants are encouraged. These inquiries are initially processed by
retail branch office personnel, with support provided by regional lending
offices. The 1-4 unit residential loan agents are compensated principally on a
commission basis. Closed 1-4 unit residential loans are also acquired by FNMC
through a correspondent lending operation acquired from LMUSA in October 1995.
The majority of 1-4 unit residential loans originated by the Bank have LTV
ratios of 80% or less at the time of origination. The Bank has originated such
loans with LTV ratios of up to 95%, with the portion of the loan exceeding 80%
guaranteed by private mortgage insurance, the premiums of which are paid monthly
by the borrower. Certain exceptions to this guideline have been made for low and
moderate income borrowers. However, the amount of 1-4 unit residential loans
subject to such exceptions is not significant in terms of the Bank's total loan
originations. The value of the property offered as security for a 1-4 unit
residential loan is determined by a professionally qualified appraiser approved
by the Bank, who may or may not be an employee of the Bank. As further security
for its loan, the Bank requires title insurance and fire and casualty insurance
on all loans secured by liens on real property. The Bank also requires flood
insurance on any loan secured by real property if the property lies within a
U.S. Housing and Urban Development Department ("HUD") designated flood hazard
area.
135
<PAGE>
The following table summarizes 1-4 unit residential loan originations for
the years ended December 31, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ------------------------------
PRODUCTION CHANNEL ARM FIXED TOTAL ARM FIXED TOTAL
- ------------------ --- ----- ----- --- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Retail and portfolio retention................ $ 74.4 $ 580.3 $ 654.7 $ 7.3 $ 265.3 $ 272.6
Wholesale..................................... 635.3 3,438.8 4,074.1 699.2 1,451.0 2,150.2
Correspondent lending......................... 1,420.0 1,321.0 2,741.0 -- 1,692.2 1,692.2
Other......................................... -- 1,040.3 1,040.3 -- 892.9 892.9
-------- -------- -------- ------ -------- --------
$2,129.7 $6,380.4 $8,510.1 $706.5 $4,301.4 $5,007.9
-------- -------- -------- ------ -------- --------
-------- -------- -------- ------ -------- --------
</TABLE>
MORTGAGE BANKING OPERATIONS
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, the Bank originates fixed rate 1-4 unit
residential loans for sale in the secondary mortgage market. ARMs originated
prior to September 30, 1995 and after December 31, 1996 have generally been held
by the Bank for investment. From September 30, 1995 through December 31, 1996,
however, substantially all of the fixed and variable rate 1-4 unit residential
loans originated were sold in the secondary market to provide funds for the
acquisition and divestiture activity occurring during the period. The Bank
employs forward sale hedging techniques to minimize the interest rate and
pricing risks associated with the origination and sale of fixed rate 1-4 unit
residential loans.
At the time of origination, management identifies 1-4 unit residential
loans that are expected to be sold in the foreseeable future. At December 31,
1997, management had identified $1.5 billion of 1-4 unit residential loans as
held for sale. These loans have been classified as assets held for sale in the
consolidated balance sheet at December 31, 1997 and are recorded at the lower of
aggregate amortized cost or market value. At December 31, 1997, the Bank had
forward commitments to sell loans totalling $1.4 billion. In addition, the Bank
had entered into commitments to originate and purchase fixed and variable rate
loans (mortgage loan pipeline) of $1.7 billion.
The servicing portfolio of FNMC (including loans subserviced for others and
excluding loans serviced for the Bank) approximates $46.6 billion and 695,237
loans as of December 31, 1997. The servicing portfolio of FNMC, including loans
serviced for the Bank, approximates $61.8 billion and 811,036 loans as of
December 31, 1997. Substantially all of FNMC's loans are serviced in a 230,000
square-foot facility in Frederick, Maryland.
Since the FN Acquisition, the Bank has sold fixed rate and adjustable rate
loans secured by 1-4 unit residential real estate to FNMA, FHLMC, and private
investors. Mortgage loan sales totalled $5.5 billion and $4.9 billion in 1997
and 1996, respectively.
Old FNB and Old California Federal occasionally sold 1-4 unit residential
loans under recourse provisions; such liabilities were assumed by the Bank in
the FN and Cal Fed Acquisitions. As of December 31, 1997, the balance of 1-4
unit residential loans sold with certain recourse provisions was
$349.1 million.
The Bank, through FNMC, has generally retained the right to service the
loans it has sold. FNMC collects from the borrower payments of principal and
interest and, after retaining a servicing fee, remits the balance to the
investors.
In accounting for its mortgage loan sales prior to April 1, 1995, a gain or
loss was recognized based on the sum of three components: (i) the difference
between the cash proceeds of the loan sales and the Bank's book value of the
loans; plus (ii) the "excess servicing," if any; less (iii) provisions for
estimated losses to be incurred from limited recourse obligations, if any.
Excess servicing resulted in a capitalized asset that reflects the discounted
present value of any difference between the interest rate received from the
borrower and the interest rate passed through to the purchaser of the loan, less
a "normal servicing fee" (dependent upon loan type), which is retained as
compensation for future servicing costs. The amount of excess servicing
recognized in any particular loan sale depended significantly upon three factors
for which estimates or assumptions were employed: (i) the estimated life of the
loans, (ii) the discount rate used in calculating discounted present value and
(iii) the "normal servicing fee."
136
<PAGE>
The servicing asset is amortized in proportion to, and over the period of,
estimated net servicing income. The Bank monitors the prepayments on the loans
serviced for investors and reduces the balance of the asset if the actual
prepayments are in excess of the estimated prepayment trends used to record the
original asset. The Bank's assumptions relative to the prepayment speed,
discount and servicing fee rates are revised periodically to reflect current
market conditions and regulatory requirements.
Effective April 1, 1995, the Bank adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122") which requires that, when a mortgage
loan is sold and MSRs are retained, a portion of the cost of originating a
mortgage loan be allocated to the MSR based on its fair market value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--FNH--Mortgage Banking Operations," for a description of SFAS
No. 122.
At December 31, 1997, FNMC owned rights to service approximately
$42.4 billion of whole loans, participation interests and mortgage-backed
securities for others. These loans had an average balance of $64,700, a weighted
average coupon rate of 8.10%, a weighted average maturity of 272 months and a
service fee spread of .43%. The greater than 30 day delinquency rate on these
loans at December 31, 1997 was 2.94%. The Bank subserviced for others
approximately $4.2 billion of whole loans, participation interests and
mortgage-backed securities. These loans had an average balance of $90,616, a
weighted average coupon rate of 8.09% and a weighted average remaining maturity
of 270 months. The servicing fee collected on these loans is passed through to
the primary servicer with the Bank retaining a flat subservice fee that is
netted out of the monthly remittance. The greater than 30 day delinquency rate
on these loans is 5.22%. For the year ended December 31, 1997, gross revenue for
servicing activities (residential loan servicing and ancillary fees) totalled
$235.7 million.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of MSRs and generally will result
in a reduction of the market value of MSRs and in the Bank's servicing fee
income. To reduce the sensitivity of its earnings to interest rate and market
value fluctuations, the Bank hedges the change in value of its MSRs based on
changes in interest rates.
At June 30, 1998, the Bank, through FNMC, was a party to several interest
rate floor contracts maturing from October 2001 through January 2003. The Bank
paid counterparties a premium in exchange for cash payments in the event that
the 10-year Constant Maturity Treasury rate falls below the negotiated strike
prices. At June 30, 1998, the notional amount of the interest rate floors was
$1.4 billion and the negotiated strike prices were between 5.5% and 6.5%. In
addition, the Bank , through FNMC, was a party to principal-only swap securities
and prepayment-linked swap agreements with a notional amount of $107.4 million
and $1.2 billion, respectively. The estimated market values of the interest rate
floor contracts and swaps designated as hedges against MSRs at June 30, 1998
were $28.6 million and $21.3 million, respectively.
On October 2, 1995, in the LMUSA 1995 Purchase, FNMC purchased the stock of
Lomas Mortgage Services Inc. (now known as FNMC Mortgage Services, Inc.), which
was a 33% owner of Lomas Mortgage Partnership L.P. (now known as First
Nationwide Mortgage Partnership LP ("FNMP")) and its managing general partner.
FNMP owned the MSRs to approximately $2.3 billion of loans serviced for FNMA,
GNMA, FHLMC and private investors. FNMP's investment in such MSRs and its other
assets were partially funded by independent bank lines of credit totalling
approximately $24.8 million and its servicing duties were performed by FNMC
under a subservicing contract. As of January 1, 1998, FNMC purchased the other
67% of FNMP.
NON-PERFORMING ASSETS
Non-performing assets consist of non-performing loans, foreclosed real
estate and repossessed assets. The Bank's exposure to losses relative to certain
assets acquired in the FN Acquisition that became non-performing or otherwise
problematic prior to November 30, 1996 was mitigated to the extent the Bank was
able to put such loans to Granite under the Put Agreement. See "--Other
Activities--the Put Agreement."
137
<PAGE>
Classification of Assets
Savings associations are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly reports
of troubled asset classification to the OTS. Assets must be classified as
"pass," "special mention," "substandard,""doubtful" or "loss." An asset is
generally designated as "special mention" if potential weaknesses are identified
that, if left uncorrected, would result in deterioration of the repayment
prospects for the asset. An asset, or a portion thereof, is generally classified
as "substandard" if it possesses a well-defined weakness which could jeopardize
the timely liquidation of the asset or realization of the collateral at the
asset's book value. Thus, these assets are characterized by the possibility that
the association will sustain some loss if the deficiencies are not corrected. An
asset, or portion thereof, is classified as "doubtful" if identified weaknesses
make collectibility or liquidation in full highly questionable and improbable.
An asset, or a portion thereof, that is considered to be uncollectible is
classified "loss." It should be noted that the Bank does not maintain assets in
a loss classification category; rather, the carrying value of all troubled
assets is reduced by any amount considered to be uncollectible. The OTS has the
authority to approve, disapprove or modify any asset classification or any
amount established as an allowance pursuant to such classification. Savings
associations must maintain adequate general valuation allowances in accordance
with generally accepted accounting principles and federal regulations for assets
classified as "substandard" or "doubtful" and either immediately write off
assets classified as "loss" or establish specific valuation allowances equal to
the amounts classified as "loss."
The Bank has a comprehensive process for classifying assets, and asset
reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral type
and/or location, and potential loan performance problems. The objective of the
review process is to identify significant trends and determine the levels of
loss exposure to the Bank that would require increases to specific and general
valuation allowances. If the quality of the Bank's loans deteriorates or if the
allowance for loan losses is inadequate to absorb actual losses, a material
adverse effect on the Bank's results of operations and financial condition would
be likely to result.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are cured
promptly; however, foreclosure proceedings, and in some cases workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which the Bank originates loans, the value of the underlying
collateral property is usually the principal source of recovery available to
satisfy the loan balance.
In general, loans are placed on nonaccrual status after being contractually
delinquent for more than 90 days. When a loan is placed on nonaccrual status,
all interest previously accrued but not received is reversed and the loan is
considered non-performing. The Bank may modify or restructure a loan as a result
of a borrower's inability to service the obligation under the original terms of
the loan agreement.
138
<PAGE>
The following table indicates the carrying value of the Bank's loans,
excluding Covered Assets, which have been placed on nonaccrual status, as well
as the carrying value of foreclosed real estate and repossessed assets, at the
dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT ---------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Real estate:
1-4 unit residential.............................. $ 133 $165 $146 $136 $133 $ 2
5+ unit residential............................... 10 12 13 23 24 9
Commercial and other.............................. 10 6 9 9 11 --
Land.............................................. -- -- -- -- 7 --
Construction...................................... 1 2 1 -- 2 --
----- ---- ---- ---- ---- -----
Total real estate............................... 154 185 169 168 177 11
Equity-line and consumer............................. 6 7 3 3 4 --
----- ---- ---- ---- ---- -----
Total non-performing loans........................ 160 192 172 171 181 11
Foreclosed real estate, net............................ 65 77 52 49 37 --
Repossessed assets..................................... 2 3 -- -- -- --
----- ---- ---- ---- ---- -----
Total non-performing assets....................... $ 227 $272(a) $224(b) $220 $218 $ 11
----- ---- ---- ---- ---- -----
----- ---- ---- ---- ---- -----
Non-perfoming loans as a percentage of the Bank's loans
receivable........................................... 0.86% 0.99% 1.69% 1.94% 1.81% 37.61%(c)
----- ---- ---- ---- ---- -----
----- ---- ---- ---- ---- -----
Non-performing assets as a percentage of the Bank's
total assets......................................... 0.67% 0.87% 1.36% 1.50% 1.49% 0.98%
----- ---- ---- ---- ---- -----
----- ---- ---- ---- ---- -----
</TABLE>
- -----------------
(a) Includes $70.2 million of assets acquired in the Cal Fed Acquisition.
(b) Includes $74.5 million of non-performing assets acquired in the 1996
Acquisitions and in the LMUSA 1996 Purchase.
(c) The significant percentage of non-performing loans to loans receivable at
December 31, 1993 reflects the small balance of loans receivable of
$29 million at December 31, 1993.
Interest income of $6.8 million was received and recognized by the Bank for
nonaccrual loans during the year ended December 31, 1997, instead of
$15.9 million which would have been recognized had the loans performed in
accordance with their original terms. The Bank has had no loans contractually
past due 90 days or more on accrual status in the past five years.
The following table indicates loans classified by the Bank as troubled debt
restructurings, net of purchase accounting adjustments, and excluding Covered
Assets, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT ------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential........................................ $ 2 $ 2 $ 3 $ 8 $ 19 $--
5+ unit residential......................................... 21 43 55 147 204 --
Commercial and other........................................ 21 26 29 79 110 --
--- ---- ---- ---- ---- --
Total restructured loans.................................... $44 $71 $87 $234 $333 $--
--- ---- ---- ---- ---- --
--- ---- ---- ---- ---- --
</TABLE>
For the year ended December 31, 1997, interest income of $3.5 million was
recognized on restructured loans instead of the $3.6 million which would have
been recognized had the loans been performing in accordance with their original
terms. There were no non-real estate restructured loans in any of the past five
years.
139
<PAGE>
Allowance for Loan Losses
Golden State Holdings charges current earnings with a provision for
estimated credit losses on loans receivable to bring the total allowance to a
level deemed appropriate by management. The provision considers both
specifically identified problem loans and credit risks not specifically
identified in the loan portfolio. The allowance for loan losses is based on such
factors as the financial condition of the borrowers, the fair value of the loan
collateral, recourse to guarantors, analysis of delinquency trends, geographic
and collateral-type concentrations, past loss experience, regulatory policies,
and other factors related to the collectibility of the Bank's loan portfolio.
The following table summarizes activity in the Bank's allowance for loan
losses during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.............................. $ 419 $247 $210 $203 $ 2 $ 15
Purchases--SFFed Acquisition.............................. -- -- 40 -- -- --
Purchases--Home Federal Acquisition....................... -- -- 5 -- -- --
Purchases--FN Acquisition................................. -- -- -- -- 202 --
Purchases--Cal Fed Acquisition............................ -- 144 -- -- -- --
Provision for loan losses................................. 20 80 40 37 6 1
Charge-offs:
1-4 unit residential................................... (13) (38) (35) (28) (4) --
5+ unit residential and commercial real estate (a) .... (3) (8) (4) -- (4) --
Consumer and other..................................... (4) (10) (6) (5) (1) (1)
Non-real estate commercial............................. -- -- -- -- -- (1)
----- ---- ---- ---- ---- ----
Total charge-offs.................................... (20) (56) (45) (33) (9) (2)
Recoveries.................................................. 2 4 3 3 2 1
----- ---- ---- ---- ---- ----
Net charge-offs........................................... (18) (52) (42) (30) (7) (1)
Allowance for losses assigned to loans sold................. -- -- (6) -- -- (13)
----- ---- ---- ---- ---- ----
Balance at end of period.................................... $ 421 $419 $247 $210 $203 $ 2
----- ---- ---- ---- ---- ----
----- ---- ---- ---- ---- ----
</TABLE>
- ------------------
(a) Lack of activity during 1996, 1995 and 1994 reflects the utilization of the
Put Agreement, which expired in November 1996.
Although the general loan loss allowance has been allocated by type of loan
for internal valuation purposes, all such allowance is available to support any
losses which may occur, regardless of type, in the Bank's loan portfolio.
140
<PAGE>
The following table sets forth the allocation of the Bank's allowance for
loan losses at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
AT JUNE 30, 1998 1997 1996 1995 1994 1993
----------------- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Specific allowance:
Real estate loans:
1-4 unit residential............................... $ -- $ -- $ -- $ 1 $ 4 $--
5+ unit residential and commercial real estate..... 6 8 6 -- -- --
----- ---- ---- ---- ---- --
Total specific allowance......................... 6 8 6 1 4 --
----- ---- ---- ---- ---- --
General allowance:
Real estate loans:
1-4 unit residential 203 202 123 115 105 2
5+ unit residential and commercial real estate..... 194 190 109 85 85 --
----- ---- ---- ---- ---- --
Total real estate loans.......................... 397 392 232 200 190 2
Equity-line and consumer loans........................ 18 19 9 9 9 --
----- ---- ---- ---- ---- --
Total general allowance.......................... 415 411 241 209 199 2
----- ---- ---- ---- ---- --
Total allowance for loan losses.................. $ 421 $419 $247 $210 $203 $ 2
----- ---- ---- ---- ---- ---
----- ---- ---- ---- ---- ---
</TABLE>
The table below provides the Bank's ratios of net charge-offs on loans
during the period indicated to average outstanding loan balances for the period
indicated:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential....................................... 0.08% 0.25% 0.55% 0.47% 0.06% 1.26%
5+ unit residential and commercial real estate............. 0.06 0.15 0.09 -- 0.10 0.19
Consumer and other........................................... 0.28 1.42 1.86 1.00 0.23 0.24
Non-real estate commercial................................... -- -- -- -- -- 1.29
</TABLE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--FNH--Problem and Potential Problem Assets," included
elsewhere in this Prospectus, for a discussion of the Bank's impaired loans as
of June 30, 1998 and December 31, 1997.
INVESTMENT ACTIVITIES
The Bank is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. The Bank
is also permitted to invest in certain other types of securities. Securities
balances (including cash equivalent securities) exceeding minimum federal
requirements are subject to change over time based on the Bank's asset/liability
funding needs and interest rate risk management objectives. The Bank's liquidity
levels take into consideration anticipated future cash flows and all available
sources of credit. Liquidity is maintained at levels management believes are
appropriate to assure future flexibility in meeting anticipated funding needs
including deposit withdrawal requests, loan funding commitments, and other
investment or restructuring requirements. See "Regulation--Regulation of the
Bank--Liquid Assets."
141
<PAGE>
Cash Equivalents
The Bank sells federal funds, purchases securities under agreements to
resell, and invests in interest-bearing deposits in other banks from time to
time to help meet the Bank's regulatory liquidity requirements and as temporary
holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115") effective January 1, 1994. On
November 15, 1995, FASB issued the Special Report. The Special Report provided
all entities an opportunity to reassess their ability and intent to hold
securities to maturity and allowed a one-time reclassification of securities
from held-to-maturity to available-for-sale without "tainting" the remaining
held-to-maturity securities. On December 29, 1995, the Bank reclassified
$231.8 million in carrying value of U.S. government and agency securities from
held-to-maturity to securities available for sale, and recorded an increase of
$2.4 million in stockholders' equity for the net unrealized gain on such
securities.
The following summarizes the amortized cost and estimated fair value of the
Bank's securities available for sale at the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAIN LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities......................... $ -- $5,443 $ -- $5,443 $ 5,443
U.S. government and agency obligations............... 777,958 545 (917) (372) 777,586
--------- ------ -------- ------ --------
Total........................................... $ 777,958 $5,988 $ (917) 5,071 $783,029
--------- ------ -------- --------
--------- ------ -------- --------
Estimated tax effect................................. (649)
------
Net unrealized holding gain in
stockholders' equity............................... $4,422
------
------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAIN LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities......................... $ -- $ -- $ -- $ -- $ --
U.S. government and agency obligations............... 812,716 957 (588) 369 813,085
--------- ------ ------ ---- --------
Total........................................... $ 812,716 $ 957 $ (588) 369 $813,085
--------- ------ ------ --------
--------- ------ ------ --------
Estimated tax effect................................. (47)
----
Net unrealized holding gain in
stockholders' equity............................... $322
----
----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAIN LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities......................... $ 27,034 $ 34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency obligations............... 480,317 936 (1,222) (286) 480,031
--------- -------- -------- -------- --------
Total........................................... $ 507,351 $ 35,890 $ (1,222) 34,668 $542,019
--------- -------- -------- --------
--------- -------- -------- --------
Estimated tax effect................................. (3,466)
--------
Net unrealized holding gain in
stockholders' equity............................... $ 31,202
--------
--------
</TABLE>
142
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities......................... $ 34,000 $ 80,068 $ -- $ 80,068 $114,068
U.S. government and agency obligations............... 231,794 2,768 (69) 2,699 234,493
--------- -------- -------- -------- --------
Total......................................... $ 265,794 $ 82,836 $ (69) 82,767 $348,561
--------- -------- -------- --------
--------- -------- -------- --------
FDIC portion of unrealized gain on marketable equity
securities......................................... (34,534)
Estimated tax effect................................. (4,822)
--------
Net unrealized holding gain in stockholders'
equity............................................. $ 43,411
--------
--------
</TABLE>
Marketable equity securities available for sale at June 30, 1998 represent
the Bank's investment in Precept Investors, Inc., acquired by the Bank in a
distribution from ACS.
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of ACS, with a cost
basis of $27 million. The ACS stock represents the only marketable equity
security classified as available for sale at December 31, 1996 and 1995.
Pursuant to the terms of a settlement agreement dated June 17, 1991, between the
Bank, ACS, and the FDIC, the FDIC was entitled to share in a defined portion of
the proceeds from the sale of the stock, which, at December 31, 1995,
approximated $34.5 million and which was recorded in other liabilities. On
June 28, 1996, the Bank sold 2,000,000 shares of its investment in common stock
of ACS for gross proceeds totalling $92.3 million from which it satisfied its
full obligation to the FDIC and recognized a pre-tax gain of $40.4 million. The
Bank's remaining shares of ACS stock were sold in October 1997, resulting in a
pre-tax gain of approximately $25.0 million.
Securities Held to Maturity
The following summarizes the amortized cost and estimated fair value of
Golden State Holdings' securities held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. government and
agency obligations .... $-- $-- $-- $-- $ 4 $ 4 $-- $--
Municipal and other
securities............. -- -- -- -- -- -- 1 1
Commercial paper......... 59 58 58 58 -- -- -- --
--- --- --- --- --- --- --- ---
Total.................... $59 $58 $58 $58 $ 4 $ 4 $ 1 $ 1
--- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- ---
</TABLE>
The weighted average stated interest rate on the Bank's securities held to
maturity was 5.09% at June 30, 1998. The weighted average stated interest rate
on the Bank's securities held to maturity was 5.32%, 6.85% and 8.25% at December
31, 1997, 1996 and 1995, respectively.
143
<PAGE>
Mortgage-Backed Securities Available for Sale
The following summarizes the amortized cost and estimated fair value of the
Bank's mortgage-backed securities ("MBS") available for sale at the dates
indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA........................................... $ 246,687 $ 1,658 $ (12) $ 1,646 $ 248,333
FNMA........................................... 2,573,312 14,912 (8,223) 6,689 2,580,001
FHLMC.......................................... 1,241,955 12,937 (2,861) 10,076 1,252,031
Other MBS...................................... 480,181 2,255 (1,555) 700 480,881
Collateralized mortgage obligations............ 3,468,567 12,118 (4,761) 7,357 3,475,924
---------- -------- -------- -------- ----------
Total....................................... $8,010,702 $ 43,880 $(17,412) 26,468 $8,037,170
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect............................. (3,382)
--------
Net unrealized holding gain in
stockholders' equity........................ $ 23,086
--------
--------
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA........................................... $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA........................................... 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC.......................................... 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS...................................... 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage obligations............ 606,965 2,698 (1,868) 830 607,795
---------- -------- -------- -------- ----------
Total....................................... $5,036,653 $ 48,395 $ (8,450) 39,945 $5,076,598
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect............................. (5,105)
--------
Net unrealized holding gain in
stockholders' equity........................ $ 34,840
--------
--------
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA........................................... $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA........................................... 523,894 5,113 (5,042) 71 523,965
FHLMC.......................................... 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage obligations............ 364,675 497 (1,244) (747) 363,928
---------- -------- -------- -------- ----------
Total....................................... $1,581,966 $ 23,377 $ (6,691) 16,686 $1,598,652
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect............................. (1,669)
--------
Net unrealized holding gain in
stockholders' equity........................ $ 15,017
--------
--------
</TABLE>
144
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA........................................... $ 14,018 $ 906 $ -- $ 906 $ 14,924
FNMA........................................... 294,070 5,643 -- 5,643 299,713
FHLMC.......................................... 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations............ 345,699 793 (4,678) (3,885) 341,814
---------- -------- -------- -------- ----------
Total....................................... $1,455,180 $ 27,013 $ (4,679) 22,334 $1,477,514
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect............................. (2,233)
--------
Net unrealized holding gain in stockholders'
equity...................................... $ 20,101
--------
--------
</TABLE>
On December 29, 1995, the Bank reclassified $1.5 billion in carrying value
of mortgage-backed securities from held-to-maturity to mortgage-backed
securities available for sale. This reclassification resulted in a net after-tax
increase in the unrealized gain account in stockholders' equity of
$20.1 million.
At June 30, 1998 and December 31, 1997 and 1996, mortgage-backed securities
available for sale included securities totalling $1.3 billion, $1.4 billion and
$53.0 million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from the Bank's, Old California Federal's and San
Francisco Federal's loan portfolios.
Mortgage-backed securities available for sale included $4.8 billion,
$4.6 billion and $1.1 billion of variable-rate securities as of June 30, 1998
and December 31, 1997 and 1996, respectively.
The Bank maintains a significant portfolio of mortgage-backed securities as
a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and the
credit risk of default which arises in holding a portfolio of loans to maturity.
By investing in mortgage-backed securities, management seeks to achieve a
positive spread over the cost of funds used to purchase these securities.
Mortgage-backed securities available for sale are carried at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment over
the life of the securities using the interest method, with the amortization or
accretion effect of prepayments being adjusted based on revised estimates of
future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings. Mortgage-backed securities issued or guaranteed by GNMA are
generally weighted at 0% for risk-based capital purposes. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in CMOs are generally weighted at 20% for
risk-based capital purposes, compared to a weight of 50% to 100% for residential
loans. See "Regulation--Regulation of the Bank."
The Bank held privately issued CMOs with an aggregate carrying value of
$1.0 billion at June 30, 1998. The largest such investment held by FNH at
June 30, 1998 is a CMO issued by Residential Funding with an aggregate carrying
value and market value of $74.7 million.
At December 31, 1997, all of the mortgage-backed securities held by the
Bank had one of the two highest credit ratings from one or more of the national
securities rating agencies except for $76 million, of which $74 million are
non-rated CMO residual class securities formed by Old California Federal from
its own originations of residential mortgages. Such credit rating, however, may
be subject to revision or withdrawal at any time by such rating agencies. The
mortgage-backed securities which the Bank purchases and maintains in its
portfolio include certain CMOs. A CMO is a special type of pay-through debt
obligation in which the stream of principal and interest payments on the
underlying mortgages or mortgage-backed securities is used to create classes
with different maturities and, in some cases, amortization schedules and a
residual class of the CMO
145
<PAGE>
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal and
interest payments on the underlying mortgage collateral and any reinvestment
earnings thereon, less the cash payments to the CMO holders and any
administrative expenses. As a matter of policy, due to the risk associated with
residual interests, the Bank does not invest in the residual interests of CMOs.
Mortgage-backed Securities Held to Maturity
A summary of the Bank's mortgage-backed securities held to maturity at the
dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA.................. $ 872 $ 890 $ 1,018 $ 1,038 $ 1,214 $ 1,232 $ 533 $ 548
FHLMC................. 269 279 318 333 406 420 988 1,016
Other................. 2 2 2 2 2 2 3 3
------- ------- ------- ------- ------- ------- ------- -------
Total............ $ 1,143 $ 1,171 $ 1,338 $ 1,373 $ 1,622 $ 1,654 $ 1,524 $ 1,567
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
At June 30, 1998, the Bank's mortgage-backed securities held to maturity
had a weighted average stated interest rate of 7.25% and included variable-rate
securities totalling $1.14 billion. The weighted average stated interest rate on
the Bank's mortgage-backed securities held to maturity was 7.33%, 7.27% and
7.46% at December 31, 1997, 1996 and 1995, respectively. At December 31, 1997,
1996 and 1995, mortgage-backed securities held to maturity included variable
rate securities totalling $1.3 billion, $1.6 billion and $1.5 billion,
respectively, which resulted from the securitization with FNMA and FHLMC of
certain qualifying mortgage loans from the Bank's, Old California Federal's and
San Francisco Federal's loan portfolios with full recourse to the Bank.
During the years ended December 31, 1997, 1996 and 1995 and the six months
ended June 30, 1998, the Bank did not sell any of its mortgage-backed securities
held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a decline
other than a temporary decline in value. Permanent declines in value are charged
to income in the periods in which the declines are determined. Premiums and
discounts on the purchase of mortgage-backed securities are amortized or
accreted as a yield adjustment over the life of the securities using the
interest method, with the amortization or accretion effect of prepayments being
adjusted based on revised estimates of future repayments.
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances from
the FHLB of San Francisco, sales, maturities and principal repayments on loans
and mortgage-backed securities and issuances of preferred stock have been the
major sources of funds for use in the Bank's lending and investment activities
and other general business purposes. Management closely monitors rates and terms
of competing sources of funds on a daily basis and utilizes the source which is
most cost-effective. The availability of funds from sales of loans and
securities is influenced by the levels of general interest rates and other
market conditions. For additional information regarding the Bank's sources of
funds, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--FNH--Liquidity" and FNH's Consolidated Statements of Cash
Flows set forth in its Consolidated Financial Statements, which are included
elsewhere in this Prospectus.
146
<PAGE>
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest rates
and money market conditions, and may fluctuate widely. Borrowings may be used to
compensate for reductions in normal sources of funds such as customer deposits.
DEPOSITS
The Bank offers a variety of deposit accounts designed to attract both
short-term and long-term deposits. There are no rate limitations on any type of
deposit account presently offered by the Bank. The ability of the Bank to retain
and attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and prevailing
market conditions. The following table shows the distribution of deposits by
type of account at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
AT
JUNE 30, 1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS
------- ----------- ------- ----------- ------- ----------- ------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts........... $ 2,420 15.1% $ 2,162 13.4% $ 841 10.0% $ 664 6.5%
Demand deposits:
Interest-bearing......... 1,159 7.2 1,149 7.1 510 6.0 684 6.7
Noninterest-bearing...... 1,399 8.7 1,179 7.3 729 8.6 697 6.8
Money market deposit
accounts................. 1,025 6.5 1,270 7.9 881 10.4 1,443 14.2
------- ----- ------- ----- ------- ----- ------- -----
Total transaction
accounts............ 6,003 37.5 5,760 35.7 2,961 35.0 3,488 34.2
Term accounts................. 9,988 62.5 10,390 64.3 5,503 65.0 6,696 65.8
------- ----- ------- ----- ------- ----- ------- -----
15,991 100.0% 16,150 100.0% 8,464 100.0% 10,184 100.0%
----- ----- ----- -----
----- ----- ----- -----
Accrued interest payable...... 52 52 32 51
Purchase accounting
adjustments, net............ 1 1 6 7
------- ------- ------- -------
Total......................... $16,044 $16,203 $ 8,502 $10,242
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Deposit balances, excluding purchase accounting adjustments, averaged
$16.2 billion during the six months ended June 30, 1998, with an average stated
interest rate of 4.43%. The weighted average stated interest rate on deposits at
June 30, 1998 was 4.42%.
Total deposits at December 31, 1997, 1996 and 1995 include escrow balances
for loans serviced for others of $702 million, $550 million and $348 million,
respectively. Deposit balances, excluding purchase accounting adjustments,
averaged $16.7 billion, $9.2 billion and $9.9 billion during 1997, 1996 and
1995, respectively, with average interest rates of 4.55%, 4.66% and 4.67%,
respectively. The weighted average stated interest rates on deposits at
December 31, 1997, 1996 and 1995 were 4.52%, 4.53% and 4.67%, respectively.
147
<PAGE>
The following table presents the average balance and weighted average rate
paid on each deposit type of the Bank for the periods indicated, excluding the
impact of purchase accounting adjustments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS --------------------------------------------------------------------
ENDED
JUNE 30, 1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts........... $ 3,043 2.96% $ 1,874 3.65% $ 1,154 2.72% $ 666 2.20%
Demand deposits:
Interest-bearing......... 457 2.61 1,150 1.07 289 1.87 699 1.00
Noninterest-bearing...... 1,430 -- 1,280 -- 825 -- 583 --
Money market deposit
accounts................. 1,116 3.45 1,408 3.56 946 3.39 1,581 3.22
Term accounts................. 10,159 5.68 11,008 5.73 6,032 6.00 6,398 6.10
------- ----- ------- ----- ------- ----- ------- -----
Total......................... $16,205 4.43% $16,720 4.55% $ 9,246 4.66% $ 9,927 4.67%
------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
The following table sets forth the scheduled maturities of the Bank's term
accounts by stated interest rate at December 31, 1997:
<TABLE>
<CAPTION>
2001 AND
1998 1999 2000 THEREAFTER TOTAL
------ ------ ---- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less.................................................... $ 1 $ -- $ -- $ -- $ 1
3.01 - 4.00%..................................................... -- -- -- -- --
4.01 - 5.00%..................................................... 229 13 -- 1 243
5.01 - 6.00%..................................................... 6,753 1,776 80 119 8,728
6.01 - 7.00%..................................................... 754 249 102 145 1,250
7.01 - 8.00%..................................................... 50 23 37 44 154
8.01 - 9.00%..................................................... 6 5 -- -- 11
9.01 - 10.00%.................................................... 2 -- -- -- 2
Over 10.00%...................................................... -- -- 1 -- 1
------ ------ ---- ---- -------
Total term accounts............................................ $7,795 $2,066 $220 $309 $10,390
------ ------ ---- ---- -------
------ ------ ---- ---- -------
</TABLE>
The following table sets forth remaining maturities for the Bank's term
deposits in amounts of $100,000 or more at December 31, 1997 (in millions):
<TABLE>
<S> <C>
3 months or less.......................................................................... $ 501
Over 3 months but within 6 months......................................................... 242
Over 6 months but within 12 months........................................................ 729
Over 12 months............................................................................ 508
------
$1,980
------
------
</TABLE>
At December 31, 1997, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger at FNH was $1.98 billion, compared with
$871 million and $690 million at December 31, 1996 and 1995, respectively.
Deposits held by foreign investors at the Bank totalled $93 million,
$58 million and $63 million at December 31, 1997, 1996 and 1995, respectively.
The Bank's deposit accounts are held primarily by individuals residing in
the vicinity of its retail branch offices located in California, Florida and
Nevada. The Bank has emphasized, and will continue to emphasize, a retail branch
network for attracting deposits. Key market areas, particularly the West Coast
region, will continue to be targeted for expansion of retail deposits and the
cross-selling of additional consumer products.
148
<PAGE>
When cost-effective relative to other sources of funding, the Bank issues
certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base. While
these funds are generally more costly than traditional passbook and money market
deposits and more volatile as a source of funds because of their sensitivity to
the rates offered, they supplement retail customer deposits in raising funds for
financing and liquidity purposes. At June 30, 1998, the Bank had $241.3 million
of Brokered Deposits outstanding, representing 1.51% of total deposits.
Borrowings
FNH and the Bank utilize various borrowings as alternative sources of funds
for its business needs. These sources have included securities sold under
agreements to repurchase, FHLB advances, subordinated debentures and the
purchase of federal funds.
Short-term Borrowings
Short-term borrowings consist of (i) securities sold under agreements to
repurchase, (ii) federal funds purchased and (iii) short-term FHLB advances.
These instruments are discussed more fully in the subsequent sections.
The following table sets forth for the Bank each category of borrowings due
within one year: (i) for the periods presented, the average amount outstanding,
the maximum amount outstanding at any month end and the average interest rate
paid, and (ii) at period end, the amount outstanding and average interest rate
paid. Amounts and rates reflected in the table exclude accrued interest payable
and purchase accounting adjustments.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEAR
SIX MONTHS ENDED DECEMBER 31,
ENDED JUNE 30 --------------------------
1998 1997 1996 1995
---------------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding..................................... $1,930 $2,275 $1,931 $1,351
Maximum amount outstanding at any month end during the period... 2,850 2,870 2,424 1,965
Balance outstanding at end of period............................ 2,850 1,829 1,510 698
Average interest rate during the period......................... 5.63% 5.68% 5.70% 6.53%
Average interest rate at end of period.......................... 5.59% 5.78% 5.88% 6.06%
Federal funds purchased:
Average balance outstanding..................................... $ 85 $ 95 $ 65 $ 37
Maximum amount outstanding at any month end during the period... 220 153 135 75
Balance outstanding at end of period............................ 185 130 25 55
Average interest rate during the period......................... 5.42% 5.59% 5.41% 6.09%
Average interest rate at end of period.......................... 6.00% 6.50% 7.50% 6.00%
FHLB advances:
Average balance outstanding..................................... $5,040 $5,561 $2,455 $ 862
Maximum amount outstanding at any month end during the period... 5,962 6,606 3,141 1,487
Balance outstanding at end of period............................ 4,120 5,263 2,741 1,487
Average interest rate during the period......................... 5.72% 5.76% 5.83% 7.19%
Average interest rate at end of period.......................... 5.72% 5.88% 5.78% 6.12%
</TABLE>
At December 31, 1997, the Bank had an estimated additional secured
borrowing capacity of $4.9 billion with the FHLB and other sources. These
collateralized funding sources may also be used to satisfy other funding
requirements.
149
<PAGE>
Securities Sold Under Agreements to Repurchase
The Bank enters into reverse repurchase agreements whereby it sells
marketable U.S. government and mortgage-backed securities and CMOs with a
commitment to repurchase the securities at a specified price and on a specified
date. These agreements are recorded as financings, and the obligation to
repurchase assets sold is reflected as a liability on the consolidated balance
sheet. The dollar amount of assets underlying the agreements remains in the
asset accounts. The securities underlying the agreements are delivered to the
dealers who arranged the transactions. The counterparty to the repurchase
agreement may have loaned the securities to other parties in the normal course
of their operations; however, all agreements require that the identical
securities be resold to the Bank at the maturity of the agreements. In order to
reduce possible risks associated with these borrowing transactions, the reverse
repurchase agreements are generally entered into with national investment
banking firms and major commercial banks which are primary dealers in these
securities.
Federal Funds Purchased
The Bank must meet legal reserve requirements on a daily basis by
(i) maintaining a specified total amount of deposits at the Federal Reserve Bank
and (ii) vault cash. Occasionally, the Bank may borrow funds from another bank
with excess reserves to meet its requirements for the day. These borrowings are
repaid with interest at maturity based on the federal funds rate. The Bank
places U.S. government securities in a custody account for the seller until the
funds are repaid and records a liability on its books.
FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A savings association may generally
borrow from its district FHLB through advances secured by its home mortgages and
other assets (principally securities which are obligations of, or guaranteed by,
the U.S. government). A savings association is required to hold a minimum amount
of capital stock of the FHLB based upon a percentage of its outstanding home
mortgage loans and similar obligations, a percentage of its outstanding advances
from the FHLB or a certain percentage of total assets. Such advances may be made
pursuant to several different credit programs made available from time to time
by the FHLB to meet seasonal activity and other withdrawals of deposit accounts
and to expand lending, each of which has its own interest rate and range of
maturities. The FHLB prescribes the acceptable uses, as well as limitations on
the size of such advances. Depending on the program, such limitations are based
either on a fixed percentage of the institution's net worth or on the FHLB's
assessment of the institution's creditworthiness.
The following table presents the carrying value and weighted average rate
paid on FHLB advances for the periods indicated, excluding accrued interest
payable and the impact of purchase accounting adjustments (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE VALUE RATE
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Fixed-rate borrowings............................... $5,447 5.88% $3,565 5.93% $1,790 6.68%
Variable-rate borrowings............................ 4,074 5.95 854 5.67 250 6.02
------ ----- ------ ----- ------ -----
Total FHLB advances............................ $9,521 5.91% $4,419 5.88% $2,040 6.60%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
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The following table sets forth remaining maturities and weighted average
stated interest rates of FHLB advances at December 31, 1997, not including
accrued interest payable or purchase accounting adjustments (dollars in
millions):
<TABLE>
<CAPTION>
BALANCE WEIGHTED
MATURING AVERAGE RATE
-------- ------------
<S> <C> <C>
1998................................................................ $5,263 5.88%
1999................................................................ 3,090 5.94
2000................................................................ 1,150 5.93
2001................................................................ 11 6.50
2002................................................................ 5 6.94
2003 and thereafter................................................. 2 7.83
------ ----
$9,521 5.91%
------ ----
------ ----
</TABLE>
During 1995, the Bank prepaid $250 million in FHLB advances resulting in a
$2 million extraordinary gain on the early extinguishment of debt, net of tax.
Interest Rate Swap Agreements
The Bank has used interest rate swap agreements to adjust its interest rate
risk exposure on fixed rate FHLB advances. The Bank had no interest rate swap
agreements outstanding at June 30, 1998. The notional amount does not represent
amounts exchanged by the parties and thus, is not a measure of the Bank's
exposure. The Bank pays the variable rate and receives the fixed rate based on
LIBOR under these agreements. The differential between these two amounts may
change significantly in the future due to fluctuations in market interest rates.
In order to reduce possible counterparty nonperformance risk, the Bank has
entered into interest rate swap agreements only with national investment banking
firms and the FHLB of San Francisco.
FNH 12 1/4% Senior Notes
In connection with the FN Acquisition, FNH issued $200 million principal
amount of the FNH 12 1/4% Senior Notes, including $5.5 million principal amount
of FNH Senior Notes to certain directors and officers of the Bank. The FNH
12 1/4% Senior Notes will mature on May 15, 2001 with interest payable
semiannually from May 15 and November 15. Deferred issuance costs associated
with the FNH 12 1/4% Senior Notes' issuance totalling $9.9 million were recorded
in other assets and are being amortized over the term of the FNH 12 1/4% Senior
Notes.
The FNH 12 1/4% Senior Notes are redeemable at the option of FNH, in whole
or in part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The notes are subordinated to all
existing and future liabilities, including deposits and other borrowings of the
Bank, the Bank Preferred Stock and the REIT Preferred Stock.
In connection with the FNH Asset Transfer, Golden State Holdings assumed
the obligations of FNH under the FNH 12 1/4% Senior Notes and the related
indenture. The terms and conditions of the FNH 12 1/4% Senior Notes indenture
impose restrictions that affect the ability of Golden State Holdings to sell
assets and merge with others. At October , 1998, $ million of the FNH
12 1/4% Senior Notes were outstanding.
FNH 9 1/8% Senior Subordinated Notes
On January 31, 1996, FNH issued $140 million principal amount of the FNH
9 1/8% Senior Subordinated Notes. The FNH 9 1/8% Senior Subordinated Notes will
mature on January 15, 2003 with interest payable semiannually on January 15 and
July 15. Deferred issuance costs associated with the issuance of the FNH 9 1/8%
Senior Subordinated Notes totalling $7.0 million were recorded in other assets
and are being amortized over the term of the FNH 9 1/8% Senior Subordinated
Notes.
The FNH 9 1/8% Senior Subordinated Notes are redeemable at the option of
FNH, in whole or in part, during the 12-month period beginning January 1, 2001,
at a redemption price of 104.5625% of the principal amount
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thereof, plus accrued interest and unpaid interest to the date of redemption,
and thereafter at 100% of the principal amount thereof, plus accrued and unpaid
interest.
The FNH 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of FNH and are subordinated in right of payment to all existing and
future senior indebtedness of FNH and to all future subordinated debt, if any is
issued. The FNH 9 1/8% Senior Subordinated Notes are subordinated to all
existing and future liabilities, including deposits, indebtedness and trade
payables of FNH's subsidiaries, including the Bank, and to the Bank Preferred
Stock and the REIT Preferred Stock.
In connection with the FNH Asset Transfer, Golden State Holdings assumed
the obligations of FNH under the FNH 9 1/8% Senior Subordinated Notes and the
related indenture. The terms and conditions of the FNH 9 1/8% Senior
Subordinated Notes indenture impose restrictions that affect the ability of
Golden State Holdings to sell assets and merge with others. At October ,
1998, $ million of the FNH 9 1/8% Senior Subordinated Notes were
outstanding.
FNH 10 5/8% Senior Subordinated Notes
In connection with the Cal Fed Acquisition, FNH acquired the net proceeds
from the issuance of First Nationwide Escrow's 10 5/8% Senior Subordinated Notes
and assumed First Nationwide Escrow's obligations under the FNH 10 5/8% Senior
Subordinated Notes and indenture. Deferred issuance costs associated with the
FNH 10 5/8% Senior Subordinated Notes of $19 million, recorded in other assets,
are being amortized over the term of the FNH 10 5/8% Senior Subordinated Notes.
The FNH 10 5/8% Senior Subordinated Notes are redeemable at the option of
FNH, in whole or in part, during the 12-month period beginning January 1, 2001,
at a redemption price of 105.313% plus accrued and unpaid interest to the date
of redemption, during the 12-month period beginning January 1, 2002 at a
redemption price of 102.656% plus accrued and unpaid interest to the date of
redemption, and thereafter at 100% plus accrued and unpaid interest to the date
of the redemption.
The FNH 10 5/8% Senior Subordinated Notes are subordinate in right of
payment to all existing and future subordinated debt, if any is issued, of FNH.
The FNH 10 5/8% Senior Subordinated Notes are subordinated to all existing and
future liabilities, including deposits, indebtedness and trade payables, of the
subsidiaries of FNH, including the Bank Preferred Stock and REIT Preferred
Stock.
In connection with the FNH Asset Transfer, Golden State Holdings assumed
the obligations of FNH under the FNH 10 5/8% Senior Subordinated Notes and the
related indenture. The terms and conditions of the FNH 10 5/8% Senior
Subordinated Notes indenture impose restrictions that affect the ability of
Golden State Holdings to sell assets and merge with others. At October ,
1998, $ million of the FNH 10 5/8% Senior Subordinated Notes were
outstanding.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, the Bank assumed subordinated debentures,
which bear interest at 10% per annum and mature on October 1, 2006 (the "10%
Subordinated Debentures Due 2006"). At June 30, 1998, the aggregate principal
amount of the 10% Subordinated Debentures Due 2006 outstanding was
$92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things:
(i) a default in the payment of interest when due and such default continues for
30 days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 notify the Bank of the default and the Bank
does not cure the default within 60 days after receipt of such notice,
(iv) certain events of bankruptcy, insolvency or reorganization of the Bank,
(v) the FSLIC/RF (or a comparable entity) is appointed to act as conservator,
liquidator, receiver or other legal custodian for the Bank and (vi) a default
under other indebtedness of the Bank in excess of $10 million resulting in such
indebtedness becoming due and payable, and such default or acceleration has not
been rescinded or annulled within 60 days after the date on which written notice
of such failure has been given by the trustee to the Bank or by holders of at
least 25% in principal amount of the outstanding 10% Subordinated Debentures Due
2006 to the Bank and the trustee.
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11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, the Bank assumed $50 million of SFFed
11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). In
connection with the assumption of the 11.20% Senior Notes, the Bank and all of
the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, the Bank repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal amount,
plus the accrued interest thereon. The Bank recorded an extraordinary loss, net
of tax, of $1.6 million in connection with such repurchase. At June 30, 1998,
the aggregate principal amount of the 11.20% Senior Notes outstanding was
$6.0 million.
Events of Default under the note purchase agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within
15 days after the date such payment was due; (iii) failure to comply with
certain covenants in the Note Purchase Agreement, provided that such failure
continues for more than 60 days; (iv) failure to deliver to holders a notice of
default, notice of event of default, or notice of claimed default as provided in
the Note Purchase Agreement; (v) failure to comply with any provision of the
Note Purchase Agreement, provided that such failure continues for more than
60 days after notice is delivered to the Bank; (vi) a default under other
indebtedness provided that the aggregate amount of all obligations in respect of
such indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against the Bank or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by the Bank or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following three debt securities of Old California Federal:
10.668% Subordinated Notes Due 1998
The Bank assumed 10.668% unsecured senior subordinated notes which mature
on December 22, 1998 (the "10.668% Subordinated Notes"). At June 30, 1998, the
aggregate principal amount of the notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to the Bank; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of the Bank and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of the Bank.
6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due
February 20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a
result of a corporate restructuring in December 1992, Cal Fed Inc. was merged
with and into XCF Acceptance Corporation ("XCF"), a subsidiary of Old California
Federal. The 6 1/2% Convertible Subordinated Debentures are redeemable at the
option of the holders on February 20, 2000, at 123% of their principal amount.
At June 30, 1998, $2.6 million of the 6 1/2% Convertible Subordinated Debentures
were outstanding. Due to the purchase of all of the Cal Fed stock by FNH in the
Cal Fed Acquisition on January 3, 1997, the common stock conversion feature has
been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make any
payment of interest when due and such payment is not made
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<PAGE>
within 30 days after the date such payment was due; (ii) failure to make any
payment of principal when due; (iii) default in the performance, or breach, of
any covenant or warranty in the indenture, provided that such default or breach
continues for more than 60 days after notice is delivered to the Bank; or
(iv) certain events of bankruptcy, insolvency or reorganization of the Bank or
its subsidiaries.
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures Due
2003"). During 1996 and 1995, Old California Federal repurchased $0.6 million
and $8.7 million, respectively, of the debentures, leaving $4.3 million
outstanding at June 30, 1998.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2003 include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was due;
(iii) failure to comply with certain covenants in the indenture; (iv) failure to
comply with certain covenants in the indenture provided that such failure
continues for more than 60 days after notice is delivered to the Bank;
(v) certain events of bankruptcy, insolvency or reorganization of the Bank; or
(vi) the default or any event which, with the giving of notice or lapse of time
or both, would constitute a default under any indebtedness of the Bank and cause
such indebtedness with an aggregate principal amount exceeding $15 million to
accelerate.
11 1/2% Preferred Stock--Minority Interest
In connection with the FN Acquisition, Cal Fed issued 3,007,300 shares of
the 11 1/2% Preferred Stock. The 11 1/2% Preferred Stock has a stated
liquidation value of $100 per share, plus declared and unpaid dividends, if any.
Cash dividends are noncumulative and are payable at an annual rate of 11 1/2%
per share if, when and as declared by the Board of Directors of the Bank.
The 11 1/2% Preferred Stock ranks prior to the common stock of the Bank and
to all other classes and series of equity securities subsequently issued, other
than any class or series expressly designated as being on a parity with or
senior to the 11 1/2% Preferred Stock as to dividends and liquidating
distributions. The 10 5/8% Preferred Stock ranks on a parity with the 11 1/2%
Preferred Stock as to dividends and liquidating distributions.
The terms of the 11 1/2% Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other classes of equity securities of the Bank
ranking junior to the 11 1/2% Preferred Stock (collectively, "Junior Stock"))
with respect to any Junior Stock or redeem or otherwise acquire, or set apart
funds for the repurchase, redemption or other acquisition of any Junior Stock
(including the common stock held by FNH), through a sinking fund or otherwise,
unless and until: (i) the Bank has paid full dividends on the 11 1/2% Preferred
Stock for the four most recent dividend periods, or funds have been paid over to
the dividend disbursing agent of the Bank for payment of such dividends, and
(ii) the Bank has declared a cash dividend on the 11 1/2% Preferred Stock at the
annual dividend rate for the current dividend period, and sufficient funds have
been paid over to the dividend disbursing agent of the Bank for the payment of a
cash dividend for such current dividend period. The Bank is currently in
compliance with both of such requirements.
Except in the event of a change of control, the 11 1/2% Preferred Stock is
not redeemable prior to September 1, 1999. The 11 1/2% Preferred Stock is
redeemable solely at the option of the Bank or its successor or any acquiring or
resulting entity with respect to the Bank (including by any parent or subsidiary
of the Bank, any such successor, or any such acquiring or resulting entity), as
applicable, at any time on and after September 1, 1999, in whole or in part, at
$105.75 per share on or after September 1, 1999 and prior to September 1, 2000,
and at prices decreasing pro rata annually thereafter to the stated liquidation
value of $100 per share on or after September 1, 2004, plus declared and unpaid
dividends, if any, without interest. Upon a change of control, the 11 1/2%
Preferred Stock is redeemable on or prior to September 1, 1999 at the option of
the Bank or its successor or any acquiring or resulting entity with respect to
the Bank (including by any parent or subsidiary of the Bank, any such successor,
or any such acquiring or resulting entity), as applicable, in whole, but not in
part, at a price per share equal to: (i) $100, plus (ii) an amount equal to
declared and unpaid dividends, if any, to the date fixed for redemption, without
interest, and without duplication, an additional amount equal to the amount of
dividends that
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<PAGE>
would be payable on the 11 1/2% Preferred Stock in respect of the period from
the first day of the dividend period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such dividends were to be
declared), plus (iii) a specified make whole premium.
Each share of 11 1/2% Bank Preferred Stock entitles the holder thereof to
one vote and holders thereof will vote together as a single class with the
holders of the common stock of the Bank, the 10 5/8% Preferred Stock, the CALGZs
and the CALGLs. In addition, holders of the 11 1/2% Bank Preferred Stock are
entitled to vote as a class in certain limited circumstances or as required by
law.
10 5/8% Preferred Stock--Minority Interest
In connection with the Cal Fed Acquisition, the Bank assumed Old California
Federal's 10 5/8% Preferred Stock. The 10 5/8% Preferred Stock has a stated
liquidation value of $100 per share, plus declared and unpaid dividends, if any,
without interest. Cash dividends are noncumulative and are payable at an annual
rate of 10 5/8% per share if, when and as declared by the Board of Directors of
the Bank.
The 10 5/8% Preferred Stock ranks prior to the common stock of the Bank and
to all other classes and series of equity securities subsequently issued, other
than any class or series expressly designated as being on a parity with or
senior to the 10 5/8% Preferred Stock as to dividends and liquidating
distributions. The 11 1/2% Preferred Stock ranks on a parity with the 10 5/8%
Preferred Stock as to dividends and liquidating distributions.
The terms of the 10 5/8% Preferred Stock provide that the Bank may not
declare or pay any full dividends with respect to any parity stock, such as the
11 1/2% Preferred Stock, unless and until the Bank has paid full dividends on
the 10 5/8% Preferred Stock for the most recent dividend period.
The terms of the 10 5/8% Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other Junior Stock) with respect to any Junior Stock
or repurchase, redeem or otherwise acquire, or set apart funds for the
repurchase, redemption or other acquisition of, any Junior Stock through a
sinking fund or otherwise, unless and until: (i) the Bank has paid full
dividends on the 10 5/8% Preferred Stock for the four most recent dividend
periods, or funds have been paid over to the dividend disbursing agent of the
Bank for payment of such dividends, and (ii) the Bank has declared a cash
dividend on the 10 5/8% Preferred Stock at the annual dividend rate for the
current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent of the Bank for the payment of a cash dividend for
such current period. The Bank is currently in compliance with both of such
requirements.
Except in the event of a change of control, the 10 5/8% Preferred Stock is
not redeemable prior to April 1, 1999. The 10 5/8% Preferred Stock is redeemable
solely at the option of the Bank or its successor or any acquiring or resulting
entity with respect to the Bank (including by any parent or subsidiary of the
Bank, any such successor or any such acquiring or resulting entity), as
applicable, at any time on or after April 1, 1999, in whole or in part, at
$105.313 per share on or after April 1, 1999 and prior to April 1, 2000, and at
prices decreasing pro rata annually thereafter to a stated liquidation value of
$100 per share on or after April 1, 2003, plus declared and unpaid dividends, if
any, without interest. Upon a change in control, the 10 5/8% Preferred Stock is
redeemable on or prior to April 1, 1999 at the option of the Bank or its
successor or any acquiring or resulting entity with respect to the Bank
(including by any parent or subsidiary of the Bank, any such successor, or any
such acquiring or resulting entity), as applicable, in whole, but not in part,
at a price per share equal to $114.50, plus an amount equal to declared and
unpaid dividends (whether or not declared) from the date of consummation of the
change of control to the date fixed for redemption, without interest.
Each share of 10 5/8% Preferred Stock entitles the holder thereof to one
vote and holders thereof will vote together as a single class with the holders
of the common stock of the Bank, the 11 1/2% Preferred Stock, the CALGZs and the
CALGLs. In addition, holders of the 10 5/8% Preferred Stock are entitled to vote
as a class in certain limited circumstances or as required by law.
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REIT Preferred Stock--Minority Interest
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
REIT Preferred Stock. The REIT Preferred Stock has a stated liquidation value of
$25 per share, plus declared and unpaid dividends, if any. Cash dividends are
noncumulative and are payable at an annual rate of 9 1/8% per share if, when and
as declared by the Board of Directors of Preferred Capital Corp.
The REIT Preferred Stock ranks prior to the common stock of Preferred
Capital Corp. and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the REIT Preferred Stock as to dividends and
liquidating distributions.
The terms of the REIT Preferred Stock provide that Preferred Capital Corp.
may not declare or pay any dividends or other distributions (other than in
shares of common stock of Preferred Capital Corp. or other classes of equity
securities of Preferred Capital Corp. ranking junior to the REIT Preferred
Stock) with respect to any Preferred Capital Corp. junior stock or repurchase,
redeem or otherwise acquire, or set apart funds for the repurchase, redemption
or other acquisition of any Preferred Capital Corp. junior stock (including the
common stock held by the Bank) through a sinking fund or otherwise, unless and
until: (i) Preferred Capital Corp. has paid in full dividends on the REIT
Preferred Stock for the four most recent dividend periods (or such lesser number
of dividend periods during which shares of REIT Preferred Stock have been
outstanding), or funds have been paid over to the dividend disbursing agent of
Preferred Capital Corp. for payment of such dividends, and (ii) Preferred
Capital Corp. has declared a cash dividend on the REIT Preferred Stock at the
annual dividend rate for the current dividend period, and sufficient funds have
been paid over to the dividend disbursing agent of Preferred Capital Corp. for
the payment of a cash dividend for such current dividend period. The initial
dividend payment date was March 31, 1997. Preferred Capital Corp. is currently
in compliance with both such requirements.
Holders of the REIT Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control or upon certain tax events, the
REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT
Preferred Stock is redeemable solely at the option of Preferred Capital Corp. or
its successor or any acquiring or resulting entity with respect to Preferred
Capital Corp. (including by any parent or subsidiary of Preferred Capital Corp.,
any such successor or any such acquiring or resulting entity), as applicable, at
any time on and after January 31, 2002 in whole or in part, at $26.14 per share
on or after January 31, 2002 and prior to January 31, 2003, and at prices
decreasing pro rata annually thereafter to the stated liquidation value of $25
per share on or after January 31, 2007, plus declared and unpaid dividends, if
any, without interest. Upon a change of control, the REIT Preferred Stock is
redeemable on or prior to January 31, 2002 at the option of Preferred Capital
Corp. or its successor or any acquiring or resulting entity with respect to the
Bank (including by any parent or subsidiary of Preferred Capital Corp., any such
successor or any such acquiring or resulting entity), as applicable, in whole,
but not in part, at a price per share equal to: (i) $25, plus (ii) an amount
equal to declared and unpaid dividends, if any, to the date fixed for
redemption, without interest, and without duplication, an additional amount
equal to the amount of dividends that would be payable on the REIT Preferred
Stock in respect of the period from the first day of the dividend period in
which the date fixed for redemption occurs to the date fixed for redemption
(assuming all such dividends were to be declared), plus (iii) a specified make
whole premium.
Each share of REIT Preferred Stock will be exchanged automatically for one
newly issued share of preferred stock of the Bank having substantially the same
terms as the REIT Preferred Stock (the "9 1/8% Preferred Stock") if the
appropriate federal regulatory agency directs in writing such exchange because
(i) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or receivership or
(iii) the appropriate federal regulatory agency, in its sole discretion,
anticipates the Bank becoming "undercapitalized" in the near term. If issued,
the 9 1/8% Preferred Stock will rank on a parity with the Bank Preferred Stock.
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OTHER ACTIVITIES
Cal Fed Contingent Litigation Recovery Participation Interests. In July
1995, Old California Federal distributed to its common shareholders its CALGZs,
each entitling the holder thereof to receive an amount (the aggregate of such
payments being referred to as the "Recovery Payment") equal to five millionths
of one percent (0.000005%) of the cash payment (the "Cash Payment"), if any,
actually received by the Bank pursuant to a final, nonappealable judgment in or
final settlement of its claim against the United States in the lawsuit,
California Federal Bank v. United States, Civil Action No. 92-138C (the
"California Federal Litigation"), after deduction of (i) the aggregate expenses
incurred by the Bank in prosecuting the California Federal Litigation and
obtaining such Cash Payment, including, but not limited to, a portion of the
annual salaries in the aggregate amount of $1,000,000, an incentive fee in the
amount of 0.25% of the aggregate value of the pre-tax recovery from the
California Federal Litigation, annual pension benefits aggregating $1,325,000,
and certain medical benefits and expenses, for Messrs. Trafton and Fink under
the Litigation Management Agreement, (ii) any income tax liability of the Bank,
computed on a pro forma basis, as a result of the Bank's receipt of such Cash
Payment (net of any income tax benefit to the Bank from making the Recovery
Payment, and disregarding for purposes of this clause (ii) the effect of any net
operating loss carryforwards or other tax attributes held by the Bank or any of
its subsidiaries or affiliated entities) and (iii) the expenses incurred by the
Bank in connection with the creation, issuance and trading of the CALGZs,
including without limitation, legal and accounting fees and the fees and
expenses of the interest agent.
Pursuant to the Old Cal Fed Merger Agreement, Old Cal Fed distributed to
common shareholders entitled to receive the merger consideration one-tenth of a
Secondary Contingent Litigation Recovery Participation Interest (the "CALGLs")
for each share of Old Cal Fed common stock held. Each CALGL will entitle the
holder thereof to receive an amount equal to twenty millionths of one percent
(0.000020%) of the "Secondary Recovery Payment," if any, as defined below.
"Secondary Recovery Payment" means sixty percent (60%) of the amount obtained
from the following equation: (A) the Cash Payment, if any, actually received by
the Bank in respect of a final, nonappealable judgment in or final settlement of
the California Federal Litigation, minus (B) the sum of the following: (i) the
aggregate expenses incurred by the Bank in prosecuting the California Federal
Litigation and obtaining such Cash Payment, including, but not limited to, a
portion of the annual salaries in the aggregate amount of $1,000,000, an
incentive fee in the amount of 0.25% of the aggregate value of the pre-tax
recovery from the California Federal Litigation, annual pension benefits
aggregating $1,325,000, and certain medical benefits and expenses, for Messrs.
Trafton and Fink under the Litigation Management Agreement, (ii) any income tax
liability of the Bank, computed on a pro forma basis, as a result of the Bank's
receipt of such Cash Payment (net of any income tax benefit to the Bank,
computed on a pro forma basis, from the payment of a portion of the Secondary
Recovery Payment to the holders of CALGLs), (iii) the expenses incurred by the
Bank in connection with the creation, issuance and trading of the CALGZs and the
CALGLs, including without limitation, legal and accounting fees and the fees and
expenses of the interest agent, (iv) the payment due to the holders of the
CALGZs and (v) one hundred twenty-five million dollars ($125,000,000). "Income
tax liability of the Bank computed on a pro forma basis" means the aggregate
amount of any and all relevant items of income, gain, loss, or deduction
associated with the receipt by the Bank of the Cash Payment multiplied by the
highest, combined marginal rate of federal, state and local income taxes in the
relevant year and disregarding for purposes of such computation the effect of
any net operating loss carryforwards or other tax attributes of the Bank or any
of its subsidiaries or affiliated entities. "Income tax benefit to the Bank
computed on a pro forma basis" means the aggregate amount of any and all
relevant items of income, gain, loss, or deduction associated with the payment
by the Bank of the Secondary Recovery Payment multiplied by the highest,
combined marginal rate of federal, state and local income taxes in the relevant
year and disregarding for purposes of such computation the effect of any net
operating loss carryforwards or other tax attributes of the Bank or any of its
subsidiaries or affiliated entities. Any distribution with respect to the CALGZs
will be subject to the OTS capital distribution regulations.
Holders of the CALGZs and the CALGLs are entitled to vote together as a
single class with the holders of the common stock of the Bank, the 11 1/2%
Preferred Stock and the 10 5/8% Preferred Stock, with each CALGL and CALGZ
entitling the holder thereof to 1/5 of one vote.
157
<PAGE>
In the California Federal Litigation, the Bank alleges, among other things,
that the United States breached certain contractual commitments regarding the
computation of its regulatory capital for which the Bank seeks damages and
restitution. The Bank's claims arose from changes, mandated by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), with
respect to the rules for computing Old California Federal's regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings for
a determination of the appropriate measure and amount of damages, which to date
have not been awarded.
On October 30, 1996, Old California Federal filed a motion for partial
summary judgment as to the Federal government's liability to the Bank for breach
of contract, which was opposed by the Federal government. In addition, the
government filed a cross-motion for partial summary judgment as to certain
liability issues. A hearing on the motions for partial summary judgment on
liability was held on August 7, 1997. On December 22, 1997, a U.S. Claims Court
Judge ruled in favor of this motion to establish the government's liability, and
a formal order in that regard was subsequently issued on July 16, 1998. The
trial of the damages phase of the Bank's case has been scheduled to begin in
December 1998.
In connection with the Cal Fed Acquisition, the Bank recorded as an asset
part of the estimated after-tax cash recovery from the California Federal
Litigation that will inure to the Bank, net of amounts payable to holders of the
CALGZs and the CALGLs in any such recovery (the "Goodwill Litigation Asset").
The Goodwill Litigation Asset was recorded at its estimated fair value of
$100 million, net of estimated tax liabilities, as of January 3, 1997, and is
included in the audited consolidated balance sheet as of December 31, 1997.
The Put Agreement
In connection with the FN Acquisition, Granite and the Bank entered into
the Put Agreement. Pursuant to the Put Agreement, the Bank had the right, on a
quarterly basis (the "Put Option"), to require Granite to purchase certain
commercial real estate loans, commercial real estate loans serviced by others
and 1-4 unit residential loans with an original principal balance greater than
$250,000, and to take certain actions to protect the Bank from losses with
respect to certain Letters of Credit ("LOC") transactions, in each case, only if
such asset was purchased by the Bank from Old FNB pursuant to the Asset Purchase
Agreement. The Put Option expired on November 30, 1996. The balance available
under the Put Agreement ($500 million) was fully utilized by the Bank prior to
the expiration of the Put Option.
The Assistance Agreement
The Texas Closed Branches were purchased effective December 28, 1988
pursuant to five acquisition agreements and the Assistance Agreement among the
FSLIC/RF, the Bank, and certain affiliates of the Bank. The Assistance Agreement
generally provided for guaranteed yield amounts to be paid on the book value of
the Covered Assets, and paid for 90% of the losses incurred upon disposition of
the Covered Assets. The remaining 10% not reimbursed, net of 10% of all asset
recoveries and certain agreed-upon Covered Asset disposition fees ("Shared
Gain"), was remitted quarterly to the FSLIC/RF.
In 1995, the FDIC, acting as manager for the FSLIC/RF, exercised its right
under the Assistance Agreement to purchase substantially all of the remaining
Covered Assets at the fair market value of such assets (the "FDIC Purchase").
Under the terms of the Assistance Agreement, losses sustained by the Bank from
the FDIC Purchase were reimbursed by the FSLIC/RF. There was no material impact
on the consolidated financial statements of the Bank as a result of the FDIC
Purchase.
158
<PAGE>
On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of
$39 million and, among other things, assumed the responsibility for the
disposition of several litigation matters involving Covered Assets which had
been retained by the Bank following the FDIC Purchase. The Bank recorded a gain
of $25.6 million as a result of this settlement.
FGB Realty Advisors, Inc.
FGB Realty Advisors, Inc. ("FGB Realty"), a wholly owned subsidiary of the
Bank, previously provided asset management, disposition and advisory services to
institutional owners of real estate. Fee revenues from unaffiliated parties were
$1.7 million, $10.1 million, and $14.0 million for the years ended December 31,
1997, 1996, and 1995, respectively. These revenues are included in management
fees in Golden State Holdings' respective consolidated statements of income.
During 1997, substantially all the asset management and disposition contracts
held by FGB Realty have expired, and operations of this subsidiary have
substantially ceased.
Cal Fed Investments
Cal Fed Investments ("CFI"), a wholly owned subsidiary of the Bank which
was acquired as part of the FN Acquisition, offers securities and insurance
products to both existing and prospective customers of the Bank. CFI is subject
to the guidelines established by the OTS for broker-dealer subsidiaries of
savings associations, and is a member of the National Association of Securities
Dealers. In addition, CFI is registered as a broker-dealer with the Securities
and Exchange Commission and the Securities Investor Protection Corporation. CFI
receives commission revenue for acting as a broker-dealer on behalf of its
customers, but CFI does not maintain customer accounts or take possession of
customer securities. Commission revenues of $27.5 million, $10.0 million and
$8.5 million for the years ended December 31, 1997, 1996 and 1995, respectively,
are included in fees and service charges in Golden State Holdings' consolidated
statements of income for such years.
DIVIDEND POLICY OF THE BANK
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors: (i) the quality and stability of the Bank's
net income, (ii) the availability of liquid assets to make dividend payments,
(iii) the level of earnings retention as it impacts the Bank's capital needs and
projected growth and funding levels, both internal and external, and (iv) the
adequacy of capital after the payment of a dividend. Under the Bank's dividend
policy, a dividend will not be declared or paid which would: (i) cause the
capital level of the Bank to be reduced below "adequately capitalized" levels,
or (ii), together with any other dividends declared during the same calendar
year, exceed 100% of the net income to date for that calendar year plus 50% of
the Bank's surplus capital at the beginning of that calendar year, so long as
the Bank is a Tier 1 association (as defined herein).
EMPLOYEES
Golden State Holdings has no employees.
At December 31, 1997, the Bank and its subsidiaries had 5,235 employees,
compared to 3,547 employees at December 31, 1996. None of the Bank's employees
is represented by any collective bargaining group and management considers its
relations with its employees to be good. The Bank maintains a comprehensive
employee benefits program providing, among other benefits, health and welfare
benefits, long and short-term disability insurance, and life insurance.
Additionally, the Bank offers employees a defined contribution investment plan
which is a qualified plan under Section 401(a) of the Internal Revenue Code.
COMPETITION
Golden State Holdings experiences significant competition in both
attracting and retaining deposits and in originating real estate and consumer
loans.
Golden State Holdings, through the Bank, competes with other savings
associations, commercial banks, insurance companies, credit unions, savings and
loan associations, money market mutual funds and brokerage
159
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firms in attracting and retaining deposits. Competition for deposits from large
commercial banks is particularly strong. Many of the nation's savings
associations and commercial banks have a significant number of branch offices in
the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, LTV ratios, loan fees, and
the amount of time it takes to process a loan from receipt of the loan
application to date of funding. The Bank's future performance will depend on its
ability to originate a sufficient volume of mortgage loans in its local market
areas and through its wholesale network and, if it is unable to originate a
sufficient volume of mortgage loans, to purchase a sufficient quantity of
high-quality mortgage-backed securities with adequate yields. There can be no
assurance that the Bank will be able to effect such actions on satisfactory
terms.
PROPERTIES
Golden State Holdings neither owns nor leases any properties directly. The
executive offices of the Bank are located at 135 Main Street, San Francisco,
California, 94105, and its telephone number is (415) 904-1100. The Bank leases
approximately 92,000 square feet in the building in which its executive offices
are located, under a ten-year lease expiring in 2001. In addition, the Bank
leases approximately 216,000 square feet in a multiple-building administrative
facility in West Sacramento, California under a ten-year lease expiring in 2001.
The Bank leases additional administrative office space in Dallas which includes
approximately 46,000 square feet of space under a lease expiring in 1999.
As part of the Cal Fed Acquisition, the Bank assumed the lease on executive
offices and an office building of approximately 513,000 square feet. The Bank
vacated all but approximately 44,000 square feet of this facility during the
first half of 1997. The office lease was to expire in 2007, however, the Bank
terminated its remaining liability on all space other than approximately
44,000 square feet by payment of approximately $28 million. The lease on the
remaining 44,000 square feet terminates in 2003. In addition, Old California
Federal had certain operating and administrative departments in a leased
facility containing approximately 225,000 square feet located in Rosemead,
California. The Bank vacated the Rosemead facility during the first half of
1997. The Rosemead lease expires in 2008.
At December 31, 1997, the Bank operated a total of 225 retail branches and
maintained 22 vacant branch facilities which were consolidated as a result of
the Branch Purchases, the 1996 Acquisitions, the Cal Fed Acquisition and various
consolidations of operations to West Sacramento. Of the 225 total operating
retail branches, 62 were owned and 163 were leased. Some of these retail
branches are multi-purpose facilities, housing loan production and
administrative facilities in addition to retail space. Of the 22 vacant
facilities (one owned and 21 leased, all in California), 14 locations have been
subleased.
At December 31, 1997, there were 16 separate loan production offices, all
of which were leased, and which include three offices housing operations
acquired in the LMUSA Purchases and 13 offices housing wholesale lending
operations. There are no vacant loan production facilities at December 31, 1997.
In addition, the Bank operated 11 separate administrative facilities (two
owned and nine leased) and maintained 13 vacant administrative facilities (five
owned and eight leased). Of the 13 vacant administrative facilities, eight were
subleased. The administrative facilities include a 230,000 square foot owned
building in Frederick, Maryland, which houses FNMC's operations and
approximately 39,000 square feet of leased space in
160
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Dallas, which houses Auto One. A state-by-state breakdown of all retail
branches, administrative facilities and loan production offices operated by the
Bank at December 31, 1997 is shown in the following table:
<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
------------------------- ------------------------- -------------------------
OWNED LEASED VACANT OWNED LEASED VACANT OWNED LEASED VACANT
----- ------ ------ ----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona.......................... -- -- -- -- 1 -- -- 2 --
California....................... 55 139 22 1 4 10 -- 4 --
Florida.......................... 6 18 -- -- 1 1 -- 1 --
Georgia.......................... -- -- -- -- -- -- -- 1 --
Illinois......................... -- -- -- -- -- 1 -- 1 --
Maryland......................... -- -- -- 1 -- -- -- 1 --
Minnesota........................ -- -- -- -- -- -- -- 1 --
Montana.......................... -- -- -- -- 1 -- -- -- --
Nevada........................... 1 6 -- -- -- -- -- 1 --
Pennsylvania..................... -- -- -- -- -- -- -- 1 --
Texas............................ -- -- -- -- 2 1 -- 1 --
Washington....................... -- -- -- -- -- -- -- 2 --
--- ---- -- --- -- -- --- -- --
Total.......................... 62 163 22 2 9 13 -- 16 --
--- ---- -- --- -- -- --- -- --
--- ---- -- --- -- -- --- -- --
</TABLE>
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2 million
and are included in noninterest expense in FNH's 1995 consolidated statement of
income. On a continuing basis, the Bank evaluates the adequacy of its office
premises. As a result, surplus office facilities may be sold or subleased to
maintain cost-effective operations and minimize vacant facilities.
LEGAL PROCEEDINGS
Golden State Holdings is involved in legal proceedings on claims incidental
to the normal conduct of its business. See also "--Other Activities--Cal Fed
Contingent Litigation Recovery Participation Interests." Although it is
impossible to predict the outcome of any outstanding legal proceedings,
management believes that such legal proceedings and claims, individually or in
the aggregate, will not have a material effect on Golden State Holdings or the
Bank.
161
<PAGE>
GLENDALE FEDERAL
GENERAL
Glendale Federal was one of the largest savings institutions in the United
States, with total consolidated assets at June 30, 1998 of $18.1 billion. Prior
to the Mergers, Glendale Federal's business consisted primarily of attracting
checking and savings deposits from the public, originating real estate, business
and consumer loans, and purchasing loans secured by mortgages on residential
real estate. Glendale Federal's mix of products and services included three
principal lines of business: business banking, consumer banking and real estate
lending. Glendale Federal, through its subsidiaries, also provided general
insurance and securities brokerage services. Glendale Federal was headquartered
in Glendale, California and operates 209 banking offices and 25 loan offices
statewide.
Glendale Federal derived its income primarily from the interest it received
on real estate, business and consumer loans and, to a lesser extent, from
interest on investment securities and fees received in connection with loans,
loan servicing, and deposit services. Its major expenses were the interest it
paid on deposits and on borrowings and general operating expenses. Glendale
Federal's operations, like those of other depository institutions, were
significantly influenced by general economic conditions, by the strength of the
real estate market, by the monetary, fiscal and regulatory policies of the
federal government and by the policies of financial institution regulatory
authorities.
Golden State was formed to become the holding company for Glendale Federal
in a reorganization that was approved by Glendale Federal's stockholders and
completed on July 24, 1997. As part of the holding company formation, shares of
Glendale Federal's common stock automatically became an equal number of shares
of Golden State common stock and shares of Glendale Federal's Noncumulative
Preferred Stock, Series E, automatically became an equal number of shares of
Golden State's Noncumulative Convertible Preferred Stock, Series A. Glendale
Federal's two classes of warrants became exercisable solely to purchase common
stock of Golden State. The members of the board of directors of Glendale Federal
also became the board of directors of Golden State.
On November 26, 1997, Golden State Financial was formed as a wholly-owned
subsidiary of Golden State for the purpose of becoming an intermediate tier
holding company to effect the acquisition of CENFED.
On April 21, 1998, Golden State acquired CENFED in a tax-free,
stock-for-stock merger. Pursuant to the terms of the transaction, Golden State
issued 7,390,557 shares of its common stock resulting in a total recorded
purchase price of $211.1 million. On April 21, 1998, CENFED was merged with and
into Golden State Financial, with Golden State Financial as the surviving entity
in the merger. On May 8, 1998, Golden State contributed its shares of Glendale
Federal to Golden State Financial and CenFed Bank was merged into Glendale
Federal, with Glendale Federal as the surviving entity. The goodwill of $90.5
million recorded in this transaction under the purchase method of accounting
will be amortized over 15 years using the straight-line method. At April 21,
1998, CenFed Bank operated 18 branches located in Los Angeles, Orange, Riverside
and San Bernardino Counties in Southern California and had $1.9 billion in
assets, including $1.4 billion of loans receivable, net, and $354 million of
mortgage-backed securities, net. CenFed Bank's liabilities at April 21, 1998
included $1.4 billion of deposits and $385.1 million of borrowings.
On July 11, 1998, Golden State acquired RedFed and its federal savings bank
subsidiary, Redlands Federal Bank, in a tax-free, stock-for-stock merger.
Pursuant to the terms of the transaction, Golden State issued 5,221,995 shares
of its common stock, resulting in a total recorded purchase price of
$158.3 million. The goodwill of $62.8 million recorded in this transaction under
the purchase method of accounting will be amortized over 15 years using the
straight-line method. At July 11, 1998, RedFed operated 15 branches located in
Riverside and San Bernardino Counties in Southern California and had
$1.0 billion in assets, including $893.7 million of loans receivable, net.
RedFed's liabilities at July 11, 1998 included $864.1 million of deposits and
$78.7 million of borrowings.
162
<PAGE>
BUSINESS BANKING
Glendale Federal's business banking program had four components: community
business banking, commercial markets banking, agribusiness lending and Small
Business Administration ("SBA") lending. Glendale Federal initially introduced a
line of community business banking products and services in fiscal 1996. This
program focused on small businesses, primarily professionals, wholesalers,
distributors and light manufacturers, with annual sales of up to $5 million,
located in the markets served by Glendale Federal's retail banking offices.
Glendale Federal's community business banking product line included business
checking accounts of various types, account analysis, payroll services,
electronic banking and merchant draft servicing. To meet the credit needs of its
business customers, Glendale Federal offered revolving lines of credit and term
loans (primarily secured) with maturities of up to five years and with
prime-based adjustable interest rates. The maximum loan offered by the community
business banking group is $1 million. At June 30, 1998, line of credit
commitments and deposit relationships under the community business banking
product line totaled $190.3 million and $611.9 million, respectively.
In fiscal 1997, Glendale Federal, through its commercial markets group,
introduced a line of middle-market banking products and services to build larger
deposit relationships. This middle-market business banking program accommodated
businesses with annual sales of up to $150 million, but focused primarily on
businesses with annual sales between $10 million and $75 million. Glendale
Federal offered its commercial markets group clients business checking accounts,
various cash management services, standby and commercial letters of credit,
revolving lines of credit and term loans with a maximum limit of $15 million.
Specific loan terms were determined based upon the financial strength of the
borrower, the amount of credit granted, and the type and quality of collateral
available. At June 30, 1998, line of credit commitments and deposit
relationships under the commercial markets group totaled $69.1 million and
$87.4 million, respectively.
Glendale Federal's agribusiness lending program served the southern half of
the Central Valley region of California and specialized in crop production loans
for crops such as cotton, grapes, nuts and stone fruits, and dairy operations,
together with loans for other agricultural businesses, such as processors and
packers. At June 30, 1998, line of credit commitments and deposit relationships
under the agribusiness lending program totaled $159.8 million and
$16.8 million, respectively.
In the fourth quarter of fiscal 1997, Glendale Federal added SBA lending to
its business banking segment to complement the SBA program acquired in the
TransWorld transaction. The SBA is a federal government agency created to assist
small businesses by providing guarantees of loans made to eligible small
businesses. Glendale Federal will focused on the long-term needs of small
businesses and provided long-term, variable and fixed-rate financing to
expanding small businesses.
In August 1997, Glendale Federal was granted statewide preferred lender
status by the SBA. This designation allowed Glendale Federal to approve
SBA-guaranteed loan applications without prior review from the SBA, thereby
speeding up the decision-making process for small business loan applications.
The preferred lender, the highest lender status awarded by the SBA, enjoys
priority funding and service from the SBA. Loans approved through the preferred
lender program carry a maximum SBA guarantee of 75 percent. At June 30, 1998,
line of credit commitments and deposit relationships under the SBA lending
program totaled $30.4 million and $5.5 million, respectively.
Glendale Federal's business banking loan products primarily had adjustable
interest rates that were indexed to the Prime Rate, as published in The Wall
Street Journal.
CONSUMER BANKING
Glendale Federal's consumer banking program focused on increasing checking
account relationships, especially the Infinity account, which was Glendale
Federal's multi-relationship deposit account, rather than the higher-rate
certificates of deposit that have been the traditional source of deposit funding
for thrift institutions. The Infinity account allowed customers to manage their
finances, including checking, money market, savings, and certificate of deposit
accounts, borrowings and investments, through the use of a series of linked
asset and loan accounts with both automatic "sweep" and discretionary transfer
features, all of which were reflected on a single statement. The customer had
the ability to transfer funds to and from checking or money market accounts.
163
<PAGE>
On the lending side, the Infinity account encouraged the use of secured and
unsecured lines of credit that carried higher yields than single-family loans.
These lines of credit products included a home equity line of credit, a line of
credit secured by a savings deposit, and an unsecured line of credit and were
primarily adjustable-rate products indexed to the Prime Rate, as published in
the Wall Street Journal.
REAL ESTATE LENDING
Glendale Federal's real estate lending activity was focused on the purchase
or origination of loans secured by single-family residential real estate. Income
property lending (loans secured by multi-family residential and non-residential
properties) and construction lending activities were discontinued in 1991,
except for the resumption of residential construction lending for a short period
during fiscal 1996. Thereafter, income property lending was restricted to
refinancing existing loans or to financing the disposition of REO and a program
initiated in fiscal 1998 of lending on multi-family residences located in low-
and moderate-income and minority communities. Construction lending was
restricted to fulfilling commitments under outstanding loans.
The largest portion of Glendale Federal's real estate loans were made to
homeowners on the security of single-family residences for the purposes of
enabling them to purchase or refinance such property. Most of Glendale Federal's
single-family residential permanent loan contracts provided for amortization of
principal over 30 years. These loans, however, remained outstanding for much
shorter periods because the original loans were refinanced or the borrowers
repaid the loans in full upon sale of the properties securing the loans, or the
underlying collateral was acquired in settlement of the loan.
Glendale Federal originated and purchased for its own portfolio, depending
upon certain yield and other guidelines, ARMs (loans bearing interest rates that
changed periodically based on changes in a reference index), loans with rates
that were fixed for up to five years and then converted to adjustable rates for
the remainder of the loan term, and fixed-rate loans.
The ARM programs offered by Glendale Federal provided for interest rates
that adjusted either monthly, semi-annually or annually, beginning three, six or
twelve months from the inception of the loan, based primarily on changes in the
average weekly yield on specified maturities of U.S. Treasury Securities or on
changes in the monthly weighted average cost of funds for savings institutions
in the Eleventh District of the Federal Home Loan Bank System ("COFI").
Adjustments to the required monthly payment of principal and interest on such
loans occurred either monthly, semi-annually or annually, depending on the loan
program selected by the borrower. Glendale Federal has placed greater emphasis
on the origination of loans whose rates were tied to U.S. Treasury Securities
since this index was more sensitive to changes in market rates.
Glendale Federal also offered several programs that provided for interest
rates that were fixed for up to five years and then converted to adjustable
rates tied to the same Treasury indices as certain of Glendale Federal's other
ARM products. See "--Loans Receivable" below for a summary of Glendale Federal's
loan originations by note type.
While ARMs have the advantage of reducing an institution's sensitivity to
interest rate fluctuations, they present certain risks not associated with
traditional fixed-rate mortgages. These include: (i) the risk that the borrower,
having qualified for the loan based upon interest rates prevailing at the time
of origination, may be unable to make the higher payments required under the ARM
when increases in the applicable index rates increase the rate payable on the
loan; and (ii) the risk that "negative amortization" of principal (that is, the
addition of a portion of monthly interest accruals to the principal amount of
the loan) may occur in those ARMs which provide for limits in the monthly
payment increase and do not correspondingly limit the rate increase. Glendale
Federal attempted to mitigate these risks by the use of underwriting standards
that included analyzing the financial impact to the borrower resulting from
payment adjustments, and which required borrowers to qualify at the greater of
the initial interest rate plus the first annual adjustment or at a predetermined
interest rate based on LTV.
Loans with an LTV in excess of 80% were required by Glendale Federal policy
to have private mortgage insurance, except that loans meeting certain criteria
could be made, at the option of the loan applicant, without mortgage insurance,
but at higher fees, interest rates and margins to reflect the increased credit
risk assumed by Glendale Federal. This option was available only on loans with a
maximum loan amount of $300,000 and an
164
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LTV ratio of no more than 90%, where the purpose of the loan was to purchase, or
to refinance an existing Glendale Federal loan secured by a one-unit,
single-family residence. This alternative was only available on loans that did
not have negative amortization features.
Glendale Federal discontinued significant originations of loans with
negative amortization features in fiscal 1991 and did not separately monitor the
historical loss experience on such loans. Negative amortization was not
considered by Glendale Federal to be a sufficiently significant credit risk
characteristic to require specific identification for historical loss monitoring
purposes. Most of the loans with negative amortization features remaining in
Glendale Federal's portfolio were income property loans that are individually
monitored to assess loss potential. Because negatively amortizing income
property loans of this type were no longer being originated by Glendale Federal,
the balances on such loans are declining on both an absolute and relative basis.
As of June 30, 1998 and 1997, the balances of loans owned by Glendale
Federal that were subject to negative amortization totaled approximately
$3.1 billion and $3.2 billion, respectively, including cumulative negative
amortization at such dates of approximately $1.0 million and $0.9 million,
respectively. Approximately 74% of such loans are secured by multi-family or
non-residential real estate.
Glendale Federal offers a loan program called California Partners to
low-and moderate-income and minority borrowers. This program provided more
favorable pricing and flexible underwriting standards, including reduced down
payment and reduced income documentation requirements. These criteria were
designed to enable eligible borrowers who might not be able to satisfy
conventional underwriting standards to qualify for a home loan. Glendale Federal
originated $181.6 million and $90.6 million of such loans in fiscal 1998 and
1997, respectively.
Loan Purchase Activity
Glendale Federal purchased single-family residential real estate loans in
the secondary mortgage market to supplement its retail single-family loan
originations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Glendale Federal--Balance Sheet Analysis--Loans
Receivable," for a three-year summary of secondary market loan purchases by note
type. The servicing rights for these loans were typically retained by the
seller. The servicer collected the mortgage payments, passed through the
interest and principal due Glendale Federal under Glendale Federal's loan
purchase agreement, and retained a servicing fee typically ranging between 0.25%
and 0.50% on the unpaid principal balances of the loans. Glendale Federal
determined the timing and amount of its whole loan purchases based on available
liquidity, current asset yields and Glendale Federal's interest rate risk
management policy. Glendale Federal's investment and underwriting policies
governing purchased loans were the same as its policies for originating
single-family residential loans. Loans purchased by Glendale Federal are
accepted or settled only after Glendale Federal's loan underwriting and
appraisal staff performed a review of a representative sample of loans in the
pool to be purchased.
To reduce Glendale Federal's loss exposure, Glendale Federal implemented
procedures designed to monitor and analyze Glendale Federal's portfolio of
mortgage loans serviced by other institutions (the "LSBO Portfolio") and to
ensure the servicer's compliance with its servicing agreement with Glendale
Federal. The majority of the loans in this portfolio were originated during the
last five years. At June 30, 1998, 97.6% of the LSBO Portfolio was secured by
single-family residential real estate.
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The following tables set forth the composition of Glendale Federal's LSBO
Portfolio by note type and by state as of the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Adjustable-rate.............................. $1,724,491 $2,245,683 $2,075,212 $ 392,078 $151,555
Fixed-rate................................... 3,397,111 2,082,616 1,068,635 1,358,107 486,685
---------- ---------- ---------- ---------- --------
$5,121,602 $4,328,299 $3,143,847 $1,750,185 $638,240
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
Weighted average rate on portfolio at end
of period............................... 7.46% 7.61% 7.37% 7.74% 7.07%
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
California................................... $2,342,130 $1,932,794 $1,442,451 $ 581,305 $243,417
New York..................................... 229,237 244,111 233,659 116,303 35,138
Virginia..................................... 225,533 201,829 97,393 81,814 24,222
Florida...................................... 212,160 190,412 123,122 112,798 83,062
Maryland..................................... 178,361 156,964 93,677 76,294 24,343
New Jersey................................... 174,162 169,456 137,311 98,215 34,493
Other(1)..................................... 1,760,019 1,432,733 1,016,234 683,456 193,565
---------- ---------- ---------- ---------- --------
$5,121,602 $4,328,299 $3,143,847 $1,750,185 $638,240
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
</TABLE>
- ------------------
(1) The states with the largest balance in the "Other" category were Illinois
with $167,319 at June 30, 1998; Texas with $152,078 at June 30, 1997;
Illinois with $101,094 at June 30 1996; Texas with $71,028 at June 30 1995;
and Massachusetts with $29,510 at June 30, 1994.
166
<PAGE>
LOANS RECEIVABLE
Loan Portfolio Composition
The following table summarizes the composition of Glendale Federal's loan
portfolio, including loans held for sale, by property type as of the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Existing structures:
1-4 units....................... $10,299,303 $ 8,785,539 $ 7,535,048 $ 6,292,589 $ 5,481,781
5-36 units...................... 1,504,288 1,472,654 1,559,097 1,666,032 1,895,203
37 or more units................ 313,575 345,052 400,415 478,803 556,440
Non-residential................. 1,336,126 1,196,703 1,338,975 1,593,839 1,749,988
Construction:
1-4 units....................... -- 7,726 16,794 2,113 35,602
5-36 units...................... 570 4,895 5,445 7,624 25,574
37 or more units................ -- -- -- -- 7,748
Non-residential................. -- 531 -- 500 8,870
Land............................... 22,754 9,779 18,250 36,251 40,888
Home equity and improvement ....... 56,335 28,563 28,470 30,468 74,966
----------- ----------- ----------- ----------- -----------
Total real estate loans.... 13,532,951 11,851,442 10,902,494 10,108,219 9,877,060
----------- ----------- ----------- ----------- -----------
Non-real estate loans:
Equity............................. 69,594 45,709 10,079 12,750 17,858
Unsecured.......................... 50,502 39,712 21,788 17,600 27,360
Deposit account.................... 16,737 15,702 17,113 17,571 20,383
Auto and recreational vehicle...... 8,699 13,838 17,588 24,739 37,855
Mobile home........................ 4,518 5,724 6,590 7,943 3,593
----------- ----------- ----------- ----------- -----------
Total consumer
loans.................... 150,050 120,685 73,158 80,603 107,049
Commercial loans................... 290,515 160,061 10,391 22,844 47,212
----------- ----------- ----------- ----------- -----------
Total non-real estate
loans.................... 440,565 280,746 83,549 103,447 154,261
----------- ----------- ----------- ----------- -----------
Total gross loans receivable......... 13,973,516 12,132,188 10,986,043 10,211,666 10,031,321
Unearned discounts (net of
premiums).......................... (21,861) (38,824) (34,772) (70,038) (50,407)
Undisbursed loan funds............... (216) (1,807) (12,160) (4,653) (22,215)
Deferred loan origination fees....... (20,377) (22,705) (24,446) (28,536) (42,205)
Allowance for loan losses............ (156,482) (163,759) (186,756) (209,142) (320,714)
----------- ----------- ----------- ----------- -----------
Loans receivable, net................ $13,774,580 $11,905,093 $10,727,909 $ 9,899,297 $ 9,595,780
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average yield on loan
portfolio at end of period......... 7.75% 7.73% 7.74% 7.91% 6.87%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
167
<PAGE>
The following table sets forth the activity in Glendale Federal's loan
portfolio for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Loans, beginning balance.............. $11,905,093 $10,727,909 $ 9,899,297 $9,595,780 $10,850,039
Originations(1)....................... 1,182,590 731,307 713,857 805,897 1,747,519
Purchases............................. 2,720,739 2,430,461 2,107,509 1,549,955 521,357
Acquisition of CenFed Bank loans(2)... 1,415,858 -- -- -- --
Acquisition of TransWorld
loans(2)............................ -- 135,766 -- -- --
Acquisition of OneCentral
loans(2)............................ -- 37,992 -- -- --
Acquisition of Union Federal loans.... -- -- -- 398,635 --
Principal repayments.................. (2,859,855) (1,894,953) (1,430,312) (892,977) (1,252,503)
Sales................................. (344,348) (78,809) (275,428) (156,494) (348,838)
Sale of University Savings Bank
loans(3)............................ -- -- -- (815,406) --
Principal reductions due to
foreclosures........................ (96,448) (156,820) (186,157) (294,822) (328,022)
Loans exchanged for mortgage-backed
securities.......................... (171,737) (42,222) (145,826) (268,436) (1,470,844)
Decrease in allowance for loan
losses.............................. 7,277 22,997 22,386 111,572 14,068
Accretion of net unearned
discount(4)......................... 3,458 (575) 12,618 8,394 6,464
(Increase) decrease in undisbursed
loan funds.......................... 1,591 10,353 (7,507) 11,073 5,509
Other changes, net.................... 10,362 (18,313) 17,472 (153,874) (148,969)
----------- ----------- ----------- ---------- -----------
Net increase (decrease)............... 1,869,487 1,177,184 828,612 303,517 (1,254,259)
----------- ----------- ----------- ---------- -----------
Loans, ending balance................. $13,774,580 $11,905,093 $10,727,909 $9,899,297 $ 9,595,780
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Weighted average yield on originations
during the period................... 7.44% 7.94% 7.90% 8.08% 6.17%
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Weighted average yield on purchases
during the period................... 7.29% 7.83% 6.78% 8.68% 8.69%
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
- ------------------
(1) Net of refinanced portion of Glendale Federal's loans, which amounted to, in
the years ended June 30: 1998--$421,685; 1997--$86,566; 1996--$153,449;
1995--$61,553; and 1994--$390,370.
(2) For information regarding the CenFed Bank, TransWorld and OneCentral
transactions, see Note 3 of the Notes to Consolidated Financial Statements
of Glendale Federal, included elsewhere in this Prospectus. The weighted
average yields of these loans at acquisition were 8.48%, 10.26%, 9.60% and
7.94%, respectively.
(3) These loans were owned by University Savings Bank, a Washington state
chartered savings bank subsidiary of Glendale Federal that was sold in
fiscal 1995.
(4) Includes accretion of discount and amortization of premium on acquired
loans.
168
<PAGE>
The following tables present Glendale Federal's gross loan portfolio,
including loans owned and serviced by Glendale Federal and loans owned and
serviced by others, by note type and the distribution of adjustable-rate loans
among the major underlying indices at the dates indicated (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------------------
LOANS
LOANS OWNED BY
OWNED AND GLENDALE FEDERAL
SERVICED BY AND SERVICED PERCENT
GLENDALE FEDERAL BY OTHERS TOTAL OF TOTAL
---------------- ---------------- ------- --------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills........................ $ 261 $ 22 $ 283 2%
1-Year Treasury Bills (1)..................... 2,270 1,634 3,904 28
11th District Cost of Funds................... 3,648 63 3,711 27
Prime......................................... 561 -- 561 4
Other......................................... 315 6 321 2
------ ------ ------- ----
7,055 1,725 8,780 63
Fixed........................................... 1,797 3,397 5,194 37
------ ------ ------- ----
Total........................................... $8,852 $5,122 $13,974 100%
------ ------ ------- ----
------ ------ ------- ----
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------------------
LOANS
LOANS OWNED BY
OWNED AND GLENDALE FEDERAL
SERVICED BY AND SERVICED PERCENT
GLENDALE FEDERAL BY OTHERS TOTAL OF TOTAL
---------------- ---------------- ------- --------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills........................ $ 328 $ 32 $ 360 3%
1-Year Treasury Bills (1)..................... 2,452 2,135 4,587 38
11th District Cost of Funds................... 3,551 71 3,622 30
Prime......................................... 288 -- 288 2
Other......................................... 115 7 122 1
------ ------ ------- ----
6,734 2,245 8,979 74
Fixed........................................... 1,070 2,083 3,153 26
------ ------ ------- ----
Total........................................... $7,804 $4,328 $12,132 100%
------ ------ ------- ----
------ ------ ------- ----
</TABLE>
- ------------------------
(1) Includes $1.2 billion at June 30, 1998 and $1.1 billion at June 30, 1997 of
loans with interest rates that are fixed for three to five years and then
convert to adjustable rates for the remainder of the loan term.
169
<PAGE>
The following table summarizes Glendale Federal's term loan originations,
including the refinanced portion of Glendale Federal's loans, for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Fixed............................................ $1,200,000 $323,824 $371,611 $152,921 $ 655,341
Convertible/fixed................................ 220,853 188,324 243,436 270,693 690,759
ARM.............................................. 99,001 224,978 164,817 296,380 636,912
Call-date........................................ 17,405 27,763 43,595 109,322 69,778
Construction/tract............................... -- 6,780 21,957 19,337 66,279
---------- -------- -------- -------- ----------
Total real estate.............................. 1,537,259 771,669 845,416 848,653 2,119,069
Consumer......................................... 12,767 16,100 20,504 18,797 18,820
Commercial....................................... 54,249 30,104 1,386 -- --
---------- -------- -------- -------- ----------
$1,604,275 $817,873 $867,306 $867,450 $2,137,889
---------- -------- -------- -------- ----------
---------- -------- -------- -------- ----------
</TABLE>
As of June 30, 1998, approximately $5.1 billion of fixed-rate loans and
$8.5 billion of adjustable-rate loans were contractually due after one year. The
following table summarizes the remaining contractual maturities of Glendale
Federal's gross loan portfolio as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Due in year 1............................................. $ 120,845 $ 66,384 $182,177 $ 369,406
Due in year 2............................................. 108,215 4,354 9,706 122,275
Due in year 3............................................. 83,841 5,597 14,584 104,022
Due after year 3 through year 5........................... 331,157 62,256 39,747 433,160
Due after year 5 through year 10.......................... 670,231 9,282 30,169 709,682
Due after year 10 through year 15......................... 309,458 1,831 3,634 314,923
Due after year 15......................................... 11,909,204 346 10,498 11,920,048
----------- -------- -------- -----------
$13,532,951 $150,050 $290,515 $13,973,516
----------- -------- -------- -----------
----------- -------- -------- -----------
</TABLE>
Actual repayments may differ from contractual maturities as borrowers
generally have the right to prepay loans.
Delinquencies
When a borrower fails to make a required payment on a loan and does not
promptly cure the delinquency, the loan is classified as delinquent. Glendale
Federal's normal practice for delinquent loans was to contact the borrower at
regular intervals in an effort to bring the loan to a current status. If a
delinquency was not cured, foreclosure proceedings are typically instituted by
Glendale Federal by the ninetieth day of delinquency.
During fiscal 1998, Glendale Federal's delinquencies, expressed in dollars,
declined in total by $31.0 million, or 14%, to $184.3 million, as well as in all
categories of loans except for increases of $2.5 million and $141,000 in the
multi-family (37 or more units) residential and consumer loan portfolios,
respectively. The overall improvement in payment performance of Glendale
Federal's portfolio reflected continuing economic recovery in California, which
was Glendale Federal's primary lending area. The increase in the multi-family
(37 or more units) residential delinquencies was primarily the result of one
loan for $2.7 million in the 31-60 days delinquent category which was repaid in
July 1998. Consumer loan delinquencies, however, increased by 4%, to
$3.9 million, at June 30, 1998. Delinquencies as a percent of consumer loans
receivable declined by 51 basis points during fiscal 1998 due to portfolio
growth.
170
<PAGE>
The following table presents the principal amount and percentage of
Glendale Federal's loan delinquencies, in each case by property type, as of the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, % OF TYPE OF JUNE 30, % OF TYPE OF JUNE 30, % OF TYPE OF JUNE 30,
1998 GROSS LOANS 1997 GROSS LOANS 1996 GROSS LOANS 1995
-------- ------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units:
31-60 Days....................................... $ 43,043 0.41% $ 46,172 0.52% $ 57,047 0.75% $ 57,979
61-90 Days....................................... 23,579 0.23 17,030 0.19 18,416 0.24 26,460
Over 90 Days..................................... 70,136 0.68 82,989 0.95 119,978 1.59 110,761
-------- ---- -------- ---- -------- ---- --------
136,758 1.32 146,191 1.66 195,441 2.58 195,200
-------- ---- -------- ---- -------- ---- --------
Multi-family 5-36 units:
31-60 Days....................................... 9,248 0.62 8,944 0.61 9,528 0.61 19,249
61-90 Days....................................... 1,463 0.10 3,021 0.20 7,601 0.49 11,433
Over 90 Days..................................... 6,755 0.45 17,713 1.20 25,595 1.63 32,804
-------- ---- -------- ---- -------- ---- --------
17,466 1.17 29,678 2.01 42,724 2.73 63,486
-------- ---- -------- ---- -------- ---- --------
Multi-family 37 or more units:
31-60 Days....................................... 3,419 1.10 1,312 0.38 2,126 0.53 4,079
61-90 Days....................................... -- -- -- -- -- -- 3,202
Over 90 Days..................................... 417 0.13 -- -- 14,461 3.61 13,371
-------- ---- -------- ---- -------- ---- --------
3,836 1.23 1,312 0.38 16,587 4.14 20,652
-------- ---- -------- ---- -------- ---- --------
Non-residential:
31-60 Days....................................... 5,632 0.42 11,240 0.93 3,169 0.23 19,789
61-90 Days....................................... 1,715 0.12 3,079 0.26 2,762 0.20 6,409
Over 90 Days..................................... 11,774 0.87 14,149 1.17 17,907 1.33 39,588
-------- ---- -------- ---- -------- ---- --------
19,121 1.41 28,468 2.36 23,838 1.76 65,786
-------- ---- -------- ---- -------- ---- --------
Commercial:
31-60 Days....................................... 804 0.28 3,235 2.02 38 0.37 --
61-90 Days....................................... 1,262 0.43 1,935 1.21 -- -- 90
Over 90 Days..................................... 1,191 0.41 726 0.45 -- -- --
-------- ---- -------- ---- -------- ---- --------
3,257 1.12 5,896 3.68 38 0.37 90
-------- ---- -------- ---- -------- ---- --------
Consumer:
31-60 Days....................................... 1,618 1.08 1,560 1.29 1,081 1.48 2,206
61-90 Days....................................... 939 0.62 624 0.52 612 0.84 941
Over 90 Days..................................... 1,330 0.89 1,562 1.29 1,001 1.36 906
-------- ---- -------- ---- -------- ---- --------
3,887 2.59 3,746 3.10 2,694 3.68 4,053
-------- ---- -------- ---- -------- ---- --------
Total:
31-60 Days....................................... 63,764 0.46 72,463 0.60 72,989 0.66 103,302
61-90 Days....................................... 28,958 0.21 25,689 0.21 29,391 0.27 48,535
Over 90 Days..................................... 91,603 0.65 117,139 0.96 178,942 1.63 197,430
-------- ---- -------- ---- -------- ---- --------
$184,325 1.32% $215,291 1.77% $281,322 2.56% $349,267
-------- ---- -------- ---- -------- ---- --------
-------- ---- -------- ---- -------- ---- --------
<CAPTION>
% OF TYPE OF JUNE 30, % OF TYPE OF
GROSS LOANS 1994 GROSS LOANS
------------ -------- ------------
<S> <C> <C> <C>
Single-family 1-4 units:
31-60 Days....................................... 0.92% $ 44,181 0.79%
61-90 Days....................................... 0.42 21,919 0.39
Over 90 Days..................................... 1.75 127,556 2.28
------ -------- ------
3.09 193,656 3.46
------ -------- ------
Multi-family 5-36 units:
31-60 Days....................................... 1.15 59,663 3.11
61-90 Days....................................... 0.68 26,841 1.40
Over 90 Days..................................... 1.96 96,920 5.04
------ -------- ------
3.79 183,424 9.55
------ -------- ------
Multi-family 37 or more units:
31-60 Days....................................... 0.85 14,434 2.56
61-90 Days....................................... 0.67 8,682 1.54
Over 90 Days..................................... 2.79 66,254 11.74
------ -------- ------
4.31 89,370 15.84
------ -------- ------
Non-residential:
31-60 Days....................................... 1.21 31,637 1.76
61-90 Days....................................... 0.39 25,767 1.43
Over 90 Days..................................... 2.43 152,415 8.47
------ -------- ------
4.03 209,819 11.66
------ -------- ------
Commercial:
31-60 Days....................................... -- 952 2.02
61-90 Days....................................... 0.39 -- --
Over 90 Days..................................... -- 5,025 10.64
------ -------- ------
0.39 5,977 12.66
------ -------- ------
Consumer:
31-60 Days....................................... 2.74 3,504 3.27
61-90 Days....................................... 1.17 1,040 0.97
Over 90 Days..................................... 1.12 1,711 1.60
------ -------- ------
5.03 6,255 5.84
------ -------- ------
Total:
31-60 Days....................................... 1.01 154,371 1.54
61-90 Days....................................... 0.48 84,249 0.84
Over 90 Days..................................... 1.93 449,881 4.48
------ -------- ------
3.42% $688,501 6.86%
------ -------- ------
------ -------- ------
</TABLE>
171
<PAGE>
Non-Accrual Loans
All loans delinquent for more than 90 days were placed on non-accrual
status. Loans delinquent 90 days or less were placed on non-accrual status if
the borrower is deemed by management to be unable to continue performance. As of
June 30, 1998 and 1997, loans 90 days or less delinquent totaling $4.4 million
and $23.2 million, respectively, had been placed on non-accrual status.
Placement of loans on non-accrual status does not necessarily mean that the
outstanding loan principal will not be collected but rather that timely
collection of principal and interest is in question. When a loan is placed on
non-accrual status, interest accrued but not received is reversed.
Under Glendale Federal's policies, a non-accrual loan could be restored to
accrual status when principal and interest payments were brought current or when
brought to 90 days or less delinquent and continuing payment of principal and
interest was expected. The amount of interest income which would have been
recorded in fiscal 1998, 1997 and 1996 had Glendale Federal's non-accrual loans
been current in accordance with their original terms was $9.1 million,
$12.4 million and $16.3 million, respectively. The amount of interest income on
these loans that was included in net earnings in fiscal 1998, 1997 and 1996 was
$3.0 million, $5.3 million and $5.8 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Glendale Federal--Balance Sheet Analysis--Non-Performing Assets and
Restructured Loans" for further discussion of non-accrual loans. See Note 7 of
the Notes to Consolidated Financial Statements of Glendale Federal, included
elsewhere in this Prospectus, for information on the geographical location of
non-accrual loans at June 30, 1998 and 1997.
The following table shows Glendale Federal's non-accrual loans by property
type as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units..................... $70,188 $ 82,989 $119,978 $111,881 $130,554
Multi-family:
5-36 units................................ 7,615 21,087 33,123 50,487 112,400
37 or more units.......................... 417 3,121 14,461 21,255 84,937
Non-residential............................. 14,504 30,672 23,860 59,430 172,897
------- -------- -------- -------- --------
Total real estate......................... 92,724 137,869 191,422 243,053 500,788
Commercial.................................. 1,828 859 22 283 6,044
Consumer.................................... 1,442 1,567 1,001 906 1,711
------- -------- -------- -------- --------
$95,994 $140,295 $192,445 $244,242 $508,543
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
Restructured Loans
Glendale Federal has agreed to loan modifications on certain existing
single-family, multi-family residential and non-residential loans in the form of
interest rate and other concessions that are not generally available for similar
loans in order to maximize the recovery of its loans that are not performing
under their original terms. Such loans that are performing in accordance with
their modified terms are presented as "restructured loans." Restructured loans
are placed on non-accrual status (and presented as "non-accrual loans") if they
become more than 90 days delinquent or the borrower otherwise fails, or is not
expected, to perform in accordance with the restructure agreement. See Note 1 of
the Notes to Consolidated Financial Statements of Glendale Federal, included
elsewhere in this Prospectus, for additional discussion of Glendale Federal's
accounting policy with respect to restructured loans.
Interest income with respect to restructured loans would have been $2.2
million, $2.9 million and
$0.9 million in fiscal 1998, 1997 and 1996, respectively, under their original
terms. Actual interest income recognized by Glendale Federal with respect to
restructured loans was $1.8 million, $2.4 million and $0.7 million in fiscal
1998, 1997 and 1996, respectively.
As of June 30, 1998, Glendale Federal's largest restructured loan was
secured by a 59 unit apartment complex located in Southern California and had a
balance outstanding of $3.0 millon, which represented 14% of all restructured
loans. As of June 30, 1998, except for $222,000 of single-family restructured
loans in Florida, all of Glendale Federal's loans were in the state of
California. See "Management's Discussion and Analysis of
172
<PAGE>
Financial Condition and Results of Operations--Glendale Federal--Balance Sheet
Analysis--Non-Performing Assets and Restructured Loans" for fiscal 1998
restructured loans activity.
The following table shows Glendale Federal's restructured loans by property
type as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units.................................... $ 2,138 $ 2,168 $ 3,222 $ 4,601 $ --
Multi-family:
5-36 units............................................... 5,074 3,676 2,197 10,717 5,338
37 or more units......................................... 6,782 18,331 2,251 7,462 14,456
Non-residential............................................ 7,471 6,889 1,524 15,762 14,424
------- ------- ------- ------- -------
$21,465 $31,064 $ 9,194 $38,542 $34,218
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
Potential Problem Assets
Impaired Loans
Impaired secured loans were carried in Glendale Federal's accounting
records at the fair value of the collateral securing the loan less estimated
selling costs. Impaired unsecured loans were recorded at the present value of
the expected future cash flows from the loans, discounted at the loan's
effective interest rate, or at the loan's observable market price. Impaired
loans excluded large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. For Glendale Federal, loans collectively
reviewed for impairment included single-family loans with unpaid balances of
less than $500,000, substantially all consumer loans, business banking loans
with principal balances less than $100,000, and performing multi-family and
non-residential real estate loans ("income property loans") having principal
balances of less than $1 million, excluding loans which have entered the workout
process.
Glendale Federal considered a loan to be impaired when, based upon current
information and events, Glendale Federal believed it was probable that it will
be unable to collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. Non-accrual income property loans, non-accrual
single-family loans or borrowing relationships with unpaid balances greater than
$500,000, non-accrual business banking loans with unpaid balances of greater
than $100,000, troubled debt restructurings, and certain performing loans were
measured individually for impairment. Loans not included in the preceding
categories were collectively measured for impairment. Specific valuation
allowances were established for impaired collateralized loans at the difference
between the loan amount and the fair value of the related collateral, reduced by
estimated selling costs, and for unsecured loans at either the present value of
the expected future cash flows from the loan, discounted at the loan's effective
interest rate, or at the loan's observable market price. Impairment losses were
recognized through an increase in the allowance for loan losses and a
corresponding charge to the provision for loan losses. Adjustments to impairment
losses due to changes in the fair value of the collateral properties for
impaired loans were included in the provision for loan losses. While a loan was
on non-accrual status, interest is recognized only as cash is received and only
if no portion of the loan's balance is classified "Doubtful." Impaired loans may
be left on accrual status during the period Glendale Federal was pursuing
repayment of the loan. When an impaired loan was either sold, transferred to REO
or written down, any related valuation allowance was charged-off against the
allowance for loan losses. Loans were placed on non-accrual status at the point
either: (1) they become 90 days delinquent; or (2) Glendale Federal determines
the borrower was incapable of, or had ceased efforts toward, continuing
performance under the terms of the loan.
At June 30, 1998 and 1997, the recorded investment in loans identified by
Glendale Federal as impaired totaled $109.9 million and $142.8 million,
respectively, and the total specific allowance for loan losses related to such
loans was $13.4 million and $14.0 million, respectively. See Note 7 of the Notes
to Consolidated Financial Statements of Glendale Federal, included elsewhere in
this Prospectus, for additional information regarding impaired loans.
173
<PAGE>
Classification of Assets
Savings institutions are required under applicable law and regulations to
review their assets on a regular basis and to classify them as "satisfactory",
"special mention", "substandard", "doubtful" or "loss". An asset which possesses
no apparent weakness or deficiency is designated "satisfactory". An asset which
possesses weaknesses or deficiencies deserving close attention is designated as
"special mention". An asset, or a portion thereof, is generally classified as
"substandard" if it possesses a well-defined weakness which could jeopardize the
timely liquidation of the asset or realization of the collateral at the asset's
book value. Thus, these assets are characterized by the possibility that the
institution will sustain some loss if the deficiencies are not corrected. An
asset, or portion thereof, is classified as "doubtful" if a probable loss of
principal and/or interest exists but the amount of the loss, if any, is subject
to the outcome of future events which are undeterminable at the time of
classification. If an asset, or portion thereof, is classified as "loss,"
Glendale Federal either establishes a specific valuation allowance equal to the
amount classified as loss or charges off such amount. The Regional Director of
the OTS has the authority to approve, disapprove or modify any asset
classification or any amount established as an allowance pursuant to such
classification. Glendale Federal monitors the level of assets within each of the
asset classification categories and utilizes this information along with its
review of the underlying collateral and other factors in determining the
appropriate level of loss allowances it maintains from period to period. See
"--Credit Loss Experience" below for further information.
Significant Loan Relationships
Most of Glendale Federal's gross loan portfolio consisted of loans with
individual balances of less than $1 million. At June 30, 1998 Glendale Federal's
largest borrower had eight performing loans secured by multi-family residential
and non-residential properties with outstanding balances totaling $16.0 million.
The second largest borrower at that date had six loans outstanding totaling
$14.8 million, all of which were performing and were secured by multi-family
residential properties. The third largest borrower at that date was an investor
in multi-family housing projects in Southern California with 14 loans
outstanding totaling $14.1 million, of which four loans totaling $3.3 million
were restructured. The fourth largest borrower at that date had five performing
loans totaling $13.3 million which were secured by non-residential properties.
The fifth largest borrower at that date had one performing loan with an
outstanding balance of $13.0 million secured by a multi-family residential
property. Glendale Federal had no other borrowing relationships exceeding $10
million at June 30, 1998.
Glendale Federal's single-family residential and consumer loans were
relatively homogeneous and typically no single loan was individually significant
in terms of size or risk of loss. Glendale Federal reviewed most of its
single-family residential and consumer portfolios by analyzing the performance
and the composition of these portfolios as a whole. Glendale Federal's
monitoring process for non-homogenous multi-family residential and
non-residential loans encompassed a periodic review of the individual loans.
Glendale Federal reviewed--annually if rated "satisfactory" or quarterly if
rated "special mention," "substandard," "doubtful," or "loss"--any loan with an
unpaid principal balance of more than $1 million, and any relationship with a
single borrower whose aggregate loan balances exceed $3 million. The reviews
were based on information available and generally included analysis of operating
statements, occupancy levels, debt coverage, the condition and the appraised
value of the collateral, the borrower's financial strength and other factors.
Glendale Federal periodically reviewed all individual commercial loans with a
balance of $100,000 or more. Loans that were rated "satisfactory" were reviewed
at least annually, and those that were rated "special mention," "substandard,"
"doubtful" or "loss" were reviewed quarterly. Glendale Federal maintained
special departments with responsibility for resolving problem loans and
liquidating collateral or selling foreclosed real estate.
Credit Loss Experience
Credit losses are inherent in the business of lending. The allowance for
loan losses is established to provide for such losses and is based on
management's assessment of trends in the homogeneous portfolio as well as the
results of management's periodic review of the individual loans in the
non-homogeneous portfolio. Specific valuation allowances are established for
impaired loans at the difference between the loan amount and the fair value of
the collateral less estimated selling costs. The general allowance for loan
losses is based upon a number of factors, including asset classification,
historical loss experience, loan portfolio composition, industry experience,
prevailing and forecasted economic and market conditions and management's
judgment. Since the factors on which the general allowance is based are subject
to change from time to time as a result of changes in relevant conditions and
management's knowledge thereof, no assurance can be given that additional
provisions
174
<PAGE>
for loss will not be required in future periods as a result of changes in
economic and market conditions, management's assessments thereof or other
factors. The OTS, as part of its examination process, reviewed the allowances
for estimated losses and may require that additions be made to such allowances
based on their judgments of the information available to them at the time of
their examination.
A summary of activity in the allowance for loan losses during the periods
indicated is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning balance...... $163,759 $186,756 $ 209,142 $ 320,714 $ 334,782
Provision for loan losses......................... (1,727) 25,204 40,350 66,150 139,726
-------- -------- --------- --------- ---------
162,032 211,960 249,492 386,864 474,508
-------- -------- --------- --------- ---------
Charge-offs:
Single-family 1-4 units......................... (11,243) (25,773) (33,617) (37,194) (43,248)
Multi-family:
5-36 units................................... (6,239) (10,756) (13,175) (54,314) (39,743)
37 or more units............................. (551) (5,860) (7,923) (33,932) (28,149)
Non-residential................................. (5,619) (12,996) (14,490) (73,602) (43,675)
-------- -------- --------- --------- ---------
Total real estate............................ (23,652) (55,385) (69,205) (199,042) (154,815)
Commercial...................................... (1,992) (68) (974) (2,340) (6,353)
Consumer........................................ (3,408) (3,043) (2,842) (4,595) (6,904)
-------- -------- --------- --------- ---------
Total charge-offs............................ (29,052) (58,496) (73,021) (205,977) (168,072)
-------- -------- --------- --------- ---------
Recoveries:
Single-family 1-4 units......................... 272 167 149 334 1,013
Multi-family:
5-36 units................................... -- 8 288 -- 440
37 or more units............................. 286 248 231 800 878
Non-residential................................. 799 1,159 2,929 9,572 2,339
-------- -------- --------- --------- ---------
Total real estate............................ 1,357 1,582 3,597 10,706 4,670
Commercial...................................... 4,341 3,575 5,590 4,748 6,873
Consumer........................................ 901 1,062 1,098 1,840 2,735
-------- -------- --------- --------- ---------
Total recoveries............................. 6,599 6,219 10,285 17,294 14,278
-------- -------- --------- --------- ---------
Net charge-offs.............................. (22,453) (52,277) (62,736) (188,683) (153,794)
-------- -------- --------- --------- ---------
Additions due to acquisitions(1):
Single-family 1-4 units......................... 5,968 -- -- 2,535 --
Non-residential................................. 10,921 219 -- 14,815 --
Commercial...................................... -- 3,857 -- -- --
Consumer........................................ 14 -- -- -- --
-------- -------- --------- --------- ---------
Total additions.............................. 16,903 4,076 -- 17,350 --
-------- -------- --------- --------- ---------
Deletions due to sale of subsidiary(2):
Single-family 1-4 units......................... -- -- -- (2,389) --
Multi-family:
5-36 units................................... -- -- -- (1,282) --
37 or more units............................. -- -- -- (401) --
Non-residential................................. -- -- -- (2,127) --
Consumer........................................ -- -- -- (190) --
-------- -------- --------- --------- ---------
Total deletions.............................. -- -- -- (6,389) --
-------- -------- --------- --------- ---------
Allowance for loan losses, ending balance......... $156,482 $163,759 $ 186,756 $ 209,142 $ 320,714
-------- -------- --------- --------- ---------
-------- -------- --------- --------- ---------
</TABLE>
- ------------------
(1) Represents the allowance for loan losses recorded in connection with the
acquisitions of CenFed Bank in fiscal 1998 and TransWorld and OneCentral in
fiscal 1997, and with the acceptance of loans receivable as part of the
consideration for assuming the deposit liabilities of Union Federal in
fiscal 1995. For additional information, see Note 3 of the Notes to
Consolidated Financial Statements of Glendale Federal, included elsewhere in
this Prospectus.
(2) Represents the reduction of the allowance for loan losses due to the sale of
University Savings.
175
<PAGE>
The following table indicates the ratio of Glendale Federal's charge-offs
(net of recoveries) to average gross loans by category for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units:
Average gross loans................ $ 9,588,733 $ 8,201,070 $ 6,952,741 $ 5,958,760 $ 5,823,737
Net charge-offs.................... 10,971 25,606 33,468 36,860 42,235
Net charge-offs/average gross
loans........................... 0.11% 0.31% 0.48% 0.62% 0.73%
Multi-family 5-36 units:
Average gross loans................ 1,491,203 1,521,046 1,619,099 1,797,216 2,054,056
Net charge-offs.................... 6,239 10,748 12,887 54,314 39,303
Net charge-offs/average gross
loans........................... 0.42% 0.71% 0.80% 3.02% 1.91%
Multi-family 37 or more units:
Average gross loans................ 329,314 372,734 439,609 521,496 633,694
Net charge-offs.................... 265 5,612 7,692 33,132 27,271
Net charge-offs/average gross
loans........................... 0.08% 1.51% 1.75% 6.35% 4.30%
Non-residential:
Average gross loans................ 1,282,947 1,282,119 1,493,908 1,715,168 1,940,320
Net charge-offs.................... 4,820 11,837 11,561 64,030 41,336
Net charge-offs/average gross
loans........................... 0.38% 0.92% 0.77% 3.73% 2.13%
Commercial:
Average gross loans................ 225,288 85,226 16,618 35,028 66,061
Net charge-offs (recoveries)....... (2,349) (3,507) (4,616) (2,408) (520)
Net charge-offs (recoveries)/
average gross loans............. (1.04)% (4.11)% (27.78)% (6.87)% (0.79)%
Consumer:
Average gross loans................ 135,367 96,922 76,880 93,826 135,704
Net charge-offs.................... 2,507 1,981 1,744 2,755 4,169
Net charge-offs/average gross
loans........................... 1.85% 2.04% 2.27% 2.94% 3.07%
Total:
Average gross loans................ $13,052,852 $11,559,117 $10,598,855 $10,121,494 $10,653,572
Net charge-offs.................... 22,453 52,277 62,736 188,683 153,794
Net charge-offs/average gross
loans........................... 0.17% 0.45% 0.59% 1.86% 1.44%
</TABLE>
176
<PAGE>
The following tables set forth the allocation of allowance for loan losses
by property type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------------------------------- -------------------------------------------------
PERCENT OF GROSS PERCENT OF PERCENT OF GROSS PERCENT OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units............ 74.11% $10,355,638 $ 48,568 0.47% 72.71% $ 8,821,828 $ 52,579 0.60%
Multi-family:
5-36 units........... 10.77 1,504,858 31,087 2.07 12.18 1,477,549 43,852 2.97
37 or more units .... 2.24 313,575 11,724 3.74 2.84 345,052 16,496 4.78
Non-residential........ 9.73 1,358,880 30,988 2.28 9.95 1,207,013 35,280 2.92
Commercial............. 2.08 290,515 11,749 4.04 1.32 160,061 7,552 4.72
Consumer............... 1.07 150,050 22,366 14.91 1.00 120,685 8,000 6.63
------ ----------- --------- ------ ----------- ---------
100.00% $13,973,516 $ 156,482 1.12% 100.00% $12,132,188 $ 163,759 1.35%
------ ----------- --------- ------ ----------- ---------
------ ----------- --------- ------ ----------- ---------
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------------------------------------------- -------------------------------------------------
PERCENT OF GROSS PERCENT OF PERCENT OF GROSS PERCENT OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units............ 69.00% $ 7,580,312 $ 56,833 0.75% 61.94% $ 6,325,170 $ 44,483 0.70%
Multi-family:
5-36 units........... 14.24 1,564,542 48,628 3.11 16.39 1,673,656 41,736 2.49
37 or more units .... 3.65 400,415 26,062 6.51 4.69 478,803 31,569 6.59
Non-residential........ 12.35 1,357,225 47,260 3.48 15.97 1,630,590 83,086 5.10
Commercial............. 0.09 10,391 4,699 45.22 0.22 22,844 4,176 18.28
Consumer............... 0.67 73,158 3,274 4.48 0.79 80,603 4,092 5.08
------ ----------- --------- ------ ----------- ---------
100.00% $10,986,043 $ 186,756 1.70% 100.00% $10,211,666 $ 209,142 2.05%
------ ----------- --------- ------ ----------- ---------
------ ----------- --------- ------ ----------- ---------
<CAPTION>
JUNE 30, 1994
-------------------------------------------------
PERCENT OF GROSS PERCENT OF
LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Single-family
1-4 units............ 55.75% $ 5,592,349 $ 44,667 0.80%
Multi-family:
5-36 units........... 19.15 1,920,777 65,878 3.43
37 or more units .... 5.62 564,188 61,867 10.97
Non-residential........ 17.94 1,799,746 137,775 7.66
Commercial............. 0.47 47,212 6,052 12.82
Consumer............... 1.07 107,049 4,475 4.18
------ ----------- ---------
100.00% $10,031,321 $ 320,714 3.20%
------ ----------- ---------
------ ----------- ---------
</TABLE>
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
Glendale Federal's allowance for loan losses, expressed both in dollars and
as a percent of loans receivable, decreased during fiscal 1998, reflecting
reduced levels of delinquencies and charge-offs, continued improvements in
classified asset levels, and a 15% increase in the size of the gross loan
portfolio from $12.1 billion at June 30, 1997 to $14.0 billion at June 30, 1998.
The increases in allowance allocations to consumer and commercial lending
reflect growth in their respective loan portfolios and Glendale Federal's
limited experience to date in managing the credit performance of these new lines
of business.
177
<PAGE>
The following tables compare Glendale Federal's gross loan portfolio
balances, allowance for loan losses, non-accrual loans and NPAs by property type
as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
PERCENT OF
PERCENT OF NPAS TO
GROSS LOAN NON- ALLOWANCE TO GROSS LOAN PERCENT OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1998 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
------------- ----------- --------- -------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units....... $10,355,638 $ 48,568 $ 70,188 69.20% $ 93,194 0.90% 52.11%
Multi-family:
5-36 units.................. 1,504,858 31,087 7,615 408.23 10,702 0.71 290.48
37 or more units............ 313,575 11,724 417 2,881.51 417 0.13 2,811.51
Non-residential............... 1,358,880 30,988 14,504 213.65 26,686 1.96 116.12
Commercial.................... 290,515 11,749 1,828 642.72 1,828 0.63 642.72
Consumer...................... 150,050 22,366 1,442 1,551.04 1,442 0.96 1,551.04
----------- --------- -------- -------- --------
$13,973,516 $ 156,482 $ 95,994 163.01% $134,269 0.96% 116.54%
----------- --------- -------- -------- --------
----------- --------- -------- -------- --------
<CAPTION>
PERCENT OF
PERCENT OF NPAS TO
GROSS LOAN NON- ALLOWANCE TO GROSS LOAN PERCENT OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1997 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
------------- ----------- --------- -------- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units....... $ 8,821,828 $ 52,579 $ 82,989 63.36% $117,105 1.33% 44.90%
Multi-family:
5-36 units.................. 1,477,549 43,852 21,087 207.96 29,501 2.00 148.65
37 or more units............ 345,052 16,496 3,121 528.55 5,054 1.46 326.39
Non-residential............... 1,207,013 35,280 30,672 115.02 50,841 4.21 69.39
Commercial.................... 160,061 7,552 859 879.16 859 0.54 879.16
Consumer...................... 120,685 8,000 1,567 510.53 1,598 1.32 500.63
----------- --------- -------- -------- ------
$12,132,188 $ 163,759 $140,295 116.72% $204,958 1.69% 79.90%
----------- --------- -------- -------- ------
----------- --------- -------- -------- ------
</TABLE>
- ------------------
(1) Comprised of non-accrual loans and REO and other repossessed assets.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Glendale Federal--Allowance for Loan Losses" for
discussion of the allowance for loan losses at June 30, 1998.
178
<PAGE>
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
The procedures for foreclosure of Glendale Federal's loans are governed by
the laws of the states in which the loan collateral is located. In California,
Glendale Federal normally utilized the non-judicial foreclosure sale procedures
available under applicable state law. In Florida, where Glendale Federal
formerly had offices and where properties secured $799 million of its mortgage
loans at June 30, 1998, judicial foreclosure is normally required. The
borrowers' rights of redemption under the laws of the respective states are also
different. In California, the right to cure the default and reinstate the loan
terminates five days before the scheduled trustee sale under a deed of trust. In
Florida, the borrower generally may cure the default under a mortgage at any
time during foreclosure proceedings and until the certificate of title is
issued, usually 10 days after the sale, by making all delinquent payments and
paying all charges, including legal fees. Florida law permits a mortgage lender
to seek a deficiency judgment against a defaulted borrower when the proceeds of
the foreclosure sale are not sufficient to satisfy the loan balance. Such
judgments are ordinarily not permitted or are impractical in California. In most
foreclosure sales, Glendale Federal acquired title to the property. REO was
recorded and carried at the lower of the recorded investment in the loan or fair
value of the asset received less selling costs. The fair value of the asset
received is based on the current appraised value less estimated selling costs.
See Note 8 of the Notes to Consolidated Financial Statements of Glendale Federal
included elsewhere in this Prospectus for information on the geographical
location of REO as of June 30, 1998 and 1997.
The following table shows Glendale Federal's REO and other repossessed
assets, net of specific valuation allowances, and gross of the general valuation
allowance, by property type as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units................................. $23,006 $34,116 $39,693 $ 37,316 $ 43,231
Multi-family:
5-36 units............................................ 3,087 8,414 11,668 18,131 27,180
37 or more units...................................... -- 1,933 4,827 5,716 2,792
Non-residential......................................... 12,182 20,169 25,893 50,024 79,089
------- ------- ------- -------- --------
Total real estate.................................. 38,275 64,632 82,081 111,187 152,292
Other repossessed assets................................ -- 31 123 93 127
------- ------- ------- -------- --------
$38,275 $64,663 $82,204 $111,280 $152,419
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Glendale Federal--Balance Sheet Analysis--Non-Performing
Assets and Restructured Loans" for additional discussion regarding REO activity
for fiscal 1998.
MORTGAGE-BACKED SECURITIES
Glendale Federal purchased mortgage-backed securities from time to time to
meet balance sheet size objectives, to augment loan originations and whole loan
purchases and to replace loan portfolio and mortgage-backed securities run-off.
Glendale Federal's primary choice for such purposes had been mortgage
pass-through securities issued or guaranteed by certain agencies including the
GNMA, FNMA and FHLMC. These securities are backed by pools of fixed-rate and
adjustable-rate single-family mortgage loans and were obtained either through
cash purchase or through securitization of Glendale Federal's single-family
mortgage loans. Glendale Federal utilized these securities to collateralize
borrowings, to secure public agency deposits, to reduce Glendale Federal's
credit risk exposure through the agency guarantees of the securities and to
reduce its regulatory capital requirements. During fiscal 1998, $584.1 million
and $171.7 million of these securities were obtained through cash purchase and
securitizations, respectively. The gross amount of these agency related
securities totaled $1.6 billion at June 30, 1998.
179
<PAGE>
The following tables summarize the composition of Glendale Federal's held
to maturity and available for sale mortgage-backed securities portfolios by
security type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
FNMA..................................... $ 336,318 $ 422,701 $ 489,919 $ 579,486 $ 665,634
FHLMC.................................... 221,364 266,272 298,090 329,081 100,879
GNMA..................................... 176,949 230,410 273,690 325,025 356,898
---------- ---------- ---------- ---------- ----------
Total agency securities............... 734,631 919,383 1,061,699 1,233,592 1,123,411
Pass-through securities.................. 156,263 212,595 256,781 1,499,337 1,867,312
Subordinated securities.................. 17,422 21,926 25,855 31,909 36,720
CMOs..................................... -- -- -- 1,878,117 2,037,867
CMO residuals............................ -- -- 277 4,760 7,043
---------- ---------- ---------- ---------- ----------
Total gross........................... 908,316 1,153,904 1,344,612 4,647,715 5,072,353
Unamortized premiums..................... 8,417 11,557 14,664 77,369 98,154
Deferred loan origination fees........... (2,140) (2,636) (3,041) (3,677) (3,321)
---------- ---------- ---------- ---------- ----------
Total, at amortized cost.............. 914,593 1,162,825 1,356,235 4,721,407 5,167,186
---------- ---------- ---------- ---------- ----------
Available for sale:
GNMA..................................... 485,221 514,321 113,181 1,840 60,115
FHLMC.................................... 242,722 44,859 142 161 109,135
FNMA..................................... 163,745 14,133 28 32 36
---------- ---------- ---------- ---------- ----------
Total agency securities............... 891,688 573,313 113,351 2,033 169,286
Pass-through securities.................. 512,961 496,784 704,586 -- 33,301
CMOs..................................... 50,104 24,831 58,357 -- --
CMO residuals............................ -- 100 -- -- --
---------- ---------- ---------- ---------- ----------
Total gross........................... 1,454,753 1,095,028 876,294 2,033 202,587
Unrealized (loss) gain................... (4,914) (2,320) (16,076) 53 (4,765)
Unamortized premiums (discounts)......... 10,931 24,001 24,337 (36) (1,176)
Deferred loan origination fees........... -- -- -- -- (53)
---------- ---------- ---------- ---------- ----------
Total, at fair value.................. 1,460,770 1,116,709 884,555 2,050 196,593
---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities, net...... $2,375,363 $2,279,534 $2,240,790 $4,723,457 $5,363,779
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average yield on mortgage-backed
securities portfolio at end of period.... 6.37% 6.78% 6.26% 6.30% 5.28%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
180
<PAGE>
The following table presents Glendale Federal's gross mortgage-backed
securities portfolio (before adjustment for unamortized premiums and discounts,
deferred loan origination fees, and any unrealized loss on mortgage-backed
securities available for sale) by note type and the distribution of
adjustable-rate mortgage-backed securities among the major underlying indices at
the dates indicated (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------ ------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills................................................... $ 322 14% $ 411 18%
1-Year Treasury Bills(1)................................................. 1,237 52 1,285 57
11th District Cost of Funds.............................................. 334 14 131 6
Prime.................................................................... 6 -- 8 --
Other.................................................................... 129 6 117 6
------ ---- ------ ----
2,028 86 1,952 87
Fixed...................................................................... 335 14 297 13
------ ---- ------ ----
$2,363 100% $2,249 100%
------ ---- ------ ----
------ ---- ------ ----
</TABLE>
- ------------------
(1) Includes $204 million and $239 million at June 30, 1998 and 1997,
respectively, of mortgage-backed securities with interest rates that are
fixed for three to five years and then convert to adjustable rates for the
remainder of the loan term.
The following table sets forth the activity in Glendale Federal's
mortgage-backed securities portfolio for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities, beginning
balance................................. $2,279,534 $2,240,790 $ 4,723,457 $5,363,779 $ 4,044,744
Mortgage-backed securities purchased ..... 584,101 498,066 115,595 958 3,524,460
Loans exchanged for mortgage-backed
securities.............................. 171,737 42,222 145,826 268,436 1,470,844
Mortgage-backed securities acquired(1).... 355,972 5,909 -- 23,963 --
Mortgage-backed securities sold(2)........ (294,767) (42,222) (1,838,289) (12,099) (1,223,167)
Principal repayments...................... (702,906) (475,949) (851,974) (711,881) (2,474,146)
Amortization of unearned premium.......... (13,393) (10,486) (20,810) (19,786) (58,316)
Other changes............................. (4,915) 21,204 (33,015) (3,214) 79,360
University Savings mortgage-backed
securities sold(1)...................... -- -- -- (186,699) --
---------- ---------- ----------- ---------- -----------
Net increase (decrease) in mortgage-
backed securities....................... 95,829 38,744 (2,482,667) (640,322) 1,319,035
---------- ---------- ----------- ---------- -----------
Mortgage-backed securities, ending
balance................................. $2,375,363 $2,279,534 $ 2,240,790 $4,723,457 $ 5,363,779
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------
(1) Represents mortgage-backed securities acquired from CenFed Bank in fiscal
1998, TransWorld and OneCentral in fiscal 1997, and from Union Federal in
fiscal 1995. For information regarding the CenFed Bank, TransWorld and
OneCentral transactions, see Note 3 of the Notes to Consolidated Financial
Statements of Glendale Federal, included elsewhere in this Prospectus.
(2) Includes loans originated by Glendale Federal and converted to
mortgage-backed securities.
181
<PAGE>
The following table summarizes the contractual maturities of Glendale
Federal's gross mortgage-backed securities portfolio as of June 30, 1998
(dollars in thousands):
<TABLE>
<CAPTION>
DUE AFTER YEAR 1 DUE AFTER YEAR 5
DUE IN YEAR 1 THROUGH YEAR 5 THROUGH YEAR 10 DUE AFTER YEAR 10 TOTAL
------------- ---------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
FNMA.......................... $ -- $5,594 $ -- $ 330,724 $ 336,318
FHLMC......................... -- -- -- 221,364 221,364
GNMA.......................... -- -- -- 176,949 176,949
------- ------ ------ ----------- ----------
Total agency securities.... -- 5,594 -- 729,037 734,631
Pass-through securities....... -- -- -- 156,263 156,263
Subordinated securities....... -- -- -- 17,422 17,422
------- ------ ------ ----------- ----------
Total...................... $ -- $5,594 $ -- $ 902,722 $ 908,316
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
Weighted average coupon
rate....................... -- 6.50% -- 7.01% 7.01%
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
Available for sale:
GNMA.......................... $ -- $ -- $ 109 $ 485,112 $ 485,221
FHLMC......................... 1,310 496 10 240,906 242,722
FNMA.......................... 273 2,917 -- 160,555 163,745
------- ------ ------ ----------- ----------
Total agency securities.... 1,583 3,413 119 886,573 891,688
Pass-through securities....... -- -- -- 512,961 512,961
CMOs.......................... -- -- 6,828 43,276 50,104
------- ------ ------ ----------- ----------
Total...................... $ 1,583 $3,413 $6,947 $ 1,442,810 $1,454,753
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
Weighted average coupon
rate....................... 7.55% 6.09% 7.06% 6.92% 6.92%
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
Total gross mortgage-backed
securities.................... $ 1,583 $9,007 $6,947 $ 2,345,532 $2,363,069
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
Weighted average coupon rate on
total gross mortgage-backed
securities portfolio at end of
period........................ 7.55% 6.35% 7.06% 6.96% 6.96%
------- ------ ------ ----------- ----------
------- ------ ------ ----------- ----------
</TABLE>
LIQUIDITY AND INVESTMENTS
Glendale Federal was required by federal regulations to maintain a
specified minimum amount of liquid assets which may be invested in specified
types of securities and was also permitted to make certain other securities
investments. The balance of securities investments maintained by Glendale
Federal in excess of regulatory requirements reflects management's objective of
maintaining liquidity at a level necessary to meet operating requirements,
taking into account anticipated cash flows and available sources of credit, to
afford future flexibility to meet withdrawal requests and loan commitments or to
make other investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Glendale Federal" for discussion of
Glendale Federal's current investing strategies.
The OTS currently requires savings institutions to maintain eligible liquid
assets as defined by federal regulations in an amount equal to or greater than
4% of average deposits and borrowings. This liquidity requirement may be changed
from time to time by the OTS Director to any amount within the range of 4% to
10% and the OTS Director has the authority to prescribe different liquidity
requirements for different classes of savings institutions, which classes may be
determined in accordance with criteria selected by the OTS Director. See
"Regulation." Glendale Federal's qualified regulatory liquidity percentage of
4.38% for the month of June 1998 exceeded the regulatory requirement.
182
<PAGE>
The following table summarizes Glendale Federal's cash and short-term,
highly liquid securities by type at the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Federal funds sold................................... $ 27,000 $ -- $ 33,000 $ 16,000 $ 45,961
Securities purchased under resale agreements ........ 145,000 482,000 375,000 280,000 270,000
Whole loans purchased under resale agreements ....... -- 150,000 25,000 -- --
-------- -------- -------- -------- --------
172,000 632,000 433,000 296,000 315,961
Cash and amounts due from banks...................... 289,978 221,557 153,608 139,697 164,576
-------- -------- -------- -------- --------
$461,978 $853,557 $586,608 $435,697 $480,537
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following table summarizes the carrying amount of Glendale Federal's
other investments (excluding FHLB stock) at the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit.............................. $ 2,200 $ 4,005 $ 10,786 $ 10,059 $ 13,716
U.S. Government and Federal agency obligations....... 39,471 25,690 8,086 17,354 148,056
Obligations of municipalities(1)..................... 83,763 -- -- -- --
Equity securities.................................... 2,874 2,104 5 5 52
Commercial paper..................................... -- -- -- 14,908 1,564
FHLB deposits........................................ -- -- -- -- 1,668
Mortgage-backed collateralized notes................. -- -- -- -- 605
Other................................................ -- -- -- -- 379
-------- -------- -------- -------- --------
$128,308 $ 31,799 $ 18,877 $ 42,326 $166,040
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Acquired in the April 1998 merger with CenFed Bank.
Shown below are the carrying amounts and weighted average rates of other
investments (excluding FHLB stock) at June 30, 1998, with related remaining
terms to maturity (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
CARRYING AVERAGE
AMOUNT RATE
-------- --------
<S> <C> <C>
Certificate of deposit maturing within 1 year.............................................. $ 2,200 5.55%
U.S. Government and Federal agency obligations:
Maturing within 1 year................................................................... 12,404 5.06
Maturing in 1-5 years.................................................................... 25,040 5.59
Maturing in 5-10 years................................................................... 2,027 5.75
Obligations of municipalities:
Maturing after 10 years.................................................................. 83,763 3.81
Equity securities.......................................................................... 2,874 --
-------- ----
$128,308 4.23%
-------- ----
-------- ----
</TABLE>
MORTGAGE LOAN SERVICING ACTIVITIES
Glendale Federal services mortgage loans for other loan investors in
exchange for servicing fees. Mortgage loan servicing activities include:
collecting payments from borrowers; forwarding the payments to the loans'
investors along with an accounting of the allocation of the payments, the loans'
payment status, and custodial funds held by Glendale Federal; holding impounded
borrower funds for the payment of taxes and insurance; if necessary, foreclosing
on delinquent borrowers; and advancing corporate funds when impounded funds on
hand are inadequate to pay property taxes and insurance, or as otherwise needed
to protect the investors' interest in the loans.
Glendale Federal entered into agreements to service mortgage loans for
others primarily through the purchase of servicing rights from other servicers,
and to a lesser extent, through the sale of mortgage loans it has originated
while retaining the right to service the loans. Of Glendale Federal's
$25.3 billion in unpaid principal of mortgage loans serviced for others at
June 30, 1998, approximately $22.9 billion was obtained through the
183
<PAGE>
purchase of servicing agreements and $2.4 billion was obtained through the sale
of loans originated by Glendale Federal with servicing rights retained.
Glendale Federal received fees from loan investors, generally expressed as
a percent of the unpaid balance of the mortgage loans serviced, and retained any
late charges or other fees collected from the borrowers. Servicing fees are
collected from the borrowers' payments, or in the event of default by the
borrower, from the investor's proceeds from foreclosure of the real estate
collateral. During the period the borrower is not making payments, Glendale
Federal receives no fees and may be required to advances corporate funds to meet
contractual principal and interest pass-through requirements for certain
investors, maintain current property taxes and insurance, to move the loan
through the foreclosure process, and to secure, prepare and market foreclosed
real estate collateral. Glendale Federal generally recovers advanced funds from
borrowers of reinstated and performing loans, and from investors of foreclosed
loans. At June 30, 1998 and 1997, 0.98% and 1.11% of Glendale Federal's loans
serviced for others were delinquent 30 days or more.
The following table summarizes activity in Glendale Federal's portfolio of
loans serviced for others for the periods indicated (in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Portfolio of mortgage loans serviced for others, beginning balance.... $29,598 $14,168 $11,678 $10,085
Add: Servicing purchased.............................................. -- 17,184 3,696 2,803
Servicing added due to the CenFed Bank acquisition............... 447 -- -- --
Servicing retained on loans sold................................. 386 92 -- --
Less: Amortization, prepayments and foreclosures...................... (5,162) (1,846) (1,206) (1,210)
------- ------- ------- -------
Portfolio of mortgage loans serviced for others, ending balance....... $25,269 $29,598 $14,168 $11,678
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Glendale Federal's Consolidated Statements of Financial Condition include
"mortgage servicing assets" ("MSA"), recorded at the lower of the amortized cost
or the estimated fair value of servicing rights acquired by Glendale Federal
through purchase, merger or retention of the servicing rights relating to
mortgage loans sold. As more fully discussed in Note 1 of the Notes to
Consolidated Financial Statements of Glendale Federal, included elsewhere in
this Prospectus, effective January 1, 1998, Glendale Federal adopted Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). SFAS No.125 requires the recognition of a servicing asset or liability
for loans sold where Glendale Federal retains the servicing rights. The amount
recognized is an allocation of the carrying value of the loan sold based on the
relative fair value of the loan to the servicing rights retained. SFAS No. 125
also requires recognition of a valuation allowance for impairment in the fair
value of the MSA.
The following table summarizes activity in Glendale Federal's MSA and
related valuation allowances for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1998 1997 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
MORTGAGE SERVICING ASSETS ACTIVITY:
MSA, beginning balance............................................ $288,519 $127,399 $ 99,122 $68,719
Purchases......................................................... 1,021(1) 187,343 50,836 51,537
Addition due to CenFed Bank acquisition........................... 8,318 -- -- --
Servicing rights on loans sold with servicing rights retained..... 4,890 1,119 -- --
Amortization...................................................... (49,245) (27,342) (22,559) (19,131)
Decrease due to sale of University Savings........................ -- -- -- (2,003)
-------- -------- -------- -------
MSA, ending balance............................................... $253,503 $288,519 $127,399 $99,122
-------- -------- -------- -------
-------- -------- -------- -------
VALUATION ALLOWANCE ACTIVITY:
MSA valuation allowance, beginning balance........................ $ (4,047) $ -- $ -- $ --
Additions charged to loan servicing income........................ (6,142) (4,047) -- --
-------- -------- -------- -------
MSA valuation allowance, ending balance........................... $(10,189) $ (4,047) $ -- $ --
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
- ------------------
(1) Consists of capitalized costs and adjustments related to prior years'
purchases.
184
<PAGE>
The fair values of Glendale Federal's MSA at June 30, 1998 and 1997 were
$297.6 million and $353.5 million, respectively. The fair value of Glendale
Federal's servicing portfolio was determined by applying market assumptions for
the serviced loans to estimate servicing-related income and expenses over the
underlying loans' estimated lives, and discounting the estimated future net
servicing income at the current market discount rate. Fair value is
significantly influenced by market prepayment expectations. Prepayment
expectations are influenced by the difference between the mortgage loans'
interest rates and current market interest rates. During periods of decreasing
interest rates, the market anticipates that homeowners will be more likely to
refinance their existing mortgages; during periods of increasing interest rates,
the market anticipates that homeowners will be less inclined to refinance their
existing mortgages. The slower prepayments anticipated by rising interest rates
results in a longer estimated period of net servicing income for the existing
servicing portfolio, and therefore increases its value. Conversely, the faster
prepayments anticipated by declining interest rates results in a shorter
estimated period of net servicing income and therefore decreases the value of
Glendale Federal's servicing portfolio.
The following table summarizes Glendale Federal's portfolio of mortgage
loans serviced for others by interest rate at June 30, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SERVICE FEE WEIGHTED AVERAGE
NUMBER OF PRINCIPAL (IN BASIS REMAINING CONTRACTUAL
INTEREST RATE LOANS BALANCE POINTS) TERM (IN MONTHS)
- ------------- --------- ----------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Less than 6.5%.................... 4,315 $ 468,537 33.7 177
6.50-6.99......................... 18,301 2,466,816 26.3 194
7.00-7.49......................... 49,619 7,358,008 29.2 262
7.50-7.99......................... 58,560 8,582,464 26.7 280
8.00-8.49......................... 36,690 3,837,659 41.6 283
8.50-8.99......................... 26,079 1,621,156 48.5 261
9.00-9.49......................... 6,472 276,897 49.6 212
9.50-9.99......................... 6,180 245,699 56.1 191
10.00 and over.................... 6,754 411,649 36.3 188
------- -----------
212,970 $25,268,885 31.9 261
------- -----------
------- -----------
</TABLE>
The following table sets forth the geographic distribution of Glendale
Federal's portfolio of mortgage loans serviced for others at June 30, 1998
(dollars in thousands):
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
- ----- --------- ----------- ----------------
<S> <C> <C> <C>
California................................................. 124,228 $17,284,546 68%
Florida.................................................... 40,259 2,174,765 9
New York................................................... 3,510 668,176 3
New Jersey................................................. 3,379 557,339 2
Texas...................................................... 6,473 547,006 2
Maryland................................................... 2,497 431,016 2
Virginia................................................... 2,033 360,284 1
Colorado................................................... 3,134 328,764 1
Washington................................................. 1,979 238,088 1
Others(1).................................................. 25,478 2,678,901 11
------- ----------- ----
212,970 $25,268,885 100%
------- ----------- ----
------- ----------- ----
</TABLE>
- ------------------
(1) No other state represents more than 1% of Glendale Federal's mortgage
servicing portfolio measured by unpaid principal balance.
185
<PAGE>
DEPOSITS
Glendale Federal's deposits were obtained primarily in California, where
its branch offices are located. Glendale Federal attracts checking and other
daily access type accounts as well as short-term and long-term certificate
accounts from the general public by providing a wide assortment of accounts and
rates. Glendale Federal's customer deposit accounts included savings, checking
and money market accounts, certificates of deposit with fixed terms ranging from
three months to five years, and negotiated rate $95,000 and over "jumbo"
certificates with maturities ranging from 14 days to five years. Included among
these savings programs are individual retirement accounts and Keogh retirement
accounts. Jumbo certificates are obtained from a diverse customer base which
includes state and local governments, private individuals, corporations and
non-profit organizations.
The following table sets forth information regarding the amounts of
deposits in the various types of deposit programs offered by Glendale Federal as
of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Daily access:
Checking............................. $ 1,815,761 $1,198,011 $ 778,980 $ 661,853 $ 850,112
Savings.............................. 477,199 452,225 492,777 551,905 1,236,446
Money-market......................... 2,379,249 2,119,553 1,719,319 1,272,012 1,038,944
----------- ---------- ---------- ----------- -----------
Total daily access................ 4,672,209 3,769,789 2,991,076 2,485,770 3,125,502
----------- ---------- ---------- ----------- -----------
Certificates with original maturities
of:
6 months and under................... 706,779 803,849 955,203 870,733 1,426,838
Over 6 months to 18 months........... 3,328,793 2,951,465 2,797,297 2,758,070 3,428,317
Over 18 months to 30 months.......... 929,305 1,096,788 961,912 1,345,524 1,288,984
Over 30 months....................... 728,697 552,342 770,786 737,891 1,088,872
Jumbo certificates................... 335,374 182,676 247,702 536,892 561,293
----------- ---------- ---------- ----------- -----------
Total certificates................ 6,028,948 5,587,120 5,732,900 6,249,110 7,794,304
----------- ---------- ---------- ----------- -----------
$10,701,157 $9,356,909 $8,723,976 $ 8,734,880 $10,919,806
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
Weighted average interest rate on
deposits at end of period............ 4.06% 4.37% 4.62% 5.13% 3.94%
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
</TABLE>
186
<PAGE>
For information regarding the changes in Glendale Federal's deposit
composition, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Glendale Federal--Balance Sheet Analysis--Deposits."
The following table sets forth information relating to Glendale Federal's
deposit flows during the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deposits, beginning balance............ $ 9,356,909 $8,723,976 $8,734,880 $10,919,806 $11,615,529
Interest credited...................... 412,559 402,863 432,992 398,861 423,132
Net deposits (decrease) increase....... (505,687) (175,087) (443,896) 608,417 (1,118,855)
Acquisition of CenFed Bank deposits.... 1,437,376 -- -- -- --
Acquisition of OneCentral deposits..... -- 68,809 -- -- --
Acquisition of TransWorld deposits..... -- 336,348 -- -- --
Sale of Florida franchise.............. -- -- -- (3,281,049) --
Sale of University Savings Bank........ -- -- -- (918,126) --
Acquisition of Independence One
deposits............................. -- -- -- 194,146 --
Acquisition of Union Federal
deposits............................. -- -- -- 812,825 --
----------- ---------- ---------- ----------- -----------
Net increase (decrease)................ 1,344,248 632,933 (10,904) (2,184,926) (695,723)
----------- ---------- ---------- ----------- -----------
Deposits, ending balance............... $10,701,157 $9,356,909 $8,723,976 $ 8,734,880 $10,919,806
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
</TABLE>
The following table sets forth information regarding the remaining
contractual maturities of deposits as of June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE TOTAL 3 MONTHS 4-6 7-12 13-24 25-36 OVER 36
RATE BALANCE OR LESS(1) MONTHS MONTHS MONTHS MONTHS MONTHS
-------- ----------- --------------- ---------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Checking................ 0.31% $ 1,815,761 $ 1,815,761 $ -- $ -- $ -- $ -- $ --
Savings................. 2.00 477,199 477,199 -- -- -- -- --
Money-market............ 3.93 2,379,249 2,379,249 -- -- -- -- --
Certificates:
5.00% and lower ...... 4.77 1,503,191 491,230 359,064 545,199 92,680 12,233 2,785
5.01%-6.00% .......... 5.52 4,095,310 1,489,394 1,004,674 646,705 792,108 71,792 90,637
6.01%-7.00% .......... 6.28 340,288 90,203 28,702 70,975 119,006 5,702 25,700
7.01%-8.00% .......... 7.28 84,266 2,555 4,643 5,410 66,844 1,358 3,456
8.01%-9.00% .......... 8.59 5,222 360 716 454 3,449 145 98
9.01%-10.00% ......... 9.43 671 3 -- 668 -- -- --
----------- ----------- ---------- ---------- ---------- ------- --------
Total
certificates .... 5.41 6,028,948 2,073,745 1,397,799 1,269,411 1,074,087 91,230 122,676
----------- ----------- ---------- ---------- ---------- ------- --------
4.06% $10,701,157 $ 6,745,954 $1,397,799 $1,269,411 $1,074,087 $91,230 $122,676
----------- ----------- ---------- ---------- ---------- ------- --------
----------- ----------- ---------- ---------- ---------- ------- --------
</TABLE>
- ------------------
(1) Includes deposits with no stated maturity.
For additional information with respect to deposits, see Note 12 of the
Notes to Consolidated Financial Statements of Glendale Federal, included
elsewhere in this Prospectus.
187
<PAGE>
BORROWINGS
The following table summarizes Glendale Federal's consolidated borrowings
by type at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Securities sold under agreements
to repurchase............................ $ 175,551 $ 768,682 $ 758,050 $2,695,176 $2,306,274
Borrowings from FHLB....................... 5,613,458 4,788,000 3,838,000 3,495,000 2,443,428
Notes payable.............................. 70 276 93 1,177 1,440
Subordinated debentures.................... -- 10,506 10,506 14,227 14,280
Collateralized notes....................... -- -- -- 13,479 81,170
---------- ---------- ---------- ---------- ----------
$5,789,079 $5,567,464 $4,606,649 $6,219,059 $4,846,592
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average interest rate on
borrowings at end of period.............. 5.59% 5.72% 5.87% 6.18% 4.65%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Glendale Federal sold securities under "reverse repurchase agreements" with
securities dealers and the FHLB. Reverse repurchase agreements consist of sales
of securities with a commitment by Glendale Federal to repurchase such
securities for a predetermined price at a future date, typically ranging from
one to 120 days after the date of initial sale. The proceeds were used to
provide investment funds. Reverse repurchase transactions are treated as
borrowings, with the repurchase obligations being reflected as a liability under
the caption "Securities sold under agreements to repurchase" in the Consolidated
Statements of Financial Condition of Glendale Federal, included elsewhere in
this Prospectus, and the related interest expense being included in "Interest
expense: Short-term borrowings" in the Consolidated Statements of Operations of
Glendale Federal, included elsewhere in this Prospectus. The securities
collateralizing the reverse repurchase agreements are included in the respective
line items in the Consolidated Statements of Financial Condition of Glendale
Federal.
The FHLBS functions in a reserve credit capacity for savings institutions
and certain other home financing institutions. As a member, Glendale Federal was
required to own capital stock in the Federal Home Loan Bank of San Francisco and
was authorized to apply for advances from the FHLB on the security of such stock
and certain of its home mortgage loans and other assets. Such borrowings may be
made pursuant to several different credit programs offered from time to time by
the FHLB. Each credit program has its own interest rate and range of maturities,
and the FHLB prescribes the acceptable uses to which the advances pursuant to
each program may be put as well as limitations on the size of the advances.
Depending upon the credit program used, FHLB advances bear interest at fixed
rates or at adjustable rates tied to various indices. When Glendale Federal
utilized adjustable-rate programs, it generally obtains advances tied to LIBOR.
The FHLB offers a full range of maturities up to 30 years at generally
competitive rates. A prepayment penalty is normally imposed for early repayment
of FHLB advances. Glendale Federal had a line of credit with the FHLB enabling
Glendale Federal to borrow up to 35% of the total consolidated assets of
Glendale Federal. Based on the amount of these assets at June 30, 1998, Glendale
Federal's credit limit with the FHLB was $6.3 billion. Glendale Federal had
borrowings outstanding from the FHLB at June 30, 1998 of $5.6 billion. All
advances from the FHLB are collateralized with mortgage loans, mortgage-backed
securities and FHLB stock. Glendale Federal was also a member of the Federal
Reserve System and could borrow from the Federal Reserve Bank of San Francisco.
Savings institutions are required to exhaust their FHLB borrowing capacity
before borrowing from the Federal Reserve Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Glendale Federal--
Liquidity and Asset and Liability Management" for further information on the
Bank's liquidity.
All of the subordinated debentures outstanding at June 30, 1997 were
redeemed on September 16, 1997 at a redemption price equal to 100% of the
principal amount together with accrued and unpaid interest from March 15, 1997
to the redemption date.
In the past, Glendale Federal utilized other sources of funds to supplement
retail deposits. These sources included the issuance by Glendale Federal of
subordinated debentures, collateralized notes, subordinated capital notes,
commercial paper, medium-term notes and other short-term debt and the use by
Glendale Federal's subsidiaries of commercial paper, lines of credit with banks
and other notes payable.
188
<PAGE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
Glendale Federal's earnings depended primarily on its net interest income,
which is the difference between the amounts it receives from interest earned on
its loans and securities investments (its "interest-earning assets") and the
amounts it paid in interest on its deposit accounts and borrowings (its
"interest-bearing liabilities"). Net interest income is affected by (i) the
difference (the "interest rate spread" as applied to a specified date and the
"yield-cost spread" as applied to a specified period) between rates of interest
earned on its interest-earning assets and rates paid on its interest-bearing
liabilities and (ii) the relative amounts of its interest-earning assets and
interest-bearing liabilities. See "--Interest Rate Margin" below for information
concerning the interest rate spread at the end of each of the past three fiscal
years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Glendale Federal--Results of Operations--Net Interest
Income" of Glendale Federal, included elsewhere in this Prospectus, for
information concerning the yield-cost spread and a discussion of net interest
income for the past three fiscal years.
Market risk reflects changes in the value of collateral underlying loans
receivable, the valuation of real estate held by Glendale Federal, and the
valuation of loans held for sale, mortgage-backed securities available for sale
and mortgage servicing assets. Changes in the value of collateral and real
estate are primarily affected by economic and market conditions in the local
communities in which the real estate is located. Changes in the value of loans,
mortgage-backed securities and mortgage servicing assets are primarily affected
by prevailing interest rates in the national credit markets.
Glendale Federal's primary objective in managing interest rate risk was to
minimize the adverse impact of changes in interest rates on Glendale Federal's
net interest income and capital, while adjusting Glendale Federal's
asset-liability structure to obtain the maximum yield-cost spread on that
structure. Glendale Federal relied primarily on its asset-liability structure to
control interest rate risk. Glendale Federal was subject to interest rate risk
to the degree that its interest-bearing liabilities mature or repriced at
different speeds, or on different bases, than its interest-earning assets.
Glendale Federal actively monitored the impact of changes in interest rates
on its net interest income. For this purpose, Glendale Federal utilized various
dynamic computer simulation models to measure the sensitivity of its net
interest income and earnings forecasts to changes in market rates and possible
offsetting changes in Glendale Federal's business strategies. Based on such
analyses, Glendale Federal developed and implemented short- and long-term
strategies to mitigate the effects of adverse operating environments.
The OTS measures interest rate risk through a somewhat similar computer
simulation model described in TB 13. Under TB 13, institutions are required to
establish limits on the sensitivity of their net interest income and net
portfolio value to changes in interest rates. Unlike Glendale Federal's
analyses, under TB 13 changes in interest rates are defined to consist solely of
instantaneous and sustained movements in interest rates in 100 basis point
increments and no possible adjustments to a company's business strategies to
reflect the assumed changes in interest rates are permitted to be taken into
account. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Glendale Federal--Liquidity and Asset and Liability
Management--Asset and Liability Management" for further information relating to
Glendale Federal's interest rate risk sensitivity at June 30, 1998 and 1997, as
calculated in accordance with the requirements of TB 13.
Another measure of Glendale Federal's exposure to differential changes in
interest rates between assets and liabilities used by some companies and
analysts, although Glendale Federal does not rely on this measure in its
interest rate risk management and planning activities, is shown in the following
table, which sets forth the maturity and rate sensitivity of Glendale Federal's
interest-earning assets and interest-bearing liabilities as of June 30, 1998.
"GAP," as reflected in the table, represents the estimated difference between
the amount of interest-earning assets and interest-bearing liabilities repricing
during future periods as adjusted for interest rate swaps and based on certain
assumptions, including those stated in the notes to the table. The interest rate
sensitivity of Glendale Federal's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differs from the assumptions used. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Glendale Federal--Liquidity and Asset and Liability
Management--Asset and Liability Management."
189
<PAGE>
<TABLE>
<CAPTION>
TOTAL PERCENT OF
BALANCE TOTAL
------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest-earning Assets(1):
Loans receivable:
Single-family 1-4 units(2)(3)................ $10,356 60.0%
Multi-family and non-residential(2)(3)....... 3,177 18.4
Consumer and commercial(3)................... 441 2.7
Mortgage-backed securities(2)(3)................ 2,363 13.7
Investment securities(4)........................ 300 1.7
Other assets(5)................................. 611 3.5
------- ------
Total interest-earning assets.............. 17,248 100.0%
------
------
Non-interest-earning assets....................... 847
-------
Total assets...................................... $18,095
-------
-------
Interest-bearing Liabilities:
Deposits:
Checking(6).................................. $ 1,816 11.0%
Savings(6)................................... 477 2.9
Money-market(6).............................. 2,379 14.4
Certificates(4).............................. 6,029 36.6
Borrowings:
FHLB(4)(7)................................... 5,613 34.0
Other(4)..................................... 176 1.1
------- ------
Total interest-bearing liabilities........... 16,490 100.0%
------
------
Non-interest-bearing liabilities.................. 327
-------
Total liabilities................................. 16,817
Stockholder's equity.............................. 1,278
-------
Total liabilities and stockholder's equity........ $18,095
-------
-------
Maturity GAP......................................
June 30, 1998 Cumulative GAP......................
As % of total assets..............................
June 30, 1997 Cumulative GAP......................
As % of total assets..............................
<CAPTION>
MATURITY/RATE SENSITIVITY
--------------------------------------------
WITHIN OVER 6 TO 12 1-5 OVER 5
6 MONTHS MONTHS YEARS YEARS
-------- ------------ ------- ------
<S> <C> <C> <C> <C>
Interest-earning Assets(1):
Loans receivable:
Single-family 1-4 units(2)(3)................$ 3,727 $1,717 $ 3,506 $1,406
Multi-family and non-residential(2)(3)....... 2,797 162 114 104
Consumer and commercial(3)................... 433 1 6 1
Mortgage-backed securities(2)(3)................ 971 608 553 231
Investment securities(4)........................ 203 -- -- 97
Other assets(5)................................. 300 -- -- 311
-------- ------ ------- ------
Total interest-earning assets..............$ 8,431 $2,488 $ 4,179 $2,150
-------- ------ ------- ------
Non-interest-earning assets.......................
Total assets......................................
Interest-bearing Liabilities:
Deposits:
Checking(6)..................................$ 164 $ 147 $ 791 $ 714
Savings(6)................................... 35 32 186 224
Money-market(6).............................. 417 344 1,272 346
Certificates(4).............................. 3,472 1,269 1,276 12
Borrowings:
FHLB(4)(7)................................... 2,879 1,049 1,685 --
Other(4)..................................... 176 -- -- --
-------- ------ ------- ------
Total interest-bearing liabilities...........$ 7,143 $2,841 $ 5,210 $1,296
-------- ------ ------- ------
Non-interest-bearing liabilities..................
Total liabilities.................................
Stockholder's equity..............................
Total liabilities and stockholder's equity........
Maturity GAP......................................$ 1,288 $ (353) $(1,031) $ 854
June 30, 1998 Cumulative GAP......................$ 1,288 $ 935 $ (96) $ 758
As % of total assets.............................. 7.1% 5.2% (0.5)% 4.2%
June 30, 1997 Cumulative GAP......................$ 1,924 $2,358 $ 631 $ 600
As % of total assets.............................. 11.9% 14.5% 3.9% 3.7%
</TABLE>
- ------------------
(1) Loans receivable balances are presented gross of unearned
discounts/premiums, deferred loan origination fees and allowance for loan
losses and net of undisbursed loan funds. Mortgage-backed securities
balances are presented gross of unearned discounts/premiums, deferred loan
origination fees and unrealized losses.
(2) ARM loans are predominantly included in the "within 6 months" and "over 6 to
12 months" categorizes, as they are subject to an interest adjustment every
month, six months or twelve months, depending upon terms of the applicable
note.
(3) Maturity/rate sensitivity is based upon contractual maturity, projected
repayments and prepayments of principal. The prepayment experience reflected
herein is based on Glendale Federal's historical experience. Glendale
Federal's average Constant Prepayment Rate ("CPR") is 21.2% and 19.6% on its
fixed-rate and adjustable-rate portfolio, respectively. The actual maturity
and rate sensitivity of these assets could vary substantially if future
prepayments differ from Glendale Federal's historical experience.
(4) Based on the contractual maturity of the instrument.
(5) Includes cash and demand deposits and FHLB stock, the latter earning a rate
of return that varies quarterly.
(6) In accordance with standard industry and regulatory practice, a decay
factor, used to estimate deposit runoff, of 38.09% (CPR) per year have been
applied to these deposits.
(7) Includes $400 million and $300 million funded in March and April 1998,
respectively, with a five-year term, but which the FHLB has the option to
call after one year and which accordingly has been allocated to the "over 6
to 12 months" category.
190
<PAGE>
The following table presents the gross balances, categorized by expected
maturity, and fair values, of Glendale Federal's financial instruments that are
sensitive to changes in interest rates at June 30, 1998. Interest rate sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. See Note 15 of the Notes to Consolidated Financial
Statements for additional information regarding the fair values of Glendale
Federal's financial instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE(1)
----------------------------------------------------------------------------
THERE- TOTAL GROSS
1999 2000 2001 2002 2003 AFTER BALANCE
----------- ---------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans receivable(2):
Single-family 1-4 units...... $2,001,762 $1,845,061 $1,483,930 $1,142,031 $ 878,506 $3,004,348 $10,355,638
Average interest rate...... 7.67% 7.70% 7.66% 7.65% 7.63% 7.53% 7.63%
Multi-family and
non-residential............ 297,444 277,885 260,444 235,347 223,144 1,882,833 3,177,097
Average interest rate...... 7.87% 7.75% 7.77% 7.69% 7.75% 7.62% 7.68%
Consumer and commercial...... 100,431 60,471 245,672 3,400 3,060 27,531 440,565
Average interest rate...... 11.81% 10.56% 9.98% 8.89% 8.89% 8.89% 10.39%
Mortgage-backed
securities(3)................ 425,116 357,314 294,496 235,760 240,470 809,913 2,363,069
Average interest rate...... 7.16% 7.07% 7.03% 6.98% 6.97% 6.78% 6.96%
Investment securities.......... 203,418 -- -- -- -- 96,890 300,308
Average interest rate...... 5.63% -- -- -- -- 3.73% 5.02%
Mortgage servicing assets(4)... 48,101 39,166 31,254 25,247 20,622 89,113 253,503
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total interest-sensitive
assets....................... $3,076,272 $2,579,897 $2,315,796 $1,641,785 $1,365,802 $5,910,628 $16,890,180
----------- ---------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- ---------- -----------
INTEREST-SENSITIVE LIABILITIES:
Deposits:
Checking..................... $311,080 $255,796 $212,311 $176,218 $146,261 $714,095 $1,815,761
Average interest rate...... 0.32% 0.32% 0.32% 0.32% 0.32% 0.32% 0.32%
Savings...................... 66,808 57,455 49,411 42,494 36,544 224,487 477,199
Average interest rate...... 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Money-market................. 1,400,660 313,148 212,941 144,800 98,464 209,236 2,379,249
Average interest rate...... 3.96% 3.96% 3.96% 3.96% 3.96% 3.96% 3.96%
Certificates................. 4,740,900 1,072,659 91,231 79,945 31,565 12,648 6,028,948
Average interest rate...... 5.36% 5.62% 5.62% 5.79% 5.79% 5.79% 5.42%
Borrowings:
FHLB......................... 3,928,458 245,000 1,000,000 -- 440,000 -- 5,613,458
Average interest rate...... 5.53% 5.53% 5.74% -- 5.97% -- 5.60%
Other........................ 175,551 -- -- 70 -- -- 175,621
Average interest rate...... 5.72% -- -- 8.75% -- -- 5.72
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total interest-sensitive
liabilities.................. $10,623,457 $1,944,058 $1,565,894 $ 443,527 $ 752,834 $1,160,466 $16,490,236
----------- ---------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- ---------- -----------
<CAPTION>
FAIR
VALUE
-----------
<S> <C>
INTEREST-SENSITIVE ASSETS:
Loans receivable(2):
Single-family 1-4 units...... $10,333,005
Average interest rate......
Multi-family and
non-residential............ 3,042,740
Average interest rate......
Consumer and commercial...... 405,642
Average interest rate......
Mortgage-backed
securities(3)................ 2,382,325
Average interest rate......
Investment securities.......... 300,308
Average interest rate......
Mortgage servicing assets(4)... 297,557
-----------
Total interest-sensitive
assets....................... $16,761,577
-----------
-----------
INTEREST-SENSITIVE LIABILITIES:
Deposits:
Checking..................... $1,815,761
Average interest rate......
Savings...................... 477,199
Average interest rate......
Money-market................. 2,379,249
Average interest rate......
Certificates................. 6,031,536
Average interest rate......
Borrowings:
FHLB......................... 5,614,652
Average interest rate......
Other........................ 174,949
Average interest rate......
-----------
Total interest-sensitive
liabilities.................. $16,493,346
-----------
-----------
</TABLE>
- ------------------
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. Glendale Federal uses certain assumptions to estimate expected
maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and prepayments of principal. The prepayment
experience reflected herein is based on Glendale Federal's historical
experience. Glendale Federal's CPR is 21.2% and 19.6% on its fixed-rate and
adjustable-rate portfolios, respectively, for interest-earning assets
(excluding investment securities, which do not have prepayment features).
For deposit liabilities, in accordance with standard regulatory and industry
practice, "decay factors", used to estimate deposit runoff, of 38.09% CPR
per year have been applied. The actual maturities of these instruments could
vary substantially if future prepayments differ from Glendale Federal's or
the industry's historical experience.
(2) Loans receivable balances are presented gross of unearned
discounts/premiums, deferred loan fees and allowance for loan losses and net
of undisbursed loan funds.
(3) Mortgage-backed securities balances are presented gross of unearned
discounts/premiums, deferred loan fees and unrealized loss.
(4) Mortgage servicing assets balances are presented gross of the valuation
allowance.
191
<PAGE>
Glendale Federal continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Glendale
Federal's management believed that derivative instruments then available were
not cost-effective, and therefore, has focused its efforts on increasing
Glendale Federal's yield-cost spread by attracting lower-costing retail
deposits, principally checking accounts from businesses and individuals. In the
past, Glendale Federal had used derivatives, primarily interest rate exchange
agreements, as a component of its interest rate risk management strategy. The
purpose of the interest rate exchange agreements was to reduce the effect of
rising interest rates on short-term deposits and FHLB advances, and the effect
thereof on interest expense. Glendale Federal had no interest rate exchange
agreements or other off-balance sheet derivatives, and had $356,000 of
interest-only strips at June 30, 1998.
INTEREST RATE MARGIN
The following table provides information concerning the interest rate
spread at the end of each of the past three fiscal years:
<TABLE>
<CAPTION>
JUNE 30
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net........................................................... 7.75% 7.73% 7.74%
Mortgage-backed securities, net................................................. 6.37 6.78 6.26
Total loans and mortgage-backed securities................................... 7.55 7.58 7.49
Federal funds sold and assets purchased under resale agreements................. 6.36 6.49 5.69
Other investments(1)............................................................ 6.09 8.41 9.58
Total investments............................................................ 6.17 7.10 6.99
Total interest-earning assets................................................ 7.50 7.55 7.46
Interest-bearing liabilities:
Deposits--daily access.......................................................... 2.33 2.76 3.02
Deposits--certificates.......................................................... 5.41 5.46 5.46
Total deposits............................................................... 4.06 4.37 4.62
Securities sold under agreements to repurchase.................................. 5.72 5.66 5.50
Borrowings from FHLB............................................................ 5.59 5.72 5.94
Other borrowings................................................................ 8.46 7.78 7.76
Total borrowings............................................................. 5.59 5.72 5.87
Total interest-bearing liabilities........................................... 4.60 4.87 5.05
Interest rate spread.............................................................. 2.90% 2.68% 2.41%
Adjusted interest rate spread(2).................................................. 3.02% 2.79% 2.59%
</TABLE>
- ------------------
(1) Includes certificates of deposit, other debt and equity securities, and
investment in capital stock of FHLB.
(2) Net interest income annualized at the rates in effect as of the reported
date divided by the balance of interest-earning assets as of such date.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Glendale Federal--Results of Operations--Net Interest
Income" for an analysis of changes in interest income and interest expense and
their effect on the results of Glendale Federal's operations.
SUBSIDIARIES
Glendale Federal conducts various business activities through its
subsidiaries including GLENFED Brokerage Services ("GBS") and GLENFED Insurance
Services, Inc. ("GIS"). Applicable regulations provide that federally chartered
institutions such as Glendale Federal may invest up to 2% of their assets in
capital stock and secured and unsecured loans to subsidiary service corporations
and an additional 1% of assets when the additional funds are used for community
development and inner-city purposes. An institution that meets its
192
<PAGE>
regulatory capital requirements is also generally permitted to make conforming
loans to service corporations (and certain joint ventures of service
corporations) in which the institution owns or holds more than 10% of the
capital stock in an aggregate amount of up to 50% of its regulatory capital. At
June 30, 1998, Glendale Federal's permissible investment limit was
$950.8 million and Glendale Federal's aggregate investment for regulatory
purposes related to this limitation was $205.3 million.
Subsidiaries of Glendale Federal whose operations were on-going included
GBS and GIS. GBS marketed investments such as mutual funds and annuity products
and provides discount securities brokerage services. GBS recorded total revenues
and pre-tax earnings of $9.2 million and $4.3 million, respectively, for fiscal
1998 and had total assets of $13.9 million at June 30, 1998. GIS provided
general insurance agency services. GIS recorded total revenues and pre-tax
earnings of $4.6 million and $2.3 million, respectively, for fiscal 1998 and had
total assets of $10.8 million at June 30, 1998. While these subsidiaries
conducted their activities separately from those of Glendale Federal, their
principal sources of customers were referrals from Glendale Federal's retail
branch offices. These subsidiaries have contributed to Glendale Federal's
non-interest income and, as such, continued to be a part of Glendale Federal's
core operations.
EMPLOYEES
As of June 30, 1998, Glendale Federal had a total of 2,961 full-time
equivalent employees. None of its employees was represented by any collective
bargaining group. Glendale Federal provided its full-time employees with a
comprehensive program of benefits, most of which are on a contributory basis,
including medical insurance, dental insurance, life insurance, accidental death
and dismemberment insurance, long-term disability coverage, a pension plan and a
401(k) plan. Glendale Federal management considered its employee relations to be
satisfactory with a work force which maintained an overall commitment to the
mission and strategic goals of Glendale Federal.
PROPERTIES
Glendale Federal conducted its business through 195 banking offices and 23
loan offices in California. Most of the loan offices are located in a branch
building, but five are located in separately leased office facilities. Glendale
Federal owned its executive offices and 89 of its banking offices, as well as 5
other principal properties in which service centers and other facilities are
located, and leased the premises for 106 of its banking offices, as well as 12
other properties in which service centers and other facilities are located. The
net book value of all offices at June 30, 1998 was $102 million, which included
$15 million of leasehold improvements. Expirations of leases for facilities
range from August 1998 to April 2034. See Notes 3 and 10 of the Notes to
Consolidated Financial Statements of Glendale Federal, included elsewhere in
this Prospectus, for further information.
Glendale Federal evaluated the suitability and adequacy of all its
facilities on a continuing basis, including branch offices, support buildings
and service centers, and had an active program of relocating, remodeling or
closing such facilities as necessary to maintain efficient and attractive
facilities. Glendale Federal believed its present facilities were adequate for
its operating purposes.
LEGAL PROCEEDINGS
Goodwill Litigation Against the Government
Following the adoption of FIRREA, Glendale Federal sued the United States
Government (the "Government") contending that FIRREA's treatment of supervisory
goodwill constituted a breach by the Government of its 1981 contract with
Glendale Federal, under which Glendale Federal merged with a Florida thrift and
Glendale Federal was permitted to include the goodwill resulting from the merger
in Glendale Federal's regulatory capital (Glendale Federal Bank, F.S.B. v.
United States, No. 90-772C, in the United States Court of Federal Claims, filed
August 15, 1990) (the "Glendale Goodwill Litigation"). In July 1992, the United
States Court of Federal Claims (the "Claims Court") found in favor of Glendale
Federal's position, ruling that the Government breached its express contractual
commitment to permit Glendale Federal to include supervisory goodwill in its
regulatory capital and that Glendale Federal is entitled to seek financial
compensation.
193
<PAGE>
On May 25, 1993, a three-judge panel of the United States Court of Appeals
for the Federal Circuit (the "Federal Court") reversed the Claims Court's July
1992 judgment in favor of Glendale Federal, ruling that the Government was not
liable for breach of contract, and remanded the case for trial of Glendale
Federal's constitutional and other claims. On August 18, 1993, the Federal
Circuit granted Glendale Federal's request for rehearing en banc and vacated the
panel decision reversing the Claims Court's July 1992 judgment. On August 30,
1995 the Federal Circuit, by a 9 to 2 decision, affirmed the judgment of the
Claims Court in favor of Glendale Federal.
The Government subsequently appealed this decision to the United States
Supreme Court and on July 1, 1996, the Supreme Court, by a vote of 7 to 2, ruled
that the Government had breached its contract with Glendale Federal and remanded
the case to the Claims Court for a determination of damages. The trial to
determine damages commenced on February 24, 1997 and the taking of testimony in
the trial was completed on April 9, 1998. Glendale Federal has presented
evidence on three alternative damages theories: (1) "Reliance Damages," pursuant
to which Glendale Federal presented evidence of damages in the amount of
$863.8 million; (2) "Expectation Damages," pursuant to which Glendale Federal
presented evidence of damages in the amount of $1.603 billion; and
(3) "Restitution," pursuant to which Glendale Federal presented evidence of
damages in excess of $2.015 billion.
The Government has presented evidence seeking to establish that Glendale
Federal benefited from the breach, rather than being damaged, and is not
entitled to recover any compensation from the Government. In addition, as an
affirmative defense, the Government asserts that certain testimony by Glendale
Federal witnesses at the trial is inconsistent with prior documents filed by
Glendale Federal and that these inconsistencies constitute a fraud against the
Government that should result in forfeiture of Glendale Federal's right to
compensation for the Government's breach of contract.
In lieu of traditional closing briefs, the Claims Court requested the
parties to respond to a series of written questions posed by the Court regarding
factual and legal issues raised in the damages trial. Responses to those
questions, as well as each party's reply to the other's responses, have been
filed with the Court and final oral arguments on these matters were held on
September 11, 1998.
Shareholder Class Action Litigation
A wholly-owned subsidiary of Glendale Federal, as the successor by merger
to Glendale Federal's former parent corporation, GLENFED, Inc. ("GLENFED") is a
defendant in consolidated class actions pending in the United States District
Court for the Central District of California (the "District Court"), entitled In
Re GLENFED, Inc. Securities Litigation, Civil No. 91-0816 WJR, originally filed
on January 18, 1991. The original consolidated complaint was dismissed by the
Court on July 15, 1991, with leave to amend, for failure to allege with
specificity the securities law and common law fraud claims asserted in the
complaint. The complaint alleged, among other things, that various
misrepresentations were made concerning the financial condition and operations
of GLENFED and Glendale Federal prior to GLENFED's announcement of a
$140 million loss on or about January 16, 1991.
After dismissal of the complaint, the plaintiffs filed an amended complaint
which was dismissed by the District Court, which then entered judgment in favor
of GLENFED and the individual officer and director defendants. Plaintiffs
appealed this dismissal and on September 15, 1993, the United States Court of
Appeals for the Ninth Circuit (the "Appeals Court") affirmed the judgment
dismissing the complaint. On December 9, 1994, the Appeals Court, sitting en
banc, reversed the decision of the three-judge panel which had found in favor of
GLENFED on only one of the alternative grounds on which the District Court had
based its opinion. Since the three-judge panel had not ruled on all the grounds
which formed the basis of the District Court's opinion, the en banc court
remanded the case to the three-judge appellate panel for a ruling on the
remaining grounds. On July 13, 1995, the three-judge panel of the Appeals Court
entered an order affirming the dismissal by the District Court of the outside
directors and remanded the remainder of the case to the District Court for
further proceedings.
On November 12, 1996, the court heard GLENFED's and the remaining officers'
and directors' motion for summary judgment and/or summary adjudication. On
January 6, 1997, the court denied the motion for summary judgment but granted
the motion for summary adjudication that: 1) the marketplace was informed of
conditions
194
<PAGE>
in the real estate and savings and loan industries during the relevant time
period; and 2) defendants monitored and disclosed the status of GLENFED's loan
loss and non-performing assets and did not make false or misleading statements
in regard to said reserves and assets. The issue remaining in the case is
whether the defendants had a reasonable belief that certain subsidiaries could
be sold without a loss. The trial court entered an order refusing to certify a
class in April 1997. After permitting another two shareholders to intervene, the
Court again refused to certify a class in April 1998 and, subsequently, the
Ninth Circuit refused to grant an interlocutory appeal on this issue, which will
now have to await trial and/or final judgment. The remaining claims of the
individual plaintiffs have yet to be set for trial.
Certain of the former officers and directors of GLENFED were also named
defendants in a California state court derivative action (entitled Donald P.
Delliquanti, et al. v. Norman M. Coulson, et al. and GLENFED, Inc., as a nominal
defendant, Case No. BC021028, filed February 8, 1991 in Los Angeles County,
California Superior Court) which charges those persons who were directors of
GLENFED during the period covered by the plaintiff's allegations with breach of
fiduciary duty and mismanagement in connection with past write-downs and loss
provisions for real estate loans and investments. Since the litigation is
derivative in nature, the subsidiary of Glendale Federal which is the successor
to GLENFED would be a recipient of any judgment and has no exposure to damages.
On October 8, 1991, the Court sustained the defendant's demurrer to the second
amended complaint in this action and entered judgment in favor of GLENFED and
the individual officer defendants. The plaintiffs filed an appeal, and on
September 1, 1993, the Court of Appeals reversed the decision of the lower
Court. The case has now been set for trial on April 5, 1999.
Golden State Acquisition/Litigation
Following the public announcement on February 5, 1998 of the Merger
Agreement and the proposed Mergers, several separate purported class action
lawsuits (collectively, the "Delaware Litigation") were filed by certain
stockholders of Golden State naming Golden State, its individual directors and,
in certain cases, FNH and MacAndrews & Forbes as defendants. The Delaware
Litigation was consolidated into one action in the Court of Chancery in Delaware
captioned In re Golden State Bancorp Inc. Shareholders Litigation, Consolidated
C.A. No. 16175NC. The plaintiffs in the Delaware Litigation have alleged, among
other things, that the individual members of Golden State's board of directors
have breached their fiduciary duties to Golden State's stockholders by entering
into the Merger Agreement. The plaintiffs are seeking, on behalf of themselves
and all similarly situated stockholders of Golden State, among other things, (i)
class certification, (ii) an order enjoining, preliminarily and permanently, the
Mergers, or, in the event the Mergers are consummated prior to the entry of a
final order, rescission of the Mergers and/or damages, including rescissory
damages, and (iii) costs and disbursements, including attorneys' fees. In
addition, several purported class action complaints alleging substantially
similar claims, and seeking substantially similar relief, have been filed in Los
Angeles Superior Court in the State of California. The plaintiffs in such
actions have agreed to a stay of such actions pending disposition of the
Delaware Litigation. A settlement in principle has been reached among counsel
for the parties in both the Delaware Litigation and the California litigation,
subject to court approval and other conditions. The terms of the proposed
settlement provided, among other things, that Golden State supply certain
additional information to shareholders in the proxy statement disseminated in
connection with the special meeting of Golden State shareholders held on August
17, 1998 and such information was included. Defendants have agreed, in
connection with the contemplated settlement, not to oppose an award of
attorney's fees to plaintiffs' counsel in an amount provided for in the
agreement. Such amount is not material to Golden State.
Other Litigation
In addition to the matters described above, Glendale Federal or its
subsidiaries are involved as plaintiff or defendant in various legal actions
incidental to their business, none of which is believed by management to be
material to the financial condition or results of operations of Glendale Federal
and its subsidiaries on a consolidated basis.
195
<PAGE>
REGULATION
GENERAL
Golden State Holdings is a savings and loan holding company within the
meaning of the HOLA and, as such, is registered with the OTS and is subject to
comprehensive OTS regulation. The Bank is a federally chartered and insured
stock savings bank subject to extensive regulation and supervision by the OTS,
as the primary federal regulator of savings associations, and the FDIC, as the
administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Issuer or the Bank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions or
proposals. The primary purpose of the statutory and regulatory scheme is to
protect deposits, the financial institutions and the financial system as a
whole.
REGULATION OF THE ISSUER
Holding Company Acquisitions
Golden State Holdings is a registered savings and loan holding company. The
HOLA and OTS regulations thereunder generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring, directly or
indirectly, the ownership or control of any other savings association or savings
and loan holding company, or all, or substantially all, of the assets or more
than 5% of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
Holding Company Activities
Golden State Holdings currently operates as a unitary savings and loan
holding company. Generally, there are limited restrictions on the activities of
a unitary savings and loan holding company and its non-savings association
subsidiaries. If Golden State Holdings ceases to be a unitary savings and loan
holding company, by, for example, acquiring another savings association in a
non-supervisory transaction, the activities of Golden State Holdings and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions. In addition, proposed legislation that would eliminate the savings
association charter could also remove protections from activity restrictions
currently accorded a unitary savings and loan holding company in the absence of
appropriate "grandfather" provisions. See "--Regulation of the Bank--Savings
Association Charter."
Dividends
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least a 30 day advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock. Dividends declared in violation of such notice
requirement are invalid. See "--Regulation of the Bank--Capital Distribution
Regulation."
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are subject
to quantitative and qualitative restrictions under Sections 23A and 23B of the
Federal Reserve Act. Affiliates of a savings association include, among other
entities, the savings association's holding company and non-banking companies
that are under common control with the savings association. In general, the
restrictions of Sections 23A and 23B do not apply to transactions between a
savings association and its parent, subsidiary or sister organizations that
themselves are banks or savings associations.
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In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; with certain exceptions, a
purchase of assets from an affiliate; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, a savings association may not make a loan or extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies; a savings association may not purchase
or invest in securities of an affiliate other than shares of a subsidiary; a
savings association and its subsidiaries may not purchase a low-quality asset
from an affiliate; and covered transactions and certain other transactions
between a savings association or its subsidiaries and an affiliate must be on
terms and conditions that are consistent with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings
association to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount of
the loan or extension of credit.
REGULATION OF THE BANK
Regulatory System
As a federal savings bank, lending activities and other investments of the
Bank must comply with various statutory and regulatory requirements. The Bank is
regularly examined by the OTS and must file periodic reports concerning its
activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
The Bank is a member of the FHLBS. Among other benefits, FHLB membership
provides the Bank with a central credit facility, from which it may borrow
generally on a secured basis in amounts determined by reference to available
collateral. The Bank is required to own capital stock in the FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) 0.3% of total assets, or (iii) 5%
of its FHLB advances (borrowings).
Liquid Assets
Under OTS regulations, for each calendar quarter, a savings bank is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable accounts plus
short-term borrowings (its liquidity base) during the preceding calendar month.
This liquidity requirement, which currently equals 4% (having been lowered from
5% on November 24, 1997), may be changed from time to time by the OTS to any
amount between 4% and 10%, depending upon certain factors. The Bank has
maintained liquid assets in compliance with the regulations in effect throughout
1998, 1997, 1996 and 1995.
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Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy minimum capital
standards: risk-based capital requirements, a leverage requirement and a
tangible capital requirement. Savings banks must meet each of these standards in
order to be deemed in compliance with OTS capital requirements. In addition, the
OTS may require a savings association to maintain capital above the minimum
capital levels.
All savings associations are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings association is required to
maintain core capital equal to a minimum of 4% of adjusted total assets. A
savings association is also required to maintain tangible capital in an amount
at least equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation; however, based on internal measures of
interest rate risk at December 31, 1997, the Bank would not have been required
to deduct an IRR component in calculating total risk-based capital had the IRR
component of the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or conditions of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
At June 30, 1998, the Bank's total capital to risk-based assets ratio was
12.15%, its core capital to risk-based assets ratio was 10.37%, its leverage
capital ratio was 5.46% and its tangible capital ratio was 5.46%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--FNH--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital Requirements
A savings association's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings association to enforcement actions and other proceedings.
Any savings association not in compliance with all of its capital requirements
is required to submit a capital plan that addresses the association's need for
additional capital and meets certain additional requirements. While the capital
plan is being reviewed by the OTS, the savings association must certify, among
other things, that it will not, without the approval of its appropriate OTS
Regional Director, grow beyond net interest credited or make capital
distributions. If a savings association's capital plan is not approved, the
association will become subject to additional growth and other restrictions. In
addition, the OTS, through a capital directive or otherwise, may restrict the
ability of a savings association not in compliance with the capital requirements
to pay dividends
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and compensation, and may require such association to take one or more of
certain corrective actions, including, without limitation: (i) increasing its
capital to specified levels, (ii) reducing the rate of interest that may be paid
on savings accounts, (iii) limiting receipt of deposits to those made to
existing accounts, (iv) ceasing issuance of new accounts of any or all classes
or categories except in exchange for existing accounts, (v) ceasing or limiting
the purchase of loans or the making of other specified investments, and
(vi) limiting operational expenditures to specified levels.
The HOLA permits savings associations not in compliance with the OTS
capital standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings association still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings association that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized,""significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage capital ratio are used to determine an association's
capital classification. The Bank met the capital requirements of a "well
capitalized" institution under the FDICIA prompt corrective action standards as
of June 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--FNH--Capital Resources."
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over Brokered
Deposits.
Savings associations that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the association and periodic review
of the association's efforts to restore its capital, (ii) a requirement that the
association submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the association guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the association's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the association into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the association's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized association if the
agency determines that such actions are necessary to resolve the problems of the
association at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the association to raise
additional capital or be acquired by another association or holding company if
certain grounds exist, (ii) restricting transactions between the association and
its affiliates, (iii) restricting interest rates paid by the association on
deposits, (iv) restricting the association's asset growth or requiring the
association to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the association to alter or terminate any
activity deemed to pose excessive risk to the association, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
Board of Governors of the Federal Reserve Board (the "FRB"), (viii) requiring
the association to divest certain subsidiaries, or requiring the association's
holding company to divest the association or certain affiliates of the
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association, and (ix) taking any other supervisory action that the agency
believes would better carry out the purposes of the prompt corrective action
provisions of FDICIA.
Savings associations classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
associations. Significantly undercapitalized associations are subject to the
mandatory provisions applicable to undercapitalized associations. The regulation
also makes mandatory for significantly undercapitalized associations certain of
the supervisory actions that are discretionary for associations classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized associations to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
associations may be subjected to certain of the restrictions applicable to
critically undercapitalized associations.
The regulation requires that an association be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with the concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions of
FDICIA. Any such determination must be renewed every 90 days. A savings
association also must be placed into receivership if the association continues
to be critically undercapitalized, on average, during the fourth quarter after
the association initially became critically undercapitalized, unless the
association's federal bank regulatory agency, with the concurrence of the FDIC,
makes certain positive determinations with respect to the association.
Critically undercapitalized associations are also subject to the
restrictions generally applicable to significantly undercapitalized associations
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such associations may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
associations may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an association is in an unsafe or unsound
condition, or if the association is deemed to be engaging in an unsafe or
unsound practice, the OTS may, if the association is well-capitalized,
reclassify it as adequately capitalized; if the association is adequately
capitalized, require it to comply with restrictions applicable to
undercapitalized associations; and, if the association is undercapitalized,
require it to comply with certain restrictions applicable to significantly
undercapitalized associations.
Conservatorship/Receivership
In addition to the grounds discussed under "--Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a conservator
or receiver for a savings association if any one or more of a number of
circumstances exist, including, without limitation, the following: (i) the
association's assets are less than its obligations to creditors and others,
(ii) a substantial dissipation of assets or earnings due to any violation of law
or any unsafe or unsound practice, (iii) an unsafe or unsound condition to
transact business, (iv) a willful violation of a final cease-and-desist order,
(v) the concealment of the association's books, papers, records or assets or
refusal to submit such items for inspection to any examiner or lawful agent of
the OTS or FDIC, (vi) the association is likely to be unable to pay its
obligations or meet its depositors' demands in the normal course of business,
(vii) the association has incurred, or is likely to incur, losses that will
deplete all or substantially all of its capital, and there is no reasonable
prospect for the association to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the association's condition, or otherwise seriously prejudice the
interests of the association's depositors or the federal deposit insurance fund,
(ix) the association consents to the appointment of the conservator or receiver,
(x) the association ceases to be an insured association, (xi) the association is
undercapitalized and the association has no reasonable prospect of becoming
adequately capitalized, fails to become adequately capitalized when required to
do so, fails to submit a timely and acceptable capital restoration plan, or
materially fails to implement an accepted capital restoration plan, (xii) the
association
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is critically undercapitalized or otherwise has substantially insufficient
capital, or (xiii) the association is found guilty of certain criminal offenses
related to money laundering.
Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly controlled
depository institution or any assistance provided by the FDIC to a commonly
controlled institution in danger of default. A depository institution is
required to pay the amount of such liability upon receipt of written notice from
the FDIC unless such written notice is received more than two years from the
date the FDIC incurred the loss. Liability for the losses of commonly controlled
institutions can lead to the failure of all depository institutions in a holding
company structure if the remaining institutions are unable to pay the liability
assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default" of
a depository institution occurs when there is an official determination pursuant
to which a conservator, receiver or other legal custodian is appointed for the
institution; and a depository institution is deemed to be "in danger of default"
when its federal or state supervisory agency determines that the institution is
not likely to be able to meet the demands of its depositors or pay its
obligations in the normal course of business and there is no reasonable prospect
that it will be able to do so, or determines that the institution has incurred
or is likely to incur losses that will deplete substantially all of its capital
and there is no reasonable prospect that the institution's capital can be
replenished without federal assistance. The Bank is not currently under common
control with any other depository institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including authority
to bring various enforcement actions against a savings association and any of
its "institution-affiliated parties" (a term defined to include, among other
persons, directors, officers, employees, controlling stockholders, agents and
shareholders who participate in the conduct of the affairs of the institution).
This enforcement authority includes, without limitation: (i) the ability to
terminate a savings association's deposit insurance, (ii) institute
cease-and-desist proceedings, (iii) bring suspension, removal, prohibition and
criminal proceedings against institution-affiliated parties, and (iv) assess
substantial civil money penalties. As part of a cease-and-desist order, the
agencies may require a savings association or an institution-affiliated party to
take affirmative action to correct conditions resulting from that party's
actions, including to make restitution or provide reimbursement, indemnification
or guarantee against loss; restrict the growth of the institution; and rescind
agreements and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying dividends
described above, OTS regulations limit certain "capital distributions" by
savings associations. Capital distributions are defined to include, in part,
dividends and payments for stock repurchases and cash-out mergers.
Under the regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision (a "Tier
1 association") may, after prior notice to but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of: (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period. A
Tier 1 association may make capital distributions in excess of the above amount
if it gives notice to the OTS and the OTS does not object to the distribution. A
savings association that meets its regulatory capital requirements both before
and after a proposed distribution but does not meet its fully phased-in capital
requirement (a "Tier 2 association") is authorized, after prior notice to the
OTS but without OTS approval, to make capital distributions in an amount up to
75% of its net income over the most recent four-quarter period, taking into
account all prior distributions during the same period. Any distribution in
excess of this amount must be approved in advance by the OTS. A savings
association that does
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not meet its current regulatory capital requirements (a "Tier 3 association")
cannot make any capital distribution without prior approval from the OTS, unless
the capital distribution is consistent with the terms of a capital plan approved
by the OTS.
At June 30, 1998, the Bank qualified as a Tier 1 association for purposes
of the capital distribution rule. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS determines that the
distribution would constitute an unsafe or unsound practice. The requirements of
the capital distribution regulation supersede less stringent capital
distribution restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an association that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate and
certain other assets). A savings association that fails the qualified thrift
lender test is subject to substantial restrictions on activities and to other
significant penalties.
Legislation permits a savings association to qualify as a qualified thrift
lender ("QTL") not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by meeting the
asset composition test under the Internal Revenue Code for a "domestic building
and loan association." The Bank currently is a domestic building and loan
association as defined in the Internal Revenue Code and, consequently is a QTL
for purposes of HOLA.
Legislation enacted in 1996 also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family, and
household purposes (other than credit card, small business, and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At June 30, 1998 under the expanded
QTL test, approximately 91.17% of the Bank's portfolio assets were qualified
thrift investments.
FDIC Assessments
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the SAIF.
Under the FDIC's risk-based insurance system, SAIF-assessed deposits are
currently subject to insurance premiums of between 0 and 27 basis points,
depending upon the institution's capital position and other supervisory factors.
The rate applicable to the Bank at December 31, 1997 was 0 basis points.
Since January 1997, institutions with Bank Insurance Fund ("BIF") deposits
have been required to share the cost of funding debt obligations issued by the
Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation (the "FSLIC"). However, until the earlier of
December 31, 1999 or the date of elimination of the thrift charter (see
"--Savings Association Charter"), the FICO assessment rate for BIF deposits is
only one-fifth of the rate applicable to SAIF deposits. Consequently, the annual
FICO assessments to be added to deposit insurance premiums, which may be
periodically adjusted, are expected to equal approximately 6.4 basis points for
SAIF deposits and 1.3 basis points for BIF deposits from January 1, 1997 through
December 31, 1999, and an equal amount for both BIF and SAIF deposits
thereafter. Since January 1, 1997, FICO payments have been paid directly by SAIF
and BIF institutions in addition to deposit insurance assessments.
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Savings Association Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
bank charters. In the absence of appropriate "grandfather" provisions,
legislation eliminating the savings association charter could have a material
adverse effect on the Bank and its parent holding companies because, among other
things, these holding companies engage in activities that are not permissible
for bank holding companies and the regulatory capital and accounting treatment
for banks and savings associations differs in certain significant respects. The
Bank cannot determine whether, or in what form, such legislation may eventually
be enacted and there can be no assurance that any legislation that is enacted
would contain adequate grandfather rights for the Bank and its parent holding
companies.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from investing
in any corporate debt security that, at the time of acquisition, is not rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating organization. The Bank does not own any non-investment grade
debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under the Community Reinvestment
Act ("CRA") and related regulations of the OTS to help meet the credit needs of
their communities, including low-and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An association's
failure to comply with the provisions of CRA could, as a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual may
acquire control of a savings association if the OTS objects. Any company that
acquires control of a savings association becomes a savings and loan holding
company subject to extensive registration, examination and regulation by the
OTS. Conclusive control exists, among other ways, when an acquiring party
acquires more than 25% of any class of voting stock of a savings association or
savings and loan holding company, or controls in any manner the election of a
majority of the directors of the company. In addition, a rebuttable presumption
of control exists if, among other things, a person acquires more than 10% of any
class of voting stock of the savings association or savings and loan holding
company (or 25% of any class of stock, whether or not voting) and, in either
case, any of certain additional control factors specified in OTS regulations
exist.
Under 1996 legislation, companies subject to the Bank Holding Company Act
that acquire or own savings associations are no longer defined as savings and
loan holding companies under the HOLA and, therefore, are not generally subject
to supervision and regulation by the OTS. OTS approval is no longer required for
a bank holding company to acquire control of an existing savings association,
although the OTS has a consultative role with the FRB in examination,
enforcement and acquisition matters.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Issuer
The following table sets forth certain information (ages as of July 1,
1998) concerning the directors and executive officers of Golden State Holdings.
All directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ronald O. Perelman................................... 55 Director
Gerald J. Ford....................................... 53 Chairman of the Board, Chief Executive Officer and
Director
Carl B. Webb......................................... 48 President, Chief Operating Officer and Director
Howard Gittis........................................ 64 Director
Christie S. Flanagan................................. 60 Executive Vice President and General Counsel
Richard H. Terzian................................... 61 Executive Vice President and Chief Financial Officer
Richard P. Hodge..................................... 43 Executive Vice President
Scott A. Kisting..................................... 51 Executive Vice President
James R. Staff....................................... 51 Executive Vice President
Renee Nichols Tucei.................................. 41 Senior Vice President and Controller
</TABLE>
The Bank
The following table sets forth certain information (ages as of July 1,
1998) concerning the current directors and executive officers of the Bank. All
directors serve terms of one year or until election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gerald J. Ford....................................... 53 Chairman of the Board, Chief Executive Officer and
Director
Carl B. Webb......................................... 48 President, Chief Operating Officer and Director
Edward G. Harshfield................................. 61 Vice Chairman of the Board and Director
Paul M. Bass, Jr..................................... 63 Director
George W. Bramblett, Jr.............................. 58 Director
Bob Bullock.......................................... 68 Director
Brian P. Dempsey..................................... 60 Director
Irwin Engelman....................................... 64 Director
John F. King......................................... 58 Director
John F. Kooken....................................... 66 Director
Gabrielle K. McDonald................................ 56 Director
Thomas S. Sayles..................................... 47 Director
Lynn Schenk.......................................... 53 Director
Robert Setrakian..................................... 74 Director
Cora M. Tellez....................................... 49 Director
Christie S. Flanagan................................. 60 Executive Vice President and General Counsel
Richard A. Fink...................................... 57 Executive Vice President and Goodwill Litigation
Manager
Kendall M. Fugate.................................... 60 Executive Vice President and Information and
Technology Services Director
Richard P. Hodge..................................... 43 Executive Vice President and Corporate Tax Director
Scott A. Kisting..................................... 51 Executive Vice President, Retail Bank
Walter C. Klein, Jr.................................. 55 Executive Vice President; President, FNMC
</TABLE>
204
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard A. Leweke.................................... 45 Executive Vice President and Administrative Services
Director
Lacy G. Newman, Jr................................... 48 Executive Vice President and Chief Credit Officer
James R. Staff....................................... 51 Executive Vice President and Chief Financial Advisor
Richard H. Terzian................................... 61 Executive Vice President and Chief Financial Officer
Peter K. Thomsen..................................... 56 Executive Vice President and Retail Banking Director
Stephen J. Trafton................................... 51 Executive Vice President and Goodwill Litigation
Manager
Dennis L. Verhaegen.................................. 46 Executive Vice President--Director of Corporate
Finance
Michael R. Walker.................................... 52 Executive Vice President--Commercial Real Estate
Renee Nichols Tucei.................................. 41 Senior Vice President and Controller
</TABLE>
- ------------------
Mr. Perelman has been a Director of Golden State Holdings since its
formation in February 1998 and a Director of Golden State since September 1998.
Mr. Perelman has been Chairman of the Board and Chief Executive Officer of
MacAndrews & Forbes and various of its affiliates since 1980. Mr. Perelman also
is Chairman of the Boards of Directors of Revlon, Inc. ("Revlon") and Meridian
Sports Incorporated ("Meridian") and Chairman of the Executive Committees of the
Boards of Directors of Cigar Holdings, M&F Worldwide Corp. ("MFW") and
Panavision Inc. ("Panavision"). Mr. Perelman is a Director of the following
corporations which file reports pursuant to the Exchange Act: Cigar Holdings,
Golden State, MFW, Meridian, Panavision, Revlon Consumer Products Corporation
("Products Corporation"), Revlon and REV Holdings Inc. ("REV Holdings"). (On
December 27, 1996, Marvel Entertainment Group ("Marvel"), Marvel (Parent)
Holdings Inc. ("Marvel Parent") and Marvel Holdings Inc. ("Marvel Holdings"), of
which Mr. Perelman was a Director, Marvel III Holdings Inc. ("Marvel III"), of
which Mr. Perelman is a Director, and several subsidiaries of Marvel filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of the Bank since the consummation of the FN Acquisition, of Golden
State Holdings since September 11, 1998, of Golden State since September 1998
and of Preferred Capital Corp. since its formation in November 1996. Mr. Ford
was Chairman of the Board and a Director of First Madison from 1993 to 1994. Mr.
Ford previously served as Chairman of the Board, Chief Executive Officer and a
Director of First Gibraltar from 1988 through 1993. Mr. Ford served as the
Chairman of the Board, Chief Executive Officer and a Director of First United
Bank Group, Inc. ("First United Bank Group"), from 1993 through 1994. Mr. Ford
is Chairman of the Board and a Director of FNMC, FGB Services, Inc. and Madison
Realty Advisors, Inc. ("Madison Realty"). Mr. Ford is also Chairman of the Board
and Chief Executive Officer of Liberte Investors Inc. and a Director of McMoRan
Oil & Gas Co.
Mr. Webb has been the President, Chief Operating Officer and a Director of
the Bank since the consummation of the FN Acquisition, of Golden State Holdings
since September 11, 1998, of Golden State since September 1998 and of Preferred
Capital Corp. since its formation in November 1996. Mr. Webb served as
President, Chief Executive Officer and Director of First Madison from 1993
through 1994. Mr. Webb previously served as President, Chief Operating Officer
and a Director of First Gibraltar from 1988 through 1993. Mr. Webb also serves
as a Director of FNMC.
Mr. Gittis has been a Director of Golden State Holdings since its formation
in February 1998 and a Director of Golden State since September 1998. Mr. Gittis
has been Vice Chairman of MacAndrews & Forbes and various of its affiliates
since 1985. Mr. Gittis is a Director of the following corporations which file
reports pursuant to the Exchange Act: Cigar Holdings, Golden State,
Jones Apparel Group, Inc., Loral Space and Communications, Ltd., MFW,
Panavision, Revlon, Products Corporation, REV Holdings, Rutherford-Moran Oil
Corporation and Sunbeam Corporation.
Mr. Flanagan has been the Executive Vice President and General Counsel of
the Bank since the consummation of the FN Acquisition and of Golden State
Holdings since September 11, 1998. Mr. Flanagan has been the Executive Vice
President, General Counsel and a Director of Preferred Capital Corp. since its
formation in November 1996. He also serves as a Director of FNMC. Mr. Flanagan
has been associated with the law firm of
205
<PAGE>
Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various capacities,
including Managing Partner, and he is currently Of Counsel to that firm.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of the Bank since April 1, 1995 and of Golden State Holdings since
September 11, 1998. Mr. Terzian has been the Executive Vice President, Chief
Financial Officer and a Director of Preferred Capital Corp. since its formation
in November 1996. For the five years prior to April 1, 1995, Mr. Terzian served
as Chief Financial Officer of Dime Bancorp, Inc. and its subsidiary, The Dime
Savings Bank of New York, FSB.
Mr. Hodge has been an Executive Vice President of the Bank since January
1996 and of Golden State Holdings since September 11, 1998 and has been employed
by the Bank since November 1995. Mr. Hodge previously was associated with the
public accounting firm of KPMG Peat Marwick LLP and its predecessors since 1981,
including most recently as a tax partner since 1986.
Mr. Kisting has been an Executive Vice President of the Bank since
September 1, 1998 and of Golden State Holdings since September 11, 1998. From
September 1997 to August 1998, Mr. Kisting served as Chief Operating Officer of
the New England-based Citizens Financial Group. From 1993 to 1997, Mr. Kisting
was associated with Norwest Corporation in Minneapolis, where he served as Group
Executive Vice President from 1995 to 1997, and as Regional President from 1993
to 1995.
Mr. Staff has been an Executive Vice President of the Bank since
October 17, 1994 and of Golden State Holdings since September 11, 1998. He also
serves as a Director of Preferred Capital Corp., FNMC and Auto One. Mr. Staff
previously was associated with the public accounting firm of KPMG Peat
Marwick LLP and its predecessors since 1979, including most recently as
Partner-in-charge of Financial Services for the Southwest-Dallas area.
Ms. Tucei has been a Senior Vice President and the Controller of the Bank
since the consummation of the FN Acquisition and of Golden State Holdings since
September 11, 1998. Ms. Tucei previously served as Senior Vice President and
Controller of First Madison from 1993 to 1994, and as Senior Vice President for
First Gibraltar from 1988 to 1993.
Mr. Harshfield has been Vice Chairman of the Board and a Director of the
Bank since January 1997. Mr. Harshfield was President, Chief Executive Officer
and a Director of Old Cal Fed from January 1996 to January 1997 and of Old
California Federal from October 1993 to January 1997. From October 1992 to March
1993, Mr. Harshfield served as Chief Executive Officer and a Director of First
City Texas National Bank. From February 1991 to December 1992, he served as
President, Chief Executive Officer and a Director of Federal Capital Bank, a
private investment bank. Since 1988, Mr. Harshfield has been the principal,
Chairman and Chief Executive Officer of EH Thrift Management Inc., a special
purpose management company, and general partner of U.S. Thrift Opportunity
Partners, L.P., a Merrill Lynch sponsored limited partnership that invests in
undercapitalized thrift institutions. Prior to 1988, Mr. Harshfield served as
President and Chief Executive Officer of Household Financial Services.
Mr. Harshfield also held various senior positions with Citicorp/Citibank and
Pepsico Inc.
Mr. Bass has been a Director of the Bank since May 1993 and of Golden State
since September 1998. Mr. Bass is currently the Vice Chairman and Director of
First Southwest Company. Mr. Bass is a Director and Chairman of the Audit
Committee of Keystone Consolidated Industries, and is a Director of Source
Services, Inc. Mr. Bass has served in the following capacities during the past
five years: Director, Endevco, Inc.; Director, Jayhawk Acceptance Corporation;
Director, Ford Bank Group; and Chairman of the Board and Director, Pizza Inn,
Inc.
Mr. Bramblett has been a Director of the Bank since May 1993 and of Golden
State since September 1998. Mr. Bramblett has been associated with the law firm
of Haynes & Boone since 1973 and is currently a Partner and a member of the
Executive Committee of that firm. Mr. Bramblett has served in the following
capacities during the past five years: Member of the Texas Higher Education
Coordinating Board of the Texas College and University System of Texas and
Trustee of the Baylor College of Dentistry.
Mr. Bullock has served as a Director of the Bank since 1994 and of Golden
State since September 1998. Mr. Bullock has been Lieutenant Governor of the
State of Texas since 1990. Mr. Bullock is Chairman of the Board, Director and
President of JFB-RDB, Inc. Mr. Bullock served as a Director of the Ford Bank
Group from 1992 to 1993, and as Director of the First United Bank Group from
1992 to 1993. Prior to 1990, Mr. Bullock served as the State of Texas
Comptroller of Public
206
<PAGE>
Accounts. Mr. Bullock has been Of Counsel to the law firm of Scott, Douglass,
Luton and McConnico, L.L.P. since 1992.
Mr. Dempsey has been a Director of the Bank and Golden State since
September 1998. Mr. Dempsey is, and has been since September 1996, Vice Chairman
of the Board and a Director of Continental Savings Bank, headquartered in
Seattle, Washington. From January 1995 until September 1996, he was the
President of Dempsey & Associates, a financial services consulting firm. From
1961 until January 1995, he was an officer of University Savings Bank, becoming
its Chief Executive Officer in 1984 and its Chairman in 1989.
Mr. Engelman has been a Director of the Bank since 1992. He has been
Executive Vice President and Chief Financial Officer of MacAndrews & Forbes and
various of its other affiliates since February 1992. He was Executive Vice
President and Chief Financial Officer of GAF Corporation from 1990 to 1991;
Director, President and Chief Operating Officer of Citytrust Bancorp Inc. from
1988 to 1990; Executive Vice President of the Blackstone Group LP from 1987 to
1988; and Director and Executive Vice President of General Foods Corporation for
more than five years prior to 1987. Mr. Engelman is a Director of the following
corporation which files reports pursuant to the Exchange Act: Revlon Products.
(On December 27, 1996, Marvel Holdings and Marvel Parent, of which Mr. Engelman
was an executive officer, and Marvel III, of which Mr. Engelman is an executive
officer, and several of the subsidiaries of Marvel filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)
Mr. King has been a Director of the Bank and Golden State since September
1998. Mr. King is President and Chief Executive Officer of Weingart Center
Association, a nonprofit association whose goal is to help break the cycle of
the homeless. He served as a Senior Adviser to Union Bank of Switzerland from
1990 to 1993. Mr. King is a former Vice Chairman of Crocker National Bank and a
former Chairman of the Board of First Interstate Bank of California. Mr. King is
a Director of Ameron International, Inc., a Trustee of the University of
Southern California and of the California Hospital Center Foundation, a Director
of the National Institute of Transplantation Foundation and the founding
Chairperson of Kidspace.
Mr. Kooken has been a Director of the Bank and Golden State since September
1998. Mr. Kooken retired as Vice Chairman and Chief Financial Officer of
Security Pacific Corporation in 1992 after 32 years with the company. Mr. Kooken
is also a Director of the Centris Group, Inc and of Pacific Gulf Properties,
Inc.
Ms. McDonald has served as a Director of the Bank since 1990 and of Golden
State since September 1998. Ms. McDonald also served as a Director of FGB-San
Antonio in 1992. Ms. McDonald currently serves as a Judge on the International
Criminal Tribunal for the former Yugoslavia. Ms. McDonald is also currently a
Professor of Law at the Thurgood Marshall School of Law of Texas Southern
University. Ms. McDonald currently serves as a director of Freeport McMoRan
Inc., McMoRan Oil & Gas Co. and Freeport McMoRan Copper & Gold Inc. Ms. McDonald
was Of Counsel to the Walker & Satterthwaite firm from 1991 to 1993. She was a
partner in the law firm of Matthews & Branscomb from 1988 through 1991. Prior to
that time, Ms. McDonald served as a United States District Court Judge for the
Southern District of Texas.
Mr. Sayles has been a Director of the Bank and Golden State since September
1998. Mr. Sayles is Senior Vice President, Consumer Markets, of Energy Pacific,
a joint venture between Pacific Enterprises and Enova Corporation, and Vice
President of Pacific Enterprises. From July 1991 until December 1992, he was
Commissioner of Corporations for the State of California. From January 1993
until December 1993, he was Secretary of the Business, Transportation and
Housing Agency of the State of California. He became Vice President of Pacific
Enterprise in January 1994 and Senior Vice President of Energy Pacific in
January 1997.
Ms. Schenk has been a Director of the Bank since November 1996 and of
Golden State since September 1998. Ms. Schenk has been a Senior Consultant to
Baker & McKenzie, San Diego, California since 1995. From January, 1993 to
January, 1995, Ms. Schenk served in the U.S. House of Representatives as
Congresswoman representing the 49th Congressional District in the State of
California. During her term in the House of Representatives, Ms. Schenk served
on the Energy and Commerce Committee and the Merchant Marine and Fisheries
Committee. Ms. Schenk served as the State of California Secretary of Business,
Transportation and Housing prior to 1983. From 1983 until her election to
Congress, Ms. Schenk was in private law practice in California and served as an
independent consultant to various public and private businesses with respect to
government relations. From 1985 to 1993, Ms. Schenk served as a director of Long
Beach Bank, F.S.B. She is currently a director of IDEC Pharmaceuticals, Inc., a
corporation which files reports pursuant to the Exchange Act.
207
<PAGE>
Mr. Setrakian has been a Director of the Bank since November 1994 and of
Golden State since September 1998. Mr. Setrakian previously served as a Director
of Old FNB for more than 10 years. Mr. Setrakian is presently the Chairman and
President of the William Saroyan Foundation and the former Chairman and
President of Mid-State Horticultural Company. He is also a former Chairman and
member of the Board of Governors of the United States Postal Service; former
Commissioner of the Federal Maritime Commission; former Chairman and Chief
Executive Officer of the California Growers Winery, Inc.; and former Chairman
and founder of the National Bank of Agriculture.
Ms. Tellez has been a Director of the Bank and Golden State since September
1998. Ms. Tellez is President and Chairman of Prudential Health Care Plan of
California, Inc. Ms. Tellez is a member of the Boards of Directors of the
California Association of Health Plans, Holy Names College, the S.H Cowell
Foundation and Asian Community Mental Health Services. She is also a member of
the Mayor of San Francisco's Blue Ribbon Committee on Health Care and of the
Advisory Panel of the University of San Francisco's School of Dentistry. From
December 1978 to June 1994 she was Vice President and Regional Manager of the
Kaiser Foundation Health Plan. From June 1994 to June 1997 she was a Senior Vice
President of Blue Shield of California. She became President and Chairman of
Prudential Health Care of California, Inc. in July 1997.
Mr. Fink has been Executive Vice President and Goodwill Litigation Manager
of the Bank since September 1998. Mr. Fink previously served as Senior Executive
Vice President and a Director of Glendale Federal from May 1992 to September
1998. He served as Chief Legal Officer from May 1992 until April 1994; Director,
Corporate Development, from April 1994 until February 1996; and has been the
Bank's Chief Credit Officer since February 1996. From 1980 until May 1992, he
was a partner in the law firm of McKenna & Fitting and was actively involved in
advising the Bank with respect to legal and regulatory matters. On March 31,
1993 a state court receiver was appointed for McKenna & Fitting.
Mr. Fugate has been an Executive Vice President of the Bank since the
consummation of the FN Acquisition. Mr. Fugate previously served as Executive
Vice President of Old FNB from 1991 to 1994, and held various executive
positions with Citibank, N.A. and Citibank California, FSB from 1982 to 1991.
Mr. Klein has been an Executive Vice President of the Bank and the
President of FNMC since January 1996. He also serves as a Director of FNMC.
Mr. Klein previously was associated with PNC Mortgage Corp. of America and its
predecessor, Sears Mortgage Corporation, since 1986, including most recently as
Chairman and Chief Executive Officer.
Mr. Leweke has been an Executive Vice President of the Bank since January
1998. Mr. Leweke served as Senior Vice President--Administrative Services since
the consummation of the FN Acquisition. Prior to that time, he served in the
same capacity for Old FNB from 1992 to 1994.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
the Bank since the consummation of the FN Acquisition. Mr. Newman has also
served as Executive Vice President of First Madison from 1993 to 1994, and
Executive Vice President of First Gibraltar since 1992. In addition, he served
as President and a Director of Madison Realty since 1992.
Mr. Thomsen has been an Executive Vice President of the Bank since the
consummation of the FN Acquisition. Mr. Thomsen previously served as Senior
Executive Vice President of Old FNB and a Director from 1992 to 1994.
Mr. Thomsen was an Executive Vice President of Old FNB from 1991 to 1992.
Mr. Thomsen had been Executive Vice President of Michigan National Corporation
from 1986 to 1991 and a Director from 1989 to 1991, and the President of
Michigan National Bank from 1988 to 1991 and a Director from 1989 to 1991.
Mr. Thomsen was Chairman of Independence One Mortgage Corporation, a subsidiary
of Michigan National Bank, from 1986 to 1990.
Mr. Trafton has been Executive Vice President and Goodwill Litigation
Manager of the Bank since September 1998. Mr. Trafton previously served as
Chairman of the Board, Chief Executive Officer and President of Glendale Federal
from April 1992 to September 1998. He joined Glendale Federal in July 1990 as
Senior Executive Vice President and Chief Financial Officer and served as Chief
Financial Officer until April 1992. He has served as a Director since June 1991.
From June 1991 until April 1992 he was Vice Chairman of the Board.
Mr. Verhaegen has been an Executive Vice President of the Bank since
February 1997. Mr. Verhaegen previously served as a Managing Director of First
Southwest Company from 1992 to 1994. Mr. Verhaegen served as a Senior Managing
Director and co-head of the Financial Institutions Group of Bear Stearns & Co.
Inc. from 1988 to 1992. From 1994 to 1996, Mr. Verhaegen operated his own
financial advisory and consulting firm.
208
<PAGE>
Mr. Walker has been an Executive Vice President of the Bank since the
consummation of the FN Acquisition. Mr. Walker served as Senior Vice President
of First Madison from 1993 to 1994. Mr. Walker previously served as Senior Vice
President of First Gibraltar from 1988 to 1993.
COMPENSATION OF DIRECTORS
None of the Directors of the Issuer receive any compensation for their
services as Directors. Directors of the Bank who do not receive compensation as
officers or employees of the Bank or any of its affiliates are paid a fee of
$3,500 for each meeting of the Board of Directors they attend and each director
who attends 67% or more of the regular meetings of the Board of Directors during
a fiscal year will receive an additional fee of $9,000. Members of the Audit
Committee of the Board of Directors of the Bank who do not receive compensation
as officers or employees of the Bank or any of its affiliates are paid a fee of
$1,500 for each meeting of the Audit Committee they attend.
EXECUTIVE COMPENSATION
The Issuer is a holding company with no business operations of its own and
accordingly, engages its business through the Bank and its subsidiaries. The
officers of the Issuer receive no compensation for their services to the Issuer.
Accordingly, the following table sets forth certain compensation awarded to,
earned by or paid to the Chief Executive Officer of the Issuer's operating
subsidiary, Cal Fed, and the four most highly paid executive officers of
Cal Fed, other than the Chief Executive Officer, who served as executive
officers of Cal Fed at December 31, 1997 for services rendered in all capacities
to Cal Fed and its subsidiaries during the years ended December 31, 1997, 1996
and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- --------------------------- ---- ---------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gerald J. Ford............................... 1997 $1,500,000 $375,000 $ 7,572 $ 70,045
Chairman & Chief 1996 1,500,000 300,000 1,152 63,000
Executive Officer 1995 1,500,000 0 7,644 49,511
Carl B. Webb (3)............................. 1997 900,000 375,000 26,542 838,421
President & Chief 1996 900,000 300,000 22,218 56,206
Operating Officer 1995 900,000 0 274,351 66,707
Christie S. Flanagan......................... 1997 700,000 150,000 15,059 631,556
Executive Vice President & 1996 700,000 120,000 16,173 52,171
General Counsel 1995 700,000 20,000 10,892 44,854
James R. Staff............................... 1997 650,000 200,000 17,034 588,657
Executive Vice President & 1996 533,352 250,000 10,411 48,722
Chief Financial Advisor 1995 450,000 0 17,348 27,001
Edward G. Harshfield (4)..................... 1997 709,723 0 106,079 48,623
Vice Chairman
</TABLE>
- ------------------
(1) Includes: (i) the value of group term life insurance, (ii) amounts paid
under relocation programs for Mr. Webb in 1995, (iii) the value of the use
of Bank-owned automobiles for Messrs. Webb, Flanagan and Staff, (iv) club
dues, (v) personal financial planning services paid by the Bank, (vi)
security expenses paid by the Bank for Messrs. Webb, Flanagan and Staff,
(vii) amounts totalling $100,104 paid under a consulting agreement with
Mr. Harshfield and (viii) amounts reimbursed for payment of taxes.
(2) Includes: (i) amounts calculated with respect to the Bank's net income and
deferred pursuant to the Deferred Compensation Plan (as defined herein) of
$742,500, $577,500 and $536,250 for Messrs. Webb, Flanagan and Staff,
respectively, in 1997, (ii) the Bank's contributions to the 401(k) plan of
$8,871 and $8,571 in 1997 and
(Footnotes continued on next page)
209
<PAGE>
(Footnotes continued from previous page)
1996, respectively, for each of Messrs. Ford, Webb, Flanagan and Staff, and
$9,111 for Mr. Harshfield in 1997, (iii) the Bank's contribution to the
Supplemental Employees' Investment Plan of $58,628, $85,630, $42,128,
$42,130 and $39,512 in 1997 for Messrs. Ford, Webb, Flanagan, Staff and
Harshfield, respectively, and $54,429, $45,430, $40,629 and $38,430 in 1996
for Messrs. Ford, Webb, Flanagan and Staff, respectively, and (iv) premiums
on supplemental life insurance paid by the Bank for Messrs. Ford, Webb,
Flanagan and Staff of $2,546, $1,420, $3,057 and $1,406, respectively, in
1997 and for Messrs. Webb, Flanagan and Staff of $2,205, $2,971 and $1,721,
respectively, in 1996.
(3) Does not include a 1996 payment of $10 million to Mr. Webb by FNH under its
long term management incentive plan.
(4) Mr. Harshfield became Vice Chairman on January 27, 1997.
Certain executive officers of the Bank have entered into employment
agreements with the Bank. See "Certain Relationships and Related
Transactions--Executive Employment Agreements." Also, Gerald J. Ford has been
and is presently a party to certain consulting and similar agreements with
certain affiliates of the Issuer, as more fully described in "Certain
Relationships and Related Transactions--Transactions with Mr. Ford."
Effective October 1, 1995, FNH adopted the Incentive Plan with respect to
certain executive officers of the Bank (the "Participants"). Awards under the
Incentive Plan are made in the form of performance units. Each performance unit
entitles the Participants to receive cash and/or stock options ("Bonuses") based
on the Participant's vested interest in a bonus pool.
Generally, the Incentive Plan provides for the payment of Bonuses, on a
quarterly basis, to the Participants upon the occurrence of certain events.
Bonuses vest at 20% per year beginning October 1, 1995. The aggregate amount of
Bonuses payable under the Incentive Plan is subject to a cap of $50 million.
During 1997, 1996 and 1995, expenses of $12.4 million, $35.6 million and $2
million, respectively, were recorded relative to the Incentive Plan. As of
December 31, 1997, the Incentive Plan has been fully accrued.
There were no long-term incentive plan awards in 1997 or 1996 to the
executive officers named in the preceding table. The Golden State Acquisition
constitutes a change in control pursuant to the terms of the Incentive Plan and,
accordingly, vesting was accelerated and Bonuses totalling $38.5 million were
paid to Participants on September 11, 1998.
On May 19, 1997, the Bank adopted a Deferred Executive Compensation Plan
(the "Deferred Compensation Plan") with respect to certain officers of the Bank
(the "Officers"). The Deferred Compensation Plan provides for an award to be
made to each Officer as a percentage of such Officer's base annual salary
determined based upon the net income of the Bank with respect to the immediately
preceding fiscal year expressed as a percentage of the target net income
established by the Board with respect to such fiscal year. The award so
determined may be increased at the discretion of the Chief Operating Officer of
the Bank.
An Officer's award with respect to each fiscal year will be paid in cash in
five equal annual installments on each of the first five anniversaries of the
date of grant of the award. Each installment of the award will include interest
from the date of the grant of the award at a rate of 6% per annum.
If a participant's employment terminates due to death, disability or
retirement, the participant (or his estate) shall receive any unpaid
installments of the award (with interest thereon) upon such termination. Upon
any other termination of employment, any unpaid installments of a participant's
award will be forfeited.
Upon a change in control of the Bank or FNMC (with respect to participants
employed by FNMC), in each case, as described in the Deferred Compensation Plan,
each Officer will receive any unpaid installments of the award (with interest
thereon). In addition, upon a change in control of the Bank or FNMC (with
respect to participants employed by FNMC), each Officer will receive an
additional award, determined in accordance with the applicable provisions of the
Deferred Compensation Plan, but in any case in an amount not in excess of 125%
of the Officer's annual base salary.
During the year ended December 31, 1997, expenses of $5.7 million were
recorded relative to the Deferred Compensation Plan.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The Issuer has no compensation committee. The following directors serve on
the Compensation Committee of the Board of the Bank: Gerald J. Ford, Howard
Gittis, Paul Bass and George Bramblett. During 1997, 1996 and 1995, Mr. Ford was
Chairman of the Board of the Bank. In addition, Mr. Ford controls Hunter's Glen,
which indirectly owns 13.2% of the common stock of Golden State, the indirect
parent of the Issuer. Each of Messrs. Perelman, Mr. Gittis, Ford and Webb is a
director of the Issuer and of the Bank. See "Certain Relationships and Related
Transactions--Transactions with Mr. Ford."
OWNERSHIP OF THE COMMON STOCK
Golden State Holdings is an indirect wholly owned subsidiary of Golden
State. Ronald O. Perelman, a director of Golden State Holdings, 35 East 62nd
Street, New York, New York 10021, through MacAndrews & Forbes, beneficially owns
34.7% of the common stock of Golden State and Hunter's Glen, a limited
partnership controlled by Gerald J. Ford, Chairman of the Board, Chief Executive
Officer and a director of the Bank and Golden State Holdings, 200 Crescent
Court, Suite 1350, Dallas, Texas 75201, owns 13.2% of the common stock of Golden
State with the balance of the common stock of Golden State being publicly held.
In addition, pursuant to the Merger Agreement, Mafco Holdings and Hunter's Glen
will be entitled to receive contingent consideration based on certain
conditions, which contingent consideration could cause the ownership percentages
of Mafco Holdings and Hunter's Glen to increase. See "The Golden State
Acquisition."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MACANDREWS & FORBES
The Issuer is an indirect wholly owned subsidiary of Golden State, which is
34.7% indirectly owned by MacAndrews & Forbes. As a result, MacAndrews & Forbes
is able to direct and control the policies of the Issuer and its subsidiaries,
including with respect to mergers, sales of assets and similar transactions. See
"Ownership of the Common Stock."
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, MacAndrews & Forbes is
engaged in the cosmetics and skin care, fragrance and personal care products
business. MacAndrews & Forbes also owns 71% of Panavision, a supplier of film
camera systems to the motion picture and television industries, and 65% of
Meridian, a manufacturer and marketer of ski boats. Through its 64% ownership of
Cigar Holdings, MacAndrews & Forbes is engaged in the manufacture and
distribution of cigars and pipe tobacco. Through its 39% ownership of MFW
(assuming conversion of certain preferred stock), MacAndrews & Forbes is in the
business of processing licorice and other flavors. MacAndrews & Forbes is also
in the financial services business through the Bank. The principal executive
offices of MacAndrews & Forbes are located at 35 East 62nd Street, New York, New
York 10021.
TAX SHARING AGREEMENT
The Issuer, the Bank and Golden State are parties to the Tax Sharing
Agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--FNH--Provision for Federal and State Income Taxes."
RATE LOCK AGREEMENTS
On May 29, 1998, Trans Network Insurance Services Inc. ("TNIS"), an
indirect parent of the Issuer, and Salomon Brothers Holding Company ("Salomon"),
which is an affiliate of one of the Initial Purchasers, entered into two
interest rate lock agreements (the "Rate Lock Agreements"). TNIS entered into
the Rate Lock Agreements for the benefit of the Issuer in order to hedge against
an increase in interest rates. Pursuant to the Rate Lock Agreements, if the
applicable interest rates payable on certain U.S. Treasury Securities were
higher at the time that the Fixed Rate Notes were priced than the interest rates
payable on such U.S. Treasury Securities on May 29, 1998 by a certain amount,
then Salomon would have been required to make a payment to TNIS. Since the
interest rates payable on such U.S. treasury securities at the time the Fixed
Rate Notes were priced were less
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than the interest rates payable on such U.S. treasury securities on May 29, 1998
by a certain amount, TNIS was required to make a comparable payment to Salomon.
Pursuant to the Rate Lock Agreements, TNIS paid Salomon approximately
$10.0 million on July 31, 1998. On September 14, 1998, the Issuer reimbursed
TNIS for such payment made by TNIS to Salomon pursuant to the Rate Lock
Agreements, plus TNIS' cost of capital applied to the payment made. Management
believes that the terms and conditions of this arrangement were at least as
favorable to the Issuer as might have been obtained in a similar transaction
with an unaffiliated party.
LOAN TO ESCROW CORP. BY AFFILIATE
Simultaneously with the consummation of the Offering, TNIS loaned
approximately $46 million to Escrow Corp., and Escrow Corp. deposited the
proceeds of such loan, together with the net proceeds of the Offering, in escrow
pursuant to an escrow agreement (the "Escrow Agreement"). Such loan bore
interest at a rate equal to TNIS' cost of capital, and was an unsecured
obligation of Escrow Corp. Such loan matured upon the consummation of the
Refinancing Transactions. Management believes that the terms and conditions of
such loan were at least as favorable to Escrow Corp. as might have been obtained
in a similar transaction with an unaffiliated party.
LOANS TO AFFILIATES
FNH loaned approximately $46.8 million to an affiliate on March 1, 1996.
Such loan accrued interest at the rate of 10.5% over the prevailing yield to
maturity of the five year United States treasury note, and was an unsecured
subordinated obligation of the borrower guaranteed by certain other affiliates
of FNH, which obligation to FNH was evidenced by a promissory note (the
"Promissory Note"). Management believes that the terms and conditions of such
loan were at least as favorable to FNH as might have been obtained in a similar
transaction with an unaffiliated party. On May 15, 1996, FNH distributed the
Promissory Note to Parent Holdings as a partial redemption of and dividend on
class C common stock.
On September 27, 1996, FNH issued $150 million aggregate liquidation value
of the FNH Preferred Stock to Special Purpose Corp. and loaned to an affiliate
approximately $19 million of the proceeds therefrom. Such loan accrued interest
at the rate of 14%, and was an unsecured subordinated obligation of the
borrower, which obligation to FNH was evidenced by a promissory note. Management
believes that the terms and conditions of such loan were at least as favorable
to FNH as might have been obtained in similar transaction with an unaffiliated
party. Such loan, together with the accrued interest thereon, was repaid to FNH
on January 3, 1997.
FIRST NATIONWIDE ESCROW MERGER AND ISSUANCE OF FIRST NATIONWIDE ESCROW PREFERRED
STOCK
Concurrent with the issuance of the FNH 10 5/8% Senior Subordinated Notes,
First Nationwide Escrow issued approximately $36 million aggregate liquidation
value of cumulative perpetual preferred stock, (the "First Nationwide Escrow
Preferred Stock") to TNIS. The First Nationwide Escrow Preferred Stock had a
stated liquidation value of $100,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the First Nationwide Escrow Preferred Stock
were cumulative and accrued at an annual rate of approximately 7.3% of the
stated liquidation value.
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow was merged with and into FNH in the First
Nationwide Escrow Merger and FNH assumed First Nationwide Escrow's obligations
under the FNH 10 5/8% Senior Subordinated Notes and the Indenture. In connection
with the First Nationwide Escrow Merger, each share of First Nationwide Escrow
Preferred Stock was converted into and became one share of cumulative perpetual
preferred stock of FNH (the "FNH/First Nationwide Escrow Preferred Stock"),
which stock had the same relative rights, terms and preferences as the First
Nationwide Escrow Preferred Stock. Immediately after issuance, FNH redeemed the
FNH/First Nationwide Escrow Preferred Stock at a redemption price equal to its
stated liquidation value plus accrued and unpaid dividends to January 3, 1997.
TRANSACTIONS WITH MR. FORD
Madison Financial, Inc. ("Madison Financial"), a corporation formerly owned
by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer and a
Director of the Issuer and the Bank, was party to a Consulting Agreement (the
"Consulting Agreement"), effective as of February 1, 1993, between Madison
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Financial and TNIS, pursuant to which Madison Financial provided consulting
services to TNIS for a term ending on December 31, 1998. The Consulting
Agreement was terminated in July 1994 in connection with the Exchange Agreement
(as defined herein). Certain costs related to the Consulting Agreement were
charged to FNH.
FNH was an indirect subsidiary of First Gibraltar Holdings. In connection
with the offering of the FNH Senior Notes, First Gibraltar Holdings incorporated
Parent Holdings and a wholly owned subsidiary of Parent Holdings, FNH, to hold
100% of the common stock of the Bank. First Gibraltar Holdings contributed all
of its shares of capital stock of the Bank to Parent Holdings, which contributed
such shares to FNH in exchange for 1,000 shares of common stock of FNH. FNH
amended its certificate of incorporation to create 800 shares of class A common
stock having one vote per share, 200 shares of class B common stock having .75
votes per share and 230.3 shares of nonvoting class C common stock, and Parent
Holdings exchanged its 1,000 shares of common stock for 800 shares of class A
common stock. Pursuant to the terms of an Exchange Agreement entered into
between FNH, Mr. Ford and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, Parent Holdings acquired
100% of the class C common stock of FNH (all of which were redeemed on June 3,
1996) in exchange for $210 million and Mr. Ford acquired 100% of the class B
common stock of FNH in exchange for his 6.25% of the class A common stock of
First Gibraltar Holdings and all of the shares of Madison Financial, the sole
asset of which was the Consulting Agreement. In addition, FNH also assumed
indebtedness of Mr. Ford in the amount of approximately $11.9 million to TNIS
(the "Ford Obligation"), which obligation has been forgiven by TNIS. As a result
of the consummation of the transactions contemplated by the Exchange Agreement,
Mr. Ford owned 100% of the class B common stock of FNH, representing 20% of its
voting common stock (representing approximately 15% of the voting power of its
voting common stock), and Parent Holdings owned 100% of the class A common stock
of FNH, representing 80% of its voting common stock (representing approximately
85% of the voting power of its voting common stock). FNH, Parent Holdings and
Mr. Ford entered into a stockholders agreement (the "Stockholders Agreement")
pursuant to which, among other things, Mr. Ford and FNH had the right to
transfer their respective shares to certain affiliates. In addition, the
Stockholders Agreement contained other customary provisions regarding
restrictions on transfer and registration rights. On December 29, 1995,
Mr. Ford transferred his shares of class B common stock to Hunter's Glen, which
assumed the obligations under, and received the benefits of, the Stockholders
Agreement. Upon consummation of the Golden State Acquisition, Hunter's Glen
received shares of Golden State Common Stock in consideration for the shares of
class B common stock of FNH held by Hunter's Glen.
Mr. Ford has entered into a loan agreement with NationsBank, N.A.
("NationsBank"), whereby NationsBank has loaned Mr. Ford $5 million. Such loan
has a maturity of up to one year and bears interest at a floating interest rate
based on LIBOR. The loan is secured by Mr. Ford's FNH 12 1/4% Senior Notes. The
terms of the loan provide that, in the event of default by Mr. Ford under such
loan or in the event of certain rapid and material declines in the value of the
FNH 12 1/4% Senior Notes pledged as collateral, NationsBank or any successor or
assignee thereof will have the right to foreclose on the pledged FNH 12 1/4%
Senior Notes and sell, or direct Mr. Ford to sell, such FNH 12 1/4% Senior
Notes, to certain Qualified Institutional Buyers ("QIBs") (as such term is
defined in Rule 144A under the Securities Act) pursuant to Rule 144A under the
Securities Act, pursuant to Regulation S under the Securities Act, to FNH or
pursuant to a shelf registration statement.
Mr. Ford has entered into an employment agreement with the Bank calling for
his continued employment by the Bank in his current executive capacity with an
annual base salary in 1998 of $1,000,000. The term of this agreement extends
through December 31, 2000, and provides for, among other things, a life
insurance policy on the life of Mr. Ford in an amount equal to three times his
base salary.
Mr. Ford has also entered into a consulting agreement with First Nationwide
Management Corp. ("First Nationwide Management"), an affiliate of FNH, providing
for the payment to him of annual consulting fees of $2,000,000 for 1998 and in
increasing amounts through 2000, and certain other related expenses. Pursuant to
an arrangement between First Nationwide Management and FNH, such consulting fees
and other related expenses paid by First Nationwide Management are charged to
FNH. Such charges amounted to approximately $1,291,000, $1,225,000 and $964,000
in 1997, 1996 and 1995, respectively. Subject to the approval of the board of
directors of Golden State, it is expected that following the consummation of the
Golden State Acquisition, Golden State will assume the obligations of First
Nationwide Management under the consulting agreement with Mr. Ford.
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In 1996, as part of the financing for the Cal Fed Acquisition, Special
Purpose Corp. invested $150 million in cash in FNH in exchange for $150 million
aggregate liquidation value of FNH Preferred Stock. Such investment was funded
through borrowings by First Gibraltar Holdings under a credit facility, which
borrowings were loaned by First Gibraltar Holdings to Special Purpose Corp.
Special Purpose Corp. pledged its shares of FNH Preferred Stock to secure the
borrowings by First Gibraltar Holdings under such credit facility. The common
stock of Special Purpose Corp. is owned by Mr. Ford.
At December 31, 1997, the issued and outstanding FNH Preferred Stock had a
liquidation value of $25.7 million. The FNH Preferred Stock was redeemed in full
on March 31, 1998.
EXECUTIVE EMPLOYMENT AGREEMENTS
In addition to the employment agreement between Mr. Ford and the Bank (see
"--Transactions with Mr. Ford"), Messrs. Webb, Flanagan, Staff, Newman and Hodge
have entered into employment agreements with the Bank calling for their
continued employment by the Bank in their current executive capacities. All five
agreements are substantially similar in their terms except that Messrs. Webb,
Staff and Newman's employment agreements terminate on December 31, 2000,
Mr. Hodge's terminates on December 31, 1998, and Mr. Flanagan's terminates
May 31, 1999 and except that Mr. Flanagan's agreement provides for a $20,000
"substitution" bonus which was paid in 1996. If any of these agreements are
terminated without cause or by the executive without good reason prior to the
respective scheduled termination dates, the relevant executive would receive
payments of base salary and benefits due for the balance of the term.
Additionally, each employment agreement provides for a life insurance policy on
the life of the insured in an amount double the base salary payable by the Bank
to such individual. Pursuant to such employment agreements, the annual base
salaries payable by the Bank in 1998 to Messrs. Webb, Flanagan, Staff, Newman
and Hodge are $1,200,000, $700,000, $700,000, $500,000, and $300,000,
respectively.
Pursuant to an Agreement for Provision of Services between Cal Fed and
First Nationwide Management, dated December 1, 1994 (the "Services Agreement"),
a portion of the salaries payable by the Bank in 1998 to Messrs. Webb, Flanagan
and Staff is charged to First Nationwide Management so that the annual net base
compensation payable by the Bank will be $800,000, $350,000 and $350,000 for
Messrs. Webb, Flanagan and Staff, respectively. All of such amounts paid by
First Nationwide Management are charged to FNH for services performed by these
executives. The total amounts received by Cal Fed pursuant to the Services
Agreement were approximately $1,885,000, $1,379,000 and $1,092,000 in 1997, 1996
and 1995, respectively, which amounts are included in the amounts allocated by
First Nationwide Management to FNH.
In January 1997, the Bank entered into a Consulting Agreement with
Mr. Harshfield whereby he agreed to assist the Bank in its pursuit of the
California Federal Litigation. Mr. Harshfield will receive $100,000 per year for
each of the two years of the agreement.
Effective January 8, 1996, FNMC entered into an employment agreement with
Mr. Klein, for a term ending January 7, 1999. Pursuant to this employment
agreement, Mr. Klein receives a base salary of $300,000 per year. The agreement
also provides for life insurance on the life of Mr. Klein in the amount of
$450,000. If Mr. Klein's agreement is terminated by the Bank without cause or by
Mr. Klein without good reason prior to the scheduled termination date, he would
receive payment for base salary and benefits due for the balance of the term. In
addition, Mr. Klein has a salary guarantee that would provide a payment equal to
the greater of $1.35 million or three times his prior year base salary plus
bonus, should FNMC be sold during the term of his agreement.
SERVICES AGREEMENTS
First Nationwide Management allocates certain of its expenditures to FNH.
Such expenditures relate to salaries and benefits payable to selected Bank
employees (including Messrs. Webb, Flanagan and Staff), aviation and other
expenses. Pursuant to this arrangement, approximately $2,600,000, $2,524,000 and
$1,935,000 was allocated by First Nationwide Management to FNH for the years
ended December 31, 1997, 1996 and 1995, respectively, including the fees paid to
Cal Fed under the Services Agreement. Subject to the approval of the board of
directors of Golden State, it is expected that following the consummation of the
Golden State Acquisition the arrangement pursuant to which First Nationwide
Management incurs such expenditures will be assumed by Golden State.
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Effective on June 1, 1995, the Bank entered into an agreement whereby it
provides marketing and other support services to TNIS in connection with the
insurance agency business it purchased from a Bank subsidiary on the same date.
Service charges under this agreement amounted to approximately $5,200, $13,300
and $43,000 per month during 1997, 1996 and 1995, respectively. Management
believes that the terms and conditions of these arrangements are at least as
favorable to the Bank as those which could be obtained from similar arrangements
with an unaffiliated party. Subject to the approval of the board of directors of
Golden State, it is expected that following the consummation of the Golden State
Acquisition TNIS will contribute the insurance agency business to the Bank and
that the marketing agreement between the Bank and TNIS will be terminated.
SALE OF BUSINESS TO TNIS
Effective on June 1, 1995, FNC Insurance Agency, Inc., a wholly owned
subsidiary of the Bank, sold that portion of its insurance agency business
related to marketing insurance products to the Bank's retail deposit and
consumer loan customers to TNIS for approximately $0.7 million. Management
believes that the terms and conditions of this transaction are at least as
favorable to the Bank as might have been obtained in a similar transaction with
an unaffiliated party.
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Some of the Bank's executive officers, directors, and members of their
immediate families have engaged in loan transactions with the Bank. Such loans
were made: (i) in the ordinary course of the Bank's business, (ii) on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions between the Bank and other
persons, and (iii) did not involve more than the normal risk of collectibility
or present other unfavorable features.
LITIGATION MANAGEMENT AGREEMENT
In connection with the execution of the Merger Agreement, Golden State,
Glendale Federal and Cal Fed entered into the Litigation Management Agreement
with Stephen J. Trafton, Chairman, President and Chief Executive Officer of
Golden State, and Richard A. Fink, Vice Chairman of Golden State. Pursuant to
the Litigation Management Agreement, which became effective at the closing of
the Mergers, Messrs. Trafton and Fink, subject to the provisions of the
Litigation Management Agreement, manage Glendale Federal's and Cal Fed's
respective goodwill lawsuits against the United States. Pursuant to the
Litigation Management Agreement, Mr. Trafton is paid an annual salary of
$600,000 and Mr. Fink is paid an annual salary of $400,000. Messrs. Trafton and
Fink are also entitled to an incentive fee out of any recovery in the lawsuits,
to annual pension benefits aggregating $1,325,000, and certain medical benefits
and expenses.
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DESCRIPTION OF THE NOTES
All of the series of Old Notes issued in connection with the Offering were
issued under the same indenture (the "Indenture") between the Issuer and The
Bank of New York, as Trustee (the "Trustee"), a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
aggregate principal amount of securities which may be issued in series under the
Indenture is not limited. Except as set forth below, the provisions of the
Indenture apply to all of the Notes and, except as may be set forth in the
supplemental indentures or board resolutions related thereto, to any additional
series of securities that may be offered under the Indenture. Certain terms of
the Notes are set forth in a separate supplemental indenture for each series of
Notes (collectively, the "Supplemental Indentures"). Each such Supplemental
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary, which describes certain provisions
of the Indenture, the Supplemental Indentures and the Notes, does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
the TIA and all the provisions of the Indenture, the Supplemental Indentures and
the Notes, including the definitions therein of terms not defined in this
Prospectus. Golden State Holdings assumed the obligations of Escrow Corp. under
the Indenture and the Supplemental Indentures pursuant to a fifth supplemental
indenture (the "Fifth Supplemental Indenture") on September 14, 1998, which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Certain terms used herein are defined below for purposes of this section
under "--Certain Definitions." References in this "Description of the Notes" to
"Fixed Rate Notes" shall refer to the 2001 Notes, the 2003 Notes and the 2005
Notes. References in this "Description of the Notes" to the "Issuer" or
"Holdings" shall refer to Golden State Holdings. The terms of the New Notes are
identical in all material respects to the terms of the Old Notes, except for
certain transfer restrictions and registration rights relating to the Old Notes
and except that, if the Exchange Offer is not consummated by March 15, 1999,
the interest rate of the Old Notes from and including such date until but
excluding the date of consummation of the Exchange Offer will increase by 0.5%.
See "--Registration Rights."
GENERAL
Floating Rate Notes
The Floating Rate Notes will mature on August 1, 2003. The New Floating
Rate Notes will be treated as a continuation of the Old Floating Rate Notes
which bear interest at the floating rate described below from August 6, 1998,
payable in arrears on February 1, 1999 and thereafter quarterly in arrears on
May 1, August 1, November 1 and February 1 of each year (each such date, subject
to adjustment as provided below, a "Floating Rate Interest Payment Date") to the
persons who are registered holders thereof at the close of business on the
April 15, July 15, October 15 or January 15 next preceding such Floating Rate
Interest Payment Date. In connection with the Offering, the Trustee
authenticated and delivered Old Floating Rate Notes for original issue in an
aggregate principal amount of $250 million.
Interest on the Floating Rate Notes accrues at a rate equal to the
Applicable LIBOR Rate and is calculated on a formula basis by multiplying the
principal amount of the Floating Rate Notes then outstanding by the Applicable
LIBOR Rate, multiplying such product by the LIBOR Fraction. All percentages
resulting from any of the above calculations are rounded, if necessary, to the
nearest one hundred-thousandth of a percentage point, with five one-millionths
of a percentage point rounded upwards (e.g., 9.876545% being rounded to
9.87655%), and all dollar amounts used in or resulting from such calculations
are rounded to the nearest cent (with one-half cent being rounded upwards).
The Applicable LIBOR Rate for each Interest Period (other than the initial
Interest Period and other than to the extent provided under "Optional
Redemption" below) will be set on May 1, August 1, November 1 and February 1 of
each year, commencing with February 1, 1999 (each such date, subject to
adjustment as provided below, an "Interest Reset Date") until maturity or
earlier redemption. If any Interest Reset Date and Floating Rate Interest
Payment Date would otherwise be a day that is not a LIBOR Business Day, such
Interest Reset Date and Floating Rate Interest Payment Date shall be the next
succeeding LIBOR Business Day, unless the next succeeding LIBOR Business Day is
in the next succeeding calendar month, in which case such Interest Reset Date
and Floating Rate Interest Payment Date shall be the immediately preceding LIBOR
Business Day. "LIBOR Business Day" means any day that is not a Saturday or
Sunday and that, in the City of New York or the City of London, is not a day on
which banking institutions are generally authorized or obligated by law to
close.
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"Interest Period" shall mean the period from and including an Interest
Reset Date (or in the case of the initial Interest Period, the Issue Date) to
but excluding the next succeeding Interest Reset Date and, in the case of the
last such period, from and including the Interest Reset Date immediately
preceding the maturity date or a redemption date, as the case may be, to but not
including the maturity date or such redemption date, as the case may be. If the
redemption date or maturity date is not a LIBOR Business Day, then the principal
amount of the Floating Rate Notes plus accrued and unpaid interest thereon shall
be paid on the next succeeding Floating Rate Business Day and no interest shall
accrue for the Floating Rate maturity date, the redemption date or any day
thereafter. "Floating Rate Business Day" shall mean any day that is not a
Saturday or Sunday and that, in the City of New York, is not a day on which
banking institutions are generally authorized or obligated by law to close.
The "Applicable LIBOR Rate," with respect to an Interest Period (except in
the circumstances provided below under "Optional Redemption") means 100 basis
points (the "Spread") over the rate (the "Base LIBOR Rate") (expressed as a
percentage per annum) for deposits in United States dollars for a three-month
period beginning on the second London Banking Day after the Interest Rate
Determination Date for such Interest Period that appears on Telerate Page 3750
as of 11:00 a.m., London time, on the Interest Rate Determination Date. If
Telerate Page 3750 does not include such a rate or is unavailable on an Interest
Rate Determination Date, the Base LIBOR Rate for the Interest Period shall be
the arithmetic mean of the rates (expressed as a percentage per annum) for
deposits of $1,000,000 for a three-month period beginning on the second London
Banking Day after the Interest Rate Determination Date that appears on Reuters
Screen LIBO Page as of 11:00 a.m., London time, on the Interest Rate
Determination Date. If Reuters Screen LIBO Page does not include two or more
rates or is unavailable on an Interest Rate Determination Date, the Trustee
shall request the principal London office of each of four major banks in the
London interbank market to provide such bank's offered quotation (expressed as a
percentage per annum), as of approximately 11:00 a.m., London time, on such
Interest Rate Determination Date, to prime banks in the London interbank market
for deposits of $1,000,000 for a three-month period beginning on the second
London Banking Day after the Interest Rate Determination Date. If at least two
such offered quotations are so provided, the Base LIBOR Rate for the Interest
Period shall be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, the Trustee shall request each of three major banks
in New York City to provide such bank's rate (expressed as a percentage per
annum), as of approximately 11:00 a.m., New York City time, on such Interest
Rate Determination Date, for loans of $1,000,000 to leading European banks for a
three-month period beginning on the second London Banking Day after the Interest
Rate Determination Date. If at least two such rates are so provided, the Base
LIBOR Rate for the Interest Period will be the arithmetic mean of such rates. If
fewer than two such rates are so provided, then the Base LIBOR Rate for the
Interest Period will be the Base LIBOR Rate in effect with respect to the
immediately preceding Interest Period. Notwithstanding the foregoing, the
Applicable LIBOR Rate for the initial Interest Period shall be 6 3/4%.
"Interest Rate Determination Date" means, with respect to each Interest
Period, the second London Banking Day prior to the Interest Reset Date that
commences such Interest Period or, in the circumstances provided below under
"Optional Redemption," the second London Banking Day prior to the relevant
Notice Date.
"LIBOR Fraction" means the actual number of days in the Interest Period
divided by 360.
"London Banking Day" means any day in which dealings in U.S. dollars are
transacted or, with respect to any future date, are expected to be transacted in
the London interbank market.
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
The Reuters Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service).
"Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service (or such other page as may replace page 3750 on that
service).
The interest rate on the Floating Rate Notes will in no event be higher
than the maximum rate permitted by New York law as the same may be modified by
United States law of general application.
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2001 Notes
The 2001 Notes will mature on August 1, 2001. The New 2001 Notes will be
treated as a continuation of the Old 2001 Notes which bear interest at 6 3/4%
per annum, computed on the basis of a 360-day year of twelve 30-day months,
payable semiannually in arrears on February 1 and August 1 of each year,
commencing February 1, 1999, to the persons who are registered holders thereof
at the close of business on the January 15 or July 15 next preceding such
interest payment date. In connection with the Offering, the Trustee
authenticated and delivered the Old 2001 Notes for original issue in an
aggregate principal amount of $350 million.
2003 Notes
The 2003 Notes will mature on August 1, 2003. The New 2003 Notes will be
treated as a continuation of the Old 2003 Notes which bear interest at 7% per
annum, computed on the basis of a 360-day year of twelve 30-day months, payable
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1999, to the persons who are registered holders thereof at the close
of business on the January 15 or July 15 next preceding such interest payment
date. In connection with the Offering, the Trustee authenticated and delivered
the Old 2003 Notes for original issue in an aggregate principal amount of
$600 million.
2005 Notes
The 2005 Notes will mature on August 1, 2005. The New 2005 Notes will be
treated as a continuation of the Old 2005 Notes which bear interest at 7 1/8%
per annum, computed on the basis of a 360-day year of twelve 30-day months,
payable semiannually in arrears on February 1 and August 1 of each year,
commencing February 1, 1999, to the persons who are registered holders thereof
at the close of business on the January 15 or July 15 next preceding such
interest payment date. In connection with the Offering, the Trustee
authenticated and delivered the Old 2005 Notes for original issue in an
aggregate principal amount of $800 million.
Other Provisions
The rate per annum at which the Old Notes bear interest may increase under
certain circumstances described below under "--Registration Rights." The
Indenture requires that payments in respect of Notes (including principal,
premium and interest) be made, in the case of a holder of at least $1 million
aggregate principal amount of Notes, by wire transfer of immediately available
funds to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. The
Notes are transferable and exchangeable initially at the office of the Trustee
and will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
The Notes are senior unsecured obligations of Golden State Holdings and
rank pari passu with the present and all future senior unsecured obligations of
Golden State Holdings as to payments of principal and interest.
Any Notes of a series that remain outstanding after the consummation of the
Exchange Offer, together with the New Notes issued in connection with the
Exchange Offer in exchange for Notes of such series, will be treated as a single
class of securities under the Indenture.
If any day on which a payment is due with respect to a Fixed Rate Note is
not a Business Day, then the holder thereof shall not be entitled to payment of
the amount due until the next following Business Day nor to any additional
principal, interest or other payment as a result of such delay.
OPTIONAL REDEMPTION
Notice of optional redemption will be mailed at least 30 days but not more
than 60 days before any redemption date to each holder of Notes to be redeemed
at its registered address; provided, however, that in the event the redemption
date with respect to Floating Rate Notes will occur following the next scheduled
Interest Reset Date, notice of redemption will be given in accordance with the
Indenture at least 30 days but not more than 35 days before the applicable
redemption date. Notes in denominations larger than $1,000 may be redeemed in
part but only in integral multiples of $1,000. If money sufficient to pay the
redemption price of all Notes (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent (or, if the Issuer or a
Subsidiary of the Issuer acts as the Paying Agent, it segregates the money held
by it as Paying Agent and holds it as a separate trust fund) on or before the
redemption date, then on and after such date interest will cease to accrue on
such Notes (or such portions thereof) called for redemption.
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Floating Rate Notes
Except as provided below in connection with a Change of Control, the
Floating Rate Notes may not be redeemed prior to August 1, 2000. Thereafter, the
Floating Rate Notes may be redeemed at the option of the Issuer, at any time as
a whole, or from time to time in part, on any Business Day at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest (if any) to the date of redemption (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on August 1 of the years set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
- ------ ----------------
<S> <C>
2000............................................ 101.50%
2001............................................ 101.00%
2002............................................ 100.50%
</TABLE>
In the event that the redemption date will occur following the next
scheduled Interest Reset Date, the rate of interest on the Floating Rate Notes
for the period from the date on which a notice of redemption is given in
accordance with the Indenture (the "Notice Date") to the redemption date will be
the higher of (x) the Applicable LIBOR Rate in effect on the Notice Date and
(y) the Applicable LIBOR Rate that is determined by using the second London
Banking Day preceding the Notice Date as the Interest Rate Determination Date.
In such case, the Applicable LIBOR Rate will not be reset on the Interest Reset
Date which follows the Notice Date and precedes the redemption date, although
accrued interest will remain due and payable on the related Floating Rate
Interest Payment Date.
Additionally, in the event of a Change of Control occurring prior to
August 1, 2000, the Floating Rate Notes may be redeemed (a "Change of Control
Call Event"), in whole but not in part, at the option of the Issuer at the
redemption price set forth below (the "Change of Control Price"). The Change of
Control Price shall equal the sum of: (i) the principal amount of the Floating
Rate Notes to be redeemed, plus (ii) accrued and unpaid interest (if any) to the
date of redemption (subject to the right of the holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Floating Rate Note at any
time of determination, the excess, if any, of (A) the sum of the present values
at such time of (i) the redemption price for such Note on August 1, 2000, and
(ii) the scheduled interest payments that would be required from the redemption
date to August 1, 2000 in respect of such Floating Rate Note to be redeemed, if
the Applicable LIBOR Rate were the "Designated Fixed Rate" (as defined below),
using in each case a discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the then outstanding principal amount of such Floating Rate
Note to be redeemed. For purposes of the foregoing, the "Designated Fixed Rate"
shall be a rate per annum equal to the sum of (a) the Treasury Rate plus
(b) the Spread plus (c) 47 basis points.
In the event the redemption date will occur following the next scheduled
Interest Reset Date, the rate of interest on the Floating Rate Notes for the
period from the Notice Date to the redemption date will be determined as
provided in the fourth preceding paragraph.
Fixed Rate Notes
The Fixed Rate Notes of any series may be redeemed at the option of the
Issuer, at any time as a whole, or from time to time in part, on any Business
Day at an aggregate redemption price equal to the sum of: the principal amount
of the Fixed Rate Notes to be redeemed, plus accrued and unpaid interest (if
any) to the date of redemption (subject to the right of the holders of record on
the relevant record date to receive interest due on the relevant interest
payment date), plus the Applicable Premium.
means, with respect to a Fixed Rate Note of any series
at any time of determination, the excess, if any, of (A) the present value at
such time of determination of the remaining required interest and principal
payments in respect of the portion of such Fixed Rate Note to be redeemed,
computed using a discount rate equal to the Treasury Rate plus (i) 40 basis
points with respect to a 2001 Note, (ii) 50 basis points with respect to a 2003
Note and (iii) 50 basis points with respect to a 2005 Note, over (B) the then
outstanding principal amount of the portion of such Fixed Rate Note to be
redeemed.
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"Treasury Rate" means, with respect to each series of Notes, the yield to
maturity at the time of computation of United States Treasury Securities with a
constant maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15(519) which has become publicly available at least two
Business Days prior to the date fixed for repayment or, in the case of
defeasance, prior to the date of deposit or, in the case of a Change of Control
Call Event, prior to the relevant Notice Date (or, if such Statistical Release
is no longer published, any publicly available source of similar market data))
most nearly equal to the then remaining Average Life to Stated Maturity of such
series; provided, however, that, if the Average Life to Stated Maturity of such
series is not equal to the constant maturity of a United States Treasury
Security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury Securities for
which such yields are given, except that, if the Average Life to Stated Maturity
of such series is less than one year, the weekly average yield on actually
traded United States Treasury Securities adjusted to a constant maturity of one
year shall be used; provided, however, that with respect to Floating Rate Notes,
for purposes of calculating the Applicable Premium in the event of a Change of
Control Call Event, the Treasury Rate shall be determined assuming a Stated
Maturity of August 1, 2000 for such Notes.
CALCULATION AGENT AND PAYING AGENT
The Trustee will act as the Calculation Agent and the Paying Agent and will
make all determinations of the Applicable LIBOR Rate, the Treasury Rate and any
Applicable Premium in respect of the Floating Rate Notes (the "Calculations").
All Calculations made by the Calculation Agent shall in the absence of manifest
error be conclusive for all purposes and binding on the Issuer and the holders
of the Floating Rate Notes. So long as any Calculation is required to be
determined with respect to the Floating Rate Notes, there will at all times be
a Calculation Agent. In the event that any acting Calculation Agent shall be
unable or unwilling to act, or that such Calculation Agent shall fail to
establish the Applicable LIBOR Rate for any Interest Period or fail to make a
Calculation, or that the Issuer proposes to remove such Calculation Agent, the
Issuer shall appoint itself or another person which is a bank, trust company,
investment banking firm or other financial institution to act as the Calculation
Agent.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Issuer to repurchase all or any part of such holder's
Notes at a repurchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that notwithstanding the occurrence of a Change in Control, the Issuer shall not
be obligated to purchase the Notes of any series pursuant to this covenant in
the event that it has exercised its right to redeem all the Notes of such series
pursuant to the provisions under "--Optional Redemption."
Within 45 days following any Change of Control, the Issuer will mail a
notice to each holder of Notes of each series (other than any series with
respect to which the Issuer has mailed a notice of redemption) with a copy to
the Trustee stating: (a) that a Change of Control has occurred and that such
holder has the right to require the Issuer to repurchase all or any part of such
holder's Notes at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); (b) the
circumstances and relevant facts regarding such Change of Control; (c) the
repurchase date (which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (d) the instructions, determined by
the Issuer consistent with the Indenture, that a holder must follow in order to
have its Notes repurchased.
The Issuer's ability to pay cash to holders of Notes upon a repurchase may
be limited by the Issuer's then existing financial resources. See "Risk
Factors--Ability to Pay Principal on the Notes."
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The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of Notes as a result of a Change
of Control. To the extent that the provisions of any securities laws or
regulations conflict with the foregoing provisions, the Issuer will comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligation under this covenant by virtue thereof.
Certain provisions relating to the Issuer's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may not be waived or
modified without the written consent of the holders of all the Notes of each
series affected.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture (except as
described in "--Investment Grade Covenant Changes" below):
Limitation on Debt. Holdings will not Issue any Debt and Holdings
will not permit any Subsidiary to Issue any Debt; provided, however, that
the foregoing shall not prohibit the Issuance of the following Debt:
(a) the Notes and the Exchange Notes;
(b) Debt of Holdings if, immediately after giving effect to any
such Issuance, the aggregate principal amount of Debt (including the
aggregate accreted value as of such date of any Debt Issued at a
discount) of Holdings outstanding would not exceed an amount equal to
the Adjusted Consolidated Net Worth of Holdings;
(c) Subordinated Obligations of Holdings if, immediately after
giving effect to any such Issuance, the Fixed Charge Coverage Ratio
would be greater than 3.00 to 1.00; provided, however, that the
Subordinated Obligations so Issued (A) shall not mature prior to the
Stated Maturity of the Notes outstanding on the date of such Issuance
and (B) shall have an Average Life to their Stated Maturity equal to or
greater than the remaining Average Life to the Stated Maturity of such
Notes;
(d) Permitted Refinancing Debt Issued by Holdings to Refinance Debt
Issued pursuant to the foregoing clauses (a), (b) and (c) and clause
(i) below;
(e) any Debt of any Subsidiary of Holdings that is a Depository
Institution or a Subsidiary of such Depository Institution;
(f) in the case of any Financial Services Subsidiary which is not a
Depository Institution or a Subsidiary of a Depository Institution,
(x) any Debt Issued by such Financial Services Subsidiary in the
ordinary course of funding its assets, (y) any additional Debt of such
Financial Services Subsidiary if, immediately after giving effect to the
Issuance of such additional Debt, the aggregate principal amount of Debt
(including the aggregate accreted value as of such date of any Debt
Issued at a discount) of such Financial Services Subsidiary outstanding
(other than any Debt described in clause (x) above) would not exceed an
amount equal to the product of 2.0 and the Adjusted Consolidated Net
Worth of such Financial Services Subsidiary, and (z) any Permitted
Refinancing Debt Issued by Holdings, such Subsidiary or a Subsidiary
thereof to Refinance any Debt Issued pursuant to clause (y) above;
(g) Debt of Holdings in an aggregate principal amount not to exceed
$200 million incurred in connection with the Refinancing Transactions
provided that such Debt shall not mature after December 31, 1999;
(h) Debt of a Subsidiary of Holdings Issued and outstanding on or
prior to the date on which such Subsidiary was acquired by Holdings
(other than Debt Issued as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary of Holdings or was acquired by
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Holdings) and any Permitted Refinancing Debt Issued by Holdings, such
Subsidiary or a Subsidiary thereof to Refinance such Debt;
(i) FNH Notes assumed by Holdings in connection with the
Transactions; or
(j) Permitted Acquisition Debt of Holdings in an aggregate amount
at any time outstanding not in excess of $300 million.
Limitation on Restricted Payments. (a) Holdings will not, and will not
permit any of its Subsidiaries, directly or indirectly, to, make any Restricted
Payment if, at the time of the making of such Restricted Payment, and after
giving effect thereto:
(1) a Default has occurred and is continuing (or would result
therefrom); or
(2) the Bank does not qualify as "well capitalized" under Section 28
of the FDIA (or any successor provision) and the regulations of the OTS
thereunder; or
(3) the Consolidated Common Shareholders' Equity of the Bank as of the
end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment would have been less than the Minimum
Common Equity Amount as of the end of such fiscal quarter; or
(4) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made from and after July 1, 1998 would
exceed the sum of (without duplication):
(i) 75% (or, in the case of that portion of Consolidated Net Income
of Holdings which is attributable to the Litigations, 100%) of Holdings'
aggregate Consolidated Net Income (or, if such aggregate Consolidated
Net Income is a deficit, minus 100% of such deficit) since July 1, 1998
to the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment;
(ii) the aggregate Net Cash Proceeds from sales of Capital Stock of
Holdings (other than Redeemable Stock or Exchangeable Stock) or cash
capital contributions made to Holdings and any earnings or proceeds
thereof to the extent invested in Temporary Cash Investments, to the
extent received, made or realized on or after the Issue Date (other than
an issuance or sale to a Subsidiary of Holdings);
(iii) the amount by which Debt of Holdings is reduced on Holdings'
balance sheet on or after the Issue Date upon the conversion or exchange
(other than by a Subsidiary of Holdings) of Debt of Holdings into
Capital Stock (other than Redeemable Stock or Exchangeable Stock) of
Holdings (less the amount of any cash or other property distributed by
Holdings or any Subsidiary of Holdings upon such conversion or
exchange); and
(iv) $320 million.
(b) The preceding paragraph will not prohibit the following (none of which
will be included in the calculation of the amount of Restricted Payments, except
to the extent expressly provided in clause (i) below):
(i) dividends paid within 60 days after the date of declaration
thereof, or Restricted Payments made within 60 days after the making of
a binding commitment in respect thereof, if at such date of declaration
or commitment such dividend or other Restricted Payment would have
complied with this covenant; provided, however, that, at the time of
payment of such dividend or the making of such Restricted Payment, no
other Default shall have occurred and be continuing (or would result
therefrom); provided further, however, that such dividend or other
Restricted Payment shall be included in the calculation of the amount of
Restricted Payments;
(ii) dividends on, or any purchase, redemption or other acquisition
or retirement for value of, the Bank Preferred Stock or Qualified
Preferred Stock;
(iii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Capital Stock or Subordinated
Obligations by exchange for or out of the proceeds from the
substantially concurrent sale of Capital Stock or of a cash capital
contribution; provided, however, that
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the Net Cash Proceeds from such sale or such capital contribution, to
the extent they are used to purchase, repurchase, redeem, defease,
acquire or retire for value Capital Stock or Subordinated Obligations,
shall be excluded from clause (a)(4)(ii) above;
(iv) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations by
exchange for or out of the proceeds from the substantially concurrent
sale of Subordinated Obligations permitted to be issued under "--Certain
Covenants--Limitation on Debt" above;
(v) any purchase or repurchase of any Subordinated Obligations
pursuant to an option given to a holder of such Subordinated Obligations
pursuant to a "change of control" covenant which is no more favorable to
the holders of such Subordinated Obligations than the provisions of the
Indenture described under "--Change of Control" above are to holders of
the Notes as determined in good faith by the Board of Directors of
Holdings, the determination of which shall be evidenced by a resolution
adopted by such Board of Directors; provided, however, that no such
purchase shall be permitted prior to the time when Holdings shall have
purchased all Notes tendered for purchase by holders electing to have
their Notes purchased pursuant to the provisions of the Indenture
described under "--Change of Control" above;
(vi) so long as no Default has occurred and is continuing, amounts
paid to Parent, to the extent necessary to enable Parent to pay actual
expenses, other than those paid to Affiliates of Holdings, incidental to
being a publicly reporting, but non-operating, company; or
(vii) any Restricted Payments to the extent necessary to consummate
the Transactions or to redeem or purchase any Bank Preferred Stock or
FNH Notes not purchased in connection with the Transactions or to the
extent resulting from the Transactions.
(c) Holdings or any Subsidiary of Holdings may take actions to make a
Restricted Payment in anticipation of the occurrence of any of the events
described in paragraph (a) or (b) of this covenant; provided, however, that the
making of such Restricted Payment shall be conditioned upon the occurrence of
such event.
Limitation on Transactions with Affiliates. (a) Holdings will not, and
will not permit any of its Subsidiaries to, conduct any business or enter into
any transaction or series of similar transactions (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of Holdings or any Affiliated Permitted Holder unless:
(i) the terms of such business, transaction or series of transactions
are (A) set forth in writing and (B) at least as favorable to Holdings or
such Subsidiary as terms that would be obtainable at the time for a
comparable transaction or series of similar transactions in arm's-length
dealings with an unrelated third Person; and
(ii) to the extent that such business, transaction or series of
transactions is known by the Board of Directors of Holdings or such
Subsidiary to involve an Affiliate of Holdings or any Affiliated Permitted
Holder, then:
(A) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$5,000,000, such transaction or series of related transactions has been
approved (and the value of any non-cash consideration has been
determined) by a majority of those members of the Board of Directors of
Holdings or such Subsidiary having no personal stake in such business,
transaction or series of transactions; and
(B) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$75,000,000 (with the value of any non-cash consideration being
determined by a majority of those members of the Board of Directors of
Holdings or such Subsidiary having no personal stake in such business,
transaction or series of transactions), such transaction or series of
related transactions has been determined, in the written opinion of a
nationally recognized investment banking firm, to be fair, from a
financial point of view, to Holdings or such Subsidiary.
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(b) The provisions of the preceding paragraph (a) above will not prohibit:
(i) any Restricted Payment permitted to be paid as described under "--Certain
Covenants--Limitation on Restricted Payments" above, (ii) any transaction
between Holdings and any of its Subsidiaries or between Subsidiaries of
Holdings; provided, however, that no portion of any minority interest in any
such Subsidiary is owned by any Affiliate of Holdings or any Affiliated
Permitted Holder (in each case, other than a Wholly Owned Subsidiary, an
Unrestricted Affiliate or a Permitted Affiliate), (iii) transactions pursuant to
which Mafco Holdings will provide Holdings and its Subsidiaries at the request
of Holdings with certain allocated services to be purchased from third party
providers, such as legal and accounting services, insurance coverage and other
services, (iv) any transaction with a Permitted Affiliate entered into in the
ordinary course of business (including compensation or employee benefit
arrangements with any such Permitted Affiliate); provided, however, that such
Permitted Affiliate holds, directly or indirectly, no more than 5% of the
outstanding Capital Stock of Holdings, (v) any transaction pursuant to the Tax
Sharing Agreement, (vi) any transaction with an Unrestricted Affiliate and
(vii) any transactions pursuant to the Escrow Corp. Merger Agreement or
otherwise necessary to consummate the Transactions.
Limitation on Restrictions on Distributions by Subsidiaries. Holdings will
not, and will not permit any Subsidiary of Holdings to, suffer to exist any
consensual encumbrance or restriction on the ability of any Subsidiary of
Holdings: (i) to pay, directly or indirectly, dividends or make any other
distributions in respect of its Capital Stock or to pay any Debt owed to
Holdings, (ii) to make loans or advances to Holdings or (iii) to transfer any of
its property or assets to Holdings, except, in any such case, any encumbrance or
restrictions:
(a) pursuant to any agreement in effect or entered into on the Issue
Date or in connection with the Transactions;
(b) pursuant to an agreement in effect or entered into by such
Subsidiary prior to the date on which such Subsidiary was acquired by
Holdings (other than an agreement in respect of Debt Issued as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by Holdings and other than any agreement entered into in
anticipation of the acquisition of such Subsidiary by Holdings) and
outstanding on such date;
(c) pursuant to an agreement effecting a Refinancing of Debt or
Preferred Stock Issued pursuant to an agreement referred to in clause
(a) or (b) above or this clause (c) or contained in any amendment to an
agreement referred to in clauses (a) and (b) or this clause (c); provided,
however, that the provisions contained in such Refinancing agreement or in
such amendment relating to such encumbrance or restriction are no more
restrictive than the provisions contained in the agreement which is the
subject of such Refinancing or amendment, as determined in good faith by
the Board of Directors of Holdings and evidenced by a resolution adopted by
such Board;
(d) any encumbrance or restriction (A) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset that
is a lease, license, conveyance or contract or similar property or asset,
(B) by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of Holdings or any
Subsidiary of Holdings not otherwise prohibited by the Indenture or
(C) arising or agreed to in the ordinary course of business and that does
not, individually or in the aggregate, detract from the value of property
or assets of Holdings or any Subsidiary of Holdings in any manner material
to Holdings or such Subsidiary;
(e) restrictions contained in security agreements securing Debt of
Holdings or any Subsidiary of Holdings to the extent such restrictions
restrict the transfer of the collateral covered by such security agreements
or, upon default, restrict the payment of dividends or distributions on
Capital Stock, and restrictions contained in agreements relating to a
disposition of property or Capital Stock of any Subsidiary, to the extent
such restrictions restrict the transfer of the property or Capital Stock
subject to such agreements;
(f) any encumbrance or restriction relating to a Financial Services
Subsidiary contained in an agreement providing for or relating to the
Issuance of Debt by such Subsidiary pursuant to clause (f) of "--Certain
Covenants--Limitation on Debt";
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(g) any encumbrance or restriction imposed by, or otherwise agreed to
with, any governmental agency having regulatory supervision over the Bank
or any other Subsidiary of Holdings; and
(h) pursuant to the terms of any Qualified Preferred Stock issued
after the Issue Date.
Limitation on Liens. Holdings will not create or permit to exist any Lien
on any of its property or assets (including Capital Stock), whether owned on the
date of the Indenture or thereafter acquired, securing any Debt of Holdings
without making effective provision to secure the Notes then outstanding (and, if
the Issuer so elects, any other Debt ranking pari passu with the Notes) equally
and ratably with or prior to such Debt with a Lien on the assets securing such
Debt for so long as such Debt is secured by such Lien.
Maintenance of Status of Bank as Insured Depository Institution; Capital
Maintenance.
(a) Holdings will do or cause to be done all things necessary to preserve
and keep in full force and effect the status of the Bank as an insured
depository institution and do all things necessary to ensure that deposits of
the Bank are insured by the FDIC or any successor organization up to the maximum
amount permitted by 12 U.S.C. Section 1811 et seq. and the regulations
thereunder or any succeeding federal law, except as to individual accounts or
interests in employee benefit plans that are not entitled to "pass-through"
insurance under 12 U.S.C. Section 1821(a)(1)(D).
(b) Holdings shall cause the Bank to maintain or exceed the status of an
"adequately capitalized" institution as defined in the FDIA and OTS regulations.
Limitation on Sale of Capital Stock of, and Merger or Sale of Assets by, the
Bank.
(a) Except in the case of the Transactions, Holdings will not, and will not
permit the Bank to, issue, sell, transfer, assign or otherwise dispose of any
shares of Voting Stock or Common Stock of the Bank, or any securities
convertible into or exchangeable for shares of Voting Stock or Common Stock of
the Bank, unless after giving effect to such transaction and to shares issuable
upon conversion or exchange of outstanding securities convertible into or
exchangeable for shares of such Voting Stock or Common Stock (including such
securities, if any, which may be the subject of such transaction) at least 80%
of the Voting Stock and Common Stock of the Bank will be owned at that time by
Holdings or a person who expressly assumes by supplemental indenture all the
obligations of the Issuer under the Indenture and the Notes ("New Holding
Company") or any Wholly Owned Subsidiary of Holdings or of a New Holding
Company.
(b) Except in the case of the Transactions, Holdings will not permit the
Bank to merge or consolidate or convey or transfer all or substantially all its
assets unless at least 80% of the Voting Stock and Common Stock (after giving
effect to such transaction and to shares issuable upon conversion or exchange of
outstanding securities convertible into or exchangeable for shares of such
Voting Stock or Common Stock, including such securities, if any, which may be
issued in such transaction) of the resulting or surviving corporation in the
case of a merger or consolidation or of the transferee corporation in the case
of a conveyance or transfer will be owned at that time by Holdings or a New
Holding Company or any Wholly Owned Subsidiary of Holdings or of a New Holding
Company.
(c) For purposes of paragraph (b) above, the phrase "convey or transfer all
or substantially all its assets" in respect of the Bank means to convey or
transfer in a single transaction or in a series of related transactions, in
either case occurring outside the ordinary course of business, more than 75% of
the assets and 75% of the deposit liabilities of the Bank in each case as shown
on a consolidated balance sheet of the Bank as of the end of the most recent
fiscal quarter ending at least 45 days prior to such transaction (or the first
transaction in any such related series of transactions); provided, however, that
in the case of such a conveyance or transfer, if Holdings at any time holds any
assets other than (1) the Capital Stock of the Bank, (2) Temporary Cash
Investments and (3) Permitted Investments described in clause (ii) of the
definition thereof, such other assets shall be deemed to be assets of the Bank
and to have been reflected on such consolidated balance sheet.
(d) Notwithstanding the foregoing, Holdings may engage in a transaction
otherwise prohibited by paragraph (a) or (b) above if prior to any such
transaction the Bank unconditionally guarantees payment when due of the
principal of, premium, if any, and interest on the Notes, the Bank obtains all
regulatory approvals, if any,
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required to permit such guarantee, and the Bank obtains an Opinion of Counsel as
to the enforceability of such guarantee.
(e) After consummation of any transaction permitted by paragraph
(b) above, the term "Bank" when used in the Indenture and the Notes shall mean
the resulting, surviving or transferee person in such transaction and not any
other entity which previously had been covered by such term. After consummation
of any transaction permitted by paragraph (a) or (b) above involving a New
Holding Company in which the requirements of paragraph (a) under "--Successor
Company" are satisfied with respect to such New Holding Company as if it were
the transferee corporation referred to in such paragraph (a), the term
"Holdings" when used in the Indenture and the Notes shall mean the New Holding
Company in such transaction and not any other entity which previously had been
covered by such term, and the New Holding Company will be the successor company
and will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under the Indenture, and thereafter the Issuer will be
discharged from all obligations and covenants under the Indenture and the Notes.
SEC Reports. Notwithstanding that Holdings may not be required to be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, Holdings will file or cause to be filed with the Commission and provide the
Trustee and holders of the Notes with the information, documents and other
reports (or copies of such portions of any of the foregoing as the Commission
may by rules and regulations prescribe) specified in Sections 13 and 15(d) of
the Exchange Act. The Issuer also will comply with the other provisions of TIA
Section 314(a).
INVESTMENT GRADE COVENANT CHANGES
If at any time the Notes of any series are rated Investment Grade, at the
election of the Issuer, each of the covenants described above under "--Certain
Covenants" (other than "--Limitation on Transactions with Affiliates,"
"--Limitation on Liens," "--Limitation on Sale of Capital Stock of, and Merger
or Sale of Assets by, the Bank,""--Maintenance of Status of Bank as Insured
Depository Institution; Capital Maintenance" and "--SEC Reports") shall be of no
further force and effect in respect of such series and shall cease to apply to
Holdings and, if applicable, its Subsidiaries in respect of such series.
SUCCESSOR COMPANY
(a) Except in the case of the Transactions, Holdings may not consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all its assets to, any person, unless: (i) the resulting, surviving or
transferee person (if not Holdings) is organized and existing under the laws of
the United States of America, any State thereof or the District of Columbia and,
in the case of any transaction covered by this paragraph (a) occurring after the
Escrow Corp. Merger in which Holdings is not the resulting, surviving or
transferee person, such person expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Issuer under the Indenture and the Notes,
(ii) immediately after giving effect to such transaction (and treating any Debt
which becomes an obligation of the resulting, surviving or transferee person or
any of its Subsidiaries as a result of such transaction as having been issued by
such person or such Subsidiary at the time of such transaction), no Default has
occurred and is continuing, (iii) immediately after giving effect to such
transaction, the resulting, surviving or transferee person has a Consolidated
Net Worth in an amount which is not less than the Consolidated Net Worth of
Holdings immediately prior to such transaction and (iv) the Issuer delivers to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) complies with the Indenture.
(b) In the case of any transaction covered by paragraph (a) above, the term
"Holdings" when used in the Indenture and the Notes shall mean the resulting,
surviving or transferee person in such transaction and not any other entity
which previously had been covered by such term. In addition, in the case of any
transaction covered by paragraph (a) above occurring after the Escrow Corp.
Merger, the resulting, surviving or transferee person will be the successor
company and will succeed to, and be substituted for, and may exercise every
right and power of, the Issuer under the Indenture, and thereafter, except in
the case of a lease, the Issuer will be discharged from all obligations and
covenants under the Indenture and the Notes.
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DEFAULTS
An Event of Default with respect to any series of Notes is defined in the
Indenture as: (i) (1) a default by the Issuer in the payment of principal of any
Note of that series when due and payable at its Stated Maturity, upon
redemption, upon required purchase, upon declaration or otherwise, or (2) a
default by the Issuer in the payment of interest on any Note of that series when
due and payable and the continuance of such default for a period of 30 days, or
(3) a failure by the Issuer to purchase or redeem Notes of that series when
required pursuant to the Indenture or the Notes, (ii) the failure by the Issuer
to comply with its obligations described under "--Successor Company" above,
(iii) the failure by the Issuer, Holdings or Holdings' Subsidiaries to comply
for 30 days after notice with any of their respective obligations under the
covenant described under "--Change of Control" (other than a failure to purchase
Notes), or under the covenants described under "--Certain Covenants--Limitation
on Debt," "--Limitation on Restricted Payments," "--Limitation on Transactions
with Affiliates,""--Limitation on Other Business Activities of Escrow Corp.,"
"--Limitation on Restrictions on Distributions by Subsidiaries," "--Limitation
on Liens," "--Maintenance of Status of Bank as Insured Depository Institution;
Capital Maintenance," "--Limitation on Sale of Capital Stock of, and Merger or
Sale of Assets by, the Bank" or "--SEC Reports," as applicable, above, (iv) the
failure by the Issuer or Holdings to comply for 60 days after notice with its
other agreements contained in the Indenture in respect of that series of Notes
(other than those referred to in clauses (i), (ii) and (iii) of this paragraph),
(v) Debt of the Issuer, Holdings or any of Holdings' Significant Subsidiaries is
not paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total principal
amount of the portion of such Debt that is unpaid or accelerated exceeds
$25 million or its foreign currency equivalent and such default continues for
five days after notice (the "cross acceleration provision"), (vi) certain events
of bankruptcy, insolvency or reorganization of the Issuer, Holdings or any of
Holdings' Significant Subsidiaries (the "bankruptcy provisions") or (vii) any
judgment or decree for the payment of money in excess of $25 million is entered
against the Issuer, Holdings or any of Holdings' Significant Subsidiaries and is
not discharged and either (A) an enforcement proceeding has been commenced by
any creditor upon such judgment or decree or (B) there is a period of 60 days
following the entry of such judgment or decree during which such judgment or
decree is not discharged, waived or the execution thereof stayed and, in the
case of (B), such default continues for 10 days after the notice specified in
the next sentence (the "judgment default provision"). However, a default under
clauses (iii), (iv), (v) and (vii)(B) will not constitute an Event of Default
with respect to a series of Notes until the Trustee or the holders of 25% in
principal amount of the outstanding Notes of such series notify the Issuer of
the default and such default is not cured within the time specified after
receipt of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vi) in the above paragraph with respect to the Issuer) occurs and is continuing
with respect to any series of Notes, the Trustee or the holders of at least 25%
in principal amount of the outstanding Notes of such series may declare the
principal amount of and accrued interest on all the Notes of such series as of
the date of such declaration to be immediately due and payable (collectively,
the "Default Amount"). If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Issuer occurs, the Default
Amount on all the Notes as of the date of such Event of Default will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes of such series may rescind any such acceleration with respect to the Notes
of any series and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the holders
of the Notes of any series (whether an Event of Default has occurred with
respect to such series and is continuing, or otherwise) unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal or interest when due, no holder of a Note of any series may pursue any
remedy with respect to the Indenture or the Notes of such series unless:
(i) such holder has previously given the Trustee written notice that an Event of
Default with respect to the Notes of such series is continuing, (ii) holders of
at least 25% in principal amount of the outstanding Notes of such series have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the holders of a
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majority in principal amount of the outstanding Notes of such series have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes of any series are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee with
respect to the Notes of such series. The Trustee, however, may refuse to follow
any direction that conflicts with law or the Indenture or, subject to the
provisions of the Indenture relating to duties of Trustee, that the Trustee
determines is unduly prejudicial to the rights of any other holder of a Note of
such series or that would involve the Trustee in personal liability.
The Indenture provides that if a Default with respect to any series of
Notes occurs and is continuing and is known to the Trustee, the Trustee must
mail to each holder of the Notes of such series notice of the Default within
90 days after it occurs. Except in the case of a Default in the payment of
principal of or interest on any Note of any series, the Trustee may withhold
notice if and so long as a committee of its Trust Officers in good faith
determines that withholding notice is in the interest of the holders of the
Notes of such series. In addition, the Issuer is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuer also is required to deliver to the Trustee, within
30 days after the occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the Issuer is taking
or proposes to take in respect thereof.
AMENDMENT
Subject to certain exceptions, the Indenture may be amended with respect to
Notes of a series with the written consent of the holders of a majority in
principal amount of the Notes of such series then outstanding affected by such
amendment and any past default or noncompliance with any provisions may be
waived in respect of any series with the consent of the holders of a majority in
principal amount of the Notes of such series then outstanding. However, without
the consent of each holder of an outstanding Note of any series affected, no
amendment may, among other things: (i) reduce the principal amount of Notes of
any series whose holders must consent to an amendment, (ii) reduce the rate of
or extend the time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note or reduce the Default
Amount of any Note, (iv) reduce the premium payable upon the redemption of any
Note or change the time at which any Note may be redeemed as described under
"--Optional Redemption" above, (v) make any Note or premium or interest thereon
payable in money other than that stated in the Note, (vi) make any change in the
definition of Change of Control or in the dates by which the Issuer must
purchase, or in the obligation of the Issuer to purchase, tendered Notes upon a
Change of Control, (vii) make any changes in the provisions relating to waiver
of past defaults or the provisions relating to the rights of Holders to receive
payment or (viii) make any change in the amendment provisions of the Indenture
which require each holder's consent.
Without the consent of or notice to any holder of the Notes, the Issuer and
the Trustee may amend the Indenture (i) to cure any ambiguity, omission, defect
or inconsistency, (ii) to provide for the assumption by a successor corporation
of the obligations of the Issuer under the Indenture if in compliance with the
provisions described under "--Successor Company" or "--Certain
Covenants--Limitation on Sale of Capital Stock of, and Merger or Sale of Assets
by, the Bank" above, (iii) to provide for uncertificated Notes in addition to or
in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in
Section 163(f)(2)(B) of the Code), (iv) to add guarantees with respect to the
Notes of any series, or to remove any such guarantee, when permitted by the
terms of the Indenture or to secure (or provide additional security for) the
Notes of any series, (v) to establish any form of Note and provide for the
issuance of securities and to set forth the terms thereof, or to add to the
rights of the holders of the Notes of any series, (vi) to add to the covenants
of the Issuer or Holdings for the benefit of the holders of the Notes of any
series or to surrender any right or power conferred upon the Issuer or Holdings
for the benefit of the holders of Notes of any series (and if such covenants or
the surrender of such right or power are to be for the benefit of less than all
series of Notes, stating that such covenants are expressly being included or
that such surrenders are expressly being made for the benefit of one or more
specified series), (vii) to evidence and provide for the acceptance of
appointment by another corporation as a successor Trustee under the Indenture
with respect to one or more series of Notes and to add to or change any
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of the provisions of the Indenture as shall be necessary to provide for or
facilitate the administration of the trusts thereunder by more than one Trustee,
(viii) to add any additional Events of Default in respect of the Notes of any
series (and if such additional Events of Default are to be in respect of less
than all series of Notes, stating that such Events of Default are expressly
being included solely for the benefit of one or more specified series), (ix) to
provide for the issuance of Notes in coupon as well as fully registered form or
(x) to make any change that does not adversely affect the rights of any holder
of the Notes of any series or to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the TIA or to otherwise
comply with the TIA.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance thereof.
After an amendment under the Indenture becomes effective with respect to
any series, the Issuer is required to mail to holders of the Notes of such
series a notice briefly describing such amendment. However, the failure to give
such notice to all holders of the Notes of such series, or any defect therein,
will not impair or affect the validity of the amendment.
A consent to any amendment or waiver under the Indenture by any holder of
Notes given in connection with a tender of such holder's Notes will not be
rendered invalid by such tender.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Issuer may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes of
any series and the Indenture in respect of such series ("legal defeasance"),
except for certain obligations, including those respecting the defeasance trust
(as defined herein) and obligations to register the transfer or exchange of the
Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a
registrar and paying agent in respect of the Notes of such series. The Issuer at
any time may terminate its obligations in respect of any series under the
covenants described under "--Certain Covenants" and "--Change of Control" above,
the operation of the cross acceleration provision, the bankruptcy provisions
with respect to Significant Subsidiaries and the judgment default provision and
the limitations contained in clause (a)(iii) described under "--Successor
Company" above ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option in respect of any series, payment of the Notes of such
series may not be accelerated because of an Event of Default with respect
thereto. If the Issuer exercises its covenant defeasance option in respect of
any series, payment of the Notes of such series may not be accelerated because
of an Event of Default specified in clause (iii), (v), (vi) (with respect only
to Significant Subsidiaries) or (vii) under "--Defaults" above, or because of
the failure of Holdings to comply with clause (a)(iii) described under
"--Successor Company" above.
The Floating Rate Notes will not be subject to either defeasance option
prior to August 1, 2000 unless at the time the Issuer is entitled to exercise a
right of redemption resulting from the occurrence of a Change of Control Call
Event. In connection with the exercise of either defeasance option in respect of
the Floating Rate Notes, the Issuer must make irrevocable arrangements with the
Trustee to call such notes for redemption on a redemption date not later than
the next scheduled Interest Reset Date; provided, however, that such redemption
date may be after the next scheduled Interest Reset Date if it is not later than
35 days following the required deposit in the defeasance trust and delivery of
the Opinions of Counsel required by the next succeeding paragraph.
In order to exercise either defeasance option with respect to any series of
Notes, the Issuer must irrevocably deposit in trust (the "defeasance trust")
with the Trustee money or U.S. Government Obligations for the payment of
principal on the Notes of such series and interest thereon to maturity or
redemption, as the case may be, and must comply with certain other conditions,
including, but not limited to (unless the Notes of such series will mature or be
redeemed within 60 days), delivering to the Trustee an Opinion of Counsel to the
effect that
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holders of the Notes of such series will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and defeasance and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been in the case if such deposit and defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service or a change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by the Issuer as Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes, and the Escrow Agreement
provides that it, will be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of another
jurisdiction would be required thereby.
CERTAIN DEFINITIONS
The following are certain definitions used in the Indenture and applicable
to the description of the Indenture set forth herein.
"Adjusted Consolidated Net Worth" of any Person means, as of any date of
determination in respect of an Issuance of Debt, the Consolidated Net Worth of
such Person as of the end of the most recent fiscal quarter ending at least
45 days prior to such determination date; provided, however, that pro forma
effect shall be given (x) to any of the following that shall have occurred since
the end of such fiscal quarter or that shall occur simultaneously with or
immediately following such Issuance and (y) to the use of the proceeds of such
Issuance to effect any of the following (in each case without duplication and as
if the following had occurred on the last day of such fiscal quarter): (i) all
Issuances of Capital Stock by such Person and equity contributions to such
Person, (ii) all Investments in or acquisitions of a Subsidiary or Person that
becomes a Subsidiary as a result of such Investment or acquisition or in
property which constitutes all or substantially all of an operating unit of a
business, (iii) all Restricted Payments and Permitted Investments and (iv) all
Asset Dispositions. For purposes of this definition, whenever pro forma effect
is to be given to an Issuance of Capital Stock or an equity contribution, an
Investment in any Person, an acquisition of assets, an Asset Disposition, a
Restricted Payment, a Permitted Investment, the amount of revenue or earnings
relating thereto, or any other circumstance, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of
Holdings.
"Affiliate" of any specified Person means: (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director or
executive officer (A) of such specified Person, (B) of any Subsidiary of such
specified Person or (C) of any Person described in clause (i) above. For
purposes of this definition, control of a Person means the power, direct or
indirect, to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Affiliated Permitted Holder" means any member of a Permitted Holder Group
if the members of such Group own, in the aggregate, legally or beneficially 5%
or more of the voting power of the Voting Stock of Escrow Corp. or Holdings.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Subsidiary of Holdings, or property or other assets of
Holdings or any Subsidiary of Holdings (each referred to for the purposes of
this definition as a "disposition") by Holdings or any of its Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Wholly Owned Subsidiary of
Holdings to Holdings or by Holdings or a Wholly Owned Subsidiary of Holdings to
a Wholly Owned Subsidiary of Holdings, (ii) a disposition of
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property or assets by Holdings or its Subsidiaries at fair market value in the
ordinary course of business and (iii) an issuance of employee stock options.
"Average Life" means, with respect to any Debt, the quotient obtained by
dividing: (i) the sum of the products of (a) the number of years from the date
of the transaction or event giving rise to the need to calculate the Average
Life of such Debt to the date, or dates, of each successive scheduled principal
payment of such Debt multiplied by (b) the amount of each such principal payment
by (ii) the sum of all such principal payments.
"Bank" means California Federal Bank, a Federal Savings Bank, and its
successors, except as otherwise provided in "--Certain Covenants--Limitation on
Sale of Capital Stock of, and Merger with Sale or Assets by, the Bank."
"Bank Preferred Stock" means (i) the 11 1/2% Noncumulative Perpetual
Preferred Stock issued by the Bank, (ii) the 10 5/8% Noncumulative Perpetual
Preferred Stock issued by the Bank, (iii) the 9 1/8% Noncumulative Exchangeable
Preferred Stock, Series A, issued by California Federal Preferred Capital
Corporation, (iv) the Preferred Stock, Series E, issued by Glendale Federal and
(v) at Holdings' election, other Preferred Stock of the Bank or any Subsidiary
of the Bank issued to Refinance stock described in the foregoing clauses
(i) through (iv) in an aggregate liquidation value at no time exceeding the sum
of the liquidation value of the stock to be Refinanced on the Issue Date plus
reasonable fees and expenses incurred in connection with such Refinancing and
accrued dividends and premium, if any.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"CALGLs" means the Secondary Contingent Litigation Recovery Participation
Interests issued by the Bank.
"CALGZs" means the Contingent Litigation Recovery Participation Interests
issued by the Bank.
"Capital Lease Obligation" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into or exchangeable for such equity and, in the case of
the Bank, excluding any CALGZs and CALGLs.
"Change of Control" means the occurrence of any of the following events on
or after the Issue Date:
(i) any Person other than a Permitted Holder shall be the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of a majority in the aggregate of the total voting
power of the Voting Stock of Holdings, whether as a result of the Issuance
of securities of Holdings, any merger, consolidation, liquidation or
dissolution of Holdings, any direct or indirect transfer of securities by a
Permitted Holder or otherwise; or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of Holdings
or Golden State (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
Holdings or of Golden State was approved by a vote of 66 2/3% of the
directors of Holdings or Golden State then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors of Holdings or Golden State then in
office;
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provided, however, that at and after the occurrence of a transaction referred to
in paragraph (d) under "--Certain Covenants--Limitation on Sale of Capital Stock
of, and Merger or Sale of Assets by, the Bank," all references to Holdings in
the foregoing clauses (i) and (ii) shall be deemed to be references to Holdings
or the Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" of any Person means the common stock of such Person, but in
the case of the Bank means the common stock of the Bank excluding any CALGZs and
CALGLs.
"Consolidated Common Shareholders' Equity" of the Bank means, at any date,
all amounts which would, in conformity with GAAP, be included under
shareholders' equity on a consolidated balance sheet of the Bank as at such
date, less any amounts included therein attributable to, without duplication,
(i) Redeemable Stock, (ii) Exchangeable Stock and (iii) Preferred Stock held by
Persons other than Holdings and its Wholly Owned Subsidiaries.
"Consolidated Net Income" of Holdings means for any period the consolidated
net income (or loss) of Holdings and its consolidated Subsidiaries for such
period determined in accordance with GAAP, less, without duplication, the amount
of dividends declared during such period in respect of any Bank Preferred Stock
and Qualified Preferred Stock held by Persons other than Holdings and its Wholly
Owned Subsidiaries (to the extent not deducted from Consolidated Net Income in
accordance with GAAP); provided, however, that there shall be excluded therefrom
(to the extent included in calculating such net income (or loss)):
(a) any net income (or loss) of any Person if such Person is not a
Subsidiary, except that (A) Holdings' equity in the net income of any such
Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during
such period to Holdings or a Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to a Subsidiary,
to the limitations contained in clause (c) below) and (B) Holdings' equity
in a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income;
(b) any net income (or loss) of any Person acquired by Holdings or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(c) any net income (or loss) of any Subsidiary (other than the Bank,
any other Depository Institution or any Subsidiaries of any of the
foregoing) if such Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by
such Subsidiary, directly or indirectly, to Holdings (other than
restrictions contained in any Qualified Preferred Stock), except that
(A) Holdings' equity in the net income of any such Subsidiary for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Subsidiary during
such period to Holdings or another Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
another Subsidiary, to the limitation contained in this clause) and (B)
Holdings' equity in a net loss of any such Subsidiary for such period shall
be included in determining such Consolidated Net Income;
(d) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of Holdings or its
consolidated Subsidiaries (other than in connection with the sale of
insured deposits) (including pursuant to any sale-and-leaseback
arrangement) and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(e) the cumulative effect of a change in accounting principles;
(f) the gain (but not the loss) from the sale, transfer, conveyance or
other disposition (other than to Holdings or any of its Subsidiaries) in a
single transaction or in a series of related transactions, in either case
occurring outside the ordinary course of business, of more than 75% of the
assets of the Mortgage Bank shown on a balance sheet of the Mortgage Bank
as of the end of the most recent fiscal quarter ending at least 45 days
prior to such transaction (or the first transaction in such related series
of transactions); and
(g) all non-recurring charges or benefits incurred or recorded in
connection with the Transactions.
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"Consolidated Net Worth" of any Person means, at any date, all amounts
which would, in conformity with GAAP, be included under shareholders' equity on
a consolidated balance sheet of such Person as at such date, less any amounts
included therein attributable to (x) Redeemable Stock and (y) Exchangeable
Stock.
"Debt" of any Person means, on any date of determination, without
duplication,
(i) the principal of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable and other accrued current liabilities
arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment (including liquidation preference) or other
repurchase of any Preferred Stock of any Subsidiary or any Redeemable Stock
of Holdings (but excluding in each case any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including Guarantees of
such obligations and dividends; and
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository Institution" shall have the meaning attributed thereto in
Section 3(c)(1) of the FDIA, 12 U.S.C. Section 1813(c)(1), or a similar
definition under any successor statute.
"Earnings Available for Fixed Charges" means, for any period, an amount
equal to, for Holdings and its consolidated Subsidiaries, the sum of
Consolidated Net Income for such period, plus the following to the extent
reducing Consolidated Net Income for such period: (i) the provision for taxes
based on income or profits or utilized in computing net loss, (ii) Fixed
Charges, and (iii) amortization of goodwill. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and amortization of
goodwill of, a Subsidiary shall be added to Consolidated Net Income to compute
Earnings Available for Fixed Charges only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income and, in the case of any Subsidiary other than the Bank,
any other Depository Institution or any Subsidiaries of any of the foregoing,
only if a corresponding amount would be permitted at the date of determination
to be dividended to Holdings by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its shareholders.
"Escrow Corp." means GS Escrow Corp. not including Holdings or any other
successors thereof.
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"Escrow Corp. Merger" means the merger of Escrow Corp. with and into Golden
State Holdings pursuant to the Escrow Corp. Merger Agreement.
"Escrow Corp. Merger Agreement" mean the Merger Agreement between Golden
State Holdings and Escrow Corp., as amended from time to time.
"Escrow Debt" means Debt of the Issuer that is not secured by any Lien on
any assets, property or Capital Stock owned by the Issuer or any of its
Subsidiaries, the proceeds of which Debt are used solely for deposit (or the
purchase of U.S. Government Obligations to be deposited) with the Escrow Agent
in an amount not to exceed the amount necessary, together with the net proceeds
to the Issuer of the issuance of the Notes, to enable the Issuer to make the
Initial Deposit (as defined in the Escrow Agreement).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock of a Person which by its terms
or otherwise is required to be exchanged or converted or is exchangeable or
convertible at the option of the holder into another security (other than
Capital Stock of such Person which is neither Exchangeable Stock nor Redeemable
Stock).
"FDIA" means the Federal Deposit Insurance Act.
"Financial Services Subsidiary" means any Subsidiary of Holdings which
conducts any financial asset origination, securitization, underwriting,
financing or servicing business or any other financial services business.
"Fixed Charge Coverage Ratio" means, as of any date of determination, the
ratio of (a) the aggregate amount of Earnings Available for Fixed Charges for
the most recent four consecutive fiscal quarters ending at least 45 days prior
to such determination date to (b) Fixed Charges for such four fiscal quarters;
provided, however, that (i) if (A) since the beginning of such period Holdings
has Issued any Debt that remains outstanding or Repaid any Debt or (B) the
transaction giving rise to the need to calculate the Fixed Charge Coverage Ratio
is an Issuance or Repayment of Debt, Fixed Charges for such period shall be
calculated after giving effect on a pro forma basis to such Issuance or
Repayment as if such Debt was Issued or Repaid on the first day of such period,
provided that, in the event of any such Repayment of Debt, Earnings Available
for Fixed Charges for such period shall be calculated as if Holdings or such
Subsidiary had not earned any interest income actually earned during such period
in respect of the funds used to Repay such Debt, and (ii) if (A) since the
beginning of such period Holdings or any Subsidiary shall have made any Asset
Disposition or an Investment (by merger or otherwise) in any Subsidiary (or any
Person which becomes a Subsidiary) or an acquisition of property which
constitutes all or substantially all of an operating unit of a business,
(B) the transaction giving rise to the need to calculate the Fixed Charge
Coverage Ratio is occurring in connection with such an Asset Disposition,
Investment or acquisition or (C) since the beginning of such period any Person
(that subsequently became a Subsidiary or was merged with or into Holdings or
any Subsidiary since the beginning of such period) shall have made such an Asset
Disposition, Investment or acquisition, Earnings Available for Fixed Charges for
such period shall be calculated after giving pro forma effect to such Asset
Disposition, Investment or acquisition as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. If any Debt bears a
floating rate of interest and its Issuance is being given pro forma effect, the
interest expense on such Debt shall be calculated as if the base interest rate
in effect for such floating rate of interest on the date of determination had
been the applicable base interest rate for the entire period (taking into
account any interest rate agreement applicable to such Debt if such interest
rate agreement has a remaining term in excess of 12 months). In the event the
Capital Stock of any Subsidiary is sold during the period, Holdings shall be
deemed, for purposes of clause (i) above, to have Repaid as of the beginning of
such period the Debt of such Subsidiary to the extent Holdings and its
continuing Subsidiaries are no longer liable for such Debt after such sale. For
purposes of this definition, whenever pro forma effect is to be given to an
Asset Disposition, an Investment in any Person, an acquisition of assets, the
amount of revenue or earnings relating thereto, the amount of Fixed Charges
associated with any Debt, or any other circumstance, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
officer of Holdings.
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"Fixed Charges" means, for any period, the sum of (i) the total interest
expense of Holdings on an unconsolidated basis determined in accordance with
GAAP for such period and (ii) dividends payable on any Redeemable Stock of
Holdings for such period.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect from time to
time, except that, for purposes of calculating Consolidated Net Income,
Consolidated Net Worth and Consolidated Common Shareholders' Equity, it shall
mean generally accepted accounting principles in the United States as in effect
on the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any other
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person: (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation of such other Person (whether arising
by virtue of partnership arrangements, or by agreement to keep well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Investment" in any Person means any loan or advance to, any net payment on
a Guarantee of, any acquisition of Capital Stock, equity interest, obligation or
other security of, or capital contribution or other investment in, such Person.
Investments shall exclude loans or advances to customers and suppliers in the
ordinary course of business. The term "Invest" has a corresponding meaning.
"Investment Grade" means, in respect of any series of Notes, a rating of
the Notes of such series by both S&P and Moody's, each such rating being in one
of such agency's four highest generic ratings categories that signifies
investment grade (i.e. BBB-- (or the equivalent) or higher by S&P and Baa3 (or
the equivalent) or higher by Moody's); provided, in each case, such ratings are
publicly available; provided further that in the event Moody's or S&P is no
longer in existence, for purposes of determining whether such Notes are rated
"Investment Grade," such organization may be replaced by a nationally recognized
statistical rating organization (as defined in Rule 436 under the Securities
Act) designated by the Issuer, notice of which designation shall be given to the
Trustee.
"Issue" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing at
the time such Person becomes a Subsidiary of another Person (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be issued by such
Subsidiary at the time it becomes a Subsidiary of such other Person.
"Issue Date" means the date of the original issue of the Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are required or permitted to be closed in the State of New York or
in the state where the principal office of the Trustee is located.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Litigations" means (i) the California Federal Litigation, (ii) the
Glendale Goodwill Litigation and (iii) the claim against the United States in
the lawsuit First Nationwide Bank, et al, v. United States, Civil Action
No. 96-590C, filed on September 20, 1996.
"Mafco Holdings" means Mafco Holdings Inc., a Delaware corporation, and its
successors.
"Minimum Common Equity Amount" means, as of the end of any fiscal quarter,
an amount equal to the sum of (i) $800 million and (ii) the excess, if any, of
amounts attributable to goodwill and core deposit intangible on the consolidated
balance sheet of the Bank as at the end of such fiscal quarter, over
$100 million.
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"Mortgage Bank" means the Subsidiary of Holdings which on the Issue Date is
a Subsidiary of the Bank that is engaged in the mortgage banking business,
including the business of originating or carrying mortgage loans.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or estimated in good
faith to be payable as a result thereof.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible common stock of such
corporation; provided, however, that Non-Convertible Capital Stock shall not
include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Vice Chairman, the
President, any Vice President, the Treasurer, an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Issuer.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the Vice Chairman, the President or a Vice President (regardless of Vice
Presidential designation), and by the Treasurer, an Assistant Treasurer,
Secretary or an Assistant Secretary, of the Issuer, and delivered to the
Trustee. One of the Officers signing an Officers' Certificate given pursuant to
the requirement for a compliance certificate as described in the last paragraph
under "Defaults" above shall be the principal executive, financial or accounting
officer of the Issuer.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Issuer (or Holdings, Mafco Holdings, Parent or one of its
Subsidiaries) or the Trustee.
"Parent" means Golden State and any other person which acquires or owns,
after the consummation of the Golden State Acquisition, directly or indirectly
80% or more of the voting power of the Voting Stock of Holdings.
"Permitted Acquisition Debt" shall mean Debt of Holdings the proceeds of
which are used for the acquisition of a Depository Institution or a Financial
Services Subsidiary or which are used by a Subsidiary that is either a
Depository Institution or Financial Services Subsidiary to acquire assets
outside the ordinary course of business that extend the geographic scope or
product lines of such Depository Institution or Financial Services Subsidiary,
and a Refinancing of any such Debt.
"Permitted Affiliate" means any individual who is a director or executive
officer of Holdings, of a Subsidiary of Holdings, of an Unrestricted Affiliate
or of Golden State, any Person controlled by Golden State or any successor to
any of the foregoing; provided, however, that such individual is not also a
director or executive officer of Mafco Holdings, any Person that controls Mafco
Holdings or any successor to any of the foregoing.
"Permitted Holder Group" means either (i) Ronald O. Perelman and his
Related Persons, collectively, or (ii) Gerald J. Ford and his Related Persons
(including, without limitation, Hunter's Glen/Ford, Ltd.), collectively.
"Permitted Holders" means the members of the Permitted Holder Groups.
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"Permitted Investments" means: (i) Investments consisting of loans to
directors and executive officers (other than any such director or executive
officer that is the beneficial owner of 5% or more of the voting power of the
Voting Stock of Holdings) of any Subsidiary of Holdings made in the ordinary
course of its business and in compliance with all regulatory restrictions on
such loans, (ii) Investments consisting of loans to Affiliates of Holdings so
long as (in the case of this clause (ii) only) the Consolidated Common
Shareholders' Equity of the Bank as of the end of the most recent fiscal quarter
ending at least 45 days prior to the date of such Investment was at least equal
to the Minimum Common Equity Amount as of the end of such fiscal quarter,
(iii) Investments in Holdings, in any Subsidiary of Holdings or in any Person
which would become a Subsidiary of Holdings as a result of such Investment and
(iv) Investments in Unrestricted Affiliates.
"Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) the new Debt is in an
aggregate principal amount (or if Issued with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount then outstanding (or if Issued with original issue discount, the
aggregate accreted value on the date of the Refinancing) of the Debt being
Refinanced and (ii) an amount necessary to pay any fees and expenses, including
underwriters' discounts and commissions, premiums and defeasance costs, related
to such Refinancing, (b) the Average Life of such Debt is equal to or greater
than the Average Life of the Debt being Refinanced, (c) the Stated Maturity of
such Debt is no earlier than the Stated Maturity of the Debt being Refinanced
and (d) if the Debt being Refinanced consists of Subordinated Obligations, the
new Debt shall consist of Subordinated Obligations.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Qualified Preferred Stock" means (x) any Preferred Stock of any Subsidiary
of Holdings that is a Depository Institution or a Subsidiary thereof (other than
Bank Preferred Stock) which meets the requirements set forth in clauses (a), (b)
and (c) below, (y) any Preferred Stock of any Subsidiary of Holdings (other than
any Subsidiary of Holdings that is a Depository Institution or a Subsidiary
thereof) which meets the requirements set forth in clauses (a), (b), (c) and (d)
below, and (z) any Preferred Stock of any Subsidiary of Holdings (other than the
Bank Preferred Stock) issued to Refinance any other Qualified Preferred Stock
or, at Holdings' election, to Refinance any Bank Preferred Stock provided that
the Preferred Stock issued in such Refinancing meets the requirements set forth
in clauses (a), (b), (c) and (e) below:
(a) Such Preferred Stock does not contain any mandatory redemption
provisions which would require it to be redeemed prior to the first
anniversary of the Stated Maturity of the Notes outstanding on the date
such Preferred Stock is Issued;
(b) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof to pay
dividends or make distributions on its common stock except in a manner that
is no more restrictive in any material respect than the following, as
determined in good faith by the Board of Directors of Holdings and
evidenced by a resolution adopted by such Board:
(i) Dividends and distributions on common stock or other capital
stock of the issuer may not be declared or paid or set apart for payment
at any time when the issuer has not declared and paid any dividends or
distributions on such Preferred Stock which are required to be declared
and paid as a precondition to dividends or distributions on other
capital stock of the issuer;
(ii) Distributions upon the liquidation, dissolution or winding up
of the issuer, whether voluntary or involuntary ("Liquidating
Distributions"), may not be made on the common stock or other capital
stock of the issuer at any time when such Preferred Stock is entitled to
receive Liquidating Distributions which have not been paid; and
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(iii) Dividends and distributions on common stock or other capital
stock of the issuer may not be declared or paid or set apart for payment
at any time when such Preferred Stock is required to be, but has not
been, redeemed pursuant to redemption provisions which meet the
requirements of clause (a) above;
(c) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof (i) to pay
any Debt or other obligation owed to Holdings; (ii) to make loans or
advances to Holdings; or (iii) to transfer any of its property or assets to
Holdings, except, in any such case, any encumbrance or restriction
permitted under "--Certain Covenants--Limitations on Restrictions on
Distributions by Subsidiaries" (other than clause (h) thereof);
(d) In the case of Preferred Stock issued pursuant to clause
(y) above, Consolidated Net Income of Holdings for the Relevant Period (as
defined in the next sentence) on a pro forma basis, after giving effect to
(i) the issuance of such Preferred Stock (including fees and expenses
incurred in connection with such issuance), (ii) the use of the proceeds
thereof, if any, (iii) any acquisition of capital stock or assets of
another Person occurring in connection with the issuance of such Preferred
Stock (including the anticipated revenue and earnings relating thereto) and
(iv) any dividend or other payment obligations with respect to such
Preferred Stock, in each case as if such Preferred Stock had been issued
and any such acquisition had been made on the first day of the Relevant
Period, is no less than the actual Consolidated Net Income of Holdings for
the Relevant Period. "Relevant Period" means, with respect to any issuance
of Preferred Stock, the four full fiscal quarters most recently ended at
least 45 days prior to the date of such issuance. For purposes of this
clause (d), whenever pro forma effect is to be given to an acquisition of
capital stock or assets, the amount of revenue and earnings relating
thereto, or any other circumstance, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer
of Holdings; and
(e) In the case of Preferred Stock issued in a Refinancing pursuant to
clause (z) above, the aggregate liquidation value of such Preferred Stock
shall not exceed the sum of the liquidation value of the Preferred Stock
being Refinanced on the date it was originally issued plus reasonable fees
and expenses incurred in connection with such Refinancing and accrued
dividends and premium, if any.
"Redeemable Stock" means, with respect to any Person, Capital Stock of such
Person that by its terms or otherwise is required to be redeemed on or prior to
the first anniversary of the Stated Maturity of the Notes outstanding on the
date such Capital Stock is Issued or is redeemable at the option of the holder
thereof at any time on or prior to the first anniversary of the Stated Maturity
of such Notes; provided, however, that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Redeemable Stock if (x) the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the terms applicable to the Notes in "--Change of Control"
and "--Certain Covenants--Limitation on Sale of Capital Stock of, and Merger or
Sale of Assets by, the Bank," as determined in good faith by the Board of
Directors of Holdings, the determination of which shall be evidenced by a
resolution of such Board of Directors, and (y) any such requirement only becomes
operative after compliance with such covenants, including the purchase of any
Notes tendered pursuant thereto.
"Refinance" or "Repay" means, in respect of any Debt or Preferred Stock, to
refinance, extend, renew, refund, repay, prepay, repurchase, redeem, defease or
retire, or to issue Debt or Preferred Stock in exchange or replacement for, such
Debt or Preferred Stock. "Refinanced" and "Refinancing" and "Repayment" and
"Repaid" shall have correlative meanings.
"Refinancing Transactions" means the Offering, the Bank Dividend, the Debt
Tender Offers, the Bank Preferred Stock Tender Offers and the Parent Holdings
Defeasance.
"Registered Exchange Offer" has the meaning ascribed thereto in the
Registration Agreement.
"Registration Agreement" means the Registration Agreement dated July 30,
1998, among Escrow Corp., Golden State Holdings and the Initial Purchasers named
therein.
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"Related Person" in respect of any specified Person means (i) in the event
of his incompetence or death, his estate, heirs, executor, administrator,
committee or other personal representative (collectively, "heirs"), (ii) any
Person controlled, directly or indirectly, by such specified Person or his
heirs, and (iii) any trust, corporation, limited liability company or
partnership more than 50% of the beneficial interests of which are held in the
aggregate by such specified Person or one or more members of his immediate
family (which shall include his parents, spouse, children, grandchildren and
siblings) or any combination of the foregoing.
"Restricted Payment" means, as to any Person making a Restricted Payment:
(i) the declaration or payment of any dividend or any distribution on or in
respect of the Capital Stock of such Person (including any payment in connection
with any merger or consolidation involving such Person) or to the holders of the
Capital Stock of such Person (except (x) dividends or distributions payable
solely in the Non-Convertible Capital Stock of such Person or in options,
warrants or other rights to purchase the Non-Convertible Capital Stock of such
Person, and (y) dividends or distributions on Capital Stock of a Subsidiary of
Holdings payable to Holdings or a Subsidiary of Holdings and to any minority
shareholders of a Subsidiary of Holdings), (ii) any purchase, redemption or
other acquisition or retirement for value of any Capital Stock of Holdings or
any Subsidiary, (iii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment, of any Subordinated Obligation
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition) and (iv) any Investment (other than a Permitted Investment)
in any Affiliate of Holdings.
"Shelf Registration Statement" has the meaning ascribed thereto in the
Registration Agreement.
"Significant Subsidiary" means: (i) any Subsidiary of Holdings which at the
time of determination either (A) had assets which, as of the date of Holdings'
most recent quarterly consolidated balance sheet, constituted at least 5% of
Holdings' total assets on a consolidated basis as of such date, in each case
determined in accordance with GAAP, or (B) had revenues for the 12-month period
ending on the date of Holdings' most recent quarterly consolidated statement of
income which constituted at least 5% of Holdings' total revenues on a
consolidated basis for such period or (ii) any Subsidiary of Holdings which, if
merged with all Defaulting Subsidiaries (as defined below) of Holdings, would at
the time of determination either (A) have had assets which, as of the date of
Holdings' most recent quarterly consolidated balance sheet, would have
constituted at least 10% of Holdings' total assets on a consolidated basis as of
such date or (B) have had revenues for the 12-month period ending on the date of
Holdings' most recent quarterly consolidated statement of income which would
have constituted at least 10% of Holdings' total revenues on a consolidated
basis for such period (each such determination being made in accordance with
GAAP). "Defaulting Subsidiary" means any Subsidiary of Holdings with respect to
which an event described under clause (v), (vi) or (vii) of "--Defaults" above
has occurred and is continuing.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency).
"Subordinated Obligation" means any Debt of Holdings (whether outstanding
on the date hereof or hereafter issued) which is subordinate or junior in right
of payment to the Notes.
"Subsidiary" means as to any Person any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests but, in the case of the Bank, excluding any CALGZs and CALGLs)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned,
directly or indirectly, by: (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means: (i) the Tax Sharing Agreement as in effect
as of the Issue Date to which Holdings, certain of its Subsidiaries and Mafco
Holdings are parties (as amended in connection with the Transactions on
September 11, 1998 and as may be further amended to the extent required in
connection with the Transactions) and (ii) any other tax sharing or allocation
agreement to which Holdings or any of its Subsidiaries or any direct or indirect
shareholder of Holdings or any predecessor entity thereto are parties with
respect to consolidated or combined tax returns which include Holdings or any of
its Subsidiaries or any predecessor entity thereto but only to the extent that
amounts payable from time to time by Holdings or any such Subsidiary under
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any such agreement do not exceed the corresponding tax payments that Holdings or
such Subsidiary or any predecessor entity thereto would have been required to
make to any relevant taxing authority had Holdings or such Subsidiary or any
predecessor entity thereto not joined in such consolidated or combined returns,
but instead had filed returns including only Holdings or its Subsidiaries or any
predecessor entity thereto, provided that any such agreement may provide that,
if Holdings or any such Subsidiary or any predecessor entity thereto ceases to
be a member of the affiliated or consolidated group of corporations to which
such tax sharing or allocation agreement applies (such cessation, a
"Deconsolidation Event"), then Holdings or such Subsidiary or any predecessor
entity thereto shall indemnify such direct or indirect shareholder with respect
to any Federal, state or local income, franchise or other tax liability
(including any related interest, additions or penalties) imposed on such
shareholder as the result of an audit or other adjustment with respect to any
period prior to such Deconsolidation Event that is attributable to Holdings,
such Subsidiary or any predecessor entity thereto (computed as if Holdings, such
Subsidiary or such predecessor entity, as the case may be, were a stand-alone
entity that filed tax returns including only Holdings or its Subsidiaries or any
predecessor entity thereto), but only to the extent that any such tax liability
exceeds any liability for taxes recorded on the books of Holdings or such
Subsidiary or such predecessor entity with respect to any such period.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof, in
each case, maturing within 360 days of the date of acquisition thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company (including the Trustee) which is organized
under the laws of the United States of America, any state thereof or any foreign
country recognized by the United States having capital, surplus and undivided
profits aggregating in excess of $250,000,000 and whose debt is rated "A" (or
such similar equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined for purposes of Rule 436 under the
Securities Act) or any money-market fund sponsored by any registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a nationally recognized broker-dealer,
(iv) investments in commercial paper, maturing not more than 90 days after the
date of acquisition, issued by a corporation (other than an Affiliate or
Subsidiary of Holdings or the Issuer) organized and in existence under the laws
of the United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-2" (or higher) according to Moody's Investors Service, Inc. or
"A-2" (or higher) according to Standard and Poor's Corporation and
(v) securities with maturities of six months or less from the date of
acquisition backed by standby or direct pay letters of credit issued by any bank
satisfying the requirements of clause (ii) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Section Section 77aaa-77bbbb) as in effect on the Issue Date; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"TIA" means, to the extent required by any such amendment, the Trust Indenture
Act of 1939 as so amended.
"Transactions" means the Refinancing Transactions, the Golden State
Acquisition and the Escrow Corp. Merger.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
"Unrestricted Affiliate" means a Person (other than a Subsidiary of
Holdings) controlled (as defined in the definition of "Affiliate") by Holdings,
in which no Affiliate of Holdings (other than (x) a Wholly Owned Subsidiary,
(y) a Permitted Affiliate and (z) another Unrestricted Affiliate) has an
Investment.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
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"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests but, in the case of the Bank,
excluding any CALGZs and CALGLs) of such Person then outstanding and normally
entitled (without regard to any contingency) to vote in the election of
directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means the Bank and any Subsidiary of Holdings all
the Capital Stock of which (other than directors' qualifying shares, Bank
Preferred Stock or Qualified Preferred Stock) is owned by Holdings, the Bank or
another Wholly Owned Subsidiary thereof or any combination of the foregoing.
BOOK ENTRY SYSTEM
The Notes will be initially issued in the form of one or more global
securities (each a "Global Security") registered in the name of The Depository
Trust Company ("DTC") or its nominee.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the Notes represented by such Global Security purchased by such Persons in the
Offering. Such accounts shall be designated by the Initial Purchasers. Ownership
of beneficial interests in a Global Security will be limited to Persons that
have accounts with DTC ("participants") or Persons that may hold interests
through participants. Ownership of beneficial interests in a Global Security
will be shown on, and the transfer of that ownership interest will be effected
only through, records maintained by DTC (with respect to participants'
interests) and such participants (with respect to the owners of beneficial
interests in such Global Security other than participants). The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
Payment of principal of and interest on Notes represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the Notes
represented thereby for all purposes under the Indenture. The Issuer has been
advised by DTC that upon receipt of any payment of principal of or interest on
any Global Security, DTC will immediately credit, on its book-entry registration
and transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Security as shown on the records of DTC. Payments by
participants to owners of beneficial interests in a Global Security held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in "street name" and will be the sole responsibility of such
participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Notes only if (a) DTC notifies the Issuer that it is unwilling
or unable to continue as a depositary for such Global Security or if at any time
DTC ceases to be a clearing agency registered under the Exchange Act, (b) the
Issuer in its discretion at any time determines not to have all the Notes
represented by such Global Security or (c) there shall have occurred and be
continuing a Default or an Event of Default with respect to the Notes
represented by such Global Security. Any Global Security that is exchangeable
for certificated Notes pursuant to the preceding sentence will be exchanged for
certificated Notes in authorized denominations and registered in such names as
DTC or any successor depositary holding such Global Security may direct. Subject
to the foregoing, a Global Security is not exchangeable, except for a Global
Security of like denomination to be registered in the name of DTC or any
successor depositary or its nominee. In the event that a Global Security becomes
exchangeable for certificated Notes, (a) certificated Notes will be issued only
in fully registered form in denominations of $1,000 or integral multiples
thereof, (b) payment of principal of, and premium, if any, and interest on, the
certificated Notes will be payable, and the transfer of the certificated Notes
will be registerable, at the office or agency of the Issuer maintained for such
purposes and (c) no service charge will be made for any registration of transfer
or exchange of the certificated Notes, although the Issuer may require payment
of a sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Security for all purposes under
the Indenture and the Notes. Except as set forth above, owners of beneficial
interests in a Global Security will not be entitled to
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have the Notes represented by such Global Security registered in their names,
will not receive or be entitled to receive physical delivery of certificated
Notes in definitive form and will not be considered to be the owners or holders
of any Notes under such Global Security. Accordingly, each Person owning a
beneficial interest in a Global Security must rely on the procedures of DTC or
any successor depositary, and, if such Person is not a participant, on the
procedures of the participant through which such Person owns its interest, to
exercise any rights of a holder under the Indenture. The Issuer understands that
under existing industry practices, in the event that the Issuer requests any
action of holders or that an owner of a beneficial interest in a Global Security
desires to give or take any action which a holder is entitled to give or take
under the Indenture, DTC or any successor depositary would authorize the
participants holding the relevant beneficial interest to give or take such
action and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised the Issuer that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuer, the Trustee or
the Initial Purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
REGISTRATION RIGHTS
Holders of the New Notes are not entitled to any registration rights with
respect to the New Notes. Escrow Corp. and Golden State Holdings agreed pursuant
to a registration agreement (the "Registration Agreement") with the Initial
Purchasers, for the benefit of the holders of the Old Notes, that the Issuer
would, at its cost, by (i) November 30, 1998, file a registration statement (the
"Exchange Offer Registration Statement") with the SEC relating to the exchange
of the Old Notes for registered notes and (ii) February 11, 1998 use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act. The Registration Statement of which this
Prospectus is a part constitutes the Exchange Offer Registration Statement for
purposes of the Registration Agreement. Upon the effectiveness of the Exchange
Offer Registration Statement, the Issuer will offer the Exchange Notes in
exchange for surrender of the Old Notes. The Issuer will keep the Exchange Offer
open for not less than 30 days (or longer if required by applicable law) after
the date notice of the Exchange Offer is mailed to the holders of the Notes. For
each Note surrendered to the Issuer pursuant to the Exchange Offer, the holder
of such Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Note. Interest on each Exchange Note will accrue from
the last interest payment date on which interest was paid on the Old Note
surrendered in exchange therefor or, if no interest has been paid on such Old
Note, from the date of its original issue. Under existing SEC interpretations,
the Exchange Notes would be freely transferable by holders of the Notes other
than affiliates of the Issuer after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of its
business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Issuer, as such terms are interpreted by the SEC; provided,
however, that in the case of broker-dealers ("Participating Broker-Dealers"), a
prospectus meeting the requirements of the Securities Act be delivered as
required. The Issuer has agreed for a period of 180 days after consummation of
the Exchange Offer to make available a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any resale of
any such Exchange Notes acquired as described below. A broker-dealer which
delivers such a prospectus to purchasers in connection with such resales will be
subject to certain of the civil liability provisions
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under the Securities Act and will be bound by the provisions of the Registration
Agreement (including certain indemnification rights and obligations).
The SEC has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of the
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Agreement, the Issuer is required to allow
Participating Broker-Dealers to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such Exchange
Notes.
Each holder of Notes who wishes to exchange such Notes for Exchange Notes
in the Exchange Offer will be required to represent that (i) any Exchange Notes
to be received by it will be acquired in the ordinary course of its business,
(ii) at the time of commencement of the Exchange Offer, it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Issuer, or if
it is an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the holder is
not a broker-dealer, it will be required to represent that it is not engaged in,
and does not intend to engage in, the distribution of the Exchange Notes. If the
holder is a broker-dealer that will receive Exchange Notes for its own account
in exchange for Notes that were acquired as a result of market-making activities
or other trading activities, it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
In the event that (i) applicable interpretations of the staff of the SEC do
not permit the Issuer to effect such an Exchange Offer, (ii) for any other
reason the Exchange Offer is not consummated by March 15, 1999, (iii) under
certain circumstances if the Initial Purchasers so request with respect to Notes
not eligible to be exchanged for Exchange Notes in the Exchange Offer or (iv)
under certain circumstances any holder of Notes (other than an Initial
Purchaser) is not eligible to participate in the Exchange Offer or does not
receive freely tradeable Exchange Notes in the Exchange Offer other than by
reason of such holder being an affiliate of the Issuer (it being understood that
the requirement that a Participating Broker-Dealer deliver the prospectus
contained in the Exchange Offer Registration Statement in connection with sales
of Exchange Notes shall not result in such Exchange Notes being not "freely
tradeable"), the Issuer will, at its cost, (a) as promptly as practicable, file
the Shelf Registration Statement covering resales of the Notes or the Exchange
Notes, (b) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (c) use its best efforts to keep
effective the Shelf Registration Statement until two years after its effective
date. The Issuer will, in the event of the Shelf Registration Statement, among
other things, provide to each holder of the Notes for whom such Shelf
Registration Statement was filed, copies of the prospectus, which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes or the
Exchange Notes, as the case may be. A holder of Notes or Exchange Notes who
sells such Notes or Exchange Notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration
Agreement which are applicable to such a holder (including certain
indemnification obligations).
The Notes and the Exchange Notes will be treated as a single class for all
purposes under the Indenture (except for provisions dealing specifically with
registration and Exchange Offer issues).
Although the Issuer has filed the registration statements described above
there can be no assurance that any such registration statement will become
effective. If by the 180th day after the consummation of both the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a business
day, the first business day thereafter), neither (i) the Exchange Offer is
consummated nor (ii) the Shelf Registration Statement is declared effective, the
rate per annum at which the Old Notes bear interest will increase by 0.5% from
and including such date, until but excluding the earlier of (i) the consummation
of the Exchange Offer and (ii) the effective date of the Shelf Registration
Statement.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Agreement, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States ("U.S.") federal income
tax consequences associated with the exchange of Old Notes for New Notes and the
ownership and disposition of the New Notes applicable to holders of Notes who
are United States Holders (as defined below). The summary is based upon current
laws, regulations, rulings and judicial decisions all of which are subject to
change and such change could affect the continuing validity of this discussion.
The discussion below does not address all aspects of U.S. federal income
taxation that may be relevant to particular holders in the context of their
specific investment circumstances or certain types of holders subject to special
treatment under such laws (for example, financial institutions, tax-exempt
organizations, insurance companies, dealers in securities, individuals who hold
Notes as a "hedge" against currency or interest rate risks or that are part of a
"straddle" or "conversion transaction" and persons having a functional currency
other than the U.S. dollar). In addition, the discussion does not address any
aspect of state, local, or foreign taxation and assumes that purchasers of the
Notes will hold them as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended (the "Code").
For purposes of this discussion, a "United States Holder" means a holder of
Notes who or which is (i) a citizen or resident of the U.S. for U.S. federal
income tax purposes, (ii) a corporation, or other entity taxable as a
corporation created or organized in the U.S. or under the laws of the U.S. or
any political subdivision thereof (including the District of Columbia),
(iii) an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source, or (iv) a trust if (a) a
court within the U.S. is able to exercise primary supervision over the
administration of the trust and (b) one or more U.S. persons have the authority
to control all substantial decisions of the trust.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR IN DETERMINING THE FEDERAL,
STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES TO THE PARTICULAR HOLDER OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NEW
NOTES.
EXCHANGE OF NOTES
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as an "exchange" for U.S. federal income tax purposes
because the New Notes do not differ materially from the Old Notes, and because
the exchange will occur by operation of the terms of the Old Notes. Rather, the
New Notes received by a holder will be treated as a continuation of the Old
Notes in the hands of such holder. As a result, no gain or loss will be
recognized on the exchange of Old Notes for New Notes pursuant to the Exchange
Offer.
DISPOSITION OF NEW NOTES
If a New Note is redeemed, sold or otherwise disposed of, the holder
thereof will generally recognize gain or loss equal to the difference between
the amount realized on the redemption, sale or other disposition of such New
Note and the holder's adjusted basis in the New Note. Subject to the market
discount rules discussed below, such gain or loss will be capital gain or loss
(except for any accrued but unpaid interest, which will be taxable as ordinary
income), provided that the holder held the New Note as a capital asset, which
will be long-term capital gain or loss if the United States Holder has held the
New Note for more than one year at the time of disposition.
Under the market discount rules of the Code, an exchanging holder (other
than a holder who made the election described below) who purchased an Old Note
with "market discount" (generally defined as the amount by which the adjusted
issue price of the Old Note on the holder's date of purchase exceeds the
holder's purchase price) will be required to treat any gain recognized on the
redemption, sale or other disposition of the New Note received in the exchange
as ordinary income to the extent of the market discount that accrued during the
holding period of such New Note (which would include the holding period of the
Old Note). A holder who has elected under applicable Code provisions to include
market discount in income annually as such discount accrues will not, however,
be required to treat any gain recognized as ordinary income under these rules.
Holders should
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consult their tax advisors as to the portion of any gain that would be taxable
as ordinary income under these provisions.
Under the market premium rules of the Code, an exchanging holder that
purchased an Old Note for an amount in excess of all amounts payable with
respect to such Note, other than "qualified stated interest," will be considered
to have purchased the Note at a premium. Such holder may elect to amortize such
premium (as an offset to interest income), using a constant-yield method, over
the remaining term of the Note. Such election, once made, generally applies to
all debt instruments held or subsequently acquired by the United States holder
on or after the first taxable year to which the election applies and may be
revoked only with the consent of the IRS. A holder that elects to amortize such
premium must reduce its tax basis in a Note by the amount of the permium
amortized during its holding period. With respect to a holder that does not
elect to amortize bond premium, the amount of such premium will be included in
the United States holder's tax basis when the Note matures or is disposed of.
Backup Withholding. Under certain circumstances, the failure of a holder
to provide sufficient information to establish that such holder is exempt from
the backup withholding provisions of the Code will subject such holder to backup
withholding at a rate of 31 percent. In general, backup withholding applies if a
holder fails to furnish a correct taxpayer identification number, fails to
report interest income in full, or fails to certify that such holder has
provided a correct taxpayer identification number and that the holder is not
subject to withholding.
Any amount withheld from a payment to a holder under the backup withholding
rules is allowable as a credit against such holder's U.S. federal income tax
liability, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and foreign individuals
who comply with certain certification requirements) are not subject to backup
withholding.
HOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THEIR QUALIFICATION FOR
EXEMPTION FROM BACKUP WITHHOLDING AND THE PROCEDURE FOR OBTAINING SUCH AN
EXEMPTION.
On October 6, 1997, the Department of the Treasury issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting requirements. The New Regulations
attempt to unify certification requirements and modify the reliance standards.
The New Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective investors
are urged to consult with their tax advisors regarding the New Regulations.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of
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Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Issuer will
promptly send additional copies of the Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such document
in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident
to the Exchange Offer other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
Following consummation of the Exchange Offer, the Issuer may, in its sole
discretion, commence one or more additional exchange offers to holders of Old
Notes who did not exchange their Old Notes for New Notes in the Exchange Offer
on terms which may differ from those contained in the Registration Agreement.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by the Issuer in connection with any such additional exchange offers. Such
additional exchange offers will take place from time to time until all
outstanding Old Notes have been exchanged for New Notes pursuant to the terms
and conditions contained herein.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
New Notes will be passed upon for the Issuer by Paul, Weiss, Rifkind, Wharton &
Garrison, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP has acted
as counsel for the Issuer in connection with the Exchange Offer. Skadden, Arps,
Slate, Meagher & Flom LLP and Paul, Weiss, Rifkind, Wharton & Garrison have from
time to time represented, and may continue to represent, MacAndrews & Forbes and
certain of its affiliates (including the Issuer and Revlon) in connection with
certain legal matters.
EXPERTS
The Consolidated Financial Statements of FNH as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31,
1997, included in this Prospectus, have been audited by KPMG Peat Marwick LLP,
independent auditors, as stated in their report thereon. Such financial
statements have been included in reliance upon the report of KPMG Peat
Marwick LLP.
The Consolidated Financial Statements of Old Cal Fed as of December 31,
1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, included in this Prospectus, have been audited by KPMG Peat
Marwick LLP, independent auditors, as stated in their report thereon. Such
financial statements have been included in reliance upon the report of KPMG Peat
Marwick LLP.
The Consolidated Financial Statements of Glendale Federal as of June 30,
1998 and 1997, and for each of the years in the three-year period ended
June 30, 1997, included in this Prospectus, have been audited by KPMG Peat
Marwick LLP, independent auditors, as stated in their report thereon. Such
financial statements have been included in reliance upon the report of KPMG Peat
Marwick LLP.
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INDEX OF DEFINED TERMS*
<TABLE>
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
6 1/2% Convertible Subordinated
Debentures........................... 153
9 1/8% Preferred Stock................. 156
10% Subordinated Debentures Due 2003... 156
10% Subordinated Debentures Due 2006... 154
10 5/8% Preferred Stock................ 38
10.668% Subordinated Notes............. 155
11 1/2% Preferred Stock................ 38
11.20% Senior Notes.................... 155
1996 Acquisitions...................... 11, 130
2001 Notes............................. Cover
2003 Notes............................. Cover
2005 Notes............................. Cover
ACS.................................... 25
Act.................................... 33, 80
Agent's Message........................ 121
ALCO................................... 83, 110
Amendments............................. 38
AMT.................................... 25
Appeals Court.......................... 192
Applicable LIBOR Rate.................. 216
Applicable Premium..................... 218
ARMs................................... 10
Asset Purchase Agreement............... 129
Assistance Agreement................... 129
Auto One............................... 11, 131
Auto One Acquisition................... 11, 131
BAC Sale............................... 129
Bank................................... 2, 5
Bank Dividend.......................... 8
Bank Junior Stock...................... 87
Bank Preferred Stock................... 38
Bank Preferred Stock
Tender Offers........................ 7, 38
BankAmerica............................ 129
Base LIBOR Rate........................ 216
BIF.................................... 199
Bonuses................................ 209
Book-Entry Confirmation................ 121
Book-Entry Transfer Facility........... 121
Branch Purchases....................... 11, 60
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
Branch Sales........................... 12, 130
Brokered Deposits...................... 151
Cal Fed................................ 2, 5
Cal Fed Acquisition.................... 5
Calculations........................... 216
CALGLs................................. 35, 157
CALGZs................................. 35, 157
California Federal Litigation.......... 159
capital distributions.................. 198
Cash Payment........................... 159
Cautionary Statements.................. 4
CENFED................................. 6
CenFed Bank............................ 6
CENFED Merger.......................... 6
CFI.................................... 159
Change of Control Call Event........... 215
Change of Control Price................ 215
Claims Court........................... 191
CMO Sale............................... 100
CMOs................................... 77
Code................................... 227, 247
COFI................................... 166
Commission............................. 3
Consulting Agreement................... 209
Contingent Shares...................... 35
covenant defeasance.................... 228
Covered Assets......................... 129
CPR.................................... 189
CRA.................................... 200
Debt Tender Offers..................... 8
Default Amount......................... 223
Deferred Compensation Plan............. 209
Delaware Litigation.................... 36
Designated Fixed Rate.................. 218
District Court......................... 191
DTC.................................... 244
Eligible Institutions.................. 121
Escrow Agent........................... 2
Escrow Corp............................ Cover
Escrow Corp. Merger.................... Cover
Exchange Act........................... 4
Exchange Agent......................... 16
Exchange Agreement..................... 209
Exchange Offer......................... Cover
</TABLE>
- ------------------------
* Does not include terms defined under "Description of the Notes--Certain
Definitions."
247
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
Exchange Offer Registration
Statement............................ 245
Expiration Date........................ 15
Fair Lending Laws...................... 200
FASB................................... 84
FDIC................................... 5
FDIC Purchase.......................... 160
FDICIA................................. 30, 111
Federal Court.......................... 191
FGB Realty............................. 159
FHLB................................... 7
FHLBS.................................. 6
FHLMC.................................. 134
FICO................................... 199
Fifth Supplemental Indenture........... 215
FIRREA................................. 160
First Gibraltar........................ 129
First Gibraltar Holdings............... 6
First Madison.......................... 129
First Nationwide Escrow................ 130
First Nationwide Escrow Merger......... 130
First Nationwide Escrow Preferred
Stock................................ 209
First Nationwide Management............ 210
First United Bank Group................ 202
Fixed Rate Notes....................... 212
Floating Rate Business Day............. 216
Floating Rate Interest Payment Date.... 212
Floating Rate Notes.................... Cover
Florida Branch Sale.................... 12, 61
FN Acquired Business................... 129
FN Acquisition......................... 129
FNH.................................... 5
FNH 9 1/8% Senior Subordinated Notes... 38
FNH 10 5/8% Senior Subordinated
Notes................................ 38
FNH 12 1/4% Senior Notes............... 38
FNH Asset Transfer..................... 6
FNH Indentures......................... 38
FNH Merger............................. 6
FNH Notes.............................. 38
FNH Preferred Stock.................... 131
FNH/First Nationwide Escrow Preferred
Stock................................ 209
FNMA................................... 134
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
FNMC................................... 10
FNMP................................... 139
Ford Motor............................. 129
Ford Obligation........................ 209
FRB.................................... 196
FSLIC.................................. 201
FSLIC/RF............................... 129
GAP.................................... 188
Garberville Branch Sale................ 60
GBS.................................... 190
GIS.................................... 190
Glendale Federal....................... 2
Glendale Goodwill Litigation........... 35, 191
GLENFED................................ 191
Global Security........................ 240
GNMA................................... 134
Golden State........................... 6
Golden State Acquisition............... 2, 6
Golden State Common Stock.............. 35
Golden State Financial................. 6
Golden State Group..................... 33
Golden State Holdings.................. Cover, 5
Golden State Merger.................... 6
Goodwill Litigation Asset.............. 160
Government............................. 191
Granite................................ 136
GSAC................................... 131
GSAC Acquisition....................... 11, 131
HFFC................................... 11, 130
HOLA................................... 5
Holding Company Mergers................ 6
Holdings............................... 215, 225
Home Federal........................... 11, 130
Home Federal Acquisition............... 11, 130
HUD.................................... 137
Hunter's Glen.......................... 6
Incentive Plan......................... 72
income property loans.................. 173
Indenture.............................. Cover, 212
Initial Purchasers..................... 3
institution-affiliated parties......... 198
Interest Period........................ 216
Interest Rate Determination Date....... 216
Interest Reset Date.................... 212
interest-bearing liabilities........... 187
</TABLE>
248
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
interest-earning assets................ 187
IRR.................................... 195
Issuer................................. Cover, 5
ITS.................................... 96
ITT Purchase........................... 11
Junior Stock........................... 156
legal defeasance....................... 228
LIBOR Business Day..................... 215
LIBOR Fraction......................... 216
Litigation Management Agreement........ 36
Litigation Tracking
Warrants(Trademark).................. 99
LMUSA.................................. 12, 130
LMUSA 1995 Purchase.................... 12, 130
LMUSA 1996 Purchase.................... 12, 130
LMUSA Purchases........................ 12, 130
LOC.................................... 160
London Banking Day..................... 216
LSBO Portfolio......................... 167
LTV.................................... 90
LTW(Trademark)......................... 99
MacAndrews & Forbes.................... 13
MacAndrews Holdings.................... 13
Madison Financial...................... 209
Madison Realty......................... 202
Mafco Group............................ 32
Mafco Holdings......................... 13
Make Whole Amount...................... 2, 18
Marvel................................. 202
Marvel Holdings........................ 202
Marvel III............................. 202
Marvel Parent.......................... 202
Maryland Acquisition................... 12, 130
master servicing portfolio............. 130
MBS.................................... 146
Merger Agreement....................... 6
Merger Agreement Amendment............. 36
Mergers................................ 35
Meridian............................... 202
MFW.................................... 202
Michigan Branch Sale................... 12, 130
MSA.................................... 108, 184
MSR Hedge.............................. 93
MSRs................................... 12, 31
NationsBank............................ 210
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
New Fixed Rate Notes................... Cover
New Floating Rate Notes................ Cover
New Holding Company.................... 221
New Notes.............................. Cover
New Regulations........................ 248
New 2001 Notes......................... Cover
New 2003 Notes......................... Cover
New 2005 Notes......................... Cover
Northeast Branch Sales................. 12, 130
Note Purchase Agreement................ 155
Notes.................................. Cover
Notice Date............................ 215
NPAs................................... 105, 178
NPV.................................... 84
NYSE................................... 6, 125
Offering............................... Cover
Officers............................... 209
Ohio Branch Sale....................... 12, 130
Old Cal Fed............................ 5
Old Cal Fed Merger Agreement........... 130
Old California Federal................. 5
Old Floating Rate Notes................ Cover
Old FNB................................ 129
Old FNB Indenture...................... 154
Old Notes.............................. Cover
Old 2001 Notes......................... Cover
Old 2003 Notes......................... Cover
Old 2005 Notes......................... Cover
OneCentral............................. 103
OTS.................................... 5
Panavision............................. 202
Parent Holdings........................ 6
Parent Holdings Defeasance............. 7, 38
Parent Holdings Notes.................. 7
Parent Holdings Notes Indenture........ 38
Participants........................... 209
Participating Broker-Dealers........... 245
Preferred Capital Corp................. 129
Products Corporation................... 202
Promissory Note........................ 208
Put Agreement.......................... 136
Put Option............................. 160
QIBs................................... 210
QTL.................................... 199
</TABLE>
249
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
QTL test............................... 199
Rate Lock Agreements................... 210
Recovery Payment....................... 159
RedFed................................. 6
RedFed Merger.......................... 6
Reduction Act.......................... 72
Refinancing Transactions............... 2, 8
Registration Agreement................. 3, 245
Registration Statement................. 4
REI.................................... 104
REIT Preferred Stock................... 131
REO.................................... 102
Reuters Screen LIBO Page............... 216
REV Holdings........................... 202
Revlon................................. 202
SAIF................................... 6
Salomon................................ 210
San Francisco Federal.................. 11, 130
Secondary Recovery Payment............. 159
Securities Act......................... Cover
Senior Indebtedness.................... 18
Series A Preferred Stock............... 99
Services Agreement..................... 210
Servicing Sale......................... 12, 131
SFAS................................... 34
SFAS No. 115........................... 144
SFAS No. 122........................... 77, 139
SFAS No. 125........................... 61, 183
SFAS No. 127........................... 61
SFAS No. 130........................... 61
SFAS No. 131........................... 61
SFAS No. 132........................... 62
<CAPTION>
TERM PAGE NUMBER
- ---- -----------
<S> <C>
SFAS No. 133........................... 62
SFFed.................................. 11, 130
SFFed Acquisition...................... 11, 130
Shared Gain............................ 160
Sonoma Purchase........................ 11
Special Purpose Corp................... 131
Special Report......................... 84
Special SAIF Assessment................ 72
Spread................................. 216
StanFed................................ 130
Stockholders Agreement................. 209
sub-servicing portfolio................ 130
Subsidiary Bank Merger................. 6
Supplemental Indentures................ 212
Tax Sharing Agreement.................. 32
Telerate Page 3750..................... 216
Texas Branch Sale...................... 131
Texas Closed Branches.................. 129
TIA.................................... 124
Tiburon Purchase....................... 11
Tier 1 association..................... 198
Tier 2 association..................... 198
Tier 3 association..................... 199
TNIS................................... 210
TransWorld............................. 103
Trustee................................ 212
U.S.................................... 247
United States holder................... 247
Weyerhaeuser Purchase.................. 12, 131
Winstar Cases.......................... 160
XCF.................................... 156
Year 2000.............................. 96
</TABLE>
250
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
First Nationwide Holdings Inc. and Subsidiaries ("FNH")
At December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995:
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets............................................................................. F-3
Consolidated Statements of Income....................................................................... F-4
Consolidated Statements of Comprehensive Income......................................................... F-5
Consolidated Statements of Stockholders' Equity......................................................... F-6
Consolidated Statements of Cash Flows................................................................... F-7
Notes to Consolidated Financial Statements.............................................................. F-9
At June 30, 1998 and for the six months ended June 30, 1998 and 1997:
Consolidated Balance Sheets (Unaudited)................................................................. F-59
Consolidated Statements of Income (Unaudited)........................................................... F-60
Consolidated Statements of Comprehensive Income (Unaudited)............................................. F-61
Consolidated Statement of Stockholders' Equity (Unaudited) ............................................. F-62
Consolidated Statements of Cash Flows (Unaudited)....................................................... F-63
Notes to Unaudited Consolidated Financial Statements.................................................... F-65
Cal Fed Bancorp Inc. and Subsidiaries
At December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994:
Independent Auditors' Report............................................................................ F-69
Consolidated Statements of Financial Condition.......................................................... F-70
Consolidated Statements of Operations................................................................... F-71
Consolidated Statements of Changes in Shareholders' Equity.............................................. F-72
Consolidated Statements of Cash Flows................................................................... F-73
Notes to Consolidated Financial Statements.............................................................. F-74
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal")
At June 30, 1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996:
Independent Auditors' Report............................................................................ F-121
Consolidated Statements of Financial Condition.......................................................... F-122
Consolidated Statements of Operations................................................................... F-123
Consolidated Statements of Changes in Stockholder's Equity.............................................. F-124
Consolidated Statements of Cash Flows................................................................... F-125
Notes to Consolidated Financial Statements.............................................................. F-127
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Nationwide Holdings Inc.:
We have audited the accompanying consolidated balance sheets of First Nationwide
Holdings Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Nationwide
Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
February 23, 1998
F-2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from banks.................................................... $ 350,214 $ 135,534
Interest-bearing deposits in other banks........................................... 36,164 20,619
Short-term investment securities................................................... 25,933 113,716
----------- -----------
Cash and cash equivalents........................................................ 412,311 269,869
Securities available for sale, at fair value....................................... 813,085 542,019
Securities held to maturity (fair value $58,299 in 1997 and $4,287 in 1996)........ 58,299 4,272
Mortgage-backed securities available for sale, at fair value....................... 5,076,598 1,598,652
Mortgage-backed securities held to maturity (fair value $1,373,289 in 1997 and
$1,653,847 in 1996).............................................................. 1,337,877 1,621,662
Loans held for sale, net........................................................... 1,483,466 825,316
Loans receivable, net.............................................................. 19,424,410 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System............................... 468,191 220,962
Office premises and equipment, net................................................. 159,349 100,164
Foreclosed real estate, net........................................................ 76,997 51,987
Accrued interest receivable........................................................ 188,203 106,034
Intangible assets (net of accumulated amortization of $60,294 in 1997 and $11,141
in 1996)......................................................................... 675,927 140,564
Mortgage servicing rights.......................................................... 536,703 423,692
Other assets....................................................................... 635,663 500,392
----------- -----------
Total assets.................................................................. $31,347,079 $16,618,168
----------- -----------
----------- -----------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Deposits........................................................................... $16,202,605 $ 8,501,883
Securities sold under agreements to repurchase..................................... 1,842,442 1,583,387
Borrowings......................................................................... 10,769,594 4,902,696
Other liabilities.................................................................. 702,475 401,609
----------- -----------
Total liabilities............................................................. 29,517,116 15,389,575
----------- -----------
Commitments and contingencies...................................................... -- --
Minority interest.................................................................. 986,456 309,376
Stockholders' equity:
Floating rate cumulative perpetual preferred stock, $1.00 par value, liquidation
value of $15,000 per share, 24,000 shares authorized, 1,712.0 shares and
10,052.8 shares issued and outstanding at December 31, 1997 and 1996,
respectively.................................................................. 25,680 150,792
Class A common stock, $1.00 par value, 800 shares authorized, issued and
outstanding................................................................... 1 1
Class B common stock, $1.00 par value, 200 shares authorized, issued and
outstanding................................................................... -- --
Additional paid-in capital....................................................... 31,890 47,752
Net unrealized holding gain on securities available for sale..................... 35,162 46,219
Retained earnings (substantially restricted)..................................... 750,774 674,453
----------- -----------
Total stockholders' equity.................................................... 843,507 919,217
----------- -----------
Total liabilities, minority interest and stockholders' equity................. $31,347,079 $16,618,168
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable...................................................... $1,553,210 $ 884,905 $ 799,607
Mortgage-backed securities available for sale......................... 297,816 115,983 --
Mortgage-backed securities held to maturity........................... 113,300 135,103 212,880
Covered assets........................................................ -- 1,413 10,705
Loans held for sale................................................... 76,364 61,595 24,257
Securities available for sale......................................... 53,936 31,416 --
Securities held to maturity........................................... 2,436 257 26,885
Interest-bearing deposits in other banks.............................. 5,638 3,127 1,511
---------- ---------- ----------
Total interest income............................................... 2,102,700 1,233,799 1,075,845
---------- ---------- ----------
Interest expense:
Deposits.............................................................. 746,985 419,174 447,359
Securities sold under agreements to repurchase........................ 140,547 120,280 104,957
Borrowings............................................................ 553,272 268,346 182,499
---------- ---------- ----------
Total interest expense.............................................. 1,440,804 807,800 734,815
---------- ---------- ----------
Net interest income................................................. 661,896 425,999 341,030
Provision for loan losses............................................... 79,800 39,600 37,000
---------- ---------- ----------
Net interest income after provision for loan losses................. 582,096 386,399 304,030
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net.............................................. 143,919 123,887 70,265
Customer banking fees and service charges............................. 100,048 45,044 47,493
Management fees....................................................... 6,211 9,694 15,141
Gain (loss) on sales of loans, net.................................... 24,721 17,802 (26)
Gain on sales of assets, net.......................................... 38,230 38,118 173
Gain on sales of branches............................................. 3,569 363,342 --
Gain from termination of Assistance Agreement......................... -- 25,632 --
Dividends on FHLB stock............................................... 24,790 11,670 6,546
Other income.......................................................... 22,996 18,189 11,381
---------- ---------- ----------
Total noninterest income............................................ 364,484 653,378 150,973
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits.................................... 256,448 204,818 154,288
Occupancy and equipment............................................... 81,914 51,936 49,897
Savings Association Insurance Fund ("SAIF") deposit
insurance premium................................................... 10,680 81,149 22,262
Loan expense.......................................................... 60,437 31,282 12,431
Marketing............................................................. 20,186 10,908 10,810
Professional fees..................................................... 48,771 18,986 11,202
Data processing....................................................... 12,402 10,491 9,787
Foreclosed real estate operations, net................................ (3,304) (7,390) (927)
Amortization of intangible assets..................................... 49,153 9,445 1,474
Other................................................................. 112,032 78,944 61,329
---------- ---------- ----------
Total noninterest expense........................................... 648,719 490,569 332,553
---------- ---------- ----------
Income before income taxes, extraordinary item and minority interest.... 297,861 549,208 122,450
Income tax expense (benefit)............................................ 47,148 (73,131) (57,185)
---------- ---------- ----------
Income before extraordinary item and minority interest.................. 250,713 622,339 179,635
Extraordinary item--(loss) gain on early extinguishment of debt, net.... -- (1,586) 1,967
---------- ---------- ----------
Income before minority interest......................................... 250,713 620,753 181,602
Minority interest....................................................... 89,344 43,230 34,584
---------- ---------- ----------
Net income.......................................................... 161,369 577,523 147,018
Preferred stock dividends............................................... 12,791 4,815 --
---------- ---------- ----------
Net income available to common stockholders......................... $ 148,578 $ 572,708 $ 147,018
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income................................................................. $ 161,369 $ 577,523 $ 147,018
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale:
Unrealized holding gains arising during the period.................... 10,907 18,225 53,980
Less: reclassification adjustment for gains included
in net income....................................................... (21,964) (35,518) (1,468)
--------- --------- ---------
Other comprehensive income............................................... (11,057) (17,293) 52,512
--------- --------- ---------
Comprehensive income....................................................... $ 150,312 $ 560,230 $ 199,530
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAIN ON
ADDITIONAL SECURITIES TOTAL
PREFERRED COMMON PAID-IN AVAILABLE FOR RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL SALE EARNINGS EQUITY
--------- ------ ---------- ---------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............. $ -- $1 $ 283,801 $ 11,000 $ 58,070 $ 352,872
Net income............................... -- -- -- -- 147,018 147,018
Redemption of class C common stock....... -- -- (60,801) -- -- (60,801)
Dividends on class C common stock........ -- -- -- -- (29,185) (29,185)
Change in net unrealized holding gains on
securities available for sale.......... -- -- -- 52,512 -- 52,512
--------- -- ---------- -------- -------- ---------
Balance at December 31, 1995............. -- 1 223,000 63,512 175,903 462,416
Net income............................... -- -- -- -- 577,523 577,523
Redemption of class C common stock....... -- -- (169,497) -- -- (169,497)
Dividends on class C common stock........ -- -- -- -- (8,575) (8,575)
Dividends on class A common stock........ -- -- -- -- (52,467) (52,467)
Dividends on class B common stock........ -- -- -- -- (13,116) (13,116)
Issuance of preferred stock.............. 150,000 -- (5,751) -- -- 144,249
Dividends on preferred stock............. 792 -- -- -- (4,815) (4,023)
Change in net unrealized holding gains on
securities available for sale.......... -- -- -- (17,293) -- (17,293)
--------- -- ---------- -------- -------- ---------
Balance at December 31, 1996............. 150,792 1 47,752 46,219 674,453 919,217
Net income............................... -- -- -- -- 161,369 161,369
FN Escrow Merger......................... 35,983 -- -- -- (1,163) 34,820
Redemption of FN Holdings/FN Escrow
Preferred Stock........................ (35,983) -- -- -- -- (35,983)
Issuance costs of FN Holdings Preferred
Stock.................................. -- -- (650) -- -- (650)
Issuance costs of REIT Preferred Stock... -- -- (17,551) -- -- (17,551)
Redemption of FN Holdings Preferred
Stock.................................. (127,339) -- 2,339 -- -- (125,000)
Stock dividends.......................... 2,227 -- -- -- (2,227) --
Cash dividends on common stock........... -- -- -- -- (71,094) (71,094)
Cash dividends on preferred stock........ -- -- -- -- (10,564) (10,564)
Change in net unrealized holding gains on
securities available for sale.......... -- -- -- (11,057) -- (11,057)
--------- -- ---------- -------- -------- ---------
Balance at December 31, 1997............. $ 25,680 $1 $ 31,890 $ 35,162 $750,774 $ 843,507
--------- -- ---------- -------- -------- ---------
--------- -- ---------- -------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 161,369 $ 577,523 $ 147,018
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Amortization of intangible assets.................................. 49,153 9,445 1,474
(Accretion) amortization of purchase accounting premiums and
discounts, net.................................................. (20,650) (15,771) (946)
Amortization of mortgage servicing rights.......................... 110,282 90,981 33,892
Provision for loan losses.......................................... 79,800 39,600 37,000
Provision for accrued termination and facilities costs............. 1,233 8,679 12,772
Gain on sales of assets, net....................................... (38,230) (38,118) (173)
Gain on sale of branches........................................... (3,569) (363,342) --
Gain on sales of foreclosed real estate............................ (12,087) (12,951) (3,010)
Loss on sale of loans, net......................................... 95,744 63,226 17,928
Gain from termination of Assistance Agreement...................... -- (25,632) --
Extraordinary loss (gain) on early extinguishment of debt, net..... -- 1,586 (1,,967)
Depreciation and amortization of office premises and equipment..... 16,773 10,921 8,884
Amortization of deferred issuance costs............................ 5,766 1,811 766
FHLB stock dividend................................................ (24,790) (11,670) (6,546)
Capitalization of mortgage servicing rights........................ (120,465) (81,028) (17,902)
Purchases and originations of loans held for sale.................. (6,293,262) (4,822,753) (1,773,437)
Proceeds from the sale of loans held for sale...................... 5,510,777 5,157,186 1,191,281
Decrease (increase) in other assets................................ 164,871 (89,224) (97,258)
(Increase) decrease in accrued interest receivable................. (11,197) 20,991 (9,743)
(Decrease) increase in other liabilities........................... (144,255) (48,804) 33,155
Minority interest.................................................. 89,344 43,230 34,584
----------- ----------- -----------
Net cash (used in) provided by operating activities............. (383,393) 515,886 (392,228)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisitions and divestitures:
Auto One Acquisition............................................. $ (2,845) $ -- $ --
SFFed Acquisition................................................ -- (83,184) --
Home Federal Acquisition......................................... -- 79,044 --
Cal Fed Acquisition.............................................. (161,196) -- --
Mortgage loan servicing rights and operations.................... (34,260) (48,305) (214,727)
Branch Purchases................................................. -- -- 501,351
Purchases of securities available for sale......................... (1,340,881) (497,963) --
Proceeds from sales of securities available for sale............... 52,014 92,320 --
Proceeds from maturities of securities available for sale.......... 1,015,410 242,514 --
Purchases of securities held to maturity........................... (58,965) (9,303) (162,845)
Principal payments from securities held to maturity................ -- 5 --
Proceeds from maturities of securities held to maturity............ 4,938 1,250 344,475
Purchases of mortgage-backed securities available for sale......... (2,589,257) (149,724) --
Principal payments on mortgage-backed securities available
for sale ........................................................ 1,099,699 475,186 --
Proceeds from sales of mortgage-backed securities available
for sale ........................................................ 50,772 -- --
Purchases of mortgage-backed securities held to maturity........... (458) -- (19,825)
Principal payments on mortgage-backed securities held to
maturity ........................................................ 283,696 387,891 570,945
Proceeds from sales of loans receivable............................ 21,179 123,026 431,247
Net decrease (increase) in loans receivable........................ 514,377 1,498,588 (85,149)
Decrease in covered assets......................................... -- 39,349 272,254
(Purchases) redemptions of FHLB stock, net......................... (50,721) (65,753) 25,565
Purchases of office premises and equipment......................... (66,131) (42,368) (15,331)
Proceeds from the disposal of office premises and equipment ....... 31,400 4,071 1,667
Proceeds from sales of foreclosed real estate...................... 200,275 170,443 71,453
Purchases of mortgage servicing rights............................. (29,627) (65,994) (774)
Proceeds from sales of mortgage servicing rights................... 31,051 -- --
------------ ----------- -----------
Net cash (used in) provided by investing activities.............. (1,029,530) 2,151,093 1,720,306
Cash flows from financing activities:
Branch Sales....................................................... (79,900) (4,585,022) --
Net (decrease) increase in deposits................................ (1,196,360) (56,694) 542,633
Proceeds from additional borrowings................................ 19,595,218 10,710,331 6,151,319
Principal payments on borrowings................................... (17,495,008) (8,484,883) (6,860,569)
Net decrease in securities sold under agreements to repurchase .... (40,289) (202,169) (913,103)
Proceeds from FN Escrow Merger..................................... 603,313 -- --
Issuance of FN Holdings Preferred Stock, net....................... (650) 144,249 --
Issuance of REIT Preferred Stock, net.............................. 482,449 -- --
Redemption of class C common stock................................. -- (124,670) (60,801)
Redemption of FN Holdings/FN Escrow Preferred Stock................ (17,250) -- --
Redemption of FN Holdings Preferred Stock.......................... (125,000) -- --
Dividends on class C common stock.................................. -- (6,633) (29,185)
Dividends on common stock.......................................... (71,094) (65,583) --
Dividends on preferred stock....................................... (10,564) (4,023) --
Dividends paid to minority stockholders, net of taxes.............. (89,500) (34,584) (34,584)
------------ ----------- -----------
Net cash provided by (used in) financing activities.............. 1,555,365 (2,709,681) (1,204,290)
------------ ----------- -----------
Net change in cash and cash equivalents.............................. 142,442 (42,702) 123,788
Cash and cash equivalents at beginning of year....................... 269,869 312,571 188,783
------------ ----------- -----------
Cash and cash equivalents at end of year............................. $ 412,311 $ 269,869 $ 312,571
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
First Nationwide Holdings Inc. (the "Company" or "FN Holdings") is a
holding company whose only significant asset is all of the outstanding shares of
common stock of California Federal Bank, A Federal Savings Bank ("California
Federal" or "Bank"), formerly First Nationwide Bank, A Federal Savings Bank
("First Nationwide"), formerly First Madison Bank, FSB ("First Madison"). The
Company is a subsidiary of First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which is a subsidiary of First Gibraltar Holdings Inc. ("First
Gibraltar Holdings"), an indirect subsidiary of MacAndrews & Forbes Holdings
Inc. ("M&F Holdings").
The Bank was organized and chartered as First Gibraltar Bank, FSB ("First
Gibraltar"), a federal stock savings bank, in December 1988 for the primary
purpose of acquiring substantially all of the assets and assuming deposit,
secured and certain other liabilities of five insolvent Texas savings and loan
associations ("Closed Associations") from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Concurrently
with the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for approximately $715 million based on estimates prepared by Old
FNB. On March 2, 1995, an additional $11.5 million was paid to Old FNB pursuant
to certain settlement provisions of the Asset Purchase Agreement. Effective on
October 1, 1994, First Madison changed its name to First Nationwide Bank, A
Federal Savings Bank.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal. The
aggregate consideration paid under the Merger Agreement consisted of
approximately $1.2 billion in cash and the issuance of litigation interests (the
"Cal Fed Acquisition"). Cal Fed, a savings and loan holding company, owned 100%
of the common stock of Old California Federal. At December 31, 1996, Old
California Federal had total assets of approximately $14.1 billion and deposits
of $8.9 billion, and operated 119 branches in California and Nevada. Effective
on January 3, 1997, First Nationwide changed its name to California Federal
Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN
Holdings made a capital contribution to the Bank on January 3, 1997 of
approximately $685 million.
In November 1996, the Bank created California Federal Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT"), for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Pursuant to a subservicing agreement with the Bank's wholly-owned mortgage
banking subsidiary, First Nationwide Mortgage Corporation ("FNMC"), FNMC
services Preferred Capital Corp.'s mortgage assets. On January 31, 1997,
Preferred Capital Corp. issued to the public $500 million of its 9 1/8%
Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which
is reflected in the Company's 1997 consolidated balance sheet as minority
interest. Preferred Capital Corp. used the proceeds from such offering to
acquire mortgage assets from the Bank.
F-9
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION--(CONTINUED)
The Bank is a diversified financial services company that primarily serves
consumers in California, and to a lesser extent, in Florida and Nevada. The
Bank's principal business consists of (i) operating retail deposit branches,
(ii) originating and/or purchasing 1-4 unit residential loans and, to a lesser
extent, certain commercial real estate and consumer loans, for investment and
(iii) mortgage banking activities, including originating and servicing 1-4 unit
residential loans for others. Recently, with its entry into the sub-prime
automobile finance business, the Bank broadened its complement of consumer
lending products. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections on
loans, asset sales and retained earnings.
2. FN ESCROW MERGER
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In connection
therewith, FN Holdings acquired the net proceeds from the issuance of FN
Escrow's $575 million of senior subordinated notes due 2003 (the "10 5/8%
Notes") and assumed FN Escrow's obligations under the 10 5/8% Notes and
indenture. Deferred issuance costs associated with the 10 5/8% Notes of
$19 million were included in FN Escrow's other assets and are being amortized
over the term of the 10 5/8% Notes.
Concurrent with the issuance of the 10 5/8% Notes, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance
Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a
stated liquidation value of $10,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as the
FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the
FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million,
representing its stated liquidation value and accrued and unpaid dividends to
January 3, 1997. At the same time, a $19 million loan receivable from an
affiliate of FN Holdings was repaid.
3. ACQUISITIONS AND DIVESTITURES
LMUSA Purchases
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the reporting
and remittances of multiple servicers for various investors (a "master servicing
portfolio") and other assets for $100.9 million, and the assumption of certain
indebtedness relating to an acquired loan portfolio totalling approximately
$274 million (the "LMUSA 1995 Purchase"). On January 31, 1996, FNMC purchased
LMUSA's remaining $14.1 billion loan servicing portfolio (including a
sub-servicing portfolio of $2.4 billion), a master servicing portfolio of
$2.7 billion, $5.9 million in foreclosed real estate, $46.8 million in net other
servicing receivables, $2.6 million in mortgage loans, and $6.2 million in net
other assets (including $1.4 million in cash and cash equivalents) for a
purchase price of approximately $160.9 million (the "LMUSA 1996 Purchase" and,
together with the LMUSA 1995 Purchase, the "LMUSA Purchases").
F-10
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
1996 Acquisitions
On February 1, 1996, the Bank acquired SFFed Corp. ("SFFed") and its
wholly-owned subsidiary, San Francisco Federal Savings and Loan Association (the
"SFFed Acquisition"). The following is a summary of the assets acquired and
liabilities assumed in connection with the SFFed Acquisition at February 1,
1996.
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
SFFED FAIR BANK LIVES
CARRYING VALUE CARRYING (IN
VALUE ADJUSTMENTS VALUE YEARS)
----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................................. $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities................................ 918,817 11,007 929,824 1-5
Loans receivable, net..................................... 2,715,758 (23,245) 2,692,513 2-12
Office premises and equipment............................. 20,581 (11,672) 8,909 3-10
Investment in FHLB System................................. 31,989 -- 31,989 --
Foreclosed real estate, net............................... 30,018 -- 30,018 --
Accrued interest receivable............................... 22,740 -- 22,740 --
Mortgage servicing rights................................. 2,238 13,762 16,000 2-4
Other assets.............................................. 44,938 (7,773) 37,165 2-5
Deposits.................................................. (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to repurchase............ (815,291) (3,640) (818,931) --
Borrowings................................................ (227,203) (8,831) (236,034) 1-9
Other liabilities......................................... (50,805) (6,075) (56,880) 1-5
----------- --------- -----------
$ 196,149 $ (47,417) 148,732
----------- ---------
----------- ---------
Purchase price............................................ 264,245
-----------
Excess cost over fair value of net assets acquired........ $ 115,513 15
-----------
-----------
</TABLE>
In connection with the SFFed Acquisition, FN Holdings issued $140 million
of 9 1/8% Senior Subordinated Notes Due 2003 (the "9 1/8% Senior Subordinated
Notes") and contributed the proceeds thereof of $133 million to the Bank as
additional paid-in capital.
F-11
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996 Acquisitions").
The aggregate consideration paid in connection with the Home Federal Acquisition
was approximately $67.8 million. The following is a summary of the assets
acquired and liabilities assumed in the Home Federal Acquisition at June 1,
1996:
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
HFFC FAIR BANK LIVES
CARRYING VALUE CARRYING (IN
VALUE ADJUSTMENTS VALUE YEARS)
--------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities.......................... 4,053 (65) 3,988 1-5
Loans receivable, net............................... 538,722 4,020 542,742 2-12
Office premises and equipment....................... 4,202 (2,125) 2,077 3-10
Investment in FHLB System........................... 6,259 -- 6,259
Foreclosed real estate, net......................... 2,421 (198) 2,223 --
Accrued interest receivable......................... 3,594 -- 3,594 --
Mortgage servicing rights........................... 817 2,243 3,060 2-4
Other assets........................................ 10,016 2,392 12,408 2-5
Deposits............................................ (632,399) (1,875) (634,274) 1-5
Borrowings.......................................... (30,000) 241 (29,759) 1-6
Other liabilities................................... (3,602) (3,293) (6,895) 1-5
--------- ------- ---------
$ 50,950 $ 1,340 52,290
--------- -------
--------- -------
Purchase price...................................... 67,823
---------
Excess cost over fair value of net assets
acquired.......................................... $ 15,533 15
---------
---------
</TABLE>
The 1996 Acquisitions and the LMUSA Purchases were accounted for as
purchases and, accordingly, their respective purchase prices were allocated to
the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates of
purchase, the results of operations related to such assets and liabilities have
been included in the Company's consolidated statements of income.
F-12
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
Cal Fed Acquisition
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
CAL FED FAIR BANK LIVES
CARRYING VALUE CARRYING (IN
VALUE ADJUSTMENTS VALUE YEARS)
----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 1,027,491 $ -- $ 1,027,491 --
Securities..................................... 6,013 12 6,025 1
Mortgage-backed securities..................... 1,963,869 4,532 1,968,401 6-9
Loans receivable, net.......................... 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net............. 58,900 (17,592) 41,308 3-10
Investment in FHLB System...................... 166,786 -- 166,786 --
Foreclosed real estate, net.................... 18,482 (16) 18,466 --
Accrued interest receivable.................... 71,868 -- 71,868 --
Mortgage servicing rights...................... 4,759 39,738 44,497 2-7
Other assets................................... 87,096 142,634 229,730 2-5
Deposits....................................... (8,985,630) (9,699) (8,995,329) 1-8
Borrowings..................................... (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities.............................. (198,454) (188,892) (387,346) 1-10
Preferred stock................................ (172,500) -- (172,500) --
----------- --------- -----------
$ 664,846 $ (56,192) 608,654
----------- ---------
----------- ---------
Purchase price................................. 1,188,687
-----------
-----------
Excess cost over fair value of net assets
acquired..................................... $ 580,033 15
-----------
-----------
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
in the transaction based on estimates of fair value at the date of purchase.
Since the date of purchase, the results of operations related to such assets and
liabilities have been included in the Company's 1997 consolidated statement of
income.
Weyerhaeuser Purchase
On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC
Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The
Company's consolidated statement of income for the year ended December 31, 1997
includes the results of the acquired servicing portfolio from June 1, 1997.
Auto One Acquisition
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One
primarily engages in indirect sub-prime auto financing activities, providing
loan processing, funding and loan servicing for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered
in Dallas, Texas, and is a wholly-owned subsidiary of the Bank. The results of
operations for Auto One for the period from September 1, 1997 are included in
the Company's consolidated statement of income for the year ended December 31,
1997.
F-13
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
Servicing Sale
On September 30, 1997, FNMC sold servicing rights for approximately 52,000
loans with an unpaid principal balance of approximately $2.3 billion,
recognizing a pre-tax gain of $14.0 million (the "Servicing Sale").
Branch Sales
During the first six months of 1996, the Bank consummated the sale of its
retail deposits and the related retail banking assets comprised of cash on hand,
loans on deposits, and facilities in Ohio, New York, New Jersey and Michigan
(collectively, the "Branch Sales") at gross prices which represented an average
premium of 7.96% of the approximately $4.6 billion deposits sold. The Bank
recorded a pre-tax gain of $363.3 million in connection with the Branch Sales.
The Company's consolidated statement of income for the year ended December 31,
1996 includes the results of operations of those branches sold in the Branch
Sales for the period prior to sale.
Garberville Branch Sale
On May 9, 1997, the Bank consummated the sale of deposit accounts and
related retail banking assets comprised of cash on hand, loans on deposits and
facilities totalling $21.7 million to Humboldt Bank at a gross price
representing a deposit premium of 4.5% (the "Garberville Branch Sale"), and
resulting in a net pre-tax gain on sale of $1.1 million.
Texas Branch Sale
On December 12, 1997, the Bank sold its retail deposits and all related
retail banking facilities in the state of Texas (consisting of three branches)
totalling $57.6 million at a gross price representing a deposit premium of 4.1%
and resulting in a pre-tax net gain on sale of $2.5 million (the "Texas Branch
Sale").
Pro Forma Financial Information
The following unaudited pro forma financial information combines the
historical results of the Company as if the Cal Fed Acquisition and the
issuances of the REIT Preferred Stock and the 10 5/8% Notes had occurred as of
the beginning of the first year presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Net interest income................................................ $663,484 $725,775
Net income......................................................... 159,529 270,858
</TABLE>
The gains recognized related to the Branch Sales, net of related taxes, and
certain sales of branches by Cal Fed are excluded from the above table. The pro
forma information does not include the effect of the Home Federal Acquisition,
the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser Purchase, the
Auto One Acquisition, the Servicing Sale, the Branch Sales, the Garberville
Branch Sale, the Texas Branch Sale, the sales of certain branches by Cal Fed or
the issuance of the 9 1/8% Senior Subordinated Notes because such effect is not
significant. The pro forma results are not necessarily indicative of the results
which would have actually been obtained if the Cal Fed Acquisition and the
issuances of the REIT Preferred Stock and the 10 5/8% Notes had been consummated
in the past nor do they project the results of operations in any future period.
F-14
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
GSAC Acquisition
On September 5, 1997, the Bank entered into an agreement with Gulf States
Acceptance Company, a Delaware limited partnership ("GSAC") and its general
partner, Gulf States Financial Services, a Texas corporation, pursuant to which
Auto One will acquire 100% of the partnership interests in GSAC and GSAC will be
liquidated and its assets and liabilities will be transferred to Auto One (the
"GSAC Acquisition"). The aggregate consideration to be paid in connection with
the GSAC Acquisition is approximately $22.5 million and a 20% interest in the
common stock of Auto One. This transaction closed on February 4, 1998. See
note 36 "Subsequent Events" for further discussion.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FN Holdings conform to generally
accepted accounting principles and general practices within the savings and loan
industry. The following summarizes the more significant of these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of FN Holdings, the Bank and the Bank's wholly-owned subsidiaries
not subject to the Assistance Agreement (as defined herein). Earnings per
share data is not presented due to the limited ownership of the Company.
All significant intercompany accounts and transactions have been
eliminated.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks, and other short-term investment securities with
original maturities of three months or less. Savings and loan associations
are required by the Federal Reserve System to maintain non-interest bearing
cash reserves equal to a percentage of certain deposits. The reserve
balance for California Federal at December 31, 1997 was $51.0 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. FN
Holdings classifies debt and equity securities, including mortgage-backed
securities, into one of three categories: held to maturity, available for
sale or trading securities. Securities held to maturity represent
securities which management has the positive intent and ability to hold to
maturity and are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in income. All other securities are classified as available
for sale and are carried at fair value, with unrealized holding gains and
losses, net of tax, reported as a separate component of stockholders'
equity until realized. Should an other than temporary decline in the fair
value of a security classified as held to maturity or available for sale
occur, the carrying value of such security would be written down to fair
value by a charge to operations. Realized gains or losses on securities
available for sale are computed on a specific identification basis and are
accounted for on a trade-date basis.
F-15
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate basis. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan origination fees
and purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method over the remaining period the
loans are expected to be outstanding. Discounts or premiums on consumer and
other loans are recognized over the lives of the loans using the interest
method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms
of these mortgages adjust on a periodic basis in accordance with various
published indices. The majority of these adjustable-rate mortgages have
terms which limit the amount of interest rate adjustment that can occur
each year and over the life of the mortgage. During periods of limited
payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See note 32.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on such factors as the
Company's past loan loss experience, delinquency trends, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is
subjective and may be adjusted in the future depending on changes in
economic conditions or other factors. Additionally, regulatory authorities,
as an integral part of their regular examination process, review the Bank's
allowance for estimated losses on a periodic basis. These authorities may
require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established, based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received.
When, in management's judgment, the borrower's ability to make periodic
interest and principal payments resumes, the loan is returned to accrual
status.
(f) Auto One Loans
Since the consummation of the Auto One Acquisition, California Federal
has purchased sub-prime auto financing contracts from an established dealer
network throughout the United States. Any premium or discount is amortized
using the interest method over the estimated lives of the loans. The
allowance for estimated losses is regularly assessed by management, and
such allowances are maintained on a static pool basis.
F-16
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) Impaired Loans
The Company considers a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due (i.e., both principal
and interest) according to the contractual terms of the loan agreement. Any
insignificant delay (i.e., 60 days or less) or insignificant shortfall in
amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing
loans which exhibit, among other characteristics, high loan-to-value
ratios, low debt-coverage ratios, or other indications that the borrowers
are experiencing increased levels of financial difficulty. The Company
bases the measurement of collateral-dependent impaired loans on the fair
value of the loan's collateral. The amount, if any, by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
recognized by recording a valuation allowance.
The measurement of impairment may be based on (i) the present value of
the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price
of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all single-family loans, and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the workout process.
Cash receipts on impaired loans not performing according to
contractual terms are generally used to reduce the carrying value of the
loan, unless the Company believes it will recover the remaining principal
balance of the loan. Impairment losses are included in the allowance for
loan losses through a charge to provision for loan losses. Adjustments to
impairment losses due to changes in the fair value of collateral of
impaired loans are included in provision for loan losses. Upon disposition
of an impaired loan, loss of principal, if any, is recorded through a
charge-off to the allowance for loan losses.
(h) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs,
are deferred and amortized to interest income using the interest method
over the contractual term of the loans, adjusted for actual loan prepayment
experience. Unamortized fees on loans sold or paid in full are recognized
as income. Adjustable-rate loans with lower initial interest rates during
the introductory period result in the amortization of a substantial portion
of the net deferred fee during the introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Other loan fees and charges, which represent income from the
prepayment of loans, delinquent payment charges, and miscellaneous loan
services, are recognized as income when collected.
(i) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold
improvements are stated at cost, less accumulated depreciation and
amortization. Premises, equipment and leasehold improvements are
depreciated or amortized on a straight-line basis over the lesser of the
lease term or the estimated useful
F-17
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
lives of the various classes of assets. Maintenance and repairs on premises
and equipment are charged to expense in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at
fair value. In the case of leased premises that are vacated by the Company,
a liability is recorded representing the difference between the net present
value of future lease payments and holding costs and the net present value
of anticipated sublease income, if any, for the remaining term of the
lease.
(j) Foreclosed Real Estate
Real estate acquired through foreclosure is initially recorded at fair
value less estimated disposal costs at the time of foreclosure. Subsequent
to foreclosure, the Company charges current earnings with a provision for
estimated losses when the carrying value of the collateral property exceeds
its fair value. Gains or losses on the sale of real estate are recognized
upon disposition of the property. Carrying costs such as maintenance and
property taxes are expensed as incurred.
(k) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over
fair value of net assets acquired in business combinations accounted for as
a purchase, are amortized on a straight-line basis over the expected period
to be benefited of 15 years. The Company periodically reviews the
operations of the businesses acquired to determine that income from
operations continues to support the recoverability of its intangible assets
and the amortization periods used.
(l) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and
acquires mortgage servicing rights by purchasing or originating mortgage
loans and selling those loans with servicing rights retained. Generally,
purchased mortgage servicing rights are capitalized at the cost to acquire
the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the relative fair value of the servicing right to the
fair value of the loan and the servicing right and are carried at the lower
of the capitalized amount, net of accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to
the mortgage servicing right based on its fair value. To determine the fair
value of mortgage servicing rights, the Company uses market prices for
comparable mortgage servicing contracts, when available, or alternatively
uses a valuation model that calculates the present value of future net
servicing income. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect
changes in prepayment rates and other estimates. A decline in long-term
interest rates generally results in an acceleration in mortgage loan
prepayments.
The Company measures the impairment of servicing rights based on the
difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all
mortgage servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. A valuation
allowance is established for any excess of amortized cost over the current
fair value, by risk stratification, by a charge to income.
F-18
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company employs hedging techniques through the use of interest
rate floor contracts and principal-only swap agreements to reduce the
sensitivity of its earnings and value of its servicing rights to declining
interest rates and borrower prepayments as further discussed in note 17.
The Company uses hedge accounting because mortgage servicing rights expose
the Company to interest rate risk and at the inception and throughout the
hedge period, high correlation of changes in the market value of the hedge
instruments and the fair value of the mortgage servicing rights are
probable so that the results of the hedge instruments will substantially
offset the effects of interest rate changes on the mortgage servicing
rights. If these requirements are not met, the hedge instruments are
considered speculative and are marked to market with changes in market
value reflected in current earnings.
The premium paid by the Company on the interest rate floor contracts
is amortized based on the option decay rate. Amounts receivable or payable
under the principal-only swap agreements and amounts receivable under the
interest rate floor contracts or terminated hedges are included in the
carrying value of mortgage servicing rights and are amortized as part of
the mortgage servicing rights basis.
(m) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights.
Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold. Deferred origination fees and expenses, net of
commitment fees paid in connection with the sale of the loans, are
recognized at the time of sale in the gain or loss determination.
(n) Servicing Fee Income
Servicing fee income is recorded for fees earned for servicing
mortgage loans under servicing agreements with Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. The amortization of mortgage servicing
rights is netted against servicing fee income.
(o) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a
means of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the hedged
liability (FHLB advances). Gains and losses on early termination of these
agreements are included in the carrying amount of the related liability and
amortized over the remaining term of the liability.
(p) Income Taxes
For federal income tax purposes, FN Holdings is a member of the Mafco
Holdings Inc. ("Mafco," the indirect parent of FN Holdings) affiliated
group, and accordingly, its federal taxable income or loss will be included
in the consolidated federal income tax return filed by Mafco. FN Holdings
may also be included in certain state and local income tax returns of Mafco
or its subsidiaries. FN Holdings' tax sharing agreement with Mafco provides
that income taxes will be based on the separate results of FN Holdings. The
agreement generally provides that FN Holdings will pay to Mafco amounts
equal to the taxes that FN Holdings would be required to pay if it were to
file a return separately from the affiliated group. Furthermore, the
agreement provides that FN Holdings shall be entitled to take into account
any net operating loss carryovers in determining its tax liability. The
agreement also provides that Mafco will pay FN Holdings amounts equal to
tax refunds FN Holdings would be entitled to if it had always filed a
separate company tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax
F-19
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(q) Extraordinary Gain or Loss from Extinguishment of Debt
During 1996, California Federal repurchased $44 million aggregate
principal amount of the $50 million in 11.20% Senior Notes (as defined
herein) assumed in the SFFed Acquisition resulting in an extraordinary loss
of approximately $1.6 million, net of income taxes, on the early
extinguishment of debt. During 1995, California Federal prepaid
$250 million in FHLB advances resulting in an extraordinary gain of
approximately $2.0 million, net of income taxes, on the early
extinguishment of such borrowings.
(r) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and (iii) the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(s) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(t) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year
the effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of
paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement,
dollar-roll, securities lending and similar transactions. SFAS No. 127
provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if
it is not possible to determine whether a transaction occurring during
calendar-year 1997 is part of a repurchase agreement, dollar-roll,
securities lending, or similar transaction, then paragraphs 9-12 of SFAS
No. 125 should be applied to that transfer. The Company adopted SFAS
No. 125, as amended by SFAS No. 127, on January 1, 1997. Such adoption did
not have a material impact on the Company's consolidated financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
It does not require a specific format for that financial statement but
requires that an enterprise display an amount representing total
comprehensive
F-20
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
income for the period in that financial statement. This statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement has no impact on the
financial condition or results of operations of the Company, but does
impact the Company's disclosure requirements. The Company adopted this
statement effective October 1, 1997.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information
about major customers. It amends Statement of Financial Accounting
Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries," to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative
informative for earlier years is to be restated. This statement need not be
applied to interim financial statements in the initial year of application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods
in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will
require changes in the Company's disclosure.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
was $1,402,800, $812,547, and $702,254, respectively.
During the year ended December 31, 1997, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $179.6 million, $19.4 million of loans made to facilitate sales of
real estate owned, and the issuance of additional preferred stock through
preferred stock dividends of $2.2 million. In addition, $50.8 million was
transferred from loans held for sale to mortgage-backed securities classified as
trading securities upon the securitization of certain of the Bank's qualifying
single-family loans.
During the year ended December 31, 1996, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $109.8 million, $13.0 million of loans made to facilitate sales of
real estate owned, the reclassification of certain consumer loans from loans
held for sale (at lower of cost or market) to loans receivable totalling
$27.7 million, a reduction in loans receivable of $46.8 million through the
redemption of and dividends on class C common stock in amounts totalling
$44.8 million and $.2 million, respectively, and the issuance of additional
preferred stock through preferred stock dividends of $.8 million.
During the year ended December 31, 1995, the Financial Accounting Standards
Board issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the "Special
Report"). The Special Report provided all entities an opportunity to reassess
their ability and intent to hold securities to maturity and allowed a one time
reclassification of securities from held-to-maturity to available-for-sale
without "tainting" the remaining held-to-maturity securities. On December 29,
1995, the Company reclassified $1.5 billion and $231.8 million in carrying value
of mortgage-backed securities and U.S. government and agency securities,
respectively, from the respective held-to-maturity categories to securities
available for sale. In addition, other noncash activity included $326.0 million
of consumer loans reclassified from loans receivable to loans held for sale,
transfers from loans receivable to foreclosed real estate of $79.6 million, and
$376.3 million transferred from loans receivable to mortgage-backed securities
held to maturity representing the securitization of certain of the Bank's
qualifying single-family loans.
F-21
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities................... $ -- $ -- $ -- $ -- $ --
U.S. government and agency obligations ........ 812,716 957 (588) 369 813,085
--------- ---- ------ ---- --------
Total..................................... $ 812,716 $957 $ (588) 369 $813,085
--------- ---- ------ --------
--------- ---- ------ --------
Estimated tax effect........................... (47)
----
Net unrealized holding gain in
stockholders' equity.................... $322
----
----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Marketable equity securities................... $ 27,034 $ 34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency obligations ........ 480,317 936 (1,222) (286) 480,031
--------- -------- -------- -------- --------
Total..................................... $ 507,351 $ 35,890 $ (1,222) 34,668 $542,019
--------- -------- -------- --------
--------- -------- -------- --------
Estimated tax effect........................... (3,466)
--------
Net unrealized holding gain in
stockholders' equity.................... $ 31,202
--------
--------
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of securities available for sale with related
maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
--------- --------- --------
<S> <C> <C> <C>
Marketable equity securities......................................... $ -- $ -- --%
U.S. government and agency obligations:
Maturing within 1 year............................................. 107,771 107,680 5.92
Maturing after 1 year but within 5 years........................... 704,945 705,405 6.52
Maturing after 5 years through 10 years............................ -- -- --
--------- --------- ------
Total........................................................... $ 812,716 $ 813,085 6.44%
--------- --------- ------
--------- --------- ------
</TABLE>
At December 31, 1997, U.S. government and agency obligations available for
sale of $78.2 million were pledged as collateral for various obligations.
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of Affiliated Computer
Services ("ACS"), representing 2.24% of the voting power with a cost basis of
$27 million. The ACS stock represents the only marketable equity security
classified as available for sale at December 31, 1996. Pursuant to the terms of
a settlement agreement dated June 17, 1991 between the Bank, ACS, and the
Federal Deposit Insurance Corporation ("FDIC"), the FDIC was entitled to share
in a defined portion of the proceeds from the sale of the stock, which, at
December 31, 1995, approximated $34.5 million, and which was recorded in other
liabilities. On June 28, 1996, the Bank sold 2,000,000 shares of its investment
in common stock of ACS for gross proceeds totalling $92.3 million from which it
satisfied its full
F-22
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES AVAILABLE FOR SALE--(CONTINUED)
obligation to the FDIC. A pre-tax gain of $40.4 million resulted from this
transaction and was recorded as a gain on sale of assets in the 1996
consolidated statement of income. The Bank's remaining shares of ACS stock were
sold in October 1997, resulting in a pre-tax gain of approximately
$25.0 million.
7. SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996 securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Municipal securities.................................. $ 170 $ -- $ -- $ 170
Commercial paper...................................... 58,129 -- -- 58,129
------- ----- ----- --------
Total............................................... $58,299 $ -- $ -- $ 58,299
------- ----- ----- --------
------- ----- ----- --------
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Municipal securities.................................. $ 190 $ -- $ -- $ 190
U.S. government and agency obligations................ 3,800 15 -- 3,815
Commercial paper...................................... 282 -- -- 282
------- ----- ----- --------
Total............................................... $ 4,272 $ 15 $ -- $ 4,287
------- ----- ----- --------
------- ----- ----- --------
</TABLE>
The weighted average stated interest rates on securities held to maturity
were 5.32% and 6.85% at December 31, 1997 and 1996, respectively.
The following represents a summary of the carrying values (amortized cost),
estimated fair values, and weighted average yield of securities held to maturity
with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
--------- --------- --------
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year.............................................. $ $ -- --%
Maturing after 1 year but within 5 years............................ -- -- --
Maturing after 10 years............................................. 170 170 8.25
Commercial paper:
Maturing within 1 year.............................................. 58,129 58,129 5.31
------- ------- ----
Total............................................................ $58,299 $58,299 5.32%
------- ------- ----
------- ------- ----
</TABLE>
F-23
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GNMA................................... $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA................................... 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC.................................. 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS.............................. 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage obligations.... 606,965 2,698 (1,868) 830 607,795
---------- -------- -------- -------- ----------
Total................................ $5,036,653 $ 48,395 $ (8,450) 39,945 $5,076,598
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect................... (5,105)
--------
Net unrealized holding gain in
stockholders' equity.............. $ 34,840
--------
--------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GNMA................................... $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA................................... 523,894 5,113 (5,042) 71 523,965
FHLMC.................................. 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage obligations.... 364,675 497 (1,244) (747) 363,928
---------- -------- -------- -------- ----------
Total................................ $1,581,966 $ 23,377 $ (6,691) 16,686 $1,598,652
---------- -------- -------- ----------
---------- -------- -------- ----------
Estimated tax effect................... (1,669)
--------
Net unrealized holding gain in
stockholders' equity.............. $ 15,017
--------
--------
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities available for sale
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
---------- ---------- --------
<S> <C> <C> <C>
GNMA............................................................. $ 249,023 $ 251,733 7.09%
FNMA............................................................. 2,408,173 2,419,769 6.99
FHLMC............................................................ 1,197,867 1,217,416 7.49
Other MBS........................................................ 574,625 579,885 6.93
Collateralized mortgage obligations.............................. 606,965 607,795 6.80
---------- ---------- ----
Total.......................................................... $5,036,653 $5,076,598 7.08%
---------- ---------- ----
---------- ---------- ----
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
available for sale were 7.16% and 7.06% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities
available for sale included securities totalling $1.4 billion and
$53.0 million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from the Bank's, Old California Federal's and San
Francisco Federal's loan portfolios.
F-24
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE--(CONTINUED)
At December 31, 1997 and 1996, mortgage-backed securities available for
sale included $4.6 billion and $1.1 billion respectively, of variable-rate
securities.
At December 31, 1997, mortgage-backed securities available for sale of
$4.1 billion were pledged as collateral for various obligations as further
discussed in notes 19, 20 and 32. Further, at December 31, 1997, mortgage-backed
securities available for sale with a carrying value of $28.8 million were
pledged to FNMA associated with the sales of certain securitized multi-family
loans.
9. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996, mortgage-backed securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC.............................................. $ 317,766 $ 15,364 $ -- $ 333,130
FNMA............................................... 1,017,835 20,048 -- 1,037,883
Other mortgage-backed securities................... 2,276 -- -- 2,276
---------- -------- ---- ----------
Total......................................... $1,337,877 $ 35,412 $ -- $1,373,289
---------- -------- ---- ----------
---------- -------- ---- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC.............................................. $ 405,488 $ 14,811 $ -- $ 420,299
FNMA............................................... 1,214,002 17,444 (70) 1,231,376
Other mortgage-backed securities................... 2,172 -- -- 2,172
---------- -------- ---- ----------
Total......................................... $1,621,662 $ 32,255 $(70) $1,653,847
---------- -------- ---- ----------
---------- -------- ---- ----------
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities held to maturity
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
---------- ---------- --------
<S> <C> <C> <C>
FHLMC............................................................ $ 317,766 $ 333,130 8.17%
FNMA............................................................. 1,017,835 1,037,883 7.03
Other mortgage-backed securities................................. 2,276 2,276 8.27
---------- ---------- ----
Total....................................................... $1,337,877 $1,373,289 7.30%
---------- ---------- ----
---------- ---------- ----
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 7.33% and 7.27% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities held to
maturity included variable rate securities totalling $1.3 billion and
$1.6 billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's, Old California
Federal's and San Francisco Federal's loan portfolios with full recourse to the
Bank.
At December 31, 1997, mortgage-backed securities held to maturity of
$1.3 billion were pledged as collateral for various obligations as further
discussed in notes 19, 20 and 32.
F-25
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LOANS RECEIVABLE, NET
At December 31, 1997 and 1996, loans receivable, net, included the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Real estate loans:
1-4 unit residential................................................... $14,071,258 $ 6,117,974
5+ unit residential.................................................... 3,035,195 2,163,992
Commercial............................................................. 2,145,634 1,977,732
Construction........................................................... 3,737 11,242
Land................................................................... 4,766 11,074
----------- -----------
19,260,590 10,282,014
Undisbursed loan funds................................................. (2,714) (4,669)
----------- -----------
Total real estate loans............................................. 19,257,876 10,277,345
----------- -----------
Equity-line loans...................................................... 354,966 243,011
Other consumer loans................................................... 320,599 55,016
Commercial loans....................................................... 8,370 29,651
----------- -----------
Total consumer and other loans...................................... 683,935 327,678
----------- -----------
Total loans receivable.............................................. 19,941,811 10,605,023
Deferred fees and unearned premiums.................................... 47,219 4,740
Allowance for loan losses.............................................. (439,233) (246,556)
Purchase accounting discounts, net..................................... (125,387) (150,624)
----------- -----------
Total loans receivable, net......................................... $19,424,410 $10,212,583
----------- -----------
----------- -----------
</TABLE>
The Bank's lending activities are principally conducted in California, New
York, Texas and Florida.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances as further discussed in note 20.
As a result of the FN and the Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 1997 totalled $2.8 billion. No loans
were sold with recourse during the years ended December 31, 1997, 1996 and 1995.
The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (other liabilities) for estimated losses related
to these potential obligations. At December 31, 1997, such liability totalled
$52.4 million.
The following table indicates the carrying value of loans which have been
placed on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
1-4 unit residential.......................................................... $164,923 $146,283
5+ unit residential........................................................... 12,128 12,713
Commercial and other.......................................................... 6,240 9,406
Construction.................................................................. 1,560 788
-------- --------
Total real estate.......................................................... 184,851 169,190
Non-real estate............................................................... 7,344 3,032
-------- --------
Total nonaccrual loans..................................................... $192,195 $172,222
-------- --------
-------- --------
</TABLE>
F-26
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LOANS RECEIVABLE, NET--(CONTINUED)
The following table indicates the carrying value of loans classified as
troubled debt restructuring, as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
1-4 unit residential.......................................................... $ 2,471 $ 3,113
5+ unit residential........................................................... 6,718 55,642
Commercial and other real estate.............................................. 26,296 28,754
-------- --------
Total restructured loans................................................... $ 35,485 $ 87,509
-------- --------
-------- --------
</TABLE>
At December 31, 1997, the Company's loan portfolio totalling $19.9 billion
is concentrated in California. The financial condition of the Company is subject
to general economic conditions such as the volatility of interest rates and real
estate market conditions and, in particular, to conditions in the California
residential real estate market. Any downturn in the economy generally, and in
California in particular, could reduce real estate values. An increase in the
general level of interest rates may adversely affect the ability of certain
borrowers to pay the interest on and principal of their obligations.
Accordingly, in the event interest rates rise or real estate market values
decline, particularly in California, the Company and the Bank may find it
difficult to maintain its asset quality and may require additional allowances
for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized") and
total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Restructured loans............................................ $ 3,532 $ 3,583 $ 12,977 $13,430
Nonaccrual loans.............................................. 6,779 15,880 4,860 13,752
-------- ------- -------- -------
$ 10,311 $19,463 $ 17,837 $27,182
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
At December 31, 1997 and 1996, the Bank and its wholly-owned subsidiary,
FGB Realty Advisors, Inc., managed principally non-performing loan and asset
portfolios totalling $1.2 million and $1.0 billion, respectively, for investors.
During 1997, substantially all the asset management and disposition contracts
held by FGB Realty Advisors, Inc. have expired, and operations of the subsidiary
have substantially ceased. Revenues related to such activities are included in
management fees in the accompanying statements of income.
Activity in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance--beginning of year......................................... $246,556 $210,484 $202,780
Purchases, net..................................................... 164,378 38,486 --
Provision for loan losses.......................................... 79,800 39,600 37,000
Charge-offs........................................................ (56,124) (44,785) (32,344)
Recoveries......................................................... 4,623 2,771 3,048
-------- -------- --------
Balance--end of year............................................... $439,233 $246,556 $210,484
-------- -------- --------
-------- -------- --------
</TABLE>
FN Holdings loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bore interest at the rate of 10.5% over the prevailing yield to
maturity of the five-year United States treasury note, and was an unsecured
subordinated obligation of the borrower guaranteed by certain other affiliates
of FN Holdings, which obligation to FN Holdings was evidenced by a promissory
note (the "Promissory Note"). Management believes that the terms and conditions
of such loan were at least as favorable to FN Holdings as might have been
obtained
F-27
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LOANS RECEIVABLE, NET--(CONTINUED)
in a similar transaction with an unaffiliated party. On May 15, 1996, FN
Holdings distributed the Promissory Note to Parent Holdings as a partial
redemption of and dividends on class C common stock.
During 1996 FN Holdings loaned approximately $19 million to an affiliate.
Such loan accrued interest at the rate of 14%, and was an unsecured subordinated
obligation of the borrower, which obligation to FN Holdings was evidenced by a
promissory note. Management believes that the terms and conditions of such loan
were at least as favorable to FN Holdings as might have been obtained in a
similar transaction with an unaffiliated party. On January 3, 1997, such loan,
together with the accrued interest thereon, was repaid.
11. IMPAIRED LOANS
At December 31, 1997 and 1996, the carrying value of loans that are
considered to be impaired totalled $110.1 million and $102.1 million
respectively (of which $18.6 million and $22.6 million, respectively, were on
nonaccrual status). The average recorded investment in impaired loans during the
years ended December 31, 1997, 1996 and 1995 was approximately $112.9 million,
$103.7 million and $125.5 million, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company recognized interest income on
those impaired loans of $10.5 million, $10.7 million and $12.9 million,
respectively, which included $.6 million, $.3 million and $.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority of
impaired loans, have not been established. Generally, the carrying value of such
loans, net of purchase accounting adjustments, does not exceed the loans'
related collateral values less estimated selling costs. There have been no
significant multi-family or commercial real estate loans originated since
October 1, 1994.
12. PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FNB had with Granite Management
and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford Motor, whereby
Old FNB had the option to sell ("put") to Granite, on a quarterly basis, up to
approximately $500 million of certain assets, primarily non-performing
commercial real estate loans and residential mortgage loans with an original
principal balance greater than $250,000. The Put Agreement expired on
November 30, 1996. The aggregate purchase price of assets "put" to Granite
equals $500 million, including assets "put" to Granite by Old FNB through
October 3, 1994. Granite purchased these assets for an amount equal to the
assets' outstanding principal balance, accrued interest and certain other
expenses.
13. RECEIVABLES FROM THE FSLIC/RF--COVERED ASSETS
As part of First Gibraltar's 1988 acquisition of the five Closed
Associations, it entered into an assistance agreement (the "Assistance
Agreement") with the FSLIC. Assets subject to the Assistance Agreement were
known as "Covered Assets." The Assistance Agreement generally provided for
guaranteed yield amounts to be paid on the book value of the Covered Assets, and
paid the Bank for 90% of the losses incurred upon disposition of the Covered
Assets ("Capital Loss Coverage").
In June 1995, the FDIC, as manager of the FSLIC Resolution Fund
("FSLIC/RF"), as successor to the FSLIC, exercised its rights under the
Assistance Agreement to purchase substantially all of the remaining Covered
Assets as of June 1, 1995 at the fair market value of such assets and further
purchased additional assets from the remaining Covered Asset portfolio in
September 1995 (the "FDIC Purchase"). Any losses sustained by the Bank as a
result of the FDIC Purchase were reimbursed under the Capital Loss Coverage
provision of the Assistance Agreement. Proceeds from this transaction were
reinvested in the normal course of business.
On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of
$39 million and, among other things, assumed the responsibility for the
disposition of several
F-28
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RECEIVABLES FROM THE FSLIC/RF--COVERED ASSETS--(CONTINUED)
litigation matters involving Covered Assets which had been retained by the Bank
following the FDIC Purchase. In connection with the agreement, a pre-tax gain of
$25.6 million was recorded.
14. INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 1997 and 1996. At December 31,
1997, the Bank's investment in FHLB stock was pledged as collateral for FHLB
advances as further discussed in note 20.
15. OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net, at December 31, 1997 and 1996 is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
LIVES AT
1997 1996 DECEMBER 31, 1997
-------- -------- -----------------
<S> <C> <C> <C>
Land........................................................ $ 29,942 $ 19,084 --
Buildings and leasehold improvements........................ 74,141 40,103 25
Furniture and equipment..................................... 85,519 50,559 6
Construction in progress.................................... 5,253 10,601 --
-------- --------
194,855 120,347
Accumulated depreciation and amortization................... (35,506) (20,183)
-------- --------
Total office premises and equipment, net.................... $159,349 $100,164
-------- --------
-------- --------
</TABLE>
Depreciation and amortization expense related to office premises and
equipment for the years ended December 31, 1997, 1996 and 1995 totalled
$16.8 million, $10.9 million and $8.9 million, respectively.
California Federal rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2029. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1997, 1996 and 1995 totalled
$29.6 million, $19.3 million and $22.6 million, respectively. Rental income from
subleasing agreements for the years ended December 31, 1997, 1996 and 1995
totalled $2.0 million, $1.6 million and $2.2 million, respectively. At
December 31, 1997, the projected minimum rental commitments, net of sublease
agreements, under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
CASH EFFECT ON
YEAR ENDED COMMITMENT NET INCOME
- ---------- ---------- ----------
<S> <C> <C>
1998......................................................................... $ 31,218 $ 20,973
1999......................................................................... 31,085 18,602
2000......................................................................... 30,264 15,970
2001......................................................................... 27,914 10,492
2002......................................................................... 24,471 6,714
Thereafter................................................................... 116,193 24,480
-------- --------
Total................................................................... $261,145 $ 97,231
-------- --------
-------- --------
</TABLE>
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments.
F-29
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents and securities........................................ $ 10,832 $ 8,399
Mortgage-backed securities...................................................... 43,700 24,110
Loans receivable and loans held for sale........................................ 133,671 73,525
-------- --------
Total accrued interest receivable............................................. $188,203 $106,034
-------- --------
-------- --------
</TABLE>
17. MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
MSR
MSR HEDGE TOTAL
-------- ------ --------
<S> <C> <C> <C>
Balance at December 31, 1994.................................................... $ 86,840 $ -- $ 86,840
Additions from Maryland Acquisition........................................... 76,369 -- 76,369
Additions from Lomas 1995 Purchase............................................ 93,362 -- 93,362
Additions--other.............................................................. 18,676 -- 18,676
Amortization.................................................................. (33,892) -- (33,892)
-------- ------ --------
Balance at December 31, 1995.................................................... 241,355 -- 241,355
Additions from Lomas 1996 Purchase............................................ 105,029 -- 105,029
Additions from SFFed Acquisition.............................................. 16,000 -- 16,000
Additions from Home Federal Acquisition....................................... 3,060 -- 3,060
Originated servicing.......................................................... 81,028 -- 81,028
Additions--other.............................................................. 64,421 -- 64,421
Premiums paid for interest rate floor contracts............................... -- 3,509 3,509
Payments received under interest rate floor contracts......................... -- (13) (13)
Net paid under principal-only swap agreements................................. -- 284 284
Amortization.................................................................. (90,706) (275) (90,981)
-------- ------ --------
Balance at December 31, 1996.................................................... 420,187 3,505 423,692
Additions from Cal Fed Acquisition............................................ 44,497 -- 44,497
Additions from Weyerhaeuser Purchase.......................................... 41,949 -- 41,949
Originated servicing.......................................................... 120,465 -- 120,465
Additions--other.............................................................. 27,939 -- 27,939
Sales--Servicing Sale......................................................... (16,792) -- (16,792)
Sales--other.................................................................. (4) -- (4)
Premiums paid for interest rate floor contracts............................... -- 7,088 7,088
Payments received under interest rate floor contracts......................... -- (471) (471)
Net received under principal-only swap agreements............................. -- (1,378) (1,378)
Amortization.................................................................. (106,972) (3,310) (110,282)
-------- ------ --------
Balance at December 31, 1997.................................................... $531,269 $5,434 $536,703
-------- ------ --------
-------- ------ --------
</TABLE>
At December 31, 1997, 1996 and 1995, the outstanding balances of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors by FNMC totalled $46.6 billion,
$43.1 billion and $28.6 billion, respectively. In addition, FNMC had
$6.2 billion, $5.7 billion and $3.0 billion of master servicing at December 31,
1997, 1996 and 1995, respectively.
F-30
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. MORTGAGE SERVICING RIGHTS--(CONTINUED)
The estimated fair value of the MSRs was $647 million and $529 million at
December 31, 1997 and 1996, respectively. The estimated market value of interest
rate floor contracts and swaps designated as hedges against MSRs at
December 31, 1997 was $18.0 million and $13.5 million, respectively. At
December 31, 1997 and 1996, no allowance for impairment of the MSRs was
necessary.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights and
generally will result in a reduction of the market value of the mortgage
servicing rights and in the Company's servicing fee income. To reduce the
sensitivity of its earnings to interest rate and market value fluctuations, the
Company hedged the change in value of its servicing rights based on changes in
interest rates.
At December 31, 1997, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002. The
Company paid counterparties a premium in exchange for cash payments in the event
that the 10-year Constant Maturity Treasury rate falls below the strike prices.
At December 31, 1997, the notional amount of the interest rate floors was
$970 million and the strike prices were between 5.0% and 6.5%. In addition, the
Company, through FNMC, entered into principal-only swap agreements with a
notional amount of $99 million.
At December 31, 1997 and 1996, servicing advances and other receivables
related to 1-4 unit residential loan servicing, net of valuation allowances of
$43.2 million and $12.7 million in 1997 and 1996, respectively, (included in
other assets) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Servicing advances.............................................................. $160,266 $152,465
Checks in process of collection................................................. 157 55,601
Other........................................................................... 6,555 23,704
-------- --------
$166,978 $231,770
-------- --------
-------- --------
</TABLE>
18. DEPOSITS
A summary of deposits carrying values at December 31, 1997 and 1996 follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Passbook accounts.......................................................... $ 2,161,967 $ 840,685
Demand deposits:
Interest-bearing......................................................... 1,149,294 509,788
Noninterest-bearing...................................................... 1,179,344 729,648
Money market deposit accounts.............................................. 1,269,540 881,285
Term accounts.............................................................. 10,389,507 5,502,902
----------- ----------
16,149,652 8,464,308
----------- ----------
Accrued interest payable................................................... 51,538 31,901
Purchase accounting adjustments............................................ 1,415 5,674
----------- ----------
Total deposits............................................................. $16,202,605 $8,501,883
----------- ----------
----------- ----------
</TABLE>
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $2 billion and
$868 million at December 31, 1997 and 1996, respectively. Brokered certificates
of deposit totalling $363 million and $470 million were included in deposits at
December 31, 1997 and 1996, respectively. Total deposits at December 31, 1997
and 1996 include escrow balances for loans serviced for others of $702 million
and $550 million, respectively.
F-31
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. DEPOSITS--(CONTINUED)
A summary of interest expense by deposit category for the years ended
December 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Passbook accounts.................................................. $ 68,408 $ 31,418 $ 14,668
Interest-bearing demand deposits................................... 12,331 5,398 6,953
Money market deposit accounts...................................... 50,152 32,073 50,847
Term accounts...................................................... 616,094 350,285 374,891
-------- -------- --------
$746,985 $419,174 $447,359
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1997, term accounts had scheduled maturities as follows (in
thousands):
<TABLE>
<S> <C>
1998................................................................................ $ 7,794,543
1999................................................................................ 2,065,788
2000................................................................................ 219,650
2001................................................................................ 131,782
2002................................................................................ 166,384
Thereafter.......................................................................... 11,360
-------------
$ 10,389,507
-------------
-------------
</TABLE>
19. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1997 and 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED MARKET INTEREST
VALUE(I) VALUE AMOUNT RATE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Maturing within 30 days............................. $ -- $ -- $ -- --%
Maturing 30 days to 90 days......................... 1,848,385 1,859,169 1,774,950 5.75
Maturing 90 days to 1 year.......................... 62,909 63,532 53,920 6.59
Maturing over 1 year................................ -- -- -- --
---------- ---------- ---------- ----
Total(ii)......................................... 1,911,294 1,922,701 1,828,870
Purchase accounting adjustment...................... (424) -- 99
Accrued interest payable............................ -- -- 13,473
---------- ---------- ----------
$1,910,870 $1,922,701 $1,842,442
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-32
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED MARKET INTEREST
VALUE(I) VALUE AMOUNT RATE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Maturing within 30 days............................. $ 626,260 $ 633,615 $ 609,949 5.61%
Maturing 30 days to 90 days......................... 573,904 585,767 550,409 5.48
Maturing 90 days to 1 year.......................... 342,531 345,599 350,000 6.97
Maturing over 1 year................................ 67,845 68,203 53,920 6.59
---------- ---------- ----------
Total (ii)........................................ 1,610,540 1,633,184 1,564,278
Purchase accounting adjustment...................... 2,578 -- 755
Accrued interest payable............................ -- -- 18,354
---------- ---------- ----------
$1,613,118 $1,633,184 $1,583,387
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(i) Recorded value includes accrued interest at December 31, 1997 and 1996. In
addition, the recorded values at December 31, 1997 and 1996 include
adjustments for the unrealized gain or loss on mortgage-backed securities
available for sale.
(ii) Total mortgage-backed securities collateral at December 31, 1997 and 1996
includes $.6 billion and $1.1 billion, respectively, in outstanding
balances of loans securitized with full recourse to the Bank. The market
value of such collateral was $.6 billion and $1.1 billion at December 31,
1997 and 1996, respectively.
At December 31, 1997 and 1996, these agreements had weighted average stated
interest rates of 5.78% and 5.90%, respectively. The underlying securities were
delivered to, and are being held under the control of, third party securities
dealers. These dealers may have loaned the securities to other parties in the
normal course of their operations, but all agreements require the dealers to
resell to California Federal the identical securities at the maturities of the
agreements. The average daily balance of securities sold under agreements to
repurchase was $2.5 billion and $2.1 billion during 1997 and 1996, respectively,
and the maximum amount outstanding at any month-end during these periods was
$3.1 billion and $2.7 billion, respectively.
At December 31, 1997, securities sold under agreements to repurchase were
collateralized with $1.9 billion of mortgage-backed securities.
F-33
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. BORROWINGS
Borrowings at December 31, 1997 and 1996 are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
----------- ------- ---------- -------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from FHLB........................ $ 5,447,168 5.88% $3,564,953 5.93%
Variable-rate borrowings from FHLB..................... 4,074,182 5.95 854,486 5.67
10% Subordinated debentures due 2006................... 92,100 10.00 92,100 10.00
11.20% Senior notes.................................... 6,000 11.20 6,000 11.20
12 1/4% Senior notes................................... 200,000 12.25 200,000 12.25
9 1/8% Senior subordinated notes....................... 140,000 9.13 140,000 9.13
10 5/8% Senior subordinated notes...................... 575,000 10.63 -- --
10.668% Subordinated notes............................. 50,000 10.67 -- --
6 1/2% Convertible subordinated debentures............. 2,633 6.50 -- --
10% Subordinated debentures due 2003................... 4,299 10.00 -- --
Federal funds purchased................................ 130,000 6.50 25,000 7.50
Other borrowings....................................... 570 8.89 885 8.54
----------- ----- ---------- -----
Total borrowings..................................... 10,721,952 6.39 4,883,424 6.33
Accrued interest payable............................... 46,839 -- 20,948 --
Purchase accounting adjustments, net................... 803 -- (1,676) --
----------- ----- ---------- -----
$10,769,594 6.36% $4,902,696 6.33%
----------- ----- ---------- -----
----------- ----- ---------- -----
</TABLE>
Maturities and weighted average stated interest rates of borrowings at
December 31, 1997, not including accrued interest payable or purchase accounting
adjustments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCES MATURING AVERAGE RATES
MATURITIES DURING THE YEARS ------------------------ -------------
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ----------------------------------------------------------- ---------- ---------- ---- -----
<S> <C> <C> <C> <C>
1998....................................................... $5,263,042 $ 180,148 5.88% 7.66%
1999....................................................... 3,090,430 64 5.94 8.90
2000....................................................... 1,150,000 33 5.93 9.50
2001....................................................... 10,833 202,633 6.50 12.18
2002....................................................... 5,000 8 6.94 7.00
Thereafter................................................. 2,045 817,716 7.83 10.30
---------- ---------- ---- -----
Total...................................................... $9,521,350 $1,200,602 5.91% 10.22%
---------- ---------- ---- -----
---------- ---------- ---- -----
</TABLE>
F-34
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. BORROWINGS--(CONTINUED)
Interest expense on borrowings for the years ended December 31, 1997, 1996
and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
FHLB Advances...................................................... $443,966 $221,017 $139,051
Interest rate swap agreements...................................... (10,743) (11,532) (15,177)
10% Subordinated debentures due 2006............................... 9,210 9,210 9,210
11.20% Senior notes................................................ 672 3,641 --
12 1/4% Senior notes............................................... 24,500 24,504 24,500
9 1/8% Senior subordinated notes................................... 12,775 11,739 --
10 5/8% Senior subordinated notes.................................. 60,648 -- --
10.668% Subordinated notes......................................... 5,291 -- --
6 1/2% Convertible subordinated debentures......................... 172 -- --
10% Subordinated debentures due 2003............................... 418 -- --
Federal funds purchased............................................ 5,300 3,529 2,268
Other borrowings................................................... 434 199 1,403
Purchase accounting adjustments.................................... 629 6,039 21,244
-------- -------- --------
Total............................................................ $553,272 $268,346 $182,499
-------- -------- --------
-------- -------- --------
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Real estate loans (primarily residential)................................................ $11,183,138
Mortgage-backed securities............................................................... 3,544,108
FHLB stock............................................................................... 468,191
-----------
Total.................................................................................. $15,195,437
-----------
-----------
</TABLE>
12 1/4% Senior Notes Due 2001
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes ("12 1/4% Senior Notes"), including
$5.5 million principal amount of 12 1/4% Senior Notes to certain directors and
officers of the Bank. The notes will mature on May 15, 2001 with interest
payable semiannually on May 15 and November 15. Deferred issuance costs
associated with the 12 1/4% Senior Notes' issuance totalling $9.9 million were
recorded in other assets and are being amortized over the term of the 12 1/4%
Senior Notes.
The notes are redeemable at the option of the Company, in whole or in part,
during the 12-month period beginning May 15, 1999, at a redemption price of
106.125% plus accrued interest to the date of redemption, and thereafter at 100%
plus accrued interest. The notes are subordinated to all existing and future
liabilities, including deposits and other borrowings of the Bank, and to the
11 1/2% Preferred Stock (as defined herein).
The terms and conditions of the 12 1/4% Senior Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and make
certain investments.
9 1/8% Senior Subordinated Notes Due 2003
On January 31, 1996, the Company issued $140 million principal amount of
the 9 1/8% Senior Subordinated Notes. The 9 1/8% Senior Subordinated Notes will
mature on January 15, 2003 with interest payable semiannually on January 15 and
July 15. Deferred issuance costs associated with the issuance of the 9 1/8%
Senior Subordinated Notes totalling $7.0 million were recorded in other assets
and are being amortized over the term of the 9 1/8% Senior Subordinated Notes.
The 9 1/8% Senior Subordinated Notes are redeemable at the option of the
Company, in whole or in part, during the 12-month period beginning January 1,
2001, at a redemption price of 104.5625% of the principal
F-35
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. BORROWINGS--(CONTINUED)
amount thereof, plus accrued interest and unpaid interest to the date of
redemption, and thereafter at 100% of the principal amount thereof, plus accrued
and unpaid interest.
The 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of the Company and are subordinated in right of payment to all
existing and future senior indebtedness of the Company and future to all
subordinated debt, if any is issued. The 9 1/8% Senior Subordinated Notes are
subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables of the Company's subsidiaries, including the
Bank, and to preferred stock issued by the Bank.
The terms and conditions of the 9 1/8% Senior Subordinated Notes indenture
impose restrictions that affect, among other things, the ability of FN Holdings
to incur debt, pay dividends or make distributions, engage in a business other
than holding the common stock of the Bank and similar banking institutions, make
acquisitions, create liens, sell assets and make certain investments.
10 5/8% Senior Subordinated Notes Due 2003
In connection with the Cal Fed Acquisition, FN Holdings acquired the net
proceeds from the issuance of Golden State Escrow's 10 5/8% Notes and assumed
Golden State Escrow's obligations under the 10 5/8% Notes and indenture.
Deferred issuance costs associated with the 10 5/8% Notes of $19 million were
included in Golden State Escrow's other assets and are being amortized over the
term of the 10 5/8% Notes.
The 10 5/8% Notes are redeemable at the option of the Company, in whole or
in part, during the 12-month period beginning January 1, 2001, at a redemption
price of 105.313% plus accrued and unpaid interest to the date of redemption,
during the 12-month period beginning January 1, 2002 at a redemption price of
102.656% plus accrued and unpaid interest to the date of redemption, and
thereafter at 100% plus accrued and unpaid interest to the date of redemption.
The 10 5/8% Notes are subordinate in right of payment to all existing and
future subordinated debt, if any is issued, of FN Holdings. The 10 5/8% Notes
are subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of FN Holdings, including
California Federal and all preferred stock issued by the Bank, including the
Bank Preferred Stock (as defined herein).
The terms and conditions of the 10 5/8% Notes indenture impose restrictions
that affect, among other things, the ability of FN Holdings to incur debt, pay
dividends, make acquisitions, create liens, sell assets and make certain
investments.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, California Federal assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006"). At December 31, 1997 the aggregate
principal amount of the 10% Subordinated Debentures Due 2006 outstanding was
$92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things:
(i) a default in the payment of interest when due and such default continues for
30 days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 notify the Bank of the default and the Bank
does not cure the default within 60 days after receipt of such notice,
(iv) certain events of bankruptcy, insolvency or reorganization of the Bank,
(v) the FSLIC/RF (or a comparable entity) is appointed to act as conservator,
liquidator, receiver or other legal custodian for the Bank and (vi) a default
under other indebtedness of the Bank in excess of $10 million resulting in such
indebtedness becoming due and payable, and such default or acceleration has not
been rescinded or annulled within 60 days after the date on which written notice
of such failure has been given by the trustee to the Bank or by holders of at
least 25% in principal amount of the outstanding 10% Subordinated Debentures Due
2006 to the Bank and the trustee.
F-36
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. BORROWINGS--(CONTINUED)
11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, California Federal assumed $50 million of
SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). In
connection with the assumption of the 11.20% Senior Notes, the Bank and all of
the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, the Bank repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal amount,
plus the accrued interest thereon. The Bank recorded an extraordinary loss, net
of tax, of $1.6 million in connection with such repurchase. At December 31,
1997, the aggregate principal amount of the 11.20% Senior Notes outstanding was
$6.0 million.
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within
15 days after the date such payment was due; (iii) failure to comply with
certain covenants in the Note Purchase Agreement, provided that such failure
continues for more than 60 days; (iv) failure to deliver to holders a notice of
default, notice of event of default, or notice of claimed default as provided in
the Note Purchase Agreement; (v) failure to comply with any provision of the
Note Purchase Agreement, provided that such failure continues for more than
60 days after notice is delivered to the Bank; (vi) a default under other
indebtedness provided that the aggregate amount of all obligations in respect of
such indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against the Bank or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by the Bank or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of Old California Federal:
10.668% Subordinated Notes Due 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matures on December 22, 1998 (the "10.668% Subordinated
Notes"). At December 31, 1997, the aggregate principal amount of 10.668%
Subordinated Notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to the Bank; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of the Bank and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of the Bank.
6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due
February 20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a
result of a corporate restructuring in December 1992, Cal Fed Inc. was merged
with and into XCF Acceptance Corporation ("XCF"), a subsidiary of Old California
Federal. The 6 1/2% Convertible Subordinated Debentures are redeemable at the
option of the holders on February 20, 2000, at 123% of their principal amount.
At December 31, 1997, $2.6 million of the 6 1/2% Convertible Subordinated
Debentures were outstanding. Due to
F-37
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. BORROWINGS--(CONTINUED)
the purchase of all of the Cal Fed stock by FN Holdings in the Cal Fed
Acquisition on January 3, 1997, the common stock conversion feature has been
eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make any
payment of interest when due and such payment is not made within 30 days after
the date such payment was due; (ii) failure to make any payment of principal
when due; (iii) default in the performance, or breach, of any covenant or
warranty in the indenture, provided that such default or breach continues for
more than 60 days after notice is delivered to the Bank; or (iv) certain events
of bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures").
During 1996 and 1995, Old California Federal repurchased $0.6 million and
$8.7 million, respectively, of the 10% Subordinated Debentures, leaving
$4.3 million outstanding at December 31, 1997.
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was due;
(iii) failure to comply with certain covenants in the indenture; (iv) failure to
comply with certain covenants in the indenture provided that such failure
continues for more than 60 days after notice is delivered to the Bank;
(v) certain events of bankruptcy, insolvency or reorganization of the Bank; or
(vi) the default or any event which, with the giving of notice or lapse of time
or both, would constitute a default under any indebtedness of the Bank and cause
such indebtedness with an aggregate principal amount exceeding $15 million to
accelerate.
21. INTEREST RATE SWAP AGREEMENTS
In connection with the FN Acquisition and the Cal Fed Acquisition, the Bank
acquired the rights and assumed the obligations under certain interest rate swap
agreements. Interest rate swap agreements outstanding and their weighted average
rates at December 31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL --------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
- ------------- --------- ---- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
1997
April 1998.......................................... $ 400,000 5.76% 8.38% .26 3 month LIBOR
1996
April 1998.......................................... $ 400,000 5.64% 8.38% 1.26 3 month LIBOR
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives or
makes payments based on the differential between fixed-rate and variable-rate
interest amounts on the notional amount of the agreement. The notional amounts
of these derivatives do not represent amounts exchanged by the parties and thus,
are not a measure of the Bank's exposure through its use of derivatives. The
Bank pays the variable-rate and receives the fixed-rate under these agreements.
The variable interest rates presented in the tables above are based on LIBOR.
The current LIBOR rates have been assumed implicitly, in the aforementioned
weighted average receive rate, to remain constant throughout the term of the
respective swaps. Any changes in LIBOR interest rates would affect the
variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of nonperformance
by the counterparties to these agreements but does not expect any counterparties
to fail their obligations. The Bank deals only with national investment banking
firms and the FHLB of San Francisco.
F-38
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. SEGMENT REPORTING
The Company's operations include two primary business segments: mortgage
lending and retail banking. The Company's principal business consists of
operating retail deposit branches and originating and/or purchasing residential
real estate loans. The Company's mortgage lending activities are conducted
through FNMC and include the origination and purchase of residential mortgage
loans for sale to various investors, as well as the servicing of loans for
others.
Selected financial information by business segment for the three years
ended December 31, 1997, 1996 and 1995 is presented in the following summary (in
thousands):
<TABLE>
<CAPTION>
MORTGAGE RETAIL CONSOLIDATED
LENDING BANKING TOTAL
---------- ----------- ------------
<S> <C> <C> <C>
1997
Total revenue(1)................................................... $ 288,360 $ 2,317,096 $ 2,467,184
Income before income taxes, extraordinary item and minority
interest........................................................ (27,782) 325,643 297,861
Office premises and equipment, net................................. 26,576 132,773 159,349
Identifiable assets(2)............................................. 3,072,219 31,140,248 31,347,079
1996
Total revenue(3)................................................... $ 212,325 $ 1,751,852 $ 1,887,177
Income before income taxes, extraordinary item and minority
interest........................................................ 5,836 543,372 549,208
Office premises and equipment, net................................. 23,410 76,754 100,164
Identifiable assets(4)............................................. 1,634,258 16,248,007 16,618,168
1995
Total revenue(5)................................................... $ 100,930 $ 1,166,180 $ 1,226,818
Income before income taxes, extraordinary item and minority
interest........................................................ (7,898) 130,348 122,450
Office premises and equipment, net................................. 17,376 76,133 93,509
Identifiable assets(6)............................................. 1,383,451 14,425,200 14,666,781
</TABLE>
- ------------------
(1) Excludes the elimination of $14.2 million in intercompany servicing fees and
$124.1 million in interest income on intercompany loans.
(2) Excludes the elimination of $20.2 million in deposits maintained with the
Bank and $2.8 billion in intercompany borrowings.
(3) Excludes the elimination of $6.9 million in intercompany servicing fees and
$70.1 million in interest income on intercompany loans.
(4) Excludes the elimination of $23.3 million in deposits maintained with the
Bank and $1.2 billion in intercompany borrowings.
(5) Excludes the elimination of $10.6 million in intercompany servicing fees and
$29.7 million in interest income on intercompany loans.
(6) Excludes the elimination of $13.7 million in deposits maintained with the
Bank and $1.1 billion in intercompany borrowings.
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability are that contribution for
the mortgage lending segment includes custodial earnings that are reported in
the retail banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage lending segment's contribution for the years ended
December 31, 1997, 1996 and 1995 was $35.9 million, $54.9 million and
$24.5 million, respectively.
F-39
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. COMPREHENSIVE INCOME
The tax effect associated with unrealized gain on securities for the years
ended December 31, 1997, 1996 and 1995 is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------- ----------
<S> <C> <C> <C>
1997
Unrealized gains on securities:
Unrealized holding gains arising during the period................... $ 12,505 $(1,598) $ 10,907
Less: reclassification adjustments for gains in net income........... (25,182) 3,218 (21,964)
-------- ------- --------
Other comprehensive income.............................................. $(12,677) $ 1,620 $(11,057)
-------- ------- --------
-------- ------- --------
1996
Unrealized gains on securities:
Unrealized holding gains arising during the period................... $ 20,250 $(2,025) $ 18,225
Less: reclassification adjustments for gains in net income........... (39,465) 3,947 (35,518)
-------- ------- --------
Other comprehensive income.............................................. $(19,215) $ 1,922 $(17,293)
-------- ------- --------
-------- ------- --------
1995
Unrealized gains on securities:
Unrealized holding gains arising during the period................... $ 59,978 $(5,998) $ 53,980
Less: reclassification adjustments for gains in net income........... (1,631) 163 (1,468)
-------- ------- --------
Other comprehensive income.............................................. $ 58,347 $(5,835) $ 52,512
-------- ------- --------
-------- ------- --------
</TABLE>
Unrealized gains on securities is the only component of other comprehensive
income and accumulated other comprehensive income for the years ended
December 31, 1997, 1996 and 1995.
24. MINORITY INTEREST
11 1/2% Preferred Stock
In connection with the FN Acquisition, California Federal issued 3,007,300
shares of its 11 1/2% noncumulative perpetual preferred stock ("11 1/2%
Preferred Stock") with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated liquidation value of $100
per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted
from additional paid-in capital. At or after September 1, 1999, the 11 1/2%
Preferred Stock is redeemable at the option of the Bank, in whole or in part, at
$105.75 per share prior to September 1, 2000, and at prices which will decrease
annually thereafter to the stated liquidation value of $100 per share on or
after September 1, 2004, plus declared but unpaid dividends. Dividends are
payable quarterly at an annual rate of 11.50% per share when declared by the
Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock for
each year during 1997 and 1996 totalled $34.6 million.
10 5/8% Preferred Stock
In connection with the Cal Fed Acquisition, California Federal assumed Cal
Fed's 10 5/8% preferred stock with liquidation value of $172.5 million (the
"10 5/8% Preferred Stock" and, together with the 11 1/2% Preferred Stock, "Bank
Preferred Stock"). The 10 5/8% Preferred Stock resulted in a $172.5 million
increase in the Bank's stockholders' equity. Cash dividends on the 10 5/8%
Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8%
per share if, when, and as declared by the Board of Directors of the Bank. The
10 5/8% Preferred Stock is generally not redeemable prior to April 1, 1999. The
10 5/8% Preferred Stock is redeemable at the option of the Bank, in whole or in
part, at $105.313 per share on or after April 1, 1999 and prior to April 1,
2000, and at prices decreasing annually thereafter to the liquidation preference
of $100.00 per share on or after April 1, 2003, plus declared but unpaid
dividends. In addition, in the event of a change of control, the 10 5/8%
Preferred Stock is redeemable at the option of the Bank or its successor on or
after April 1, 1996 and prior to
F-40
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. MINORITY INTEREST--(CONTINUED)
April 1, 1999 in whole, but not in part, at $114.50 per share. Dividends paid on
the 10 5/8% Preferred Stock during 1997 were $18.3 million.
REIT Preferred Stock
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
the REIT Preferred Stock for $500 million. The REIT Preferred Stock has a stated
liquidation value of $25 per share, plus declared and unpaid dividends, if any.
The annual cash dividends on the 20,000,000 shares of REIT Preferred Stock,
assuming such dividends are declared by the Board of Directors of Preferred
Capital Corp., are expected to approximate $45.6 million per year. As long as
Preferred Capital Corp. qualifies as a REIT, distributions on the REIT Preferred
Stock will be a dividends-paid deduction by Preferred Capital Corp. for tax
purposes. Dividends paid on the REIT Preferred Stock during 1997 were
$36.6 million, net of the income tax benefit.
25. STOCKHOLDERS' EQUITY
(a) Common Stock
In connection with the FN Acquisition and the offering of the 12 1/4%,
Senior Notes, First Gibraltar Holdings incorporated Parent Holdings and FN
Holdings to hold 100% of the common stock of First Nationwide. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create 800
shares of class A common stock having one vote per share, 200 shares of class B
common stock having .75 votes per share, and 230.3 shares of nonvoting class C
common stock. Parent Holdings exchanged its 1,000 shares of common stock of FN
Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued 100%
of its class C common stock to Parent Holdings for approximately
$210.3 million, and the Bank's Chairman acquired 100% of the class B common
stock of FN Holdings in exchange for his 6.25% of the class A common stock of
First Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owns 100% of the class B common stock of
FN Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock), and Parent Holdings
owns (i) 100% of the class A common stock of FN Holdings, representing 80% of
its voting common stock (representing approximately 85% of the voting power of
its common stock) and (ii) 100% of the class C common stock of FN Holdings. The
class C common stock was redeemed out of distributions from the Bank for
$230.3 million plus accrued interest during 1995 and 1996. On December 29, 1995,
the Bank's Chairman transferred his shares of class B common stock to a limited
partnership, Hunter's Glen/Ford Ltd. ("Hunter's Glen"), over which he maintains
control.
No dividends were payable on the class A common stock or the class B common
stock of the Company as long as any shares of the class C common stock remained
outstanding. Dividends on the Company's class C common stock during 1995
totalled $29.2 million and 60.8 shares of the Company's class C common stock
were redeemed, resulting in a capital distribution totalling $60.8 million.
Dividends on the Company's class A, B and C common stock during 1996 totalled
$52.5 million, $13.1 million and $8.6 million, respectively. In addition, the
remaining 169.5 shares of the class C common stock were redeemed during the
period, resulting in a capital distribution totalling $169.5 million. Dividends
on the Company's class A and B common stock during 1997 totalled $56.9 million
and $14.2 million, respectively.
(b) Preferred Stock
On September 19, 1996, the Company issued 10,000 shares of preferred stock
("FN Holdings Preferred Stock") with a liquidation value of $150 million to a
corporation owned by the Chairman of the Board of the
F-41
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. STOCKHOLDERS' EQUITY--(CONTINUED)
Bank, ("Special Purpose Corp."). Cash dividends on the FN Holdings Preferred
Stock are cumulative and are payable: (i) in cash at an annual rate of the cost
of funds to an affiliate of FN Holdings under such affiliate's bank credit
facility (the "Cost of Funds Rate") and (ii) in newly issued shares of another
series of cumulative perpetual preferred stock of FN Holdings ("Additional FN
Holdings Preferred Stock") at an annual rate of 2% of the stated liquidation
value of the FN Holdings Preferred Stock, if, when, and as declared by the Board
of Directors of FN Holdings. Dividends on the Additional FN Holdings Preferred
Stock are cumulative and accrue and are payable in shares of Additional FN
Holdings Preferred Stock at an annual rate equal to the Cost of Funds Rate plus
2% of the stated liquidation value of the Additional FN Holdings Preferred Stock
if, when and as declared by the Board of Directors of the Company. Additional FN
Holdings Preferred Stock will have substantially the same relative rights, terms
and preferences as the FN Holdings Preferred Stock except as set forth above
with respect to the payment of dividends. Dividends on the FN Holdings Preferred
Stock are payable quarterly each year, commencing January 1, 1997, out of funds
legally available therefor. In addition, the payment of dividends by FN Holdings
is subject to certain federal laws applicable to savings and loan holding
companies. The FN Holdings Preferred Stock ranks prior to the common stock of
the Company and to all other classes and series of equity securities
subsequently issued.
The FN Holdings Preferred Stock and the Additional FN Holdings Preferred
Stock are redeemable so long as Special Purpose Corp. is the sole holder
thereof, at any time, and, if Special Purpose Corp. is not the sole holder
thereof, at any time after the fifth anniversary of the issuance of the FN
Holdings Preferred Stock, in each case, upon prior written notice, at the option
of the Company, in whole or in part, at a redemption price equal to the stated
liquidation value of $15,000 per share plus any accrued and unpaid dividends.
Upon any redemption of the FN Holdings Preferred Stock by the Company, a pro
rata portion of the outstanding Additional FN Holdings Preferred Stock will be
contributed to the capital of the Company, without any payment therefor, and
such shares will be retired and canceled.
(c) Payment of Dividends
The terms of the 9 1/8% Senior Subordinated Notes indenture and the 12 1/4%
Senior Notes indenture (the "Indentures") generally will permit the Company to
make distributions of up to 75% of the consolidated net income of the Company
if, after giving effect to such distribution, (i) the Bank is "well capitalized"
under applicable OTS regulations and (ii) the Consolidated Common Shareholders'
Equity (as defined therein) of the Bank is at least equal to the Minimum Common
Equity Amount (as defined therein). The Federal thrift laws and regulations of
the Office of Thrift Supervision (the "OTS") limit the Bank's ability to pay
dividends on its preferred or common stock. The Bank generally may not pay
dividends without the consent of the OTS if, after the payment of the dividends,
it would not be deemed "adequately capitalized" under the prompt corrective
action standards of the Federal Deposit Insurance Corporation Improvement Act of
1991.
As of December 31, 1997, the Bank could pay dividends of $502.4 million
without the consent of the OTS and it could pay dividends of $153.8 million and
still be "well capitalized." As of December 31, 1997, the Company could pay
dividends of $254.0 million without violating the most restrictive terms of the
Indentures. (26) Regulatory Capital of the Bank
26. REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F-42
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26. REGULATORY CAPITAL OF THE BANK--(CONTINUED)
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table. There are no conditions or events since the most recent
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1997 and
1996 are also presented in the table (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
----------------------- ----------------------- -----------------------
AS A % AS A % AS A %
AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
Stockholders' equity of the Bank per
financial statements.................. $2,260,044
Minority interest in Preferred Capital
Corp.................................. 500,000
Net unrealized holding gains............ (35,162)
----------
2,724,882
----------
Adjustments for tangible and leverage
capital:
Goodwill litigation asset............. (100,000)
Intangible assets..................... (675,927)
Non-allowable minority interest in
Preferred Capital Corp............. (71,099)
Non-qualifying MSRs................... (53,670)
Non-includable subsidiaries........... (53,582)
Excess deferred tax asset............. (55,000)
----------
Total tangible capital.................. $1,715,604 5.65% $ 455,457 1.50% N/A N/A
---------- ---------- ----------
---------- ---------- ----------
Total leverage capital.................. $1,715,604 5.65% $ 910,915 3.00% $1,518,191 5.00%
---------- ---------- ----------
---------- ---------- ----------
Tier 1 risk-based capital............... $1,715,604 10.14% N/A N/A $1,015,036 6.00%
---------- ---------- ----------
---------- ---------- ----------
Adjustments for risk-based capital:
Qualifying subordinated debt
debentures......................... 93,847
General loan loss allowance........... 214,217
Assets required to be deducted........ (5,648)
----------
Total risk-based capital........... $2,018,020 11.93% $1,353,382 8.00% $1,691,727 10.00%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-43
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26. REGULATORY CAPITAL OF THE BANK--(CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
----------------------- ----------------------- -----------------------
AS A % AS A % AS A %
AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
1996 ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the Bank per
financial statements.................. $1,463,862
Net unrealized holding gains............ (46,219)
----------
1,417,643
----------
Adjustments for tangible and leverage
capital:
Intangible assets..................... (140,564)
Non-qualifying MSRs................... (42,369)
Non-includable subsidiaries........... (6,001)
Excess deferred tax asset............. (68,000)
----------
Total tangible capital.................. $1,160,709 7.17% $ 242,828 1.50% N/A N/A
---------- ---------- ----------
---------- ---------- ----------
Total leverage capital.................. $1,160,709 7.17% $ 485,655 3.00% $ 809,426 5.00%
---------- ---------- ----------
---------- ---------- ----------
Tier 1 risk-based capital............... $1,160,709 11.50% N/A N/A $ 605,843 6.00%
---------- ---------- ----------
---------- ---------- ----------
Adjustments for risk-based capital:
Qualifying subordinated debt
debentures......................... 89,907
General loan loss allowance........... 127,708
Assets required to be deducted........ (2,882)
----------
Total risk-based capital.............. $1,375,442 13.62% $ 807,791 8.00% $1,009,738 10.00%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
27. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Other noninterest income:
Disbursement float......................................................... $ 8,169 $ 5,369 $ 2,622
Other...................................................................... 14,827 12,820 8,759
-------- -------- --------
$ 22,996 $ 18,189 $ 11,381
-------- -------- --------
-------- -------- --------
Other noninterest expense:
Telephone.................................................................. $ 15,932 $ 11,727 $ 7,652
Insurance and surety bonds................................................. 5,642 3,811 4,005
Postage.................................................................... 8,070 7,141 6,856
Printing, copying and office supplies...................................... 9,230 6,549 6,096
Employee travel............................................................ 8,745 6,112 5,244
Clerical and other losses.................................................. 11,410 2,636 4,345
Other...................................................................... 53,003 40,968 27,131
-------- -------- --------
$112,032 $ 78,944 $ 61,329
-------- -------- --------
-------- -------- --------
</TABLE>
F-44
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
28. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and minority
interest........................................................... $47,148 $(73,131) $(57,185)
Extraordinary item................................................... -- (176) 221
Net unrealized holding (loss) gain on securities available for sale.. 17 (1,921) 7,055
------- -------- --------
$47,165 $(75,228) $(49,909)
------- -------- --------
------- -------- --------
</TABLE>
Income tax expense (benefit) attributable to income before income taxes,
extraordinary item and minority interest for the years ended December 31, 1997,
1996 and 1995 consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- --------
<S> <C> <C> <C>
Federal
Current........................................................... $ 5,908 $ 11,733 $ 285
Deferred.......................................................... -- (125,000) (69,000)
------- --------- --------
5,908 (113,267) (68,715)
------- --------- --------
State and local
Current........................................................... 41,240 40,136 11,530
Deferred.......................................................... -- -- --
------- --------- --------
41,240 40,136 11,530
------- --------- --------
$47,148 $ (73,131) $(57,185)
------- --------- --------
------- --------- --------
</TABLE>
The consolidated income tax expense (benefit) for the years ended
December 31, 1997, 1996 and 1995 differs from the amounts computed by applying
the statutory federal corporate tax rate of 35% for 1997, 1996 and 1995 to
income before income taxes, extraordinary item and minority interest (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" income tax expense........................... $ 104,251 $ 192,223 $ 42,858
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax benefit.......... 26,806 26,088 7,495
Tax exempt income.............................................. (5) (584) (2,636)
Amortization of excess cost over fair value of net assets
acquired.................................................... 16,959 33 --
Adjustment to prior year's tax expense......................... -- 595 (1,675)
Unrealized holding (loss) gain on securities available for sale
recognized for tax purposes................................. (12,234) (3,703) 15,937
REIT preferred dividend........................................ (14,682)
Other.......................................................... 2,843 1,214 (1,747)
Adjustments to deferred tax asset fully offset by valuation
allowance:
Temporary differences from acquisitions..................... (115,633) 6,196 --
Adjustment to deferred tax asset............................ (16,911) 2,821 7,644
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense..................................................... 55,754 (298,014) (125,061)
--------- --------- ---------
$ 47,148 $ (73,131) $ (57,185)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-45
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
28. INCOME TAXES--(CONTINUED)
The significant components of deferred income tax (benefit) expense
attributable to income before income taxes, extraordinary item and minority
interest for the years ended December 31, 1997, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of other
components listed below)............................. $ 76,790 $ 163,997 $ 56,061
Adjustments to deferred tax asset fully offset by
valuation allowance.................................. (132,544) 9,017 --
Increase (decrease) in beginning-of-the-year
balance of the valuation allowance for
deferred tax assets.................................. 55,754 (298,014) (125,061)
--------- --------- ---------
$ -- $(125,000) $ (69,000)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................... $ 715,615 $ 723,234
Foreclosed real estate..................................................... 6 312
Loans receivable........................................................... 60,835 4,774
Securities................................................................. -- 95
Miscellaneous accruals..................................................... 31,520 11,851
Accrued liabilities........................................................ 86,617 30,017
Deferred interest.......................................................... 5,369 6,440
State taxes................................................................ 39,927 16,074
Other intangible assets.................................................... 39,848 35,476
Alternative minimum tax credit and investment tax credit
carryforwards........................................................... 16,887 14,157
Other...................................................................... 5,731 3,165
---------- ---------
Total gross deferred tax assets......................................... 1,002,355 845,595
Less valuation allowance................................................ (568,781) (513,027)
---------- ---------
Net deferred tax assets................................................. 433,574 332,568
---------- ---------
Deferred tax liabilities:
Change in accounting method................................................ 30,000 23,362
Securities................................................................. 8,166 --
Other intangible assets.................................................... 73,872 48,280
Purchase accounting adjustments............................................ 18,137 29,881
FHLB stock................................................................. 52,337 12,688
Unrealized gains on securities available for sale.......................... 5,152 1,640
Goodwill litigation........................................................ 58,450 --
Other...................................................................... 65,279 24,357
---------- ---------
Net Deferred tax liabilities............................................ 311,393 140,208
---------- ---------
Net deferred tax assets and liabilities................................. $ 122,181 $ 192,360
---------- ---------
---------- ---------
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was an increase of $55.8 million which is attributable to
income before income taxes and minority interest.
F-46
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
28. INCOME TAXES--(CONTINUED)
Based on a historical earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Company's net deferred tax assets and recognized
a deferred tax benefit (i.e., reduced valuation allowance) of $125.0 million in
the second quarter of 1996 and $69.0 million in the fourth quarter of 1995.
Management believes that the realization of the resulting deferred tax asset is
more likely than not, based upon the expectation that FN Holdings will generate
the necessary amount of taxable income in future periods.
At December 31, 1997, if FN Holdings had filed a consolidated federal
income tax return on behalf of itself (as common parent) and its subsidiaries,
it would have had regular and alternative minimum tax net operating losses for
federal income tax purposes of approximately $2.0 billion and $789 million,
respectively, which expire in 2004 through 2010.
If for any reason FN Holdings was to deconsolidate from the Mafco Group
(see note 33, "Subsequent Event"), only the amount of the net operating loss
carryovers of FN Holdings not already utilized by the Mafco Group would be
available to offset the taxable income subsequent to the date of
deconsolidation. If FN Holdings had deconsolidated as of December 31, 1997, FN
Holdings would have had approximately $970 million of regular net operating loss
carryforwards. It cannot be predicted to what extent the Mafco Group will
utilize the net operating losses of FN Holdings in the future or the amount, if
any, of net operating loss carryforwards that FN Holdings may have upon
deconsolidation. Additionally, the net operating loss carryovers are subject to
review and potential disallowance, in whole or in part, by the Internal Revenue
Service.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act") was enacted into law generally effective for tax years beginning after
1995. One provision of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions which are treated as large
banks. Another provision of the Act requires the Company to take into income the
balance of its post-1987 bad debt reserves over a six year period beginning in
1996 subject to a two-year deferral if certain residential loan tests are
satisfied. As of December 31, 1995, the Company had approximately $279 million
of post-1987 bad debt reserves that are subject to recapture. The Company has
fully provided for the tax related to this recapture.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of the Company.
The base year reserves are generally the balance of the tax bad debt reserve as
of December 31, 1987 reduced proportionately for reductions in the Company's
loan portfolio since that date. At December 31, 1997, the amount of those
reserves was approximately $152 million. The amount of the unrecognized deferred
tax liability at December 31, 1997 was approximately $53 million. Pursuant to
the Act, circumstances that may require an accrual of this unrecorded tax
liability are a failure to meet the definition of a "bank" for federal income
tax purposes, dividend payments in excess of tax earnings and profits, and other
distributions, dissolution, liquidation or redemption of stock, excluding
preferred stock meeting certain conditions.
29. EMPLOYEE BENEFIT PLANS
Post-retirement Benefits Plan
The Bank provides certain post-retirement medical benefits to certain
eligible employees and their dependents through age 65. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate.
The estimated cost for post-retirement health care benefits has been
accrued on an actuarial net present value basis.
F-47
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated balance sheet at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees................................................................. $2,228 $2,212
Eligible active plan participants........................................ 554 471
Ineligible active plan participants...................................... 1,343 733
------ ------
Accumulated post-retirement benefit obligation (other liabilities) ... $4,125 $3,416
------ ------
------ ------
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996 was
determined using a discount rate of 7.5%. At December 31, 1997, an increase of
1% in the health care cost trend rate would cause the accumulated
post-retirement benefit obligation to increase by $.4 million, and the service
and interest costs to increase by less than $.1 million.
Net periodic post-retirement benefits cost for the years ended
December 31, 1997 and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service cost--benefits attributable to service during the current period...... $364 $301
Interest cost on accumulated post-retirement benefit obligation............... 498 231
Amortization of loss.......................................................... -- 19
---- ----
Periodic post-retirement benefit cost....................................... $862 $551
---- ----
---- ----
</TABLE>
The initial health care cost trend rate for medical benefits in 1997 was
9%, the average trend rate was 7.25% and the ultimate trend rate was 5.5%, which
will be reached in eight years. Similar trend rates were utilized for the 1996
valuation.
In connection with the SFFed Acquisition, the Bank assumed SFFed's defined
benefit pension plan which covered substantially all employees of San Francisco
Federal. The SFFed benefit plan was frozen effective September 30, 1995 and no
additional benefits accrued after such time.
The following table sets forth the funded status and amounts recognized in
the Bank's consolidated balance sheet for its defined benefit pension plan (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $40,995
in 1997 and $21,720 in 1996........................................ $40,995 $21,720
------- -------
------- -------
Projected benefit obligations......................................... $40,995 $21,720
Plan assets at fair value............................................. 42,292 23,085
Excess (deficiency) of plan assets over projected benefit
obligations........................................................ 1,297 1,365
Unrecognized net gain (loss).......................................... 5,506 5,414
------- -------
Accrued (prepaid) pension liability................................ $ 4,209 $ 4,049
------- -------
------- -------
</TABLE>
F-48
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Net periodic expense for 1997, 1996 and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Service cost benefit earned during the period................... $ -- $ -- $ --
Interest cost on projected benefit obligations.................. 2,796 2,143 --
Expected return on plan assets.................................. (3,306) (2,349) --
Net amortization and deferral................................... (91) 1,278 --
Curtailment gain................................................ (404) -- --
------- ------ ------
Total net periodic pension expense............................ $(1,005) $1,072 $ --
------- ------ ------
------- ------ ------
Assumptions used in computing the funded status were:......
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Discount rate................................................... 7.75% 8.50% --%
Rate of increase in future compensation levels.................. -- -- --
Long-term rate of return on assets.............................. 9.00% 8.50% --
</TABLE>
In the Cal Fed Acquisition, the Bank assumed sponsorship of the Old
California Federal defined benefit plan which was frozen effective May 31, 1993
and at which time, all accrued benefits became 100% vested. Effective April 30,
1997, the SFFed benefit plan was merged with and into the Old California Federal
benefit plan. The fair value of assets transferred was $23.6 million.
Investment Plan
The Bank offers a defined contribution plan which is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching contribution
was a maximum of 100% of up to the first 3% of employee deferrals. The annual
discretionary employer profit sharing contribution is a maximum of 3% of
eligible compensation. It can be declared at any level in the range from 0% to
3%. Employees vest immediately in their own deferrals and any employer profit
sharing contributions and vest in employer matching contributions based on
completed years of service. The Bank's contributions to such plan totalled
$3.8 million, $2.3 million, and $2.8 million for the years ended December 31,
1997, 1996 and 1995, respectively.
During 1996, defined contribution plans assumed in the SFFed and Home
Federal Acquisitions were merged with and into Old FNB's defined contribution
plan. The fair value of assets transferred was $14.4 million.
In the Cal Fed Acquisition, contributions made to Old California Federal's
defined contribution plan became 100% vested at the date of acquisition.
Effective December 31, 1997, the Old California Federal contribution plan was
merged with and into the Bank's plan. The fair value of assets transferred was
$33.6 million.
30. INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Incentive Plan") with certain executive officers of the Bank
("Participants"). Awards under the Incentive Plan will be made in the form of
performance units. Each performance unit entitles Incentive Plan Participants to
receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provides for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vest at 20% per year beginning October 1,
1995 and are subject to a cap of $50 million.
Bonuses are recorded by a charge to compensation and employee benefits and
an increase to other liabilities. During 1997 and 1996, accruals relative to the
Incentive Plan totalled $12.4 million and $35.6 million, respectively.
F-49
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
31. SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special assessment
("Special SAIF Assessment") related to the recapitalization of the SAIF, which
was levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic
deposits held as of March 31, 1995. As a result of the Act, the Company recorded
a pre-tax charge of $60.1 million on September 30, 1996. The 1997 SAIF deposit
premiums declined to 6.42 cents per $100 of SAIF-insured deposits per year from
the prior rate of 23 cents.
32. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company, through FNMC, enters into financial
instruments with off-balance sheet risk through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include commitments
to extend credit and purchase loans (mortgage loan pipeline) and mandatory and
optional forward commitments to sell loans.
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Commitments to originate and purchase loans............................................... $1,718,729
Mandatory commitments to sell loans....................................................... 1,368,123
</TABLE>
The Company's pipeline of loans in process include loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore, the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $691.7 million at December 31, 1997. On a daily basis, the Company
determines what percentage of the portfolio of loans in process for which rate
commitments have been extended to a borrower to hedge. Both the anticipated
percentage of the pipeline that is expected to fund and the inherent risk
position of the portfolio are considered in making this determination.
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. Unrealized gain and
losses on mandatory and optional-delivery forward commitments are included in
the lower of cost or market valuation adjustment to mortgage loans held for
sale.
On September 28, 1994, the Company entered into an agreement with FNMA
pursuant to which FNMA provided credit enhancements for certain bond-financed
real estate projects originated by Old FNB. The agreement requires that the
Company pledge to FNMA collateral in the form of certain eligible securities
which are held by a third party trustee. The collateral requirement varies based
on the balance of the bonds outstanding, losses incurred (if any), as well as
other factors. At December 31, 1997 and 1996, the Company had pledged as
collateral certain securities available for sale with a carrying value of
$78.2 million and $91.6 million.
F-50
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
32. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
At December 31, 1997 and 1996, mortgage-backed securities available for
sale with a carrying value of $28.8 million and $33.4 million, respectively,
were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
At December 31, 1997, mortgage-backed securities available for sale and
mortgage-backed securities held to maturity of $4.1 billion and $1.3 billion,
respectively, were pledged as collateral for various obligations as discussed in
notes 8, 9, 19 and 20. At December 31, 1996, mortgage-backed securities
available for sale and mortgage-backed securities held to maturity of
$936.2 million and $1.4 billion, respectively, were pledged as collateral for
various obligations.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances.
At December 31, 1997 and 1996, loans receivable included approximately
$7.5 billion and $2.3 billion, respectively, of loans that had the potential to
experience negative amortization.
The Bank is the plaintiff in a claim against the United States in the
lawsuit, California Federal Bank v. United States (the "Cal Fed Litigation"),
which it assumed in the Cal Fed Acquisition. In connection with this lawsuit,
the Company recorded as an asset the estimated after-tax cash recovery from the
Cal Fed Litigation that will inure to the Company, net of amounts payable to
holders of certain publicly-traded rights in any such recovery (the "Goodwill
Litigation Asset"). In connection with the Cal Fed Acquisition, the Goodwill
Litigation Asset was recorded at its estimated fair value of $100 million, net
of estimated tax liabilities, as of January 3, 1997, and is included in the
Company's consolidated balance sheet as of December 31, 1997.
In addition, the Company is involved in various claims and lawsuits arising
in the ordinary course of business. Management is of the opinion that the
effect, if any, of these claims and lawsuits is not material to the Company.
F-51
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
33. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents......................... $ 412,311 $ 412,311 $ 269,869 $ 269,869
Securities available for sale..................... 813,085 813,085 542,019 542,019
Securities held to maturity....................... 58,299 58,299 4,272 4,287
Mortgage-backed securities available for sale..... 5,076,598 5,076,598 1,598,652 1,598,652
Mortgage-backed securities held to maturity....... 1,337,877 1,373,289 1,621,662 1,653,847
Loans held for sale............................... 1,483,466 1,493,867 825,316 825,316
Loans receivable, net............................. 19,424,410 19,786,805 10,212,583 10,428,934
Investment in FHLB................................ 468,191 468,191 220,962 220,962
Accrued interest receivable....................... 188,203 188,203 106,034 106,034
Mortgage servicing rights......................... 536,703 673,975 423,692 531,726
Financial liabilities:
Deposits.......................................... 16,202,605 16,224,399 8,501,883 8,514,099
Securities sold under agreements to repurchase.... 1,842,442 1,842,737 1,583,387 1,585,964
Borrowings:
Gross.......................................... 10,769,995 10,892,364 4,908,087 4,941,563
Interest rate swap agreements(1)............... (401) (2,954) (5,391) (13,763)
----------- ----------- ----------- -----------
Total borrowings............................. $10,769,594 $10,889,410 $ 4,902,696 $ 4,927,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Off-balance sheet net unrealized gains (losses):
Commitments to originate loans.................... $ 1,652 $ (503)
Forward commitments to sell loans................. (7,099) 1,022
Principal-only swap agreements.................... 13,520 112
</TABLE>
- ------------------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated balance sheet under the indicated captions, except for off-balance
sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgment was
required in estimating fair value for certain items. The subjective factors
include, among other things, the estimated timing and amount of cash flows, risk
characteristics, and interest rates, all of which are subject to changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
F-52
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
33. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of performing
commercial and multi-family loans is calculated by discounting scheduled
principal and interest cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated cash
flows, or underlying collateral values, where appropriate.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Mortgage servicing rights: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating future
net servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental rates
for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities. Fair values of the
Company's interest rate swap agreements, which effectively hedge certain of the
Company's FHLB advances, are based on the net present value of the estimated
interest due to the Company as compared to the estimated interest due to the
counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Company's
commitments to originate loans is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Fair values of forward
commitments to sell loans are determined using current estimated replacement
costs. Fair values of the Company's floors are based on quoted market prices for
comparable floors. To calculate the value of the principal-only swaps, dealer
bids are obtained on the underlying principal-only swaps. The change in the
market price of a principal-only swap from the date of inception to the
termination date is applied to the remaining principal-only swap.
F-53
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
34. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1997 and 1996 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 TOTAL 1997
------------ ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income...................... $ 530,809 $ 531,303 $ 527,837 $ 512,751 $ 2,102,700
Total interest expense..................... (368,883) (365,865) (361,065) (344,991) (1,440,804)
---------- --------- --------- --------- -----------
Net interest income........................ 161,926 165,438 166,772 167,760 661,896
Provision for loan losses.................. (19,950) (19,950) (19,950) (19,950) (79,800)
---------- --------- --------- --------- -----------
Net interest income after provision for
loan losses.............................. 141,976 145,488 146,822 147,810 582,096
Total noninterest income................... 108,351 94,846 82,448 78,839 364,484
Total noninterest expense.................. (169,957) (154,287) (171,189) (153,286) (648,719)
---------- --------- --------- --------- -----------
Income before income taxes, extraordinary
item and minority interest............ 80,370 86,047 58,081 73,363 297,861
Income taxes............................... (11,710) (13,547) (10,237) (11,654) (47,148)
---------- --------- --------- --------- -----------
Income before extraordinary item and
minority interest........................ 68,660 72,500 47,844 61,709 250,713
Extraordinary item......................... -- -- -- -- --
---------- --------- --------- --------- -----------
Income before minority interest............ 68,660 72,500 47,844 61,709 250,713
Minority interest.......................... (23,175) (23,176) (23,144) (19,849) (89,344)
---------- --------- --------- --------- -----------
Net income................................. 45,485 49,324 24,700 41,860 161,369
Preferred stock dividends.................. (1,786) (2,762) (3,720) (4,523) (12,791)
---------- --------- --------- --------- -----------
Net income available to common
stockholders.......................... $ 43,699 $ 46,562 $ 20,980 $ 37,337 $ 148,578
---------- --------- --------- --------- -----------
---------- --------- --------- --------- -----------
</TABLE>
F-54
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
34. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 TOTAL 1996
------------ ------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total interest income....................... $ 299,386 $ 308,137 $ 318,100 $ 308,176 $1,233,799
Total interest expense...................... (194,112) (205,047) (208,520) (200,121) (807,800)
---------- --------- --------- --------- ----------
Net interest income....................... 105,274 103,090 109,580 108,055 425,999
Provision for loan losses................... (9,900) (9,900) (9,900) (9,900) (39,600)
---------- --------- --------- --------- ----------
Net interest income after provision for
loan losses............................ 95,374 93,190 99,680 98,155 386,399
Total noninterest income.................... 57,917 75,870 154,652 364,939 653,378
Total noninterest expense................... (111,669) (157,013) (103,666) (118,221) (490,569)
---------- --------- --------- --------- ----------
Income before income taxes, extraordinary
item and minority interest................ 41,622 12,047 150,666 344,873 549,208
Income taxes................................ (6,593) (1,627) 110,354 (29,003) 73,131
---------- --------- --------- --------- ----------
Income before extraordinary item and
minority interest......................... 35,029 10,420 261,020 315,870 622,339
Extraordinary item.......................... -- (1,586) -- -- (1,586)
---------- --------- --------- --------- ----------
Income before minority interest............. 35,029 8,834 261,020 315,870 620,753
Minority interest........................... (8,646) (8,646) (8,646) (17,292) (43,230)
---------- --------- --------- --------- ----------
Net income................................ 26,383 188 252,374 298,578 577,523
Preferred stock dividends................... 4,815 -- -- -- 4,815
---------- --------- --------- --------- ----------
Net income available to common
stockholders........................... $ 21,568 $ 188 $ 252,374 $ 298,578 $ 572,708
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
</TABLE>
F-55
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
35. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 18,690 $ 112,496
Investment in the Bank.......................................... 2,260,044 1,463,862
Loan to affiliate............................................... -- 20,443
Other assets and deferred charges............................... 32,462 14,724
---------- ----------
Total assets.................................................... $2,311,196 $1,611,525
---------- ----------
---------- ----------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Senior notes.................................................... $ 200,000 $ 200,000
Senior sub notes................................................ 140,000 140,000
Senior subordinated notes due 2003.............................. 575,000 --
Accrued interest payable........................................ 24,189 9,021
Payable to affiliates........................................... 1,375 4,786
Other liabilities............................................... 40,669 29,125
---------- ----------
Total liabilities............................................... 981,233 382,932
Minority interest--Bank Preferred Stock......................... 486,456 309,376
Total stockholders' equity...................................... 843,507 919,217
---------- ----------
Total liabilities, minority interest and stockholders' equity... $2,311,196 $1,611,525
---------- ----------
---------- ----------
</TABLE>
The following represents parent company only condensed statements of income
for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income.................................................... $ 859 $ 4,061 $ 341
Dividends received from the Bank................................. 311,200 275,707 111,900
-------- -------- --------
312,059 279,768 112,241
Interest expense................................................. 97,923 36,243 25,539
Noninterest expense.............................................. 13,610 10,850 5,819
-------- -------- --------
Income before equity in undistributed net income of the Bank..... 200,526 232,675 80,883
Equity in undistributed net income of the Bank................... 2,482 387,220 99,360
-------- -------- --------
Income before income taxes and minority interest................. 203,008 619,895 180,243
Income tax benefit............................................... (11,117) (858) (1,359)
-------- -------- --------
Income before minority interest.................................. 214,125 620,753 181,602
Minority interest in earnings of the Bank........................ 52,756 43,230 34,584
-------- -------- --------
Net income.................................................... 161,369 577,523 147,018
Preferred stock dividends.......................................... 12,791 4,815 --
-------- -------- --------
Net income available to common stockholders................... $148,578 $572,708 $147,018
-------- -------- --------
-------- -------- --------
</TABLE>
F-56
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
35. CONDENSED PARENT COMPANY FINANCIAL INFORMATION--(CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $161,369 $577,523 $147,018
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred issuance costs.......................... 5,766 1,811 764
Increase in receivable from the Bank............................. -- -- 3,156
Decrease (increase) in other assets and deferred charges......... 2,686 (2,842) 633
(Decrease) increase in payable to affiliates..................... (3,411) 4,482 (997)
(Decrease) increase in accrued interest payable.................. (2,481) 5,890 --
Increase in other liabilities.................................... 11,160 27,023 1,979
Equity in undistributed net income of the Bank................... (2,482) (387,220) (99,360)
Minority interest................................................ 52,756 43,230 34,584
-------- -------- --------
Total adjustments............................................. 63,994 (307,626) (59,241)
-------- -------- --------
Net cash provided by operating activities..................... 225,363 269,897 87,777
-------- -------- --------
Cash flows from investing activities:
(Decrease) increase in loans receivable.......................... 61 (67,212) --
Proceeds from disposal of furniture, fixture and equipment....... -- -- 414
Capital contributions to the Bank................................ (697,985) (168,634) (2,000)
-------- -------- --------
Net cash used in investing activities......................... (697,924) (235,846) (1,586)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Senior Sub Notes....................... -- 135,100 --
Proceeds from Golden State Escrow Merger......................... 603,313 -- --
Issuance of preferred stock, net................................. (650) 144,249 --
Redemption of FN Holdings/Golden State Escrow Preferred Stock.... (17,250) -- --
Redemption of FN Holdings Preferred Stock........................ (125,000) -- --
Redemption of class C common stock............................... -- (124,670) (60,801)
Dividends on class A common stock................................ (56,875) (52,468) --
Dividends on class B common stock................................ (14,219) (13,116) --
Dividends on class C common stock................................ -- (6,633) (29,185)
Dividends on preferred stock..................................... (10,564) (4,023) --
-------- -------- --------
Net cash provided by (used in) financing activities........... 378,755 78,439 (89,986)
-------- -------- --------
Net change in cash and cash equivalents.......................... (93,806) 112,490 (3,795)
Cash and cash equivalents at beginning of year................... 112,496 6 3,801
-------- -------- --------
Cash and cash equivalents at end of year......................... $ 18,690 $112,496 $ 6
-------- -------- --------
-------- -------- --------
</TABLE>
Noncash investing and financing activities:
During 1997, the Company issued additional preferred stock through
preferred stock dividends of $2.2 million. During 1996, loans receivable was
reduced by $46.8 million through a reduction of cash paid for the redemption of
and dividends on class C common stock in amounts totalling $44.8 million and
$2 million, respectively. The Company also issued additional preferred stock
through preferred stock dividends of $.8 million in December 1996.
F-57
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
36. SUBSEQUENT EVENTS (UNAUDITED)
GSAC Acquisition
On February 4, 1998, Auto One completed the GSAC Acquisition in a
transaction accounted for under the purchase method of accounting. GSAC engaged
in sub-prime automobile financing activities and provided loan processing,
funding and loan servicing primarily in the states of Texas, Louisiana and
Georgia. The purchase price paid was $22.5 million and the issuance of 250
shares of Auto One's common stock. The estimated fair value of assets acquired
was approximately $102.9 million consisting of approximately 7,400 loans.
Golden State Merger
On February 4, 1998, Parent Holdings and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange of
shares in a merger transaction (the "Golden State Merger"). Following the Golden
State Merger, the combined parent company, Golden State, will have 135 to
145 million common shares outstanding and will continue to be a publicly traded
company. As part of the Golden State Merger Agreement, Glendale Federal will be
merged with and into California Federal.
The terms of the Golden State Merger Agreement provide for Golden State
shareholders to retain ownership of approximately 55% to 58% of the merged
entity, based on the average trading price of Golden State shares during a
period preceding the close of the transaction, as determined after distribution
of Golden State's share of certain litigation interests. The remaining ownership
of the merged entity will be retained by the principal shareholders of
California Federal, Gerald J. Ford, chairman and chief executive officer of the
Bank, and MacAndrews & Forbes Holdings Inc. As part of the Golden State Merger
Agreement, the owners of Parent Holdings will receive, after a final resolution
of the Cal Fed Litigation, additional Golden State stock.
The Golden State Merger will be accounted for as a purchase. Golden State's
assets, liabilities and other items will be adjusted to their estimated fair
value at the closing date of the merger.
As a result of the Golden State Merger, Parent Holdings and its
subsidiaries will deconsolidate from the Mafco Group. Therefore, the amount of
net operating loss carryovers available to offset the taxable income of Parent
Holdings and its subsidiaries will be reduced. See note 28.
As of December 31, 1997, Glendale Federal had total assets of approximately
$16.0 billion and deposits of $9.5 billion, and operated 181 branches and 26
loan offices in California. During 1997, Golden State has entered into
agreements to acquire Redfed Bancorp Inc. ("Redfed") and its federal savings
bank subsidiary, Redlands Federal Bank, in a tax-free stock-for-stock merger,
and CENFED Financial Corporation ("CENFED") and its federal savings bank
subsidiary, CenFed Bank, in a tax-free exchange of shares. At December 31, 1997,
Redfed and CENFED had total assets of approximately $1.0 billion and
$2.2 billion, respectively, and deposits of $.8 billion and $1.2 billion,
respectively. On a pro forma basis at December 31, 1997, Golden State would have
consolidated assets of $19.2 billion and deposits of $11.9 billion. Further, on
a pro forma basis, the merged entities (including Redfed and CENFED) would have
consolidated assets of $51.9 billion and deposits of $28.1 billion at
December 31, 1997.
The Golden State Merger is subject to regulatory and stockholder approval
and is expected to close during the third quarter of 1998.
F-58
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks.................................................... $ 345,921 $ 350,214
Interest-bearing deposits in other banks........................................... 2,081 36,164
Short-term investment securities................................................... 35,404 25,933
----------- ------------
Cash and cash equivalents........................................................ 383,406 412,311
Securities available for sale, at fair value....................................... 783,029 813,085
Securities held to maturity........................................................ 58,557 58,299
Mortgage-backed securities available for sale, at fair value....................... 8,037,170 5,076,598
Mortgage-backed securities held to maturity........................................ 1,143,112 1,337,877
Loans held for sale, net........................................................... 1,725,497 1,483,466
Loans receivable, net.............................................................. 18,626,425 19,424,410
Investment in Federal Home Loan Bank ("FHLB") System............................... 540,127 468,191
Office premises and equipment, net................................................. 179,278 159,349
Foreclosed real estate, net........................................................ 64,892 76,997
Accrued interest receivable........................................................ 207,422 188,203
Intangible assets (net of accumulated amortization of $83,523 in 1998 and $60,294
in 1997)......................................................................... 656,177 675,927
Mortgage servicing rights.......................................................... 669,056 536,703
Other assets....................................................................... 961,809 635,663
----------- ------------
Total assets....................................................................... $34,035,957 $ 31,347,079
----------- ------------
----------- ------------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Deposits........................................................................... $16,044,288 $ 16,202,605
Securities sold under agreements to repurchase..................................... 2,861,604 1,842,442
Borrowings......................................................................... 12,276,287 10,769,594
Other liabilities.................................................................. 729,131 702,475
----------- ------------
Total liabilities................................................................ 31,911,310 29,517,116
----------- ------------
Commitments and contingencies...................................................... -- --
Minority interest.................................................................. 986,296 986,456
Stockholders' equity:
Floating rate cumulative perpetual preferred stock, $1.00 par value, liquidation
value of $15,000 per share, 24,000 shares authorized, 0 shares and 1,712
shares issued and outstanding at March 31, 1998 and December 31, 1997,
respectively.................................................................. -- 25,680
Class A common stock, $1.00 par value, 800 shares authorized, issued and
outstanding................................................................... 1 1
Class B common stock, $1.00 par value, 200 shares authorized, issued and
outstanding................................................................... -- --
Additional paid-in capital....................................................... 32,677 31,890
Net unrealized holding gain on securities available for sale..................... 28,101 35,162
Retained earnings (substantially restricted)..................................... 1,077,572 750,774
----------- ------------
Total stockholders' equity......................................................... 1,138,351 843,507
----------- ------------
Total liabilities, minority interest and stockholders' equity...................... $34,035,957 $ 31,347,079
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-59
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable.................................................................... $ 761,340 $ 779,663
Mortgage-backed securities available for sale....................................... 178,529 134,432
Mortgage-backed securities held to maturity......................................... 47,433 58,869
Loans held for sale................................................................. 58,230 37,627
Securities available for sale....................................................... 28,286 25,278
Securities held to maturity......................................................... 1,572 929
Interest-bearing deposits in other banks............................................ 1,571 3,790
---------- ----------
Total interest income............................................................ 1,076,961 1,040,588
---------- ----------
Interest expense:
Deposits............................................................................ 355,202 374,787
Securities sold under agreements to repurchase...................................... 57,049 72,786
Borrowings.......................................................................... 340,345 258,483
---------- ----------
Total interest expense........................................................... 752,596 706,056
---------- ----------
Net interest income.............................................................. 324,365 334,532
Provision for loan losses............................................................. 20,000 39,900
---------- ----------
Net interest income after provision for loan losses................................. 304,365 294,632
---------- ----------
Noninterest income:
Loan servicing fees, net............................................................ 71,363 74,979
Customer banking fees and service charges........................................... 51,197 46,752
Gain on sale of loans, net.......................................................... 36,124 11,358
(Loss) gain on sale of branches..................................................... (86) 1,069
Loss on sale of assets, net......................................................... (181) (214)
Dividends on FHLB stock............................................................. 14,562 11,975
Other income........................................................................ 11,755 15,368
---------- ----------
Total noninterest income......................................................... 184,734 161,287
---------- ----------
Noninterest expense:
Compensation and employee benefits.................................................. 127,620 127,502
Occupancy and equipment............................................................. 41,406 40,844
Savings Association Insurance Fund deposit insurance premium........................ 5,054 5,450
Loan expense........................................................................ 23,500 33,966
Marketing........................................................................... 9,914 7,684
Professional fees................................................................... 19,609 22,198
Data processing..................................................................... 6,897 6,182
Foreclosed real estate operations, net.............................................. (5,138) (857)
Amortization of intangible assets................................................... 23,229 24,595
Other............................................................................... 49,605 56,911
---------- ----------
Total noninterest expense........................................................ 301,696 324,475
---------- ----------
Income before income taxes and minority interest...................................... 187,403 131,444
Income tax (benefit) expense.......................................................... (221,134) 21,891
---------- ----------
Income before minority interest..................................................... 408,537 109,553
Minority interest..................................................................... 45,614 42,993
---------- ----------
Net income.......................................................................... 362,923 66,560
Preferred stock dividends............................................................. 578 8,243
---------- ----------
Net income available to common stockholders......................................... $ 362,345 $ 58,317
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-60
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Net income................................................................................. $362,923 $66,560
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available for sale:
Unrealized holding (loss) gain arising during the period.............................. (6,496) 6,804
Less: reclassification adjustment for gains included in net loss...................... (565) (4)
-------- -------
Other comprehensive (loss) income........................................................ (7,061) 6,800
-------- -------
Comprehensive income....................................................................... $355,862 $73,360
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-61
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
ADDITIONAL ON SECURITIES TOTAL
PREFERRED COMMON PAID-IN AVAILABLE FOR RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL SALE EARNINGS EQUITY
--------- ------ ---------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997........................... $ 25,680 $ 1 $ 31,890 $ 35,162 $ 750,774 $ 843,507
Net income....................... -- -- -- -- 362,923 362,923
Redemption of FN Holdings
Preferred Stock................ (25,787) -- 787 -- -- (25,000)
Change in net unrealized holding
gains on securities available
for sale....................... -- -- -- (7,061) -- (7,061)
Stock dividends.................. 107 -- -- -- (107) --
Cash dividends on common stock... -- -- -- -- (35,547) (35,547)
Cash dividends on preferred
stock.......................... -- -- -- -- (471) (471)
--------- ---- -------- -------- ---------- -----------
Balance at June 30, 1998......... $ -- $ 1 $ 32,677 $ 28,101 $1,077,572 $ 1,138,351
--------- ---- -------- -------- ---------- -----------
--------- ---- -------- -------- ---------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-62
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 362,923 $ 66,560
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Amortization of intangible assets.............................................. 23,229 24,595
Accretion of purchase accounting premiums and discounts, net................... (3,675) (9,882)
Amortization of mortgage servicing rights...................................... 57,074 51,070
Provision for loan losses...................................................... 20,000 39,900
Loss (gain) on sales of assets, net............................................ 181 214
Loss on sale of branches....................................................... 86 (1,069)
Gain on sales of foreclosed real estate, net................................... (8,403) (7,191)
Loss on sale of loans, net..................................................... 65,491 51,816
Depreciation and amortization of office premises and equipment................. 11,225 7,603
Amortization of deferred debt issuance costs................................... 3,342 2,495
FHLB stock dividends........................................................... (14,562) (11,975)
Capitalization of originated mortgage servicing rights and excess servicing
fees receivable............................................................... (101,615) (63,174)
Purchases and originations of loans held for sale.............................. (4,847,904) (3,024,959)
Proceeds from the sale of loans held for sale.................................. 4,537,939 2,962,052
(Increase) decrease in other assets............................................ (335,037) 109,155
Increase in accrued interest receivable........................................ (18,649) (15,004)
Increase (decrease) in other liabilities....................................... 31,378 1,973
Minority interest.............................................................. 45,614 42,993
----------- -----------
Net cash (used in) provided by operating activities.......................... $ (171,363) $ 227,172
----------- -----------
</TABLE>
(continued)
See accompanying notes to unaudited consolidated financial statements.
F-63
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Acquisitions:
Cal Fed Acquisition....................................................... $ -- $ (161,196)
GSAC Acquisition.......................................................... (13,577) --
Mortgage loan servicing rights and operations............................. -- (7,728)
Purchases of securities available for sale..................................... (513,957) (607,845)
Proceeds from maturities of securities available for sale...................... 549,442 204,888
Purchases of securities held to maturity....................................... (615) (58,149)
Proceeds from maturities of securities held to maturity........................ 357 4,374
Purchases of mortgage-backed securities available for sale..................... (4,083,863) (1,743,072)
Principal payments on mortgage-backed securities available for sale............ 1,107,314 345,823
Proceeds from sales of mortgage-backed securities available for sale........... 3,253 22,184
Principal payments on mortgage-backed securities held to maturity.............. 194,445 136,207
Net decrease in loans receivable............................................... 728,600 652,385
Purchases of FHLB stock, net................................................... (71,936) --
Purchases of office premises and equipment..................................... (37,221) (24,264)
Proceeds from disposal of office premises and equipment........................ 5,840 1,828
Proceeds from sales of foreclosed real estate.................................. 76,424 67,216
Purchases of mortgage servicing rights......................................... (63,628) (21,230)
----------- -----------
Net cash flows used in investing activities............................... (2,119,122) (1,188,579)
----------- -----------
Cash flows from financing activities:
Branch Sales................................................................... -- (21,683)
Net decrease in deposits....................................................... (157,876) (810,276)
Proceeds from additional borrowings............................................ 11,829,493 9,147,953
Principal payments on borrowings............................................... (10,321,926) (8,598,582)
Net increase in securities sold under agreements to repurchase................. 1,019,260 500,856
Proceeds from FN Escrow Merger................................................. -- 603,313
Issuance of REIT Preferred Stock, net.......................................... -- 482,449
Redemption of FN Holdings/FN Escrow Preferred Stock............................ -- (17,250)
Redemption of FN Holdings Preferred Stock...................................... (25,000) (62,500)
Dividends on common stock...................................................... (35,547) (35,547)
Dividends on preferred stock................................................... (471) (6,831)
Dividends paid to minority stockholders, net of taxes.......................... (46,353) (47,728)
Capital distribution to parent................................................. -- (550)
----------- -----------
Net cash flows provided by financing activities.............................. 2,261,580 1,133,624
----------- -----------
Net change in cash and cash equivalents............................................. (28,905) 172,217
Cash and cash equivalents at beginning of period.................................... 412,311 269,869
----------- -----------
Cash and cash equivalents at end of period.......................................... $ 383,406 $ 442,086
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-64
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of Regulation
S-X, Article 10 and therefore do not include all disclosures necessary for
complete financial statements. In the opinion of management, all adjustments
have been made that are necessary for a fair presentation of the financial
position and results of operations and cash flows as of and for the periods
presented. All such adjustments are of a normal recurring nature. The results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any
other interim period. Certain amounts for the three and six month periods in the
prior year have been reclassified to conform with the current period's
presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide Holdings Inc. ("FN Holdings" or the "Company"), California
Federal Bank, A Federal Savings Bank and its subsidiaries. On January 3, 1997,
First Nationwide Bank, A Federal Savings Bank merged with and into California
Federal Bank, A Federal Savings Bank (the "Cal Fed Acquisition"). Unless the
context otherwise indicates, (i) "Old California Federal" refers to California
Federal Bank, A Federal Savings Bank prior to the consummation of the Cal Fed
Acquisition and (ii) "California Federal" or "Bank" refers to California Federal
Bank, A Federal Savings Bank, as the surviving entity after the consummation of
the Cal Fed Acquisition, and to First Nationwide and its predecessors for
periods prior to the Cal Fed Acquisition. All significant intercompany balances
and transactions have been eliminated in consolidation. These financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. All terms used but not defined elsewhere herein have
meanings ascribed to them in the Company's Annual Report on Form 10-K.
Minority interest represents amounts attributable to the Bank Preferred
Stock, the preferred stock ("REIT Preferred Stock") of California Federal
Preferred Capital Corporation, whose common stock is wholly owned by the Bank,
and that portion of stockholders' equity of Auto One Acceptance Corporation, a
subsidiary of the Bank ("Auto One"), attributable to 20% of its common stock.
Earnings per share data is not presented due to the limited ownership of
the Company. FN Holdings is a holding company whose only significant asset is
all of the common stock of the Bank, and therefore all activities for the
consolidated entity are carried out by the Bank and its operating subsidiaries.
2. ACQUISITIONS AND DIVESTITURES
On February 4, 1998, Auto One acquired 100% of the partnership interests in
Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and its
general partner, Gulf States Financial Services, Inc., a Texas corporation. GSAC
was liquidated and its assets and liabilities were transferred to Auto One (the
"GSAC Acquisition"). The aggregate consideration paid in connection with the
GSAC Acquisition was approximately $13.6 million plus a 20% interest in the
common stock of Auto One.
On February 4, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), parent company of FN Holdings and the Bank, and Hunter's Glen/Ford
Ltd. ("Hunter's Glen"), a 20% minority shareholder of FN Holdings, entered into
a definitive merger agreement ("Golden State Merger Agreement") with Golden
State Bancorp Inc. ("Golden State"), the publicly traded parent company of
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to
which, Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free
exchange of shares in a merger transaction (the "Golden State Merger"), to be
accounted for under the purchase method of accounting. In connection with the
execution of the Golden State Merger Agreement, Golden State, Glendale Federal,
the Bank, Stephen J. Trafton, Chairman of the Board, President and Chief
Executive Officer of Golden State and Richard A. Fink, Vice Chairman of Golden
State, entered into a Litigation Management Agreement ("Litigation Management
Agreement") pursuant to which, among other things, Messrs. Trafton and Fink will
oversee and manage the California Federal Litigation (hereinafter defined) and
continue to
F-65
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
oversee and manage similar litigation being prosecuted by Glendale Federal,
following the consummation of the Golden State Merger. Following the Golden
State Merger, the combined parent company, Golden State, will have approximately
135 to 145 million common shares outstanding and will continue to be a publicly
traded company. As part of the Golden State Merger Agreement, Glendale Federal
will be merged with and into the Bank. At March 31, 1998, Glendale Federal had
total assets of approximately $15.9 billion and deposits of $9.7 billion and
operated 181 branches and 26 loan offices in California. The Golden State Merger
is subject to regulatory and stockholder approval and is expected to close
during the third quarter of 1998.
On March 29, 1998, the Company signed a definitive agreement to sell its
Florida bank franchise (consisting of 24 branches with deposits of $1.5 billion)
to Union Planters Bank of Florida, a wholly owned subsidiary of Union Planters
Corp. (the "Florida Branch Sale"). The Company expects to record a pre-tax gain
of approximately $110 million in connection with the Florida Branch Sale,
representing a deposit premium of approximately 7.5%. On June 2, 1998, the
Company received regulatory approval for this transaction, which is expected to
close during the third quarter of 1998.
3. CASH, CASH EQUIVALENTS, AND STATEMENT OF CASH FLOWS
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the six months ended June 30, 1998 and
1997 was $746.9 million and $677.3 million, respectively.
During the six months ended June 30, 1998, noncash activity consisted of
transfers of $62.4 million from loans receivable to foreclosed real estate,
$5.5 million of loans made to facilitate sales of real estate owned and
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities classified as trading securities upon the
securitization of certain of the Bank's single-family loans. Noncash activity
also includes the retirement of preferred stock of $.8 million and the issuance
of additional preferred stock through preferred stock dividends of $.1 million.
During the six months ended June 30, 1997, noncash activity consisted of
transfers of $86.8 million from loans receivable and $1.2 million from loans
held for sale (at lower of cost or market) to foreclosed real estate, $21.6
million of loans made to facilitate sales of real estate owned, the retirement
of preferred stock of $.8 million, the issuance of additional preferred stock
through preferred stock dividends of $1.4 million and the forgiveness of a $19
million loan from an affiliate of FN Holdings in exchange for the redemption of
the FN Holdings/FN Escrow Preferred Stock.
4. MINORITY INTEREST
In connection with the GSAC Acquisition, Auto One issued 250 shares of its
common stock, par value $1.00 per share, representing a 20% interest in Auto
One. The carrying value of Auto One's common stockholders' equity attributable
to the minority stockholders at June 30, 1998 is ($.2) million.
5. STOCKHOLDERS' EQUITY
Cash dividends on the FN Holdings Preferred Stock totalled $.5 million and
$6.8 million during the six months ended June 30, 1998 and 1997, respectively.
Dividends on common stock totalled $35.5 million during each of the six months
ended June 30, 1998 and 1997.
6. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim
F-66
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This statement supersedes FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise, but retains the requirement to
report information about major customers. It amends FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries. This
statement is effective for fiscal years beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is to
be restated. This statement need not be applied to interim financial statements
in the initial year of application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application. This statement
has no impact on the financial condition or results of operations of the
Company, but will require changes in the Company's disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No.
87, No. 88 and No. 106. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful as they
were when FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions,were issued. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of disclosures for earlier periods provided for comparative
purposes, if available. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 132 is adopted.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes standards for derivative instruments and for
hedging activities, and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Under SFAS No. 133, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. SFAS
No. 133 applies to all entities and amends FASB Statement No. 107, Disclosures
About Fair Values of Financial Instruments, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, Accounting for Futures
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk,and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this statement. Earlier application of all of the provisions of SFAS No. 133
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. SFAS No. 133 should not be applied
retroactively to financial statements of prior periods. Management has not yet
completed its analysis of SFAS No. 133 and is unable to determine the effect, if
any, implementation may have on the Company's consolidated financial statements.
F-67
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUBSEQUENT EVENT
On August 6, 1998, GS Escrow Corp. ("GS Escrow") issued $2 billion in debt
securities ("GS Escrow Notes"). The GS Escrow Notes were issued to fund a series
of refinancing transactions described below. Upon consummation of the Golden
State Merger and the refinancing transactions, GS Escrow will be merged (the "GS
Escrow Merger") with and into Golden State Holdings Inc. ("GS Holdings"), which
is currently named New First Nationwide Holdings Inc. ("New FN Holdings") and is
a newly formed subsidiary of FN Holdings. Upon consummation of the Golden State
Merger and the GS Escrow Merger, the GS Escrow Notes will be obligations of New
FN Holdings. GS Holdings was formed to acquire all of the assets of FN Holdings
(including all of the common stock of the Bank) as part of the Golden State
Merger.
Prior to the consummation of the Golden State Merger, (i) FN Holdings (or
an affiliate other than GS Escrow) is expected to commence cash tender offers
and consent solicitations (collectively, the "Debt Tender Offers") for each of
its three outstanding series of long-term notes (the "FN Holdings Notes") which
together have a total aggregate principal balance of $915 million; and (ii) FN
Holdings (or an affiliate other than GS Escrow Corp.) is expected to commence
cash tender offers (the "Bank Preferred Stock Tender Offers") for each of the
Bank's two outstanding series of preferred stock which together have a total
aggregate liquidation preference of $473.2 million.
The Debt Tender Offers and Bank Preferred Stock Tender Offers are expected
to close subsequent to the closing of the Golden State Merger.
After the closing of the Golden State Merger and concurrently with the
closings of the Debt Tender Offers, Golden State Financial Corporation (an
entity that will own 100% of the common stock of GS Holdings following the
consummation of the Golden State Merger), as the successor obligor, is expected
to give a 30-day notice of redemption for all of the outstanding $455 million
aggregate principal amount of 12 1/2% Senior Notes Due 2003 of Parent Holdings
(the "Parent Holdings Notes"), and to irrevocably deposit in trust money or
government obligations in an amount sufficient to pay the redemption price
therefor, together with any accrued and unpaid interest to the date of
redemption, for the purpose of defeasing the Parent Holdings Notes (the "Parent
Holdings Defeasance").
The Debt Tender Offers, the Bank Preferred Stock Tender Offers and the
Parent Holdings Defeasance will be financed with the net proceeds from the
offering of the GS Escrow Notes and, to the extent required, a cash dividend
from the Bank.
There can be no assurance that all of the outstanding FN Holdings Notes
will be tendered to and purchased by FN Holdings in the Debt Tender Offers. Any
FN Holdings 12 1/4% Senior Notes that remain outstanding after the consummation
of the Debt Tender Offers will rank pari passu with the GS Escrow Notes and any
FN Holdings 9 1/8% Senior Subordinated Notes or FN Holdings 10 5/8% Senior
Subordinated Notes that remain outstanding after the consummation of the Debt
Tender Offers will be subordinated in right of payment to the GS Escrow Notes.
It is not expected that all of the Bank Preferred Stock will be purchased
in the Bank Preferred Stock Tender Offers. FN Holdings expects to purchase any
outstanding Bank Preferred Stock not acquired in the Bank Preferred Stock Tender
Offers once it becomes redeemable (April 1, 1999 in the case of the 10 5/8%
Preferred Stock and September 1, 1999 in the case of the 11 1/2% Preferred
Stock).
F-68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Federal Bank, A Federal Savings Bank
We have audited the accompanying consolidated statements of financial condition
of Cal Fed Bancorp Inc. and subsidiaries ("Cal Fed") as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of Cal Fed's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cal Fed as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 of the notes to the consolidated financial statements,
Cal Fed adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, in 1994.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
F-69
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash.................................................................................... $ 242.1 $ 273.7
Short-term liquid investments........................................................... 69.0 74.1
Securities purchased under agreements to resell......................................... 1,310.1 1,674.6
Securities available for sale........................................................... 6.0 200.3
Securities held to maturity (market value: $1,942.3 in 1996 and $2,361.3 in 1995)....... 1,963.9 2,366.7
Loans receivable held for sale (market value: $8.7 in 1996 and $13.8 in 1995)........... 8.7 13.6
Loans receivable held for investment.................................................... 10,099.4 9,290.0
Federal Home Loan Bank stock............................................................ 166.8 135.7
Interest receivable..................................................................... 74.0 79.5
Premises and equipment.................................................................. 58.9 71.2
Real estate held for sale............................................................... 12.9 49.5
Prepaid expenses and other assets....................................................... 86.6 91.7
--------- ---------
Total assets....................................................................... $14,098.4 $14,320.6
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................................................ $ 8,918.3 $ 9,476.7
Advances from Federal Home Loan Banks................................................... 3,111.0 2,671.0
Securities sold under agreements to repurchase.......................................... 978.4 857.3
Student Loan Marketing Association advances............................................. -- 200.0
Subordinated debentures................................................................. 57.0 57.6
Other borrowings........................................................................ 0.3 0.5
Interest payable........................................................................ 21.7 29.4
Other liabilities....................................................................... 120.5 140.6
--------- ---------
Total liabilities.................................................................. $13,207.2 $13,433.1
--------- ---------
Minority interest in preferred stock of subsidiary...................................... 172.5 266.0
Stockholders' equity:
Common stock.......................................................................... 50.3 49.2
Additional paid-in capital............................................................ 846.7 838.6
Retained earnings (deficit)........................................................... (178.3) (266.3)
--------- ---------
Total stockholders' equity......................................................... 718.7 621.5
--------- ---------
Total liabilities and stockholders' equity......................................... $14,098.4 $14,320.6
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-70
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Interest income:
Loans receivable.............................................................. $ 763.4 $ 706.9 $ 630.4
Securities held to maturity................................................... 143.7 170.3 135.5
Securities purchased under agreements to resell............................... 91.7 68.5 44.0
Securities available for sale................................................. 11.8 49.4 75.2
Short-term liquid investments................................................. 4.7 12.9 23.0
-------- -------- -------
Total interest income...................................................... 1,015.3 1,008.0 908.1
-------- -------- -------
Interest expense:
Deposits...................................................................... 430.6 441.6 390.8
Borrowings.................................................................... 236.1 254.5 175.7
-------- -------- -------
Total interest expense..................................................... 666.7 696.1 566.5
-------- -------- -------
Net interest income........................................................ 348.6 311.9 341.6
Provision for loan losses....................................................... 41.3 31.8 74.9
-------- -------- -------
Net interest income after provision for loan losses........................ 307.3 280.1 266.7
Other income:
Fee income.................................................................... 60.0 54.5 62.4
Gain (loss) on sales of loans................................................. 0.7 (0.3) 0.5
Gain on sales of securities................................................... 1.1 6.9 0.2
Gain on sale of southeast division............................................ -- -- 135.0
Other......................................................................... 58.2 2.4 3.1
-------- -------- -------
Total other income......................................................... 120.0 63.5 201.2
-------- -------- -------
Other expenses:
Compensation.................................................................. 113.5 97.1 118.7
Office occupancy.............................................................. 37.2 39.4 47.3
Other general and administrative.............................................. 91.1 79.4 89.2
Federal deposit insurance premiums and special assessments.................... 22.0 26.0 35.1
-------- -------- -------
Total general and administrative expenses.................................. 263.8 241.9 290.3
Savings association insurance fund special assessment......................... 58.1 -- --
Operations of real estate held for sale....................................... 8.5 8.0 45.9
Loss on assets held for accelerated disposition............................... -- -- 274.8
-------- -------- -------
Total other expenses....................................................... 330.4 249.9 611.0
-------- -------- -------
Earnings (loss) before income tax expense (benefit) and cumulative effect of
change in accounting for goodwill............................................. 96.9 93.7 (143.1)
Income tax expense (benefit).................................................... (14.5) 0.1 6.3
-------- -------- -------
Earnings (loss) before cumulative effect of change in accounting for goodwill... 111.4 93.6 (149.4)
Cumulative effect of change in accounting for goodwill.......................... -- -- (273.7)
-------- -------- -------
Net earnings (loss) before dividends on preferred stock of subsidiary...... $ 111.4 $ 93.6 $(423.1)
Dividends on preferred stock of subsidiary...................................... 23.4 25.6 16.9
-------- -------- -------
Earnings (loss) available for common stockholders............................... $ 88.0 $ 68.0 $(440.0)
-------- -------- -------
-------- -------- -------
Earnings (loss) per common share before the cumulative effect of change in
accounting for goodwill....................................................... $ 1.75 $ 1.36 $ (3.82)
Loss per share of the cumulative effect of change in accounting for goodwill.... $ -- $ -- $ (6.28)
Net earnings (loss) per common share............................................ $ 1.75 $ 1.36 $(10.10)
</TABLE>
See accompanying notes to consolidated financial statements.
F-71
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year....................................................... $ 49.2 $ 49.2 $ 25.0
Issuance of shares of common stock.............................................. 1.1 -- 21.6
Exercise of common stock warrants............................................... -- -- 2.6
------ ------ ------
Balance at end of year............................................................. 50.3 49.2 49.2
------ ------ ------
Additional paid-in capital:
Balance at beginning of year....................................................... 838.6 836.6 658.2
Issuance cost of Preferred Stock, Series B...................................... -- -- (8.3)
Issuance of shares of Common Stock.............................................. -- -- 161.7
Exercise of common stock warrants............................................... -- -- 20.7
Long-term incentive stock options............................................... 2.0 2.0 4.3
Exercise of common stock options................................................... 6.1 -- --
------ ------ ------
Balance at end of year............................................................. 846.7 838.6 836.6
------ ------ ------
Net unrealized holding (losses) gains on securities available for sale:
Balance at beginning of year....................................................... -- (19.2) 8.3
Net unrealized holding gains (losses)........................................... -- 19.2 (27.5)
------ ------ ------
Balance at end of year............................................................. -- -- (19.2)
------ ------ ------
Retained earnings (deficit):
Balance at beginning of year....................................................... (266.3) (334.3) 105.7
Net earnings (loss) available for common stockholders........................... 88.0 68.0 (440.0)
------ ------ ------
Balance at end of year............................................................. (178.3) (266.3) (334.3)
------ ------ ------
Total stockholders' equity........................................................... $718.7 $621.5 $532.3
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-72
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) available for common stockholders...................... $ 88.0 $ 68.0 $ (440.0)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Loss on assets held for accelerated disposition......................... -- -- 274.8
Cumulative effect of change in accounting principle..................... -- -- 273.7
Depreciation and amortization........................................... 14.2 13.0 14.8
Accretion of fees and discounts......................................... -- (13.5) (37.3)
Provision for losses on loans receivable................................ 41.3 31.8 74.9
Provision (recovery) for losses on real estate held for sale............ 5.0 (7.4) 79.7
(Gain) loss on sales of loans........................................... (0.7) 0.3 (0.5)
Loans originated for sale............................................... (230.8) (117.2) (115.8)
Gain on sales of securities............................................. (2.3) (6.9) (0.2)
Proceeds from sales of loans receivable held for sale................... 281.1 183.2 1,099.4
Decrease in other assets................................................ 10.6 39.0 7.3
(Decrease) increase in other liabilities................................ (27.8) (34.4) 17.0
Other items............................................................. (11.7) (11.1) (20.5)
--------- --------- ---------
Net cash provided by operating activities............................. 166.9 144.8 1,227.3
Cash flows from investing activities:
Loans originated for investment............................................ (2,369.2) (2,128.9) (2,503.5)
Purchases of securities available for sale................................. (221.0) (202.9) (1,519.2)
Proceeds from sales of securities available for sale....................... 261.6 976.3 670.4
Net (purchases) maturities of securities held to maturity.................. -- (54.2) 0.4
Principal collected on loans receivable held for investment................ 1,399.7 1,152.1 1,406.9
Principal collected on securities held to maturity......................... 401.8 435.8 533.5
Proceeds from maturities of securities..................................... 156.0 808.8 1.0
Net increase in FHLB stock................................................. (31.1) (1.6) (12.6)
Proceeds from sales of real estate held for sale, net...................... 126.2 136.8 398.2
Net (additions) dispositions of premises and equipment..................... (1.6) (2.8) 8.3
Net increase (decrease) in short-term liquid investments................... 5.1 259.7 (27.0)
Net increase (decrease) in securities purchased under agreements to
resell.................................................................. 364.5 (1,626.4) (18.0)
--------- --------- ---------
Net cash used (provided) by investing activities...................... 92.0 (247.3) (1,061.6)
Cash flows from financing activities:
(Decrease) increase in deposits............................................ (558.4) 1,115.8 (4,239.9)
Proceeds from federal home loan bank advances.............................. 2,030.0 3,135.0 1,710.0
Payments on federal home loan bank advances................................ (1,590.0) (2,990.0) (200.0)
Net decrease (increase) in reverse repurchase agreements................... 121.1 (893.7) 1,501.2
Proceeds from other borrowings............................................. 0.4 3.0 202.0
Payments on other borrowings and subordinated debentures................... (201.2) (286.7) (41.4)
(Payments) proceeds from the (redemption) issuance of common stock......... 1.1 -- 210.9
(Payments) proceeds from the (redemption) issuance of preferred stock...... (93.5) -- 164.2
--------- --------- ---------
Net cash (provided) used by financing activities...................... (290.5) 83.4 (693.0)
--------- --------- ---------
Net decrease in cash......................................................... (31.6) (19.1) (527.3)
Cash at beginning of period.................................................. 273.7 292.8 820.1
--------- --------- ---------
Cash at end of period........................................................ $ 242.1 $ 273.7 $ 292.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cal Fed
Bancorp Inc. ("Bancorp") and its subsidiaries ("Cal Fed"). Cal Fed, through
California Federal Bank, A Federal Savings Bank ("California Federal") maintains
119 full service branches in California and Nevada and is one of the largest
savings associations in the United States. Cal Fed offers a broad range of
consumer financial services including demand and term deposits and mortgage and
consumer loans. Subsidiaries of Cal Fed sell insurance and investment products
to Cal Fed's customers, and have previously engaged in the real estate
investment and development and trust business. Cal Fed's deposit gathering and
loan production operations are concentrated in California, particularly in
Southern California.
It is Cal Fed's policy to consolidate all majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the 1995 and 1994
data in order to conform to the current presentation. The preparation of Cal
Fed's financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
operations of Cal Fed for the periods presented. Actual results may differ from
those estimates calculated by Cal Fed.
On January 3, 1997, Cal Fed was acquired by First Nationwide Holdings Inc.
("Holdings"). The consolidated financial statements do not reflect any purchase
accounting adjustments from the acquisition.
During 1995, California Federal obtained regulatory and stockholder
approval to reorganize into a holding company structure, which provided greater
flexibility for meeting future financial and competitive needs. In December
1995, California Federal contributed approximately $22 million in capital to
Bancorp as part of the reorganization into a holding company structure. As a
result of the reorganization, on January 1, 1996, each share of California
Federal's common stock was converted into one share of Bancorp common stock.
Consequently, California Federal became a wholly-owned subsidiary of Bancorp.
California Federal's other securities remain outstanding securities of
California Federal.
SHORT-TERM LIQUID INVESTMENTS
Cal Fed's short-term liquid investments consist of federal funds sold and
certificates of deposit. These investments generally mature within 60 days. Cal
Fed invests in these assets as a means to maximize its return on short-term
funds that it holds for liquidity purposes.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cal Fed, through California Federal, invests in securities purchased under
agreements to resell ("repurchase agreements") to maximize the yield on its
liquid assets. Cal Fed obtains collateral for these agreements, which normally
consists of U.S. treasury securities or mortgage-backed securities ("MBS")
guaranteed by agencies of the U.S. government. The collateral is held in the
custody of a trustee, who is not a party to the transaction. The duration of
these agreements is typically less than 30 days. Cal Fed deals only with
nationally recognized investment banking firms as the counterparties to these
agreements. Cal Fed's investment in repurchase agreements consisted solely
consisted of securities purchased under agreements to resell identical
securities.
INVESTMENTS IN SECURITIES
Cal Fed's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. Cal Fed has created MBS when it
exchanges pools of loans for mortgage-backed securities ("securitized loans").
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"), Cal Fed classifies its investment in securities as held to maturity
securities, trading securities and available for sale securities as applicable.
Cal Fed did not hold any trading securities at December 31, 1996 or 1995.
F-74
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Available for Sale Securities
Cal Fed has classified certain securities as "available for sale." Cal Fed
classifies securities as available for sale based upon a determination that such
securities may be sold at a future date or if there are foreseeable
circumstances under which Cal Fed would sell such securities.
Securities designated as available for sale are recorded at market value.
Changes in the market value of debt securities held for sale are included in
Stockholders' Equity as unrealized holding gains or losses net of the related
tax effect, if any. Unrealized losses on available for sale securities
reflecting a decline in value judged to be other than temporary are charged to
income in the Consolidated Statements of Operations. Realized gains or losses on
available for sale securities are computed on a specific identification basis.
Securities Held to Maturity
Cal Fed has classified certain securities as "held to maturity." Securities
are designated as held to maturity if Cal Fed has the positive intent and the
ability to hold the securities to maturity. Held to maturity securities are
carried at amortized cost, adjusted for the amortization of any related premiums
or the accretion of any related discounts into interest income using a
methodology which approximates a level yield of interest over the estimated
remaining period until maturity. Unrealized losses on held to maturity
securities, reflecting a decline in value, judged by Cal Fed to be other than
temporary, are charged to income and reported under the caption "Gain (loss) on
Sale of Securities" in the Consolidated Statements of Operations.
LOANS RECEIVABLE
Cal Fed's principal interest-earning asset is loans receivable. Cal Fed,
through California Federal, primarily originates loans secured by residential
property of four units or less ("residential 1-4 loans"). Prior to 1993, Cal Fed
was active in the origination of loans secured by residential properties of five
or more units ("multifamily loans") and loans secured by office buildings,
shopping centers, industrial buildings, warehouses, marinas and hotels
("commercial real estate loans"). Cal Fed currently limits its originations of
multifamily and commercial real estate loans to finance the sale of real estate.
Prior to 1993, Cal Fed was active in the origination of loans secured by
vehicles, mobile homes, boats and unsecured personal loans ("consumer loans").
Since 1993, Cal Fed has ceased originating consumer loans for its own portfolio.
However, Cal Fed does originate consumer loans for other financial institutions
for a fee. Cal Fed segregates its loan portfolio into loans held for sale and
loans held for investment. Cal Fed normally designates a loan as held for sale
at the time of origination. Cal Fed's portfolio of residential 1-4 loans,
multi-family loans and commercial real estate loans is primarily secured by
property located in California. Cal Fed continues to focus its origination
efforts in California, particularly in Southern California. Cal Fed's ability to
originate loans is affected by economic conditions, competition and the market
for real estate in California. Likewise, the ability of Cal Fed's borrowers to
honor their contractual loan obligations to Cal Fed is also affected by the
strength of the California economy and particularly the availability of
employment and the pricing for residential housing. Should the California
economy, the market for real estate, and/or the availability of employment
experience a significant downturn over the near term, Cal Fed may experience a
reduction in the level of loan originations and/or an increase in loan losses.
Loans Receivable Held for Sale
Cal Fed, through California Federal, has designated certain of its loans
receivable as "held for sale." In determining the level of loans held for sale,
Cal Fed considers whether such loans would be sold in response to liquidity
needs, asset/liability management requirements, regulatory capital needs and
other factors. Cal Fed's current policy is to designate substantially all
originations of fixed-rate residential 1-4 loans that conform to the
underwriting criteria of Fannie Mae ("FNMA"), formerly known as the Federal
National Mortgage Association or Freddie Mac ("FHLMC"), formerly known as the
Federal Home Loan Mortgage Corporation, as held for sale.
F-75
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Loans held for sale are recorded at the lower of cost or market value.
Unrealized losses are recorded as a reduction in earnings and are included under
the caption "Gain (loss) on sale of loans" in the Consolidated Statements of
Operations. Realized gains and losses from the sale of loans receivable are
computed under the specific identification method.
Gains and Losses from the Sale of Loans
Cal Fed, through California Federal, sells whole loans and participations
in mortgage loans to institutional and private investors. Gains and losses
resulting from the sales of loans are determined on the specific identification
method and reflect the extent that the sales proceeds exceed or are less than
Cal Fed's investment in the loans (which includes adjusting the unpaid principal
balance of the loans for unearned discounts, premiums and deferred fees and
costs at the time of sale). In some cases, Cal Fed sells loans and continues to
service such loans for the investor. In these cases, Cal Fed recognizes a gain
or loss on the loan sale measured by the present value of the difference between
the yield on the loans and the yield to be paid to the buyer, reduced by the
normal servicing fees, over the estimated remaining lives of those loans using
market prepayment, default and discount rate assumptions. If loans are sold with
recourse, the estimated liability under the recourse provisions is provided for
in the computation of the gain or loss. The resulting deferred discount or
premium ("excess servicing") is amortized as an addition to or deduction from
income using the interest method, adjusted for actual prepayments. Cal Fed
periodically reviews the remaining premium to ensure that it does not exceed the
present value of the estimated excess servicing fees, using current estimates of
market prepayments and default. In the event that actual prepayments exceed the
assumptions used in determining the gain or loss, the deferred premium is
adjusted to reflect current prepayment projections by a charge to operations. To
the extent sales of loans involve the sale of part of a loan or a pool of loans
with disproportionate credit and prepayment risks, the cost basis is allocated
based upon the relative fair market value of the portion sold and the portion
retained on the date such loans were acquired or, if that is not determinable,
the date of sale. The amount of excess servicing recorded by Cal Fed was
$4.8 million and $3.9 million at December 31, 1996 and 1995, respectively. Such
amounts were included in "Prepaid expenses and other assets" on the Consolidated
Statements of Financial Condition.
Loan Servicing
Cal Fed, through California Federal, services its loan portfolio and real
estate and consumer loans which are owned by independent investors. Loans
serviced by Cal Fed for others are primarily the result of Cal Fed selling loans
while retaining the servicing of such loans. Loans which are serviced for other
parties are not included with loans receivable or any other asset in the
accompanying consolidated financial statements. Fees earned for servicing loans
for others are reported as income when the related loan payments are collected.
Loan servicing costs are charged to expense as incurred.
Loans Receivable Held for Investment
Cal Fed's loan portfolio is comprised of residential 1-4 loans, loans
secured by income producing real estate ("income property loans") and consumer
loans. Since 1993, Cal Fed has not actively engaged in originating income
property loans, except to finance the sale of Cal Fed's real estate.
Loans receivable are generally recorded at the contractual amounts owed by
borrowers, less deferrals, unearned interest, the allowance for loan losses,
undisbursed funds and purchase premiums and discounts. Interest on loans is
credited to income as earned, to the extent deemed collectible. Discounts on
loans purchased and unearned interest on consumer loans is accreted into
interest income using the interest method over the contractual lives of the
loans, adjusted for actual prepayments.
F-76
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment of
loan yield using the interest method. When a loan is paid off or sold, any
unamortized net deferred fee balance is credited to income. Commitment fees
received in connection with the purchase of loans are deferred and recognized
over the life of the resulting loans as an adjustment of yield, or if the
commitment expires unexercised, credited to income upon expiration of the
commitment. Any costs in connection with the purchase of loans are expensed as
incurred.
Impaired and Non-Performing Loans
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114"). A loan is impaired when it is "probable"
that a creditor will be unable to collect all amounts due (i.e., both principal
and interest) according to the contractual terms of the loan agreement. SFAS
No. 114 excludes among other items, large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment. Cal Fed adopted SFAS
No. 114 as of January 1, 1995. Cal Fed has defined residential 1-4 loans,
consumer loans, multifamily loans with an outstanding balance of less than
$750,000 and commercial real estate loans with an outstanding balance of less
than $500,000 as homogenous loans. All homogenous loans that are 90 days or more
delinquent or are in foreclosure are automatically placed on non-performing
status. Additionally, homogenous loans that have had a modification of terms are
individually reviewed to determine if they meet the definition of a troubled
debt restructuring. The measurement of impairment may be based on (i) the
present value of the expected future cash flows of the impaired loan discounted
at the loan's original effective interest rate, (ii) the observable market price
of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The amount by which the recorded investment of the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for losses. For
all loans secured by real estate, Cal Fed measures impairment and establishes
specific valuation allowances by utilizing the fair value of the property
collateralizing the loan.
All loans designated by Cal Fed as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with those
loans reported as non-performing. Cal Fed's non-performing loans consist of
loans on which Cal Fed has ceased the accrual of interest ("non-accrual loans")
and loans on which various concessions have been made with respect to the
interest rate or other terms due to the inability of the borrower to service the
obligation under the original terms of the agreement ("restructured loans"). It
is Cal Fed's policy to place a loan on non-accrual status in the event that the
borrower is 90 days or more delinquent or earlier if the timely collection of
interest and/or principal appears doubtful. When a loan is determined to be
impaired and/or placed on non-accrual status, the accrued and unpaid interest
receivable is reversed. All cash subsequently collected on non-accrual loans is
used to reduce the recorded investment in the loan until the loan is returned to
performing status. Cal Fed's policy allows loans that are contractually
performing to be designated as impaired and to be placed on non-accrual status
if the future collection of interest and or principal appears doubtful or the
risk of default is probable.
Allowance for Loan Losses
Cal Fed has established valuation allowances for estimated losses on
specific loans ("specific valuation allowances") and for the inherent risk in
the loan portfolio which has yet to be specifically identified ("general
valuation allowances").
Cal Fed maintains a loan monitoring system which provides a means for the
timely identification of impaired and potential problem loans and to permit the
evaluation of the adequacy of the allowances for losses. Cal Fed's loan
monitoring system has established specific policies relating to its residential
1-4, income property, commercial banking and consumer loan portfolios.
Additionally, Cal Fed is required by various regulatory
F-77
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
agencies to monitor and classify its assets as Pass, Special Mention,
Substandard, Doubtful and Loss. Cal Fed's monitoring system further
disaggregates loans that are determined to be Pass into four separate grades.
Additionally, Cal Fed places loans on a watchlist if they exhibit certain credit
characteristics. These characteristics include dollar size, tenant concentration
and the timing of maturity.
Cal Fed's residential 1-4 loans and consumer loans are relatively
homogenous and no single residential 1-4 or consumer loan possesses the
potential for significant risk of loss. Therefore, Cal Fed normally evaluates
the risk of loss on these loans by analyzing their loss experience, performance,
default rates and other indicators of risk for the portfolios as a whole. Cal
Fed stratifies its income property loan portfolio by size and by type and treats
performing multi-family loans with outstanding principal balances less than
$750,000 and commercial real estate loans with balances less than $500,000 as
homogenous portfolios. Income property loans that are below the homogenous
threshold are evaluated for impairment based upon their payment status and on a
pool basis. For income property loans exceeding the homogenous threshold, Cal
Fed conducts a periodic review of each loan in order to test each loan for
impairment. The frequency and type of review is dependent upon the inherent risk
attributed to each loan. The level of risk is measured by a scale which
evaluates each loan on a continuum of multiple grades. The frequency and
intensity of the loan review is directly proportionate to the adversity of the
loan grade. Cal Fed evaluates the risk of default and the risk of loss for each
loan subject to individual monitoring. Non-performing income property loans and
performing loans that have been graded substandard, special mention, or
watchlist are typically reviewed on a quarterly basis. Current appraisals are
generally obtained annually as long as the loan continues to possess certain
risk characteristics. These loans are monitored throughout the year by a review
of the collateral's operating performance and the borrowers' indicated or
demonstrated ability to continue to meet their obligations. When necessary, Cal
Fed utilizes operating statements of the collateral to perform its own
discounted cash flow analyses. These analyses provide the basis for specific
valuation allowances. Numerous other factors are considered in the evaluation,
including a review of certain individual borrowers' current financial status,
credit standing, available collateral, Cal Fed's judgment regarding prevailing
and anticipated economic conditions and other relevant factors.
Specific valuation allowances are provided when an identified decline in
the value of an impaired loan (or the related collateral) is identified. The
determination of specific valuation allowances includes a periodic evaluation of
the financial status of certain individual borrowers or collateral relating to
loans specifically identified as containing elements of potential risk in the
loan portfolio. For loans that are impaired and secured by real estate or other
collateral, Cal Fed provides specific allowances based upon the excess of the
outstanding loan amount over the fair value of the related collateral with
consideration of holding and selling costs.
General valuation allowances are based upon the inherent risk in the loan
portfolio that has not been specifically identified. The general valuation
allowance is based upon a number of factors, including historical loss
experience, the level of non-performing and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecast economic conditions
and Cal Fed's judgment. General allowances are provided for all loans,
regardless of any specific allowances provided. The determination of Cal Fed's
allowance for loan losses is based on estimates that are affected by changes in
the regional or national economy and market conditions. Cal Fed believes that as
of December 31, 1996 and 1995, the allowance for loan losses is adequate based
on current economic and market conditions. However, in the course of evaluating
the adequacy of the allowance for loan losses, Cal Fed has projected that the
California economy and the market for real estate will remain in the same
relative condition that it was in at December 31, 1996. Should these factors
experience a downturn in the near term or if market interest rates increase
significantly in the near term, Cal Fed could experience a material increase in
the level of loan defaults and charge-offs.
F-78
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
REAL ESTATE HELD FOR SALE
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and real estate investments ("REI"). REO generally results when
property collateralizing a loan is foreclosed upon or otherwise acquired by Cal
Fed, through California Federal, in satisfaction of the loan. REO is recorded at
the lower of the recorded investment in the loan satisfied, the fair value or
the disposition value of the related assets acquired less anticipated
disposition costs. The fair value of the assets is based upon a current
appraisal adjusted for estimated carrying and selling costs. The disposition
value is based upon the current market pricing of the asset. Net cash receipts
on REO are recorded as a reduction in the basis of the asset. Net cash payments
are expensed as incurred. Cal Fed's REI consists of properties that Cal Fed,
through its subsidiaries, acquired for purposes of development where Cal Fed is
actively seeking to dispose of the property in an expeditious manner. Cal Fed
has not been actively involved in real estate investment or development for
several years. Cal Fed records its REI at the lower of cost or fair value of the
properties. Cal Fed determines fair value by utilizing recent sales activity and
deducting holding and disposition costs over the estimated remaining period to
sell the projects. Cal Fed has assumed an orderly disposition in estimating the
holding period to sale. Should Cal Fed be unable to sell the project at the
projected prices, if the holding period is substantially longer than forecast,
or if Cal Fed's intent with respect to an orderly disposition were to change,
the fair value ultimately realized by Cal Fed could be materially lower than Cal
Fed's current forecast.
PREMISES AND EQUIPMENT, DEPRECIATION AND CAPITALIZATION OF INTEREST
Maintenance and repairs on premises and equipment are charged to expense in
the year incurred. Depreciation and amortization of premises and equipment are
computed using the straight-line method over the estimated useful lives of the
assets. Interest incurred on amounts used to finance the construction of such
assets is capitalized and amortized over the depreciable lives of the related
assets.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of
tangible and identifiable intangible net assets acquired, was amortized on a
straight-line basis over the expected periods to be benefited, ranging from 20
to 40 years. During 1994, Cal Fed applied Statement of Financial Accounting
Standards No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions ("SFAS No. 72") to acquisitions initiated, by Cal Fed, prior to
September 30, 1982. SFAS No. 72 requires, among other things, that to the extent
the fair value of liabilities assumed exceeds the fair value of identifiable
assets acquired from a banking or thrift institution, the unidentifiable
intangible asset recognized (i.e., goodwill) generally shall be amortized over a
period no longer than the discount on the acquired long-term interest-earning
assets. SFAS No. 72 was effective for acquisitions initiated after
September 30, 1982 with retroactive application permitted. Cal Fed had been
accounting for its acquisitions initiated subsequent to September 30, 1982 in
accordance with SFAS No. 72. The cumulative effect of the retroactive
application of SFAS No. 72 resulted in the acceleration of Cal Fed's goodwill
amortization arising from Cal Fed's thrift institution acquisitions initiated
prior to September 30, 1982. Under generally accepted accounting principles, the
cumulative effect from the retroactive application of SFAS No. 72 must be
reflected as of the first day of the fiscal year in which it is implemented. To
that extent, $273.7 million of remaining unamortized goodwill was eliminated
effective January 1, 1994.
INCOME TAXES
Bancorp files a consolidated federal income tax return and a combined
California franchise tax report with its subsidiaries.
Cal Fed has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109") and has applied the provisions of SFAS No. 109 retroactively to January 1,
1982. Under the asset and liability method of SFAS No. 109, deferred income tax
expense (benefit) is derived by establishing deferred tax assets and liabilities
as of the reporting date for the
F-79
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Cal Fed's
evaluation of the realizability of deferred tax assets includes consideration of
the amount and timing of future reversals of existing temporary differences, as
well as available taxable income in carryback years. Cal Fed has not considered
income from future operations in evaluating the realizability of its deferred
tax assets. See Note 20 Income Taxes.
STOCKHOLDERS' EQUITY
The par value of Cal Fed's common stock was $1.00 per share at December 31,
1996 and at December 31, 1995. The number of shares issued and outstanding were
50,316,774 and 49,200,444 at December 31, 1996 and 1995, respectively. The
authorized number of common shares were 100,000,000 at December 31, 1995 and
1994.
On July 29, 1996 Bancorp, the parent company of California Federal,
announced that it had entered into a definitive merger agreement with First
Nationwide Holdings Inc., the parent company of First Nationwide Bank, San
Francisco ("First Nationwide"). The merger agreement was approved by Bancorp's
stockholders and by regulatory authorities and closed on January 3, 1997.
During the fourth quarter of 1995, California Federal obtained regulatory
and stockholder approval to reorganize into a holding company structure. As a
result of the reorganization, on January 1, 1996, each share of California
Federal's common stock was converted into one share of Bancorp common stock.
Consequently, California Federal became a wholly-owned subsidiary of Bancorp.
California Federal's other equity securities remained outstanding securities of
California Federal.
During 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock, Series B ("Preferred Stock, Series B").
Cash dividends on the Preferred Stock, Series B, are not cumulative and are
payable quarterly when declared by Cal Fed's Board of Directors. The Preferred
Stock, Series B, has a liquidation preference and par value of $100.00 per
share. The par value of the Preferred Stock, Series B was $100.00 per share at
December 31, 1996 and 1995. Both the designated and outstanding number of shares
at December 31, 1996 and 1995 were 1,725,000. The Preferred Stock, Series B, is
generally not redeemable prior to April 1, 1999. The Preferred Stock, Series B,
is redeemable at the option of California Federal, in whole or in part, at
$105.313 per share on or after April 1, 1999 and prior to April 1, 2000, and at
prices decreasing annually thereafter to the liquidation preference of $100.00
per share on or after April 1, 2003, plus declared but unpaid dividends. In
addition, the Preferred Stock, Series B, is redeemable at the option of
California Federal or its successor or any acquiring or resulting entity with
respect to California Federal on or after April 1, 1996 and prior to April 1,
1999 in whole, but not in part, in the event of a change of control of
California Federal at $114.50 per share.
During the second quarter of 1996 California Federal called for redemption
all 3,740,000 shares of its 7 3/4% noncumulative convertible preferred stock,
Series A. Except for the conversion of 18,820 shares into 23,336 shares of
Bancorp's common stock, the Series A shares were redeemed effective June 14,
1996 at a redemption price of $25.00 per share, plus a dividend of $0.398264 per
share.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding, including the dilutive effect, if any, of common stock
equivalents. For the years ended December 31, 1996, 1995 and 1994, the weighted
average number of shares used to calculate primary earnings (loss) per share
were 50,220,881, 49,855,150 and 43,556,167 respectively. For the years ended
December 31, 1996, 1995, and 1994 the weighted average number
F-80
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of shares used to calculate fully diluted earnings (loss) per share were
50,238,827, 50,020,218 and 43,556,167, respectively.
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107").
Financial instruments are defined under SFAS No. 107 as cash, evidence of
an ownership in an entity, or a contract that conveys or imposes on an entity
the contractual right or obligation to either receive or deliver cash or another
financial instrument.
A significant portion of Cal Fed's assets and liabilities are financial
instruments as defined under SFAS No. 107. Cal Fed is also a party to financial
instruments that are not reported on the Consolidated Statements of Financial
Condition ("off balance sheet financial instruments"). Such off balance sheet
financial instruments include commitments to originate loans, standby letters of
credit, recourse arrangements and interest rate exchange agreements.
Risks Associated with Financial Instruments
Credit Risk
Credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the terms
of the contract. The most significant credit risk associated with Cal Fed's
financial instruments is concentrated in its loans receivable. Additionally, Cal
Fed is subject to credit risk on certain off-balance sheet financial
instruments. Cal Fed utilizes a loan monitoring system to evaluate the level of
credit risk on its loan portfolio and utilizes a similar process for loans sold
by Cal Fed with recourse and standby letters of credit. Cal Fed's credit risk
with respect to interest rate exchange agreements is limited to the premium paid
on interest rate cap and floor arrangements, and the amount of interest due from
the counterparty.
Market Risk
Market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of Cal Fed. Cal Fed's market risk is
concentrated in California Federal's portfolios of securities held for sale and
loans receivable. California Federal's securities held for sale are traded in
active markets. The values of these securities are susceptible to fluctuations
in the general market. When a borrower fails to meet the contractual
requirements of his loan agreement, Cal Fed is subject to the market risk of the
collateral securing the loan.
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency, degree or basis that varies from market repricing.
Cal Fed is subject to interest rate risk to the degree that its interest-
earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. A majority of Cal Fed's loans receivable and
mortgage backed securities reprice based upon the FHLB Eleventh District cost of
funds index ("COFI"). The repricing of COFI tends to lag market interest rates.
Cal Fed closely monitors the pricing sensitivity of its financial instruments
and, if deemed cost effective, utilizes hedging and other asset/liability
techniques to mitigate the impact of interest rate risk.
Concentrations of Credit Risk
Cal Fed's lending activities are principally conducted in California and
Cal Fed currently focuses on the origination of residential 1-4 loans. The
largest concentration of Cal Fed's loan portfolio is located in the Los Angeles
County area of California. The ability of Cal Fed's borrowers to repay their
commitments is contingent
F-81
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
on several factors, including the economic conditions in the borrower's
geographic region, primarily Southern California, market interest rates, and
upon the individual financial condition of the borrower.
Fair Value of Financial Instruments
SFAS No. 107 requires the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of financial condition,
for which it is practicable to estimate the value. SFAS No. 107 requires that
Cal Fed disclose estimated fair values for its financial instruments. Fair
values, estimates and assumptions are set forth in Note 21 Fair Value of
Financial Instruments.
Derivative Financial Instruments
Cal Fed's derivative financial instruments are primarily limited to
interest rate exchange contracts and such contracts are predominantly utilized
for hedging activities for existing assets and liabilities.
Cal Fed uses several types of interest rate exchange contracts as an
integral part of its asset/liability management program including (i) interest
rate swaps, (ii) interest rate caps and (iii) interest rate floors. Interest
rate exchange agreements have been utilized primarily to reduce interest rate
risk on certain interest-bearing liabilities and interest-earning assets.
Interest rate swap agreements are instruments in which Cal Fed and another party
agree to exchange interest payments on a notional amount. When using interest
rate cap agreements, Cal Fed pays another party a premium in exchange for cash
payments on a notional amount in the event that a specified index exceeds a
specified rate. When utilizing interest rate floors, Cal Fed pays a premium in
exchange for cash payments on a notional amount in the event that a specified
index is less than a specified rate. These premiums are amortized over the
duration of the agreement. The notional amounts of interest rate exchange
agreements are not reflected in the Consolidated Statements of Financial
Condition, but are disclosed in the notes to these Consolidated Financial
Statements. Cal Fed records interest income and expense on the accrual method
for its interest rate exchange agreements. Changes in the value of interest rate
exchange agreements that are designated as held for a purpose other than trading
are not reflected in the Consolidated Financial Statements unless Cal Fed
determined that it was probable that the counterparty would default. Interest
rate exchange agreements that are designated as held for trading purposes are
evaluated at fair value, and in the event that such evaluation indicates a net
liability to Cal Fed, such liability is reflected on the Consolidated Statements
of Financial Condition with a corresponding charge reflected on the Consolidated
Statements of Operations. To the extent that Cal Fed is in a gain position, Cal
Fed records net cash flow as income upon receipt and typically does not record
unrealized gains as income.
NEWLY ENACTED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" ("SFAS No. 121"). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used for
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In the event that a long lived asset is determined to be
impaired, an impairment loss shall be recognized. SFAS No. 121 prescribes that
impairment losses for long-lived assets shall be measured as the amount by which
the carrying amount of the asset exceeds its fair value. Additionally, SFAS
No. 121 provides that long-lived assets, to be disposed by sale or abandonment,
shall be reported at the lower of carrying amount or fair value less cost of
disposition. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995; earlier application is permitted. SFAS
No. 121 was adopted by Cal Fed on January 1, 1996 and did not have a material
adverse effect on the financial position or results of operations.
F-82
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"), an
amendment of FASB Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" ("SFAS No. 65"). SFAS No. 122 amends SFAS No. 65 to remove the
distinction in accounting for mortgage servicing rights resulting from
originated loans and those resulting from purchased loans. Additionally, SFAS
No. 122 requires that an enterprise with mortgage banking activities assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS No. 122 is to be applied prospectively to fiscal years
beginning after December 15, 1995; earlier application is permitted. SFAS No.
122 was adopted during the first quarter of 1996. Cal Fed did not experience a
material impact to its results of operations or financial condition from such
implementation.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This Statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. Those transactions must be accounted for, or at
least disclosed in the case of stock options, based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The accounting requirements of SFAS
No. 123 are effective for transactions entered into in fiscal years that begin
after December 15, 1995. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. During 1996, Cal Fed had no
stock-based employee compensation plans. In addition, Cal Fed did not enter into
any transactions in which its equity instruments were used to acquire goods or
services from non-employees. Therefore, SFAS No. 123 had no effect on the
Financial Statements of Cal Fed.
In November 1995, the FASB issued a Special Report ("Special Report") as an
aid in understanding and implementing Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). The Special Report included such guidance that
enabled Cal Fed to reassess the appropriateness of the classifications of all
securities held and account for any resulting reclassifications at fair value in
accordance with SFAS No. 115. During the fourth quarter of 1995, Cal Fed, in
accordance with the Special Report, redesignated $17.2 million of MBS from "held
to maturity" to "available for sale." Prior to December 31, 1995, Cal Fed sold
such MBS for a loss of less than $0.1 million.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 establishes new
criteria for determining whether a transfer of financial assets in exchange for
cash or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements for pledged collateral. As issued, SFAS No. 125 is effective for
all transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and earlier or retroactive
application is not permitted. During 1996, the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127
defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and
(b) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement,
dollar-roll, securities lending, and similar transactions. SFAS No. 127 provides
additional guidance on the types of transactions for which the effective date of
SFAS No. 125 has been deferred. It also requires that if it is not possible to
determine whether a transfer occurring during calendar-year 1997 is part of a
repurchase agreement, dollar-roll, securities lending, or similar transaction,
then paragraphs 9-12 of SFAS No. 125 should be applied to that transfer.
Although the provisions of SFAS No. 125 as amended by SFAS No. 127 have not yet
F-83
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
been adopted by Cal Fed, management does not expect such adoption to have a
material impact on its consolidated financial statements.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, Cal Fed
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash Paid (Received) During the Year for:
Interest expense.............................................................. $674.4 $685.2 $ 557.8
Income taxes refunded......................................................... (11.2) (1.6) (8.5)
Non-Cash Investing and Financing Activities:
Loan foreclosures............................................................. 120.2 146.2 189.3
Loans exchanged for mortgage-backed securities................................ -- 239.7 424.0
Transfer of securities to available for sale.................................. -- 17.2(a) --
Change in unrealized gain on securities available for sale.................... -- 19.2 (27.5)
Transfer of loans to held for sale............................................ 44.9 78.7 1,213.9(b)
</TABLE>
- ------------------
(a) In November 1995, FASB issued the Special Report. During the fourth quarter
of 1995, Cal Fed, in accordance with the Special Report, redesignated
$17.2 million of MBS from "held to maturity" to "available for sale" and,
prior to December 31, 1995, sold such MBS for a loss of less than
$0.1 million.
(b) During 1994, Cal Fed designated $1.2 billion of performing and
non-performing loans as assets held for accelerated disposition. This
designation was made during 1994 as an integral part of Cal Fed's program to
improve its capital position, reduce non-performing assets and improve its
operating efficiency.
3. SHORT-TERM LIQUID INVESTMENTS
Cal Fed's short-term liquid investments include certificates of deposit,
commercial paper and Federal funds sold. The amount of short-term liquid
investments held by Cal Fed at any point in time is a function of many factors
including liquidity requirements, projected cash requirements and cash flows.
The following table presents Cal Fed's short-term liquid investments at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------ ------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
CARRYING WEIGHTED AVG. MATURITY CARRYING WEIGHTED AVG. MATURITY
VALUE RATE (DAYS) VALUE RATE (DAYS)
-------- ------------- ------------- -------- ------------- -------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold........... $ 69.0 6.08% 2 $ 70.0 5.80% 2
Certificates of deposit...... -- -- -- 4.1 5.19 27
------ ------
$ 69.0 6.08% $ 74.1 5.77%
------ ------
------ ------
</TABLE>
At December 31, 1996 and 1995 accrued interest and dividends receivable
related to short-term liquid investments held to maturity were $0.1 million and
$0.2 million, respectively.
F-84
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1996 and by U.S. Treasury securities
at December 31, 1995. The following table provides additional information on the
agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to resell............................... $1,310.1 $1,674.6
Market value of collateral........................................... 1,341.2 1,704.4
Maximum amounts of outstanding agreements to resell at any
month-end.......................................................... 1,912.9 1,704.2
Average amounts of outstanding agreements to resell for the year..... 1,660.5 1,144.5
Weighted average interest rate for the year.......................... 5.52% 5.99%
Weighted average interest rate on year-end balances.................. 6.72% 6.01%
Weighted average maturity of outstanding agreements to resell
(days)............................................................. 3 11
</TABLE>
At December 31, 1996 and 1995, Cal Fed held only securities purchased under
agreements to resell the identical securities. The securities collateralizing
these agreements are held in the custodial accounts of a trustee, who is not a
party to the agreement for Cal Fed for the duration of the agreements. The
following table presents Cal Fed's securities purchased under agreements to
resell, by counterparty, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
COUNTERPARTY 1996 1995
- ------------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers...................................................... $ 263.0 $ 700.7
Nomura Securities.................................................... 350.0 500.0
Bear Stearns......................................................... 209.8 473.9
Paine Webber......................................................... 407.3 --
Donaldson, Lufkin and Jenrette....................................... 80.0 --
-------- --------
$1,310.1 $1,674.6
-------- --------
-------- --------
</TABLE>
Accrued interest related to securities purchased under agreements to resell
at December 31, 1996 and 1995 totaled $1.6 and $2.7 million, respectively.
5. SECURITIES AVAILABLE FOR SALE
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING GAINS MARKET AVERAGE
COST VALUE GAINS LOSSES (LOSSES) VALUE RATE
---------- -------- ---------- ---------- -------------- ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing after 1 year but within
5 years.............................. $6.0 $6.0 $ -- $ -- $ -- $6.0 6.13%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
F-85
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SECURITIES AVAILABLE FOR SALE--(CONTINUED)
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING GAINS MARKET AVERAGE
COST VALUE GAINS LOSSES (LOSSES) VALUE RATE
---------- -------- ---------- ---------- -------------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year................ $150.0 $149.9 $ -- $ (0.1) $ (0.1) $ 149.9 4.00%
Maturing after 1 year but within
5 years............................ 50.3 50.4 0.1 -- 0.1 50.4 7.46
------ ------ ------ ------ ------ -------
$200.3 $200.3 $ 0.1 $ (0.1) $ -- $ 200.3 4.87%
------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ -------
</TABLE>
The table below presents the activity of securities available for sale for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1.................................................... $ 200.3 $1,731.5 $ 894.7
Purchases............................................................. 221.0 202.9 1,519.2
Sales................................................................. (259.3) (969.4) (670.2)
Transfers............................................................. -- 17.2 (a) --
Maturities(b)......................................................... (156.0) (801.1) 22.2
Market value adjustment............................................... -- 19.2 (34.4)
------- -------- --------
Balance, December 31.................................................. $ 6.0 $ 200.3 $1,731.5
------- -------- --------
------- -------- --------
</TABLE>
- ------------------
(a) During 1995, Cal Fed transferred $17.2 million of mortgage-backed securities
held to maturity to securities available for sale. See Note 6 Securities
Held to Maturity for further information.
(b) Maturities include amortization of premiums and accretion of discounts.
Accrued interest receivable on securities available for sale at
December 31, 1996 and December 31, 1995 totaled $0.1 million and $2.7 million,
respectively.
Proceeds from sales of securities available for sale during the years ended
December 31, 1996, 1995 and 1994 were $261.6 million, $976.3, and $670.4
million, respectively.
Cal Fed has pledged certain securities, including those available for sale,
as collateral for advances from the Student Loan Mortgage Association ("SLMA")
and various other borrowings. The following table presents the outstanding
balances at Cal Fed's carrying value of securities pledged as collateral at
December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
----- ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Pledged as collateral for:
SLMA advances............................................................................... $ -- $124.9
Other borrowings............................................................................ 52.0 58.8
----- ------
$52.0 $183.7
----- ------
----- ------
</TABLE>
F-86
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES HELD TO MATURITY
Cal Fed's securities held to maturity have primarily consisted of MBS. Cal
Fed also had an investment in a guaranteed investment contract which matured in
1995. Cal Fed's portfolio of MBS consists of securities issued by agencies of
the United States, such as FNMA. The investments are purchased or are obtained
by exchanging pools of mortgage loans for the securities ("securitized loans").
Summarized below are securities held to maturity at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ------------------------------------------------
GROSS GROSS GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE
-------- ---------- ---------- -------- -------- ---------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FNMA................ $1,038.2 $6.2 $ (3.1) $1,041.3 $1,192.7 $ 17.9 $ (0.2) $1,210.4
Cal Fed AA-rated
mortgage pass-
through
securities........ 623.9 0.9 (2.4) 622.4 802.3 1.3 (5.2) 798.4
Other............... 301.8 0.4 (23.6) 278.6 371.7 1.5 (20.7) 352.5
-------- ---- ------ -------- -------- ------ ------ --------
$1,963.9 $7.5 $(29.1) $1,942.3 $2,366.7 $ 20.7 $(26.1) $2,361.3
-------- ---- ------ -------- -------- ------ ------ --------
-------- ---- ------ -------- -------- ------ ------ --------
</TABLE>
The weighted average interest rates of MBS held to maturity were 6.82% and
6.93% at December 31, 1996 and 1995, respectively. Accrued interest receivable
related to MBS held to maturity outstanding at December 31, 1996 and 1995
totaled $11.2 million and $13.8 million, respectively. Cal Fed utilizes MBS as
collateral for various borrowings. At December 31, 1996 and 1995, $1,374.1 and
$1,316.3 million, respectively, of MBS, were pledged as collateral for various
borrowings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB......................................... $ 374.6 $ 255.9
Repurchase agreements...................................... 975.7 908.9
SLMA advances.............................................. -- 108.6
Other obligations.......................................... 23.8 42.9
-------- --------
$1,374.1 $1,316.3
-------- --------
-------- --------
</TABLE>
At December 31, 1996, Cal Fed had $924.9 million of securitized loans with
some form of recourse to Cal Fed. In the unanticipated event the securitized
loans are sold, purchasers would have varying forms of recourse to Cal Fed. The
recourse provisions subject Cal Fed to varying degrees of liability in the event
of loss. Cal Fed currently intends to hold its portfolio of mortgage-backed
securities until maturity. The following table presents the composition of
securitized loans with potential recourse, by collateral type, at December 31,
1996:
<TABLE>
<CAPTION>
ORIGINAL
ORIGINAL LOAN TO VALUE
ORIGINAL LOAN TO VALUE RATIO 80%
SECURITIZED LOANS WITH LOAN TO VALUE RATIO 80% WITHOUT
RECOURSE COLLATERALIZED BY RATIO=80% WITH PMI(A) PMI(A) TOTAL
- -------------------------------------------------- ------------- ------------- ------------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 units............................. $ 537.5 $44.0 $ 8.9 $590.4
Multi-family property............................. 331.8 -- 2.7 334.5
------- ----- ----- ------
$ 869.3 $44.0 $11.6 $924.9
------- ----- ----- ------
------- ----- ----- ------
</TABLE>
- ------------------
(a) Private mortgage insurance (PMI) provides limited insurance protection to
Cal Fed in the event of default.
F-87
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES HELD TO MATURITY--(CONTINUED)
Cal Fed periodically reviews the credit quality of its portfolio of MBS. In
the case of securitized loans with recourse provisions, Cal Fed makes an
assessment of the credit quality of the underlying loans. See Note 1 Summary of
Significant Accounting Policies for a discussion of Cal Fed's loan monitoring
policies.
In November 1995, the FASB issued the Special Report as an aid to
understanding and implementing SFAS No. 115. During the fourth quarter of 1995,
Cal Fed, in accordance with the Special Report, redesignated $17.2 million of
MBS from "held to maturity" to "available for sale" and, prior to December 31,
1995, sold such MBS for a loss of less than $0.1 million. There were no sales of
MBS during the year ended December 31, 1994.
7. LOANS RECEIVABLE HELD FOR SALE
In order to manage its asset size, liquidity requirements, the composition
and interest rate sensitivity of its interest-earning assets and other factors;
Cal Fed originates certain fixed rate residential 1-4 loans for sale.
At December 31, 1996 and 1995, the historical cost bases of loans
receivable held for sale were $8.7 and $13.6 million, respectively. At December
31, 1996 and 1995, the market value of loans receivable held for sale were $8.7
million and $13.8 million, respectively. Market values, at December 31, 1996 and
1995, were based upon quotes of similar or identical loans.
Gross unrealized gains on loans receivable held for sale were less than
$0.1 million and $0.2 million at December 31, 1996 and 1995, respectively. Gross
unrealized losses on loans receivable held for sale were less than $0.1 million
at both December 31, 1996 and 1995. Proceeds from sales of loans receivable held
for sale were $281.1 million, $183.2 million, and $1,099.4 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
The following table summarizes the gains and losses recorded for the
periods presented for loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Realized gains from sales of loans receivable......................... $ 1.4 $ 0.3 $ 1.0
Realized losses from sales of loans receivable........................ (0.7) (0.6) (0.5)
----- ----- -----
Net gains (losses).................................................... $ 0.7 $(0.3) $ 0.5
----- ----- -----
----- ----- -----
</TABLE>
F-88
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loans secured by real estate:
Residential 1-4........................................... $ 8,253.1 $7,277.6
Equity.................................................... 57.4 64.1
--------- --------
8,310.5 7,341.7
Income property:
Multi-family.............................................. 1,249.4 1,346.2
Shopping centers.......................................... 69.1 81.8
Office buildings.......................................... 145.6 168.9
Other income property..................................... 272.5 291.3
--------- --------
Total income property.................................. 1,736.6 1,888.2
--------- --------
Total loans secured by real estate.......................... 10,047.1 9,229.9
Consumer:
Mobile homes.............................................. 53.0 66.3
Vehicles.................................................. 2.1 21.5
Equity creditline......................................... 117.4 137.8
Unsecured................................................. 14.1 14.6
Loans secured by deposits................................. 8.1 9.4
--------- --------
Total consumer loans........................................ 194.7 249.6
--------- --------
Business Banking............................................ 16.9 --
--------- --------
10,258.7 9,479.5
Less:
Undisbursed loan funds.................................... (0.3) 0.1
Deferred loan (costs) fees................................ (26.2) (13.9)
Allowance for loan losses................................. 173.1 181.0
Unearned interest on equity/consumer loans................ -- 1.3
Discount on acquired loans................................ 4.0 7.4
--------- --------
Total loans receivable...................................... 10,108.1 9,303.6
Less: Loans held for sale (see Note 7)...................... 8.7 13.6
--------- --------
Loans receivable held for investment...................... $10,099.4 $9,290.0
--------- --------
--------- --------
</TABLE>
Certain of Cal Fed's adjustable loan programs allow the borrower to make
monthly payments which are lower than the amount required to amortize the loan
until its maturity in any particular month. In the event that the monthly
payment is not sufficient to pay the interest accruing during the month, the
deficiency is added to the loan's principal balance ("negative amortization").
In the event that a loan incurs significant negative amortization, there is an
increased risk that the market value of the underlying collateral on the loan
may be insufficient to fully satisfy the outstanding principal and interest
should the borrower default.
At December 31, 1996 and 1995, Cal Fed's loan portfolio included $4.8
billion and $4.7 billion, respectively, of loans with the potential to
negatively amortize, of which $0.9 billion and $1.4 billion of loans have some
amount of negative amortization.
Accrued interest receivable related to loans receivable including loans
held for sale at December 31, 1996 and 1995 totaled $61.0 million and
$60.1 million, respectively.
F-89
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
Cal Fed has pledged certain loans as collateral for advances from the FHLB,
letters of credit, interest rate swaps, and capital lease obligations. The
following table presents the outstanding balance of loans pledged as collateral
at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB......................................... $3,895.3 $3,322.1
Letters of credit from FHLB................................ 23.3 52.3
Interest rate swap agreements.............................. -- --
Capital lease obligations.................................. 6.6 8.7
-------- --------
$3,925.2 $3,383.1
-------- --------
-------- --------
</TABLE>
Cal Fed's loans are concentrated in (i) loans secured by residential
property of 1-4 units, (ii) loans with collateral located in California and
(iii) loans secured by residential property of five units or more. The following
table shows the concentrations of the gross real estate secured portfolio by
state and property type:
<TABLE>
<CAPTION>
INCOME PROPERTY
----------------------------------------
RESIDENTIAL 1-4 EQUITY MULTI-FAMILY COMMERCIAL(B)
-------------------- -------------- -------------------- ----------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------- -------------- -------------------- ----------------
STATE 1996 1995 1996 1995 1996 1995 1996 1995
- ------------------------------------- -------- -------- ----- ----- -------- -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California........................... $7,146.0 $6,288.9 $46.6 $49.5 $1,155.0 $1,234.6 $467.0 $512.7
Florida.............................. 389.6 456.4 8.3 11.3 26.0 31.5 9.6 14.8
Nevada............................... 201.0 183.4 2.4 2.9 36.0 41.7 4.8 6.3
Georgia.............................. 67.5 79.6 0.1 0.1 7.6 7.9 1.9 2.0
New York............................. 32.2 34.4 -- -- 0.1 0.1 -- --
Arizona.............................. 31.4 16.1 -- 0.1 14.8 15.3 0.7 1.6
New Jersey........................... 33.9 32.5 -- -- -- -- -- --
Texas................................ 46.3 24.8 -- -- 1.6 2.5 -- 0.6
Connecticut.......................... 30.1 21.0 -- -- -- -- -- --
Washington........................... 32.6 13.5 -- -- 4.8 4.9 -- --
Colorado............................. 35.3 16.4 -- -- -- -- 1.4 1.6
Illinois............................. 23.5 11.3 -- 0.1 0.9 1.1 -- --
Other(a)............................. 183.7 99.3 -- 0.1 2.6 6.6 1.8 2.4
-------- -------- ----- ----- -------- -------- ------ ------
$8,253.1 $7,277.6 $57.4 $64.1 $1,249.4 $1,346.2 $487.2 $542.0
-------- -------- ----- ----- -------- -------- ------ ------
-------- -------- ----- ----- -------- -------- ------ ------
</TABLE>
- ------------------
(a) Includes states with aggregate gross real estate loans that are less than
$23 million.
(b) Includes shopping centers, office buildings and other income property.
The majority of Cal Fed's California real estate loans are secured by
property located in Los Angeles, Orange, and San Diego counties.
At December 31, 1996, the largest amount of loans to a single borrower
totaled $38.5 million. The collateral for the loan is a 225,000-square foot
office building occupied entirely by certain of Cal Fed's operating and
administrative departments and subject to a lease for the life of the loan.
Impaired and Non-Performing Loans
Cal Fed identifies impaired loans through its loan monitoring process. See
Note 1 Summary of Significant Accounting Policies for further information about
Cal Fed's loan monitoring process. Cal Fed stratifies its review procedures by
loans that are reviewed on an individual basis, and those that are treated as
homogenous pools.
F-90
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
Loans that are considered to be homogenous are evaluated on the basis of their
payment record and/or on a pool basis. All homogenous loans that are 90 days or
more delinquent or are in foreclosure are automatically placed on non-performing
status. Additionally, homogenous loans that have had a modification of terms are
individually reviewed to determine if they meet the definition of a troubled
debt restructuring.
Loans that are individually monitored are determined to be impaired if it
is determined that it is probable that Cal Fed will be unable to collect the
contractual amount of principal and interest owed to Cal Fed. Cal Fed's policy
allows for a loan to be designated as impaired even if the borrower has
currently fulfilled his repayment obligations. Loans are normally designated as
impaired if delinquent 90 days or more, in foreclosure or if the borrower has
filed for bankruptcy. If a loan is designated as impaired, the loan is either
placed on non-accrual status or designated as a restructured loan and is
included as a non-performing loan. Cash collected on impaired loans on
non-accrual status is generally applied as a reduction to the carrying value of
the loan.
Cal Fed has identified two types of non-performing loans within its
portfolio: non-accrual loans and restructured loans. The following table
summarizes Cal Fed's gross non-performing loans by property type at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------------
NON-ACCRUAL RESTRUCTURED TOTAL NON-ACCRUAL RESTRUCTURED TOTAL
----------- ------------ ------ ----------- ------------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4....................... $ 62.1 $1.9 $ 64.0 $ 99.6 $3.0 $102.6
Income property:
Multi-family........................ 50.5 -- 50.5 86.3 0.3 86.6
Shopping centers.................... 3.4 -- 3.4 1.3 -- 1.3
Office buildings.................... 5.7 -- 5.7 8.8 -- 8.8
Hotels/motels....................... -- -- -- -- -- --
Other income property............... 6.0 1.3 7.3 6.8 -- 6.8
------- ---- ------ ------- ---- ------
Total income property................. 65.6 1.3 66.9 103.2 0.3 103.5
------- ---- ------ ------- ---- ------
Consumer.............................. 1.9 -- 1.9 3.5 -- 3.5
------- ---- ------ ------- ---- ------
$ 129.6 $3.2 $132.8 $ 206.3 $3.3 $209.6
------- ---- ------ ------- ---- ------
------- ---- ------ ------- ---- ------
Interest not recognized............... $ 10.3 $ -- $ 10.3 $ 10.6 $ -- $ 10.6
------- ---- ------ ------- ---- ------
------- ---- ------ ------- ---- ------
</TABLE>
For each of the years ended December 31, 1996 and 1995, interest income of
less than $0.1 million was recorded on restructured loans. This was less than
$0.1 million lower than what would have been recorded if the restructured loans
had been performing in accordance with their original contractual terms.
F-91
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
The following table summarizes Cal Fed's concentration of gross non-accrual
and restructured loans by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
NON-ACCRUAL RESTRUCTURED
---------------------------------- ------------------------------
STATE 1996 1995 1996 1995
- ----- --------------- --------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California........................................ 117.5 90.6% $188.7 91.5% $3.2 100.0% $3.1 94.0%
Florida........................................... 6.4 4.9 8.5 4.1 -- -- -- --
Nevada............................................ 2.1 1.6 3.5 1.7 -- -- 0.2 6.0
Georgia........................................... 0.4 0.4 1.2 0.6 -- -- -- --
Texas............................................. -- -- 1.0 0.5 -- -- -- --
Arizona........................................... -- -- 0.4 0.2 -- -- -- --
Other............................................. 3.2 2.5 3.0 1.4 -- -- -- --
------ ----- ------ ----- ---- ----- ---- -----
$129.6 100.0% $206.3 100.0% $3.2 100.0% $3.3 100.0%
------ ----- ------ ----- ---- ----- ---- -----
------ ----- ------ ----- ---- ----- ---- -----
</TABLE>
The following table presents impaired loans with specific allowances and
impaired loans without specific allowances by property type and by the method
that impairment is determined at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
------ --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family................................................. $50.4 $(6.7) $ 43.7
Commercial real estate:
Office buildings.......................................... 5.7 (2.0) 3.7
Shopping centers.......................................... 3.4 (0.2) 3.2
Industrial................................................ 5.1 (0.4) 4.7
Other..................................................... 0.9 (0.2) 0.7
------ ----- ------
Total commercial real estate................................. 15.1 (2.8) 12.3
------ ----- ------
Total impaired loans with specific allowances.................. 65.5 (9.5) 56.0
------ ----- ------
Impaired Loans without Specific Allowances:
Residential 1-4.............................................. 1.9 -- 1.9
Commercial real estate....................................... 1.4 -- 1.4
------ ----- ------
Total impaired loans without specific allowances............... 3.3 -- 3.3
------ ----- ------
Total impaired loans measured by individual review............. 68.8 (9.5) 59.3
------ ----- ------
Impairment Measured on a Pool Basis:
Residential 1-4.............................................. 62.1 -- 62.1
Consumer..................................................... 1.9 -- 1.9
------ ----- ------
64.0 -- 64.0
------ ----- ------
Total impaired loans........................................... $132.8 $(9.5) $123.3
------ ----- ------
------ ----- ------
</TABLE>
Cal Fed has designated all impaired loans at December 31, 1996 as
non-accrual or as a troubled debt restructuring. For all impaired loans, Cal Fed
evaluates the need for a specific allowance by comparing the fair value of the
related collateral to the net recorded investment in the loan. For all impaired
loans where the fair value of the related collateral is less than the net
recorded investment in the loan, Cal Fed allocates a specific allowance equal to
the excess of the net recorded investment in the loan over the fair value of the
related collateral with consideration given to holding and selling costs. All
uncollected interest relating to impaired loans
F-92
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
has been fully reversed from income. At December 31, 1996, Cal Fed had
designated $25.7 million of loans as impaired that were performing in accordance
with their contractual terms. Cal Fed applies cash collections from impaired
loans as a reduction of the loan's carrying amount. The average recorded
investment in the impaired loans was $173.8 million for the year ended
December 31, 1996. During the year ended December 31, 1996, Cal Fed recognized
$2.3 million of interest income on impaired loans.
Allowance for Loan Losses
Cal Fed's policies for providing the appropriate level of allowance for
loan losses are discussed further in Note 1 Summary of Significant Accounting
Policies.
The following table presents an analysis of the general and specific
allowances at the dates presented:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ------------------------------------------
SPECIFIC GENERAL SPECIFIC GENERAL
ALLOWANCE ALLOWANCE TOTAL ALLOWANCE ALLOWANCE TOTAL
--------- --------- ------ --------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4.............................. $ -- $ 45.0 $ 45.0 $ -- $ 45.0 $ 45.0
Income property.............................. 11.7 96.4 108.1 24.3 90.0 114.3
----- ------- ------ ----- ------- ------
Total real estate......................... 11.7 141.4 153.1 24.3 135.0 159.3
Consumer....................................... -- 10.0 10.0 -- 11.7 11.7
Unallocated.................................... -- 10.0 10.0 -- 10.0 10.0
----- ------- ------ ----- ------- ------
Total..................................... $11.7 $ 161.4 $173.1 $24.3 $ 156.7 $181.0
----- ------- ------ ----- ------- ------
----- ------- ------ ----- ------- ------
</TABLE>
F-93
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
Activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1,............................................. $181.0 $211.6 $ 254.3
Provision for losses............................................ 41.3 31.8 74.9
Increase in general allowances from acquisitions................ 0.6 -- --
Charge-offs:
Real estate:
Residential 1-4............................................ (28.1) (24.8) (19.5)
Income property:
Multi-family............................................. (18.4) (30.2) (56.1)
Shopping centers......................................... -- (4.9) (0.9)
Office buildings......................................... (2.3) (5.5) (15.2)
Hotels/motels............................................ -- -- (11.6)
Other income property.................................... (0.6) (1.6) (6.2)
------ ------ -------
Total income property................................. (21.3) (42.2) (90.0)
------ ------ -------
Total real estate............................................. (49.4) (67.0) (109.5)
Commercial banking............................................ -- -- (6.8)
Consumer...................................................... (8.0) (5.4) (7.0)
------ ------ -------
Total Charge-offs.......................................... (57.4) (72.4) (123.3)
------ ------ -------
Recoveries:
Real estate:
Residential 1-4............................................ 4.2 3.1 0.9
Income property:
Multi-family............................................. 1.7 5.2 0.9
Shopping centers......................................... -- 0.1 --
Office buildings......................................... 0.1 0.4 0.3
Hotels/motels............................................ -- -- --
Other income property.................................... 0.1 -- 0.4
------ ------ -------
Total income property................................. 1.9 5.7 1.6
------ ------ -------
Total real estate............................................. 6.1 8.8 2.5
Commercial banking............................................ -- -- 2.1
Consumer...................................................... 1.5 1.2 1.1
------ ------ -------
Total recoveries........................................... 7.6 10.0 5.7
------ ------ -------
Net charge-offs............................................... (49.8) (62.4) (117.6)
------ ------ -------
Balance, December 31,........................................... $173.1 $181.0 $ 211.6
------ ------ -------
------ ------ -------
</TABLE>
During the normal course of business, Cal Fed has securitized and/or sold
certain loans with recourse. Estimated probable loan losses and related costs of
collection and repossession are provided for at the time of such sales and are
periodically reevaluated. Cal Fed evaluates the credit risk of loans sold with
recourse in the same manner as it reviews its own portfolio of loans. Cal Fed
has accrued an allowance for potential future losses on loans sold with
recourse. Such allowance is included with "Other liabilities" on the
Consolidated Statements of Financial Condition.
F-94
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LOANS RECEIVABLE HELD FOR INVESTMENT--(CONTINUED)
A summary of the outstanding balance of loans sold with recourse at
December 31, 1996 follows:
<TABLE>
<CAPTION>
RESIDENTIAL INCOME
1-4 PROPERTY TOTAL
----------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans with original loan to value ratio less than or equal to 80%............... $ 103.1 $ 232.8 $335.9
Loans with original loan to value ratio greater than 80%
With PMI...................................................................... 1.6 -- 1.6
Without PMI................................................................... 22.7 25.9 48.6
------- ------- ------
$ 127.4 $ 258.7 $386.1
------- ------- ------
</TABLE>
Cal Fed has obtained credit insurance for $333.1 million of residential
loans sold with recourse not included in the amounts above. The amount of Cal
Fed's liability on these loans was limited to $2.4 million at December 31, 1996.
The insurance was obtained to limit Cal Fed's risk of loss on these loans. The
fair value of Cal Fed's potential obligation for recourse or guarantees on loans
sold with recourse at December 31, 1996 and 1995 was determined to approximate
the value of the liability established by Cal Fed for the potential cost of such
obligations, which totaled $9.7 million and $11.5 million at December 31, 1996
and December 31, 1995, respectively.
At December 31, 1996, $3.5 billion of loans owned by others were serviced
by Cal Fed (virtually all of which were originated by Cal Fed) compared to $3.8
billion and $4.5 billion at December 31, 1995 and 1994, respectively.
Loan servicing fees, which are included as a component of "Fee income" on
the Consolidated Statements of Operations, totaled $10.9 million, $12.4 million,
and $14.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Fair Value of Loans Receivable
The fair value information presented below represents Cal Fed's estimate of
the fair value of its loans held for investment. The assumptions inherent in
these fair value estimates may be found in Note 21 Fair Value of Financial
Instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
BOOK VALUE(A) FAIR VALUE BOOK VALUE(A) FAIR VALUE
------------- ---------- ------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 loans:
Fixed.................................................. $ 1,511.3 $ 1,524.7 $ 994.1 $ 996.6
Adjustable............................................. 6,755.7 6,863.8 6,295.3 6,293.1
--------- ---------- --------- --------
Total residential 1-4 loans......................... 8,267.0 8,388.5 7,289.4 7,289.7
Multi-family loans....................................... 1,181.4 1,143.6 1,269.7 1,230.6
Commercial real estate loans............................. 449.2 439.6 494.3 485.0
Consumer loans........................................... 184.9 190.8 236.6 240.8
Business banking loans................................... 16.9 17.1 -- --
--------- ---------- --------- --------
Total loans held for investment..................... $10,099.4 $ 10,179.6 $ 9,290.0 $9,246.1
--------- ---------- --------- --------
--------- ---------- --------- --------
</TABLE>
- ------------------
(a) Book value is presented net of undisbursed loan funds, discounts, deferred
items and allowances for loan losses.
9. REAL ESTATE HELD FOR SALE
Cal Fed's real estate held for sale is comprised of REO and REI.
F-95
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. REAL ESTATE HELD FOR SALE--(CONTINUED)
A summary of real estate held for sale, net of allowance for losses,
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Residential 1-4................................................. $11.3 $47.3
Multi-family.................................................... 1.2 1.5
Office buildings................................................ 0.1 0.3
Hotels/motels................................................... -- --
Other income property........................................... 0.3 0.4
----- -----
$12.9 $49.5
----- -----
----- -----
</TABLE>
The following table presents Cal Fed's real estate held for sale by state
and property type at December 31, 1996:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- OFFICE COMMERCIAL/
1-4 UNITS FAMILY BUILDINGS INDUSTRIAL TOTAL
----------- ------ --------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California................................................. $10.8 $1.2 $ 0.1 $ 0.3 $12.4
Florida.................................................... 0.3 -- -- -- 0.3
New York................................................... 0.2 -- -- -- 0.2
----- ---- ----- ----- -----
Total...................................................... $11.3 $1.2 $ 0.1 $ 0.3 $12.9
----- ---- ----- ----- -----
----- ---- ----- ----- -----
REO........................................................ $ 9.8 $1.2 $ 0.1 $ 0.3 $11.4
REI........................................................ 1.5 -- -- -- 1.5
----- ---- ----- ----- -----
Total...................................................... $11.3 $1.2 $ 0.1 $ 0.3 $12.9
----- ---- ----- ----- -----
----- ---- ----- ----- -----
</TABLE>
The operating results of real estate held for sale are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Losses) gains from the sale of real estate and other net operating income... $(3.5) $(15.4) $ 33.8
(Provision for) recoveries of losses on real estate.......................... (5.0) 7.4 (79.7)
----- ------ ------
$(8.5) $ (8.0) $(45.9)
----- ------ ------
----- ------ ------
</TABLE>
The following table presents the activity in the allowance for losses on
real estate held for sale:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1......................................................... $ 39.1 $ 95.7 $ 121.6
Provision for (recoveries of) losses....................................... 5.0 (7.4) 79.7
Net charge-offs............................................................ (33.2) (49.2) (105.6)
------ ------ -------
------ ------ -------
Balance, December 31....................................................... $ 10.9 $ 39.1 $ 95.7
------ ------ -------
</TABLE>
F-96
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. FEDERAL HOME LOAN BANK STOCK
Cal Fed's investment in Federal Home Loan Bank of San Francisco ("FHLB")
stock at December 31, 1996 and 1995 was $166.8 million and $135.7 million,
respectively. The FHLB provides a central credit facility for member
institutions. As a member of the FHLB system, Cal Fed is required to own capital
stock in the FHLB in an amount at least equal to the greater of 1% of the
aggregate principal amount of its unpaid home loans, home purchase contracts and
similar obligations at the end of each calendar year, assuming for such purposes
that at least 30% of its assets were home mortgage loans, or 5% of its advances
(borrowings) from the FHLB. Cal Fed was in compliance with this requirement at
December 31, 1996. The fair value of Cal Fed's FHLB stock approximates book
value due to Cal Fed's ability to redeem such stock with the FHLB at par value.
11. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land.................................................................... $ 11.6 $ 12.0
Buildings............................................................... 96.5 103.8
Furniture and equipment................................................. 94.7 102.6
------- -------
202.8 218.4
Less accumulated depreciation........................................... (143.9) (147.2)
------- -------
$ 58.9 $ 71.2
------- -------
------- -------
</TABLE>
Cal Fed has operating lease commitments on certain premises and equipment.
Lease expense, net of sublease income, totaled $25.2 million, $25.5 million, and
$30.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Sublease income totaled $9.7 million, $9.8 million, and $10.3
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Annual minimum lease commitments at the dates presented were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Within one year.......................................................... $ 21.9 $ 22.3
Within two years......................................................... 21.2 21.7
Within three years....................................................... 23.0 20.2
Within four years........................................................ 22.1 23.4
Within five years........................................................ 23.4 22.9
Thereafter............................................................... 140.6 160.2
------ ------
$252.2 $270.7
------ ------
------ ------
</TABLE>
12. ACCELERATED DISPOSITION OF ASSETS
During 1994, Cal Fed completed the accelerated disposition of $1.3 billion
of performing and non-performing assets (the "1994 Bulk Sales"). The assets
included in the 1994 Bulk Sales included loans receivable and REO. The loans
receivable were transferred from the portfolio of loans held for investment to
"held for accelerated disposition" as an integral part of Cal Fed's 1994 program
to raise capital, reduce non-performing assets and improve operating efficiency.
The 1994 Bulk Sales were designed to reduce Cal Fed's non-performing assets and
reduce Cal Fed's exposure to certain performing loans with higher risk profiles
than Cal Fed wished to retain in its portfolio. In selecting performing loans
for the 1994 Bulk Sales, Cal Fed considered the credit risk
F-97
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. ACCELERATED DISPOSITION OF ASSETS--(CONTINUED)
inherent in the loan, the concentration that certain loans possessed because of
the geographic location of the collateral, the size of the loan and/or the
overall relationship with certain borrowers. A substantial amount of the
performing loans sold as part of the 1994 Bulk Sales were classified as
substandard or designated as special mention. Cal Fed recorded a $274.8 million
loss from the 1994 Bulk Sales. Cal Fed recorded $60.4 million of charge-offs,
relating to previously established specific allowances, on loans receivable
included in the 1994 Bulk Sales.
13. DEPOSITS
Cal Fed obtains deposits primarily through a network of full service
branches located in California and Nevada. Deposits obtained by Cal Fed are
insured by the SAIF of the FDIC up to a maximum of $100,000 for each depositor.
A summary of deposit balances and weighted average rates at the dates
indicated follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
---------------- ----------------
BALANCE RATE BALANCE RATE
-------- ---- -------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook accounts................................................. $ 424.1 2.21% $ 509.7 2.22%
Money market accounts............................................. 2,072.4 2.94 2,008.4 2.65
Non-interest bearing commercial................................... 324.3 -- 216.9 --
-------- --------
2,820.8 2,735.0
Certificate accounts:
2.00% to 2.99%.................................................. 10.6 2.77 16.5 2.86
3.00% to 3.99%.................................................. 3.9 3.12 22.5 3.34
4.00% to 4.99%.................................................. 146.0 4.73 208.2 4.61
5.00% to 5.99%.................................................. 5,123.1 5.53 2,545.3 5.49
6.00% to 6.99%.................................................. 538.3 6.35 3,630.4 6.26
7.00% to 7.99%.................................................. 274.5 7.08 293.0 7.13
8.00% to 8.99%.................................................. 1.1 8.12 23.3 8.45
9.00% to 9.99%.................................................. -- -- 2.5 9.29
-------- --------
Total certificate accounts................................... 6,097.5 5.65 6,741.7 5.95
-------- --------
$8,918.3 4.64% $9,476.7 4.87%
-------- --------
-------- --------
</TABLE>
Deposit maturities are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Maturing within one year............................................. $6,522.2 $8,216.6
Maturing after one year and within two years......................... 1,890.5 946.6
Maturing after two years and within three years...................... 360.0 196.2
Maturing after three years and within four years..................... 68.0 53.6
Maturing after four years and within five years...................... 63.4 26.6
Thereafter........................................................... 14.2 37.1
-------- --------
$8,918.3 $9,476.7
-------- --------
-------- --------
</TABLE>
F-98
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. DEPOSITS--(CONTINUED)
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
3 months or less..................................................... $ 862.3 $ 789.5
Over 3 months but within 6 months.................................... 255.1 247.2
Over 6 months but within 12 months................................... 458.9 369.9
Over 12 months....................................................... 67.4 112.2
-------- --------
$1,643.7 $1,518.8
-------- --------
-------- --------
</TABLE>
At December 31, 1996, Cal Fed had $254.8 million of brokered deposits. At
December 31, 1995, Cal Fed had $273.8 million of brokered deposits. Accrued
interest payable on deposits at December 31, 1996 and 1995 was $2.8 million and
$10.8 million, respectively, which is included in "Interest payable" on the
Consolidated Statements of Financial Condition.
On August 4, 1994, Cal Fed completed the sale of 44 branches located in
Florida and Georgia ("Southeast Division"). At the time of the sale, the
Southeast Division had deposits totaling approximately $3.9 billion. Cal Fed
received a 4.10% deposit premium from the sale which contributed to a net gain
of $135.0 million recorded from the sale.
During the second quarter of 1996, Cal Fed sold six branches located in San
Diego County, California, with deposits totaling approximately $380 million. The
sale of the branches resulted in a net gain of $12.0 million. The $12.0 million
gain is included with "Other income" in the Consolidated Statements of
Operations.
A summary of interest expense by deposit type is summarized in the table
below for the years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook accounts.......................................................... $ 9.6 $ 11.1 $ 14.9
Money market and NOW accounts.............................................. 60.4 55.3 60.2
6-Month certificates....................................................... 29.9 26.2 27.8
9-Month to 1-Year certificates............................................. 103.0 133.5 113.5
Other certificates......................................................... 227.7 215.5 174.4
------ ------ ------
$430.6 $441.6 $390.8
------ ------ ------
------ ------ ------
</TABLE>
Savings deposit fees, which are included as a component of "Fee income" in
the Consolidated Statements of Operations, totaled $30.5 million, $25.4 million,
and $25.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
14. ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances totaling $3,111.0 million at December 31, 1996 and $2,671.0
million at December 31, 1995, principally adjustable rate, fixed term, with
interest rates ranging from 5.50% to 9.71%, are secured by MBS and certain
mortgage loans aggregating $4.3 billion and $3.6 billion at December 31, 1996
and 1995, respectively. The rates of the FHLB advances primarily reprice based
upon the LIBOR index and therefore are sensitive to its volatility. Accrued
interest payable on FHLB advances was $16.6 million at both December 31, 1996
and 1995. The accrued interest on FHLB advances is included with "Interest
payable" on the Consolidated Statements of Financial Condition.
F-99
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. ADVANCES FROM FEDERAL HOME LOAN BANK--(CONTINUED)
A summary of maturities of FHLB advances and weighted average interest
rates at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
BALANCE RATE BALANCE RATE
-------- ---- -------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in one year.............................................. $3,100.0 5.66% $ 880.0 6.16%
Maturing in two years............................................. -- -- 1,780.0 5.98
Maturing in three years........................................... 11.0 9.71 -- --
Maturing in four years............................................ -- -- 11.0 9.71
Maturing in five years............................................ -- -- -- --
-------- --------
$3,111.0 5.67% $2,671.0 6.06%
-------- --------
-------- --------
</TABLE>
At December 31, 1996, Cal Fed had credit availability with the FHLB which
allows borrowings up to 35% of Cal Fed's assets, subject to the balance of
pledged collateral, with terms up to ten years in the form of FHLB Advances and
Letters of Credit.
During 1995, $1.6 billion of Cal Fed's FHLB advances, utilized as a funding
source for the sale of the Southeast Division, matured and $0.3 billion matured
in January 1996. Those borrowings bore an interest rate based upon the one month
LIBOR plus 0.27%. When those borrowings matured, the FHLB offered to renew them.
In order to reduce the cost of those borrowings, Cal Fed entered into an
interest rate swap agreement which reduces the cost of the advances to
approximately the one month LIBOR plus 0.20%. The interest rate swap agreement
was established such that the index which determines the interest that Cal Fed
receives is identical to the index that Cal Fed pays relative to the FHLB
Advances. The notional amount of the swaps totaled $1.5 billion at December 31,
1995 and $1.8 billion at December 31, 1996 and the maturity of the swaps is
identical to that of the FHLB advances. The counterparty to the interest rate
swaps is an internationally recognized broker-dealer.
15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase ("reverse repurchase
agreements") were collateralized by MBS at both December 31, 1996 and 1995. The
following table provides additional information on the agreements:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to repurchase........................... $ 978.4 $ 857.3
Carrying value of collateral......................................... 975.7 908.9
Market value of collateral........................................... 977.8 907.5
Maximum amounts of outstanding agreements at any month-end........... 1,005.4 1,336.8
Average amounts of outstanding agreements............................ 1,042.7 1,098.9
Weighted average interest rate for the year.......................... 5.40% 5.91%
Weighted average interest on year end balances....................... 6.83% 5.56%
Weighted average maturity of outstanding agreements (days)........... 109 148
</TABLE>
The securities collateralizing these agreements are held in the custodial
account of a trustee that is not a party to the agreements until the maturities
of the agreements. For all of the agreements, the dealers have agreed
F-100
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--(CONTINUED)
to resell the identical securities to Cal Fed. The following table presents
reverse repurchase agreements by counterparty:
<TABLE>
<CAPTION>
COUNTERPARTY DECEMBER 31, 1996 DECEMBER 31, 1995
------------ ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers........................................ $ 461.3 $ 780.9
Bear Stearns........................................... 109.8 76.4
Paine Webber........................................... 407.3 --
------- -------
$ 978.4 $ 857.3
------- -------
------- -------
</TABLE>
Accrued interest related to reverse repurchase agreements at December 31,
1996 and 1995 totaled $1.8 million and $1.2 million, respectively.
16. STUDENT LOAN MARKETING ASSOCIATION ADVANCES
At December 31, 1995, the SLMA Advance totaled $200.0 million and was
secured by MBS with a carrying value of $108.6 million and government securities
with a carrying value of $124.9 million and had a weighted average interest rate
of 5.86%. The SLMA Advance outstanding at December 31, 1995 matured on
September 18, 1996.
Accrued interest related to the SLMA Advance at December 31, 1995 totaled
$0.4 million.
17. SUBORDINATED DEBENTURES
Cal Fed's subordinated debentures consist of (i) a senior subordinated
note, (ii) subordinated debentures issued in connection with the 1992 corporate
restructuring and (iii) convertible subordinated debentures.
Senior Subordinated Note. Cal Fed has outstanding a $50.0 million, 10.68%
unsecured senior subordinated note which is scheduled to mature on December 22,
1998.
1992 Subordinated Debentures. On December 16, 1992, Cal Fed issued $13.6
million of 10.0% unsecured subordinated debentures due 2003. Cal Fed repurchased
$0.6 million and $8.7 million of these debentures during 1996 and 1995,
respectively, at no material gain or loss, leaving a remaining balance
outstanding at December 31, 1996 of $4.3 million.
Convertible Subordinated Debentures. The debentures were issued in 1986 by
CalFed Inc., Cal Fed's former holding company, which as a result of the 1992
corporate restructuring was merged with and into XCF Acceptance Corporation
("XCF"), a subsidiary of Cal Fed. The debentures are unsecured obligations of
XCF, bear an annual interest rate of 6.5%, and, effective January 1, 1996, are
convertible into the common stock of Bancorp at a conversion price of $143.95
per share. The debentures are redeemable at the option of the holders on
February 20, 2000, at 123% of their principal amount.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- DATE OF INTEREST
1996 1995 MATURITY RATE
----- ----- ------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Senior Subordinated Note.............................................. $50.0 $50.0 Dec. 22, 1998 10.68%
1992 Subordinated Debt................................................ 4.3 4.9 Jan. 3, 2003 10.00
Convertible Subordinated Debentures................................... 2.7 2.7 Feb. 20, 2001 6.50
----- -----
$57.0 $57.6
----- -----
----- -----
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1996
and 1995 totaled $0.5 million and $0.4 million, respectively.
F-101
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBORDINATED DEBENTURES--(CONTINUED)
18. INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings is comprised of the following for the years
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase (short-term)................ $ 56.3 $ 64.9 $ 68.5
FHLB advances (short-term)................................................. 20.2 14.7 7.4
------ ------ ------
Interest expense on short-term borrowings.................................. 76.5 79.6 75.9
------ ------ ------
FHLB advances (long-term).................................................. 145.4 139.4 76.2
Convertible subordinated debentures........................................ 0.2 0.2 0.2
Subordinated debentures.................................................... 0.4 0.7 1.4
SLMA advances (long-term).................................................. 8.2 29.2 16.5
Other...................................................................... 5.4 5.4 5.5
------ ------ ------
Interest expense on long-term borrowings................................... 159.6 174.9 99.8
------ ------ ------
Total Interest Expense on Borrowings....................................... $236.1 $254.5 $175.7
------ ------ ------
------ ------ ------
</TABLE>
19. DERIVATIVE FINANCIAL INSTRUMENTS
Cal Fed's use of derivative financial instruments is limited to interest
rate exchange agreements. Cal Fed utilizes interest rate exchange agreements as
an integral part of its asset/liability management program.
The primary focus of Cal Fed's asset/liability management program is to
measure and monitor the sensitivity of net interest income under varying
interest rate scenarios. On a quarterly basis, Cal Fed simulates the level of
net interest income expected to be earned over a twelve month period following
the date of the simulation. The simulation is based on a projection of market
interest rates at varying levels and estimates the impact of such market rates
on the levels of interest-earning assets and interest-bearing liabilities during
the measurement period. Also, any periodic or lifetime caps that contractually
limit the repricing of any interest earning asset is considered.
Based upon the outcome of the simulation analysis, Cal Fed may consider the
use of interest rate exchange agreements as a means of reducing the volatility
of projected net interest income within certain ranges of projected changes in
interest rates. Cal Fed evaluates the effectiveness of entering into any
interest rate exchange agreements by measuring the cost of such agreements in
relation to the reduction in net interest income volatility within an assumed
range of interest rates.
F-102
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. DERIVATIVE FINANCIAL INSTRUMENTS--(CONTINUED)
The following tables present Cal Fed's interest rate exchange agreements
which were designated as hedges at December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------
NOTIONAL WEIGHTED WEIGHTED
AMOUNT AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE (DOLLARS IN MONTHS TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT MILLIONS) MATURITY CAL FED CAL FED LIABILITY HEDGED
- --------------------------------------- ----------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Interest rate swap..................... $ 370.0 2 5.48% 5.60% FHLB Advances
Interest rate swap..................... 300.0 3 5.57 5.60 FHLB Advances
Interest rate swap..................... 415.0 4 5.49 5.61 FHLB Advances
Interest rate swap..................... 290.0 5 5.46 5.63 FHLB Advances
Interest rate swap..................... 105.0 6 5.47 5.56 FHLB Advances
Interest rate swap..................... 320.0 7 5.49 5.63 FHLB Advances
Interest rate swap..................... 300.0 11 6.08 5.56 FHLB Advances
---------
Total............................. $ 2,100.0
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------
NOTIONAL WEIGHTED WEIGHTED
AMOUNT AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE (DOLLARS IN MONTHS TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT MILLIONS) MATURITY CAL FED CAL FED LIABILITY HEDGED
- ------------------------------- ----------- --------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C>
Interest rate swap............. $ 25.0 5 5.74% 8.77 FHLB advances
Interest rate swap............. 500.0 10 5.94 5.63 FHLB advances
Interest rate swap............. 100.0 3 5.45 5.94 2-year fixed rate CDs
Interest rate swap............. 100.0 4 7.45 5.75 18-month fixed rate CDs
Interest rate swap............. 100.0 3 6.36 5.60 1-year fixed rate CDs
Interest rate swap............. 1,540.0 15 5.83 5.91 FHLB advances(a)
---------
Total..................... $ 2,365.0
---------
---------
</TABLE>
- ------------------
(a) Please refer to Note 14 Advances from Federal Home Loan Bank for further
information about this interest rate swap.
The estimated fair value of swaps designated as hedges at December 31, 1996
and 1995 were gains of $11.1 million and $7.1 million, respectively.
At December 31, 1995, Cal Fed had an index amortizing interest rate swap
which was designated as held for trading with a notional balance of
$50.0 million, with interest payable at a variable rate determined by a
specified index (three month LIBOR) in exchange for interest receivable at a
fixed rate. On October 9, 1996 the index amortizing swap was sold. Cal Fed
recorded a gain of $1.2 million from the sale of the index amortizing swap.
At December 31, 1996 and 1995, Cal Fed was also a party to an interest rate
floor contract maturing September 1998. In addition, Cal Fed was a party to an
interest rate floor contract that matured in June 1995. Cal Fed paid the
counterparties premiums in exchange for cash payments in the event that a
specified index (e.g., 5-year CMT, 1-year CMT, etc.) falls below the strike
price. At December 31, 1996, the notional amount of the remaining interest rate
floor was $100.0 million, the strike price was 3.38% and the monthly floating
rate was 5.50%. At December 31, 1995, the notional amount of the interest rate
floors was $100.0 million, the weighted average strike price was 3.38% and the
monthly floating rate was 5.29%. There was no unamortized premium on the
interest rate floors at December 31, 1996 or 1995. At December 31, 1996 the
floating rate exceeded the strike price by 2.12%. At December 31, 1995 the
floating rate exceeded the strike price by an average of 1.91%.
F-103
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. DERIVATIVE FINANCIAL INSTRUMENTS--(CONTINUED)
Cal Fed adheres to credit guidelines when entering into interest rate
exchange agreements in order to minimize its exposure to credit loss in the
event of non-performance by the counterparties to the agreements. In the event
that a counterparty to an interest rate swap does not perform in accordance with
the terms of the agreement, Cal Fed would be at risk for the amount of the net
interest receivable due from the counterparty. At December 31, 1996, Cal Fed was
at risk for $9.6 million of net interest receivable from its counterparties on
its aggregate interest rate exchange portfolio.
20. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit):
Federal................................................................... $(43.7) $ -- $ --
State..................................................................... 20.1 0.1 --
------ ------ ------
(23.6) 0.1 --
------ ------ ------
Deferred Tax Expense (Benefit):
Federal................................................................... 64.9 (31.4) (49.0)
State..................................................................... 15.3 (9.6) (12.3)
------ ------ ------
80.2 41.0 (61.3)
Change in valuation allowance for deferred tax asset........................ (71.1) (41.0) 61.3
------ ------ ------
Net change in net deferred taxes.......................................... 9.1 -- --
------ ------ ------
Total income tax expense (benefit)........................................ (14.5) 0.1 --
Total allocated to continuing operations.................................. (14.5) 0.1 $ 6.3
Total allocated to Stockholders' Equity................................... -- -- (6.3)
------ ------ ------
Total tax expense (benefit)............................................ (14.5) $ 0.1 $ --
------ ------ ------
------ ------ ------
</TABLE>
F-104
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. INCOME TAXES--(CONTINUED)
The table below sets forth the significant components of the net deferred
tax asset/liability at December 31, 1996 and December 31, 1995 (as adjusted and
restated for 1995 and prior year tax returns filed through 1996):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(DOLLARS IN
MILLIONS)
------------------
<S> <C> <C>
Components of the deferred tax asset:
Bad debt reserve................................................................. $ (39.0) $ (53.9)
Real estate and partnerships..................................................... (10.0) (34.9)
Prior year affirmative adjustments, net.......................................... (0.2) (52.3)
Depreciation..................................................................... (6.0) (9.1)
Net operating loss carryforward.................................................. (92.3) (69.3)
Alternative minimum tax credit carryforward...................................... (7.0) (27.7)
State Income Taxes............................................................... (12.0) (2.2)
Stock Options.................................................................... (0.2) (3.6)
Other............................................................................ (31.9) (5.4)
------- -------
(198.6) (258.4)
Valuation allowance.............................................................. 86.7 157.8
------- -------
Deferred tax asset, net of valuation allowance................................ (111.9) (100.6)
Components of the deferred tax liability:
Loan fees, interest and discount, net.............................................. 60.4 58.4
FHLB stock....................................................................... 41.0 36.5
Accrued interest income.......................................................... 20.0 (3.3)
Prepaid expense.................................................................. 0.9 3.2
Other............................................................................ 5.0 12.1
------- -------
Deferred tax liability........................................................ 127.3 106.9
------- -------
Net deferred tax liability.................................................... $ 15.4 $ 6.3
------- -------
------- -------
Net state deferred tax liability................................................... $ 15.4 $ 6.3
Net federal deferred tax liability................................................. -- --
------- -------
Net deferred tax liability....................................................... $ 15.4 $ 6.3
------- -------
------- -------
</TABLE>
The change in the valuation allowance from December 31, 1995 relates to the
increase in the net taxable temporary differences not recognized for current
income tax purposes that create future tax benefits and liabilities and
adjustments made in contemplation of settlements related to the ongoing federal
and state examinations (see discussion below). The valuation allowance of $86.7
million includes $9.4 million related to the $26.8 million balance of an
acquired federal net operating loss expiring in 2002 and 2003 and $70.3 million
attributable to Cal Fed's federal and California tax losses occuring in 1991
through 1995. To the extent Cal Fed realizes a tax benefit not otherwise
available as a result of the acquired federal net operating loss, 65% of the tax
benefits may be payable to the FDIC pursuant to the acquisition agreement.
Cal Fed generated net operating losses in 1993, 1994 and 1995 for federal
income tax purposes of $22.5 million, $26.3 million and $146.2 million expiring
in 2008, 2009 and 2010, respectively. In addition, Cal Fed has adjusted net
operating loss carryforwards from 1991, 1992, 1993, 1994, 1995 and 1996 for
California franchise tax purposes of $2.1 million, $22.4 million, $26.3 million,
$35.0 million, $14.5 million and $29.6 million, respectively, expiring in 1998,
1999 and 2000. The expiration dates of the net operating loss carryforwards may
be accelerated as a result of Bancorp's acquisition by Holdings. In addition,
Cal Fed also has
F-105
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. INCOME TAXES--(CONTINUED)--(CONTINUED)
alternative minimum tax credit carryforwards of $2.1 million for federal income
tax purposes and $4.9 million for California franchise tax purposes which have
no expiration date.
On August 20, 1996, the Small Business Job Protection Act ("1996 Act") was
enacted into federal law generally effective for tax years beginning after 1995.
One provision of the 1996 Act repealed the reserve method for computing bad debt
deductions for large (over $500 million in assets) savings institutions for
taxable years beginning in 1996. Another provision of the 1996 Act provided that
beginning no later than 1998, an institution must recapture into taxable income
over six years the amount of "applicable excess reserves." An institution's
applicable excess reserves is generally the institution's aggregate tax bad debt
reserves at the end of 1995 over the amount of its "adjusted base year
reserves." For taxable years subsequent to 1987, an institution's adjusted base
year reserves are generally the aggregate of its qualifying, nonqualifying and
supplemental tax bad debt reserves at December 31, 1987, the first two of which
being proportionately decreased for any reductions in the institution's loan
portfolio since such date to December 31, 1995. The 1996 Act further provided
that an institution must recapture its adjusted base year reserves if the
institution no longer qualifies as a "bank" for federal income tax purposes or
if its tax bad debt reserves are used for the payment of nontaxable dividends or
other distribution (including distributions in dissolution, liquidation or
redemption of stock), generally as such rules existed prior to the 1996 Act
other than certain newly adopted preferred stock exceptions.
For federal income tax purposes for taxable years beginning before 1996,
savings institutions that met certain definitional and other tests were allowed
to compute a bad debt deduction based on either the percentage of taxable income
method or the experience method. Prior to the enactment of the Tax Reform Act of
1986 ("1986 Act"), many qualifying institutions, including California Federal,
used the percentage of taxable income method which generally resulted in a lower
effective federal income tax rate than that applicable to other types of
corporations. However, the 1986 Act reduced the maximum percent that could be
deducted under the percentage of taxable income method from 40% to 8% for tax
years beginning after December 31, 1986; thus, many qualifying institutions,
including California Federal, began to use the experience method beginning in
1987. For taxable years beginning prior to 1996, the amount by which a
qualifying institution's actual tax bad debt reserves exceeded an allowable
offset computed under the experience method ("excess tax bad debt reserves")
was, in certain situations involving the payment of nontaxable dividends or
other distributions (including distribution in dissolution, liquidation or
redemption in stock), subject to recapture and includable in taxable income.
The consolidated financial statements at December 31, 1996 and 1995 do not
include a potential federal income tax liability of $43.4 million attributable
to California Federal's tax bad debt reserves. Pursuant to the 1996 Act,
circumstances that may require an accrual of this unrecorded tax liability are a
failure to meet the definition of a "bank" for federal income tax purposes, and
dividend payments in excess of tax earnings and profits and other distributions
in dissolution, liquidation or redemption of stock, excluding preferred stock
meeting certain conditions.
F-106
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. INCOME TAXES--(CONTINUED)--(CONTINUED)
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the statutory federal corporate income tax rate to earnings
(loss) from continuing operations before income tax expense (benefit) follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX EARNINGS
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory federal corporate income tax rate............................................ 35.0% 35.0% 35.0%
State tax, net of federal income tax effect............................................ 19.6 0.1 0.7
------ ------ ------
54.6 35.1 (34.3)
Increase (decrease) resulting from:
Valuation allowance.................................................................. (66.9) (33.5) 34.2
Bad debt deduction................................................................... 0.1 3.4
Stock options........................................................................ (2.5) (1.6) 1.0
Other, net........................................................................... (0.1) -- 0.1
------ ------ ------
(14.9)% 0.1% 4.4%
------ ------ ------
------ ------ ------
</TABLE>
During the fourth quarter of 1996, Cal Fed recorded a net current tax
receivable of $23.6 million, representing the estimated net recovery of prior
years' federal and state taxes. This net tax receivable was based on recently
completed meetings with Internal Revenue Service ("IRS") representatives whereby
agreement was reached on certain tax positions taken by Cal Fed. Further, Cal
Fed also recorded a $41.5 million receivable for the interest related to the net
tax refund.
In August 1996, Cal Fed received $62.9 million from the IRS representing a
refund of taxes in the amount of $12.4 million and interest with respect thereto
of $50.5 million. This refund was due to the settlement of an IRS examination
for the taxable years 1973 through 1981. Further, the IRS and the California
Franchise Tax Board ("FTB") have completed examinations of Cal Fed's
consolidated federal income tax returns through 1988 and combined California
franchise tax reports through 1989, respectively, and have proposed certain
adjustments primarily related to timing differences as to the recognition of
taxable income and expense. Cal Fed previously filed formal protests with both
the IRS and the FTB to take exception to these proposed adjustments and has
filed claims for refund to recover its payment of the assessed federal
deficiencies. Cal Fed currently intends to pursue most of the positions set
forth in its federal and California protests as well as in its federal refund
claims.
In addition, the IRS has completed its examination of the consolidated
federal income tax returns filed by a former Cal Fed life insurance company
affiliate, Beneficial Standard Life Insurance Company ("BSLIC"), through 1989
and in December 1993, assessed certain deficiencies against BSLIC. In March
1994, Cal Fed filed a Tax Court petition on behalf of BSLIC, and in November
1995, the Tax Court rendered its decision affirming Cal Fed's position on most
of the issues contested by Cal Fed on behalf of BSLIC.
Cal Fed's current income tax receivables at December 31, 1996 and 1995 were
$20.3 million and $7.9 million, respectively.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of Cal Fed's financial instruments.
Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for
a significant portion of Cal Fed's financial instruments, active markets do not
exist. Therefore, considerable judgment was required in estimating fair value
for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 1996 and December 31, 1995, the
F-107
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
Cash and Short-Term Investments
The book value of cash and short-term investments approximates the fair
value of such assets because of the short maturity of such investments.
Securities Purchased Under Agreements to Resell
The book value of securities purchased under agreements to resell
approximates the fair value of such securities due to the short term maturity of
such investments.
Securities Available for Sale and Securities Held to Maturity
Cal Fed has utilized market quotes for similar or identical securities in
an actively traded market, where such a market exists, or has obtained quotes
from independent security brokers or dealers to determine the fair value of its
securities available for sale and securities held to maturity.
Loans Receivable
The fair value of loans receivable was computed as follows: (i) for loans
held for sale, quotes were obtained from independent brokers or dealers; (ii)
for performing residential loans held for investment, Cal Fed aggregated the
loans into pools based upon secondary market requirements for mortgage-backed
securities and utilized market quotes for similar securities; (iii) for
performing consumer, commercial banking and income property loans, the fair
value was determined by a discounted cash flow analysis and (iv) the fair value
of impaired income property loans was determined on an individual basis, based
upon the fair value of the related collateral, reduced by an estimate of the
cost and timing of disposition. For impaired residential 1-4 and consumer loans,
fair value was estimated based on a discounted cash flow analysis, adjusted for
Cal Fed's estimate of excess credit risk.
Deposits
The fair value of deposits was determined as follows: (i) for demand
deposits, passbook accounts, money market accounts and other deposits
immediately withdrawable, fair value was determined to approximate the amount
payable on demand and (ii) for fixed maturity deposits, the fair value was
estimated by discounting expected cash flows using an average of rates offered
by other institutions combined with Cal Fed's current offering rates of term
deposits with similar maturities. In accordance with SFAS No. 107, no value has
been assigned to Cal Fed's long-term relationships with its deposit customers
(core deposit intangible) since it is not a financial instrument as defined
under SFAS No. 107.
Borrowings
The fair value of Cal Fed's borrowings was determined as follows: (i) the
fair value of FHLB advances was based upon current rates for advances with
similar terms and maturities; (ii) the fair value of student loan marketing
advances was estimated to approximate the amounts due as the rates on these
borrowings fluctuate with a market index; (iii) the fair value of reverse
repurchase agreements was based upon the current pricing for such agreements and
(iv) the fair value of Cal Fed's various other borrowings was based upon
alternative borrowing costs.
F-108
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Off-Balance Sheet Financial Instruments
The fair value of Cal Fed's off-balance sheet financial instruments was
determined as follows: (i) the fair value of interest rate exchange agreements
that do not have an active market was determined by computing the net present
value of the estimated interest due to Cal Fed as compared to the estimated
interest due to the counterparties of the interest rate exchange agreements;
(ii) the fair value of Cal Fed's recourse arrangements on assets sold was
determined to approximate the value of the liability currently recorded for such
recourse arrangements; and (iii) Cal Fed's standby letters of credit and
commitments to originate or sell loans have terms that are consistent with
current market terms. Therefore, Cal Fed estimates that the face amount of these
commitments approximates book value.
The following table presents fair value estimates and carrying amounts for
financial instruments at December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENT ASSETS:
Cash............................................................ $ 242.1 $ 242.1 $ 273.7 $ 273.7
Short-term liquid investments................................... 69.0 69.0 74.1 74.1
Securities purchased under agreements to resell................. 1,310.1 1,310.1 1,674.6 1,674.6
Securities available for sale................................... 6.0 6.0 200.3 200.3
Securities held to maturity..................................... 1,963.9 1,942.3 2,366.7 2,361.3
Loans receivable held for sale.................................. 8.7 8.7 13.6 13.8
Loans receivable held for investment(a)......................... 10,099.4 10,179.6 9,290.0 9,246.1
Accrued interest receivable and other........................... 78.7 78.7 83.4 98.4
FINANCIAL INSTRUMENT LIABILITIES:
Savings deposits(b)............................................. 8,918.3 8,952.0 9,476.7 9,534.6
Advances from Federal Home Loan Banks........................... 3,111.0 3,096.7 2,671.0 2,676.0
Securities sold under agreements to repurchase.................. 978.4 980.0 857.3 852.2
Student loan marketing association advances..................... -- -- 200.0 193.9
Other borrowings................................................ 57.3 62.8 58.1 65.3
Interest payable................................................ 21.7 21.7 29.4 29.4
Other liabilities............................................... 120.5 120.5 140.6 140.6
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps (designated as a hedge)..................... -- 11.1 -- 7.1
Interest rate swaps (designated as held for trading)(c)......... -- -- (0.3) (0.3)
Loans sold with recourse(d) .................................... $ 9.7 $ 9.7 $ 11.5 $ 11.5
</TABLE>
- ------------------
(a) Please see Note 8 Loans Receivable Held for Investment for additional
detail.
(b) The fair value does not include any amount that relates to core deposit
intangibles, since they are not defined as financial instruments under SFAS
No. 107.
(c) The estimated fair values represent either a net gain or a net (loss). The
net loss has been reflected in the Consolidated Statement of Financial
Position as a component of "other liabilities."
(d) These amounts represent Cal Fed's estimate of its credit exposure with
respect to loans sold with recourse.
F-109
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. COMMITMENTS AND CONTINGENCIES
Cal Fed is a party to various outstanding commitments and contingent
liabilities in the normal course of business which are not reflected in the
accompanying consolidated financial statements. The following is a summary of
such commitments and contingencies:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Standby letters of credit.............................. $ 49.8 $ 57.9
Commitments to sell loans.............................. 5.5 15.7
Commitments to fund fixed rate loans................... 189.6 232.0
Commitments to fund adjustable rate loans.............. 57.8 98.3
</TABLE>
Cal Fed makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. Cal Fed does not anticipate any material loss as
a result of these transactions. Cal Fed applies the same credit standards used
in the lending process when extending these commitments, and periodically
reassesses the customers' creditworthiness through ongoing credit reviews.
The fair value of Cal Fed's commitments at December 31, 1996 and 1995 was
based upon (i) the contractual terms of the commitment as compared to market
terms, (ii) the period of time that the commitments could be exercised and
(iii) the inherent credit risk of the commitments. The fair value of Cal Fed's
commitments approximates the amount of the outstanding commitments at December
31, 1996 and 1995.
During the second quarter of 1995, Cal Fed provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of Cal Fed
formerly engaged in real estate development activities. During the second
quarter of 1995, an Orange County, California Superior Court jury rendered a
verdict in which it determined that Cal Fed was financially liable for two loans
made to CCI by the plaintiff. CCI subsequently defaulted on the loans. The jury
awarded the plaintiff $6.5 million in compensatory damages and assessed punitive
damages of $20.0 million against Cal Fed and $5.0 million against CCI. Cal Fed
has begun the process of appealing the judgment. While Cal Fed believes that its
liability from this litigation, if any, will be less than the amount awarded by
the jury, there can be no assurance that the ultimate outcome of this litigation
will result in an amount less than the amount determined by the jury and it is
possible that Cal Fed and its subsidiary could ultimately be found liable for an
amount in excess of the allowance that has been established. The provision for
this allowance has been included in 1995 real estate operations.
Cal Fed is involved as a defendant in certain legal proceedings incidental
to its business. Cal Fed has established an accrual for its estimate of the
potential liability that it believes it may be found liable for. However, it is
possible that Cal Fed's actual liability may be substantially higher or lower
than the amount of the established allowance. Cal Fed does not believe that the
litigation to which it is a party, if adversely decided, in the aggregate would
have a material adverse effect upon Cal Fed.
23. MINORITY INTEREST
Minority interest at December 31, 1996 was comprised of California
Federal's 10 5/8% noncumulative perpetual preferred stock, Series B. At
December 31, 1995, in addition to California Federal's preferred stock, Series
B, minority interest of Cal Fed included California Federal's 7 3/4%
noncumulative convertible preferred stock, Series A.
F-110
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. MINORITY INTEREST--(CONTINUED)
7 3/4% Noncumulative Convertible Preferred Stock, Series A, Par Value $25.00
Per Share
In March 1993, California Federal issued 3,740,000 shares of 7 3/4%
noncumulative convertible preferred stock at its liquidation preference of
$25.00 per share (the "Preferred Stock, Series A"). The issuance of the
Preferred Stock Series A, resulted in an $89.0 million increase in California
Federal's equity capital, after deducting issuance costs of $4.5 million.
Effective January 1, 1996, the Preferred Stock, Series A, was convertible
by the holders into the common stock of Bancorp at any time at a conversion
price of $20.16 per share, subject to adjustment. During the second quarter of
1996 California Federal called for redemption all 3,740,000 shares of the
Preferred Stock, Series A. Except for the conversion of 18,820 shares into
23,336 shares of the Cal Fed's common stock, the Series A shares were redeemed
effective June 14, 1996 at a redemption price of $25.00 per share, plus a
dividend of $0.398264 per share.
10 5/8% Noncumulative Perpetual Preferred Stock, Series B, Par Value $100.00
Per Share
In March 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock at its liquidation preference of $100.00
per share (the "Preferred Stock, Series B"). The issuance of the Preferred
Stock, Series B resulted in an $164.2 million increase in California Federal's
equity capital, after deducting issuance costs of $8.3 million. The Preferred
Stock, Series B, is generally not redeemable prior to April 1, 1999. The
Preferred Stock, Series B, is redeemable at the option of California Federal, in
whole or in part, at $105.313 per share on or after April 1, 1999 and prior to
April 1, 2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, the Preferred Stock, Series B, is redeemable at
the option of California Federal or its successor or any acquiring or resulting
entity with respect to California Federal on or after April 1, 1996 and prior to
April 1, 1999 in whole, but not in part, in the event of a change of control of
California Federal at $114.50 per share.
24. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
Common Stock
Cal Fed's common stock at December 31, 1996 and 1995 is summarized in the
table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Par value........................................................................ $ 1.00 $ 1.00
Number of shares authorized...................................................... 100,000,000 100,000,000
Number of shares issued and oustanding........................................... 50,316,774 49,200,444
</TABLE>
During the fourth quarter of 1995, Cal Fed obtained regulatory and
shareholder approval to reorganize into a holding company structure to provide
greater flexibility for meeting future financial and competitive needs. As a
result of the reorganization, on January 1, 1996, each share of California
Federal's common stock was converted into one share of Bancorp common stock.
Consequently, California Federal became a wholly-owned subsidiary of Bancorp.
Participation Interests
During 1995, California Federal registered contingent litigation recovery
participation interests ("Litigation Interests") to be issued to its common
shareholders. The Litigation Interests represent a right to receive an amount
equal to up to 25.377745% of the cash payment, if any, actually received by
California Federal, resulting from California Federal's pending goodwill lawsuit
against the Federal government. In the lawsuit, California
F-111
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL--(CONTINUED)
Federal alleges that the United States breached certain contractual commitments
regarding the computation of its regulatory capital and deprived California
Federal of certain of its property without just compensation in violation of the
United States constitution. California Federal's claims arose from changes,
mandated by FIRREA, with respect to the rules for computing California Federal's
regulatory capital. California Federal's shareholders of record on July 14, 1995
received one Litigation Interest for every ten shares of common stock owned on
the record date. The Litigation Interests were distributed on July 28, 1995 and
began trading on the NASDAQ Small Cap Market under the symbol "CALGZ" on
August 1, 1995.
During 1996, California Federal registered Secondary Contingent Litigation
Recovery Participation Interests ("Secondary Litigation Interests") to be issued
to the common shareholders of Bancorp in connection with the acquisition of
Bancorp by Holdings (the "Merger"). One Secondary Litigation Interest was
distributed to shareholders for each ten common shares of Bancorp held at the
closing of the Merger which occurred January 3, 1997. The Secondary Litigation
Interests represent the right to participate in the cash proceeds, if any,
recovered in California Federal's pending breach-of-contract lawsuit against the
Federal government relating to the phase-out of supervisory goodwill resulting
from the enactment of FIRREA in 1989. Each Secondary Litigation Interest will
entitle the holder to receive a pro rata portion of 60% of the net distributable
cash proceeds, if any, of Cal Fed's goodwill lawsuit after (a) payment of
expenses, (b) pro forma taxes, (c) the net cash proceeds distributable to the
holders of the Participation Interests, and (d) the retention of $125 million of
net distributable cash proceeds by First Nationwide. The Secondary Litigation
Interests were distributed and began trading on the NASDAQ under the symbol
"CALGL" in January 1997.
Regulatory Capital
As a savings institution which is regulated by the OTS, California Federal
is required to comply with the capital requirements of the OTS. The regulations
of the OTS require savings institutions to maintain certain minimum levels of
regulatory capital. An institution that fails to comply with its regulatory
capital requirements must obtain OTS approval of a capital plan and can be
subject to a capital directive and certain restrictions on its operations. An
institution that fails to obtain OTS approval of its capital plan is deemed to
be in an unsafe and unsound condition and could be the subject of the
appointment of a conservator or a receiver. At December 31, 1996, the
industry-wide minimum regulatory capital requirements were:
o Tangible capital of 1.5% of adjusted total assets, consisting
generally of stockholder's equity, but excluding most intangible
assets such as goodwill.
o A leverage ratio requiring core capital of 3.0% of adjusted total
assets, consisting of tangible capital plus supervisory goodwill
(certain goodwill arising as a result of the acquisition of troubled
institutions and regulatory assisted acquisitions).
o Total risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and general
valuation allowances on loans receivable equal to 8.0% of the value
of risk-weighted assets plus off-balance sheet items.
The table below presents California Federal's capital ratios as compared to
the industry-wide minimum capital requirements at December 31, 1996:
<TABLE>
<CAPTION>
CALIFORNIA REGULATORY EXCESS
FEDERAL REQUIREMENT CAPITAL
------------------------ -------------------------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Tangible Capital..................................... $828.5 5.85% $ 212.3 1.50% $ 616.2
Core Capital......................................... 828.5 5.85 424.6 3.00 403.9
Risk-based Capital................................... 945.2 12.01 630.2 8.00 315.0
</TABLE>
F-112
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL--(CONTINUED)
The OTS has implemented a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS has established
specific capital ratios for five separate capital categories:
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
Under the OTS regulations, an institution is treated as well-capitalized if
its ratio of total capital to risk-weighted assets is 10.0% or more, its ratio
of core capital to risk-weighted assets is 6.0% or more, its ratio of core
capital to total assets is 5.0% or greater and it is not subject to any order or
directive by the OTS to meet a specific capital level.
At December 31, 1996, (i) California Federal's total risk-based capital
ratio was 12.01%, $158.1 million in excess of "well-capitalized" requirements,
(ii) California Federal's Tier 1 risk-based capital ratio was 10.56%, $357.6
million in excess of "well-capitalized" requirements, and (iii) California
Federal's leverage ratio was 5.85%, $120.7 million in excess of
"well-capitalized" requirements. Therefore, at December 31, 1996, California
Federal met and exceeded all of the requirements of a well-capitalized
institution.
An institution is undercapitalized if its ratio of total capital to
risk-weighted assets is less than 8.0%, its ratio of core capital to
risk-weighted assets is less than 4.0% or its ratio of core capital to total
assets is less than 4.0% (3.0% if the institution receives the highest rating on
the CAMEL examination rating system). An institution whose capital falls between
the well-capitalized and undercapitalized levels is treated as adequately
capitalized. An institution is treated as significantly undercapitalized if the
above capital ratios are less than 6.0%, 3.0%, or 3.0% respectively. An
institution is treated as critically undercapitalized if its ratio of tangible
equity (core capital, plus cumulative preferred stock, minus intangible assets
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights) to total assets is equal to or less than 2.0%. The OTS can
apply to an institution in a particular capital category the sanctions that
apply to the next lower capital category if the OTS determines, after providing
the institution notice and opportunity for a hearing, that (i) the institution
is in an unsafe and unsound condition, or (ii) the institution received, in its
most recent report of examination, a less than satisfactory rating for asset
quality, management, earnings, or liquidity, and the deficiency has not been
corrected. The OTS cannot, however, use this authority to require an adequately
capitalized institution to file a capital restoration plan, or to subject a
significantly undercapitalized institution to the sanctions applicable to
critically undercapitalized institutions.
F-113
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL--(CONTINUED)
Following is a reconciliation of California Federal's stockholders' equity
to regulatory capital as of December 31, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' Equity of California Federal....................................... $864.9 $ 864.9 $864.9
Non-allowable capital:
Intangible assets.............................................................. (15.7) (15.7) (15.7)
Investment in non-permissible subsidiaries..................................... (20.7) (20.7) (20.7)
Tier II capital items:
Allowable subordinated debt.................................................... -- -- 18.7
Allowable general valuation allowance on loans receivable (limited to 1.25% of
risk-weighted assets)....................................................... -- -- 98.0
------ ------- ------
Regulatory capital of California Federal......................................... 828.5 828.5 945.2
Bank's minimum regulatory capital requirement.................................... 212.3 424.6 630.2
------ ------- ------
Excess over minimum regulatory capital requirements............................ $616.2 $ 403.9 $315.0
------ ------- ------
------ ------- ------
</TABLE>
California Federal's investments in and extensions of credit to any
subsidiary engaged in activities not permissible for a national bank
("non-includable subsidiaries") must be deducted from capital.
Restriction on Stockholders' Equity and Dividends
The payment of dividends, stock repurchases, and other capital
distributions by California Federal are subject to regulation by the OTS. The
OTS requires 30 days prior notice of any capital distribution. On December 5,
1994, the OTS proposed various amendments to its rules on capital distributions
to conform them to the prompt corrective action system established by the
Federal Deposit Insurance Corporation Improvement Act of 1991. Under the
proposed regulation, those institutions that have the CAMEL ratings of 1 or 2
and are not controlled by a holding company would no longer be required to
notify OTS before capital distributions. Most other savings institutions could
make capital distributions upon giving notice to OTS provided that, following
the distribution, the institution would remain at least adequately capitalized
as defined by the prompt corrective action system. The proposed amendments are
pending. Pursuant to statutes, savings institutions that do not meet their
current capital requirements generally may not make any capital distributions.
Tax Bad Debt Reserves
On August 20, 1996, the Small Business Job Protection Act ("1996 Act") was
enacted into federal law generally effective for the tax years beginning after
1995. Although the 1996 Act repealed the reserve method for computing bad debt
deductions for large savings institutions, including California Federal, it
generally retained prior law regarding recapture of tax bad debt reserves. Under
the 1996 Act, a savings institution must recapture its adjusted base year
reserves if the institution no longer qualifies as a "bank" for federal income
tax purposes or if its tax bad debt reserves are used to pay nontaxable
dividends or make other distributions in dissolution, liquidation or redemption
of stock, excluding preferred stock meeting certain conditions. Similar to
pre-1996 federal tax law, the amount includable in taxable income is equal to
the distribution plus the federal income tax attributable thereto, up to the
aggregate amount of the adjusted base year reserves. At December 31, 1996,
Bancorp's retained earnings included approximately $124 million attributable to
California Federal's adjusted base year reserves.
F-114
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL--(CONTINUED)
Prior to 1996, federal tax law provided that savings institutions that met
certain definitional and other tests were allowed special bad debt reserve
deductions. If amounts appropriated to these tax bad debt reserves in excess of
an allowable offset computed under the experience method ("excess tax bad debt
reserves") were used for the payment of nontaxable dividends or other
distributions to stockholders (including distributions in dissolution,
liquidation or redemption of stock), an amount will generally be includable in
taxable income up to the aggregate amount of excess tax bad debt reserves. At
December 31, 1995, California Federal's total tax bad debt reserves of
approximately $195 million did not include any amount which may represent excess
tax bad debt reserves.
25. EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Plans
Cal Fed has two defined benefit plans: one covering its employees
("retirement income plan") and one for the non-employee directors ("outside
directors plan"). The outside directors plan was terminated as of the date of
the merger with Holdings, and liquidated for the amount of $1.0 million. Prior
to 1995, Cal Fed had two outside directors plans. During 1995, one of the
outside directors plans was terminated and subsequently liquidated.
Effective May 31, 1993, the retirement income plan was frozen and all
accrued benefits became 100% vested. However, credited service will continue to
accrue for purposes of determining eligibility for early retirement (and the
applicable early retirement reduction factors). Effective May 1, 1996 the plan
was also amended to generally allow a vested participant whose termination of
employment occurred before June 1, 1996 and whose benefit was not eligible to be
paid in a lump sum cash distribution, to elect to receive a severance benefit in
a single lump sum payment. The participant was to make the election and receive
the distribution prior to July 31, 1996. This resulted in a decrease in
projected benefit obligation.
Cal Fed's funding policy for the retirement income plan is to contribute an
amount equal to the minimum required contribution under the Employee Retirement
Income Security Act of 1974. Cal Fed from time to time may increase its
contribution beyond the minimum reflecting the tax and cash position of Cal Fed
and the funded status of the plan. Additionally, Cal Fed had a supplemental
defined benefit retirement plan for key employees (the "supplemental plan")
which was terminated on December 31, 1993. Cal Fed has recorded a liability of
$0.1 million as of December 31, 1996 related to the supplemental plan.
The following tables set forth the funded status of the pension plan and
amounts recognized in Cal Fed's consolidated statements for the years indicated:
<TABLE>
<CAPTION>
RETIREMENT INCOME PLAN
-----------------------------------------
ACCUMULATED ASSETS ASSETS
BENEFITS EXCEED EXCEED
EXCEED ACCUMULATED ACCUMULATED
ASSETS BENEFITS BENEFITS
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$18.4 million in 1996, $34.4 million in 1995, $30.9 million in
1994............................................................. $19.3 $35.3 $30.1
----- ----- -----
----- ----- -----
Projected benefit obligation for service rendered to date.......... $19.3 $35.3 $30.1
Plan assets at fair value, primarily listed stock and fixed income
securities....................................................... 19.2 35.5 33.3
----- ----- -----
Projected benefit obligation greater than (or less than) plan assets.. 0.1 (0.2) (3.2)
</TABLE>
F-115
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. EMPLOYEE RETIREMENT BENEFIT PLANS--(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Unrecognized net loss from past experience different from that
assumed.......................................................... (3.9) (7.7) (3.3)
Adjustment required to recognize minimum liability................. 3.9 -- --
----- ----- -----
Pension liability (asset) included in other liabilities (assets) $ 0.1 $(7.9) $(6.5)
----- ----- -----
----- ----- -----
Net pension expense included the following components:
Interest cost on projected benefit obligation.................... $ 2.0 $ 2.0 $ 2.4
Actual return on plan assets..................................... (1.9) (5.7) (1.5)
Other, net....................................................... 0.1 3.3 (1.3)
----- ----- -----
Net periodic pension expense (income)................................... 0.2 (0.4) $(0.4)
Adjustment for settlement of obligations......................... 3.9 -- --
----- ----- -----
Total periodic pension expense, net of adjustment....................... $ 4.1 $(0.4) $(0.4)
----- ----- -----
----- ----- -----
</TABLE>
Average assumptions used for all plans were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Discount rate..................................................................... 7.75% 7.25% 8.00%
Rate of increase in compensation levels........................................... N/A(a) N/A(a) N/A(a)
Expected long-term rate of return on assets....................................... 8.50% 8.50% 8.50%
</TABLE>
- ------------------
(a) Not applicable due to a freeze in accrued benefits of the plan.
The FASB has issued Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
No. 106"). SFAS No. 106 became effective for fiscal years beginning after
December 15, 1992. SFAS No. 106 establishes accounting standards for all
employers' postretirement benefits other than pensions; however, it focuses on
postretirement health care benefits. SFAS No. 106 changes the current practice
of accounting for postretirement benefits on a cash basis by accruing the cost
of these benefits during the years the employee renders the necessary service.
Cal Fed has a defined benefit postretirement plan which provides for
postretirement medical benefits to eligible retired employees.
F-116
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. EMPLOYEE RETIREMENT BENEFIT PLANS--(CONTINUED)
The following table sets forth the funded status of the postretirement
benefit plans and amount recognized in Cal Fed's consolidated statements for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Current Retirees........................................................................... $ 1.8 $ 2.1
Current Actives............................................................................ 0.9 1.0
------ ------
Total................................................................................. 2.7 $ 3.1
------ ------
------ ------
Accumulated Postretirement Benefit Obligation................................................... $ 2.7 $ 3.1
Plan assets at fair value....................................................................... -- --
------ ------
Excess of accumulated postretirement benefit obligations greater than plan assets .... 2.7 3.1
Unrecognized transition obligation.............................................................. (3.8) (4.0)
Unrecognized net gain........................................................................... 3.7 3.1
------ ------
Net postretirement benefit liability included in other liabilities.................... $ 2.6 $ 2.2
------ ------
------ ------
Net Periodic Postretirement Benefit Cost:
Service cost............................................................................... $ 0.2 0.2
Interest cost.............................................................................. 0.2 0.3
Amortization of transition obligation...................................................... 0.2 0.2
Other, net................................................................................. (0.2) (0.2)
Net periodic postretirement benefit cost.............................................. $ 0.4 $ 0.5
Effect of one percent increase in trend rates:
Service and interest cost.................................................................. $ 0.1 $ 0.1
------ ------
Accumulated postretirement benefit obligation.............................................. $ 0.3 $ 0.4
------ ------
</TABLE>
The cost of inflation for health care and medical costs of plan
participants (the "health care trend rate") was assumed to start at 11.0% for
1996, and gradually trend downward over 10 years to 6%. The assumed discount
rate, in determining postretirement benefits, was 7.75% and 7.25% at December
31, 1996 and 1995, respectively. At December 31, 1996 and 1995, there were no
plan assets related to this plan.
Investment Plus Plan
The Investment Plus Plan (the "Plan") is a defined contribution plan that
is available to substantially all employees. The Plan is a qualified plan under
Section 401(k) of the Internal Revenue Code. Employee contributions are
voluntary, as employees may elect to defer from one to ten percent of
compensation, exclusive of overtime, bonuses or other special payments
("qualifying compensation"). Participants vest immediately in their own
contributions and they vest in Cal Fed's contributions based on years of
service. Up to 4% of participants' contributions are matched by Cal Fed on a
schedule that is determined by the participants' years of
F-117
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. EMPLOYEE RETIREMENT BENEFIT PLANS--(CONTINUED)
service with Cal Fed. The table below presents Cal Fed's matching contributions
as determined by the participants' years of service.
<TABLE>
<CAPTION>
CAL FED'S MATCHING
OF PARTICIPANTS' PARTICIPANTS'
CONTRIBUTIONS UP VESTING IN
TO 4% OF QUALIFIED CAL FED'S
YEARS OF SERVICE COMPENSATION CONTRIBUTION
---------------- ------------------ --------------
<S> <C> <C>
At least 3 months but less than 2 years........................................ 125% 0%
At least 2 years but less than 3 years......................................... 125 25
At least 3 years but less than 4 years......................................... 125 50
At least 4 years but less than 5 years......................................... 125 75
At least 5 years, but less than 10 years....................................... 150 100
10 or more years............................................................... 200 100
</TABLE>
Cal Fed's contributions may be made without regard to current or
accumulated profits, provided that the Plan is designed to qualify as a profit
sharing plan for purposes of Section 401(a), et seq. of the Internal Revenue
Code. For the years ended December 31, 1996, 1995 and 1994, Cal Fed's pre-tax
Plan expense was $4.0 million, $3.9 million and $4.2 million, respectively. As
of the date of the merger with Holdings, Cal Fed's contributions to all active
participants became 100% vested.
26. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- ---------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest income............................................ $ 256.9 $ 252.1 $ 252.6 $ 253.7
Interest expense........................................... 171.3 163.3 166.1 166.0
------- ---------- ----------- ----------
Net interest income........................................ 85.6 88.8 86.5 87.7
Provision for loan losses.................................. 10.2 10.2 10.4 10.5
Other income............................................... 15.8 28.0(a) 18.2 58.0(c)
Other expenses............................................. 61.6 62.5 118.6(b) 87.7
Income tax expense (benefit)............................... -- 0.1 -- (14.6)(d)
------- ---------- ----------- ----------
Net earnings (loss)........................................ $ 29.6 $ 44.0 (24.3) $ 62.1
------- ---------- ----------- ----------
------- ---------- ----------- ----------
Net earnings (loss) per common share....................... $ 0.46 $ 0.72 $ (0.58) $ 1.15
------- ---------- ----------- ----------
------- ---------- ----------- ----------
</TABLE>
- ------------------
(a) The increase in other income during the second quarter of 1996 represents
the $12.0 million gain on the sale of six branches in San Diego.
(b) The increase in other expenses during the third quarter of 1996 resulted
from the accrual of $58.1 million for a one-time special SAIF assessment.
(c) Other income increased during the fourth quarter of 1996 as a result of a
$42.2 million income tax refund.
F-118
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--(CONTINUED)
(d) The income tax benefit for the fourth quarter of 1996 resulted from
adjustments to prior years' income taxes.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- ---------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest income............................................ $ 245.6 $ 252.1 $ 249.9 $ 260.4
Interest expense........................................... 172.8 175.7 170.0 177.6
------- ---------- ----------- ----------
Net interest income........................................ 72.8 76.4 79.9 82.8
Provision for loan losses.................................. 8.3 8.6 7.6 7.3
Other income............................................... 14.5 14.3 21.5(a) 13.2
Other expenses............................................. 64.3 60.3 61.9 63.4
Income tax expense......................................... -- 0.1 -- --
------- ---------- ----------- ----------
Net earnings............................................... $ 14.7 $ 21.7 $ 31.9 $ 25.3
------- ---------- ----------- ----------
------- ---------- ----------- ----------
Net earnings per common share.............................. $ 0.17 $ 0.31 $ 0.50 $ 0.38
------- ---------- ----------- ----------
------- ---------- ----------- ----------
</TABLE>
- ------------------
(a) Other income increased during the third quarter of 1995 as a result of
$6.8 million of gains on the sale of $729.3 million of securities held for
sale.
27. SUBSEQUENT EVENTS
On July 29, 1996 Cal Fed announced that it had entered into a definitive
merger agreement with Holdings, the parent company of First Nationwide, pursuant
to which on January 3, 1997, Holdings acquired 100% of the outstanding stock of
Cal Fed. The aggregate consideration paid consisted of approximately
$1.2 billion in cash and the issuance of litigation interests owned by Cal Fed.
The terms of the Merger agreement provided for each Cal Fed stockholder to
receive a cash payment of $23.50 per common share plus a new security (see
"Secondary Litigation Interests" below).
During 1996, Cal Fed registered Secondary Litigation Interests to be issued
to its common stockholders in connection with Merger. One Secondary Litigation
Interest was distributed to stockholders for each ten common shares held at the
closing of the Merger which occurred January 3, 1997. The Secondary Litigation
Interests represent the right to participate in the cash proceeds, if any,
recovered in Cal Fed's pending breach-of-contract lawsuit against the federal
government relating to the phase-out of supervisory goodwill resulting from the
enactment of FIRREA in 1989. Each Secondary Litigation Interest will entitle the
holder to receive a pro rata portion of 60 percent of the net distributable cash
proceeds, if any, of Cal Fed's goodwill lawsuit after (a) payment of expenses,
(b) pro forma taxes, (c) the net cash proceeds distributable to the holders of
the Litigation Interests, and (d) the retention of $125 million of net
distributable cash proceeds by First Nationwide. In January 1997, the Secondary
Litigation Interests were distributed and began trading on the NASDAQ under the
symbol "CALGL."
28. PARENT COMPANY FINANCIAL INFORMATION
The following financial statements are for Cal Fed Bancorp, Inc., the
parent company, on a stand-alone basis. These financial statements should be
read in conjunction with the other Notes to the consolidated financial
statements.
F-119
<PAGE>
CAL FED BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
<S> <C>
ASSETS
Cash.......................................................................................... $ 0.4
Investment in subsidiaries.................................................................... 692.4
Due from subsidiaries......................................................................... 26.0
------
Total assets............................................................................. $718.8
------
------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities............................................................................. $ 0.1
Total stockholders' equity.................................................................... 718.7
------
$718.8
------
------
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------
<S> <C>
Other income.................................................................................. $ 0.1
Interest on loans to subsidiaries............................................................. 1.0
------
1.1
General and administrative expenses........................................................... 6.1
Income tax expense (benefit).................................................................. --
------
Net loss before equity in undistributed net earnings of subsidiaries.......................... (5.0)
------
Equity in undistributed net earnings of subsidiaries.......................................... 93.0
------
Net earnings.................................................................................. $ 88.0
------
------
STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------
<S> <C>
Net cash flows from operating activities:
Net earnings................................................................................ $ 88.0
Adjustments to reconcile net earnings to net cash provided by operating activities:
Increase in other liabilities.......................................................... 0.1
Equity in undistributed net earnings of subsidiaries................................... (93.0)
------
Net cash used by operating activities............................................... (4.9)
Cash flows from investing activities:
Increase in due from subsidiaries...................................................... (26.0)
------
Net cash provided by investing activities.............................................. (26.0)
Cash flows from financing activities:
Exercise of common stock options....................................................... (76.1)
Litigation interest dividend from California Federal................................... 57.1
------
Proceeds from issuance of common stock................................................. 50.3
------
Net cash used by financing activities.................................................. 31.3
------
Net increase in cash.......................................................................... 0.4
Cash at beginning of year..................................................................... --
------
Cash at end of year........................................................................... $ 0.4
------
------
</TABLE>
F-120
<PAGE>
GLENDALE FEDERAL BANK
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Glendale Federal Bank
We have audited the accompanying consolidated statements of financial
condition of Glendale Federal Bank and subsidiaries (the Bank) as of June 30,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholder's equity and cash flows for each of the years in the three-year
period ended June 30, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Glendale
Federal Bank and subsidiaries as of June 30, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 20, 1998
F-121
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from banks.................................................... $ 289,978 $ 221,557
Federal funds sold and assets purchased under resale agreements.................... 172,000 632,000
Certificates of deposit--substantially restricted.................................. 2,200 4,005
Other debt and equity securities available for sale, at fair value................. 126,108 27,794
Mortgage-backed securities held to maturity, at amortized cost
(fair value: $921,555 in 1998 and $1,166,941 in 1997)............................ 914,593 1,162,825
Mortgage-backed securities available for sale, at fair value....................... 1,460,770 1,116,709
Loans receivable, net of allowance for loan losses of $156,482 in 1998
and $163,759 in 1997............................................................. 13,742,673 11,886,090
Loans held for sale, at lower of cost or market.................................... 31,907 19,003
Real estate held for sale or investment............................................ 6,327 8,689
Real estate acquired in settlement of loans........................................ 37,393 61,500
Interest receivable................................................................ 114,009 102,940
Investment in capital stock of Federal Home Loan Bank, at cost..................... 300,339 259,587
Premises and equipment, at cost, less accumulated depreciation..................... 146,893 134,936
Mortgage servicing assets.......................................................... 243,314 284,472
Goodwill and other intangible assets, less accumulated amortization
($31,261 in 1998 and $22,110 in 1997)............................................ 180,463 99,533
Other assets....................................................................... 326,429 196,619
----------- -----------
$18,095,396 $16,218,259
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits......................................................................... $10,701,157 $ 9,356,909
Securities sold under agreements to repurchase................................... 175,551 768,682
Borrowings from the Federal Home Loan Bank....................................... 5,613,458 4,788,000
Other borrowings................................................................. 70 10,782
Other liabilities and accrued expenses........................................... 281,603 221,540
Income taxes payable............................................................. 45,158 60,272
----------- -----------
Total liabilities........................................................... 16,816,997 15,206,185
----------- -----------
Stockholder's Equity:
Preferred stock, Series A, $1.00 par value per share and $25.00 liquidation
preference per share (5,000,000 shares authorized; 4,621,982 shares issued and
outstanding at June 30, 1998 and 1997)........................................ 4,622 4,622
Common stock, $1.00 par value per share (100,000,000 shares authorized;
57,754,480 shares issued and outstanding in 1998; 50,348,509 shares issued and
outstanding at June 30, 1997)................................................. 57,754 50,349
Additional paid-in capital....................................................... 1,008,464 793,111
Net unrealized holding loss on debt and equity securities available for sale..... (1,612) (1,154)
Retained earnings--substantially restricted...................................... 209,171 165,146
----------- -----------
Total stockholder's equity.................................................. 1,278,399 1,012,074
----------- -----------
$18,095,396 $16,218,259
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-122
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable...................................................... $ 950,265 $ 861,858 $ 803,432
Mortgage-backed securities............................................ 149,749 149,551 216,812
Investments........................................................... 57,931 61,547 59,791
---------- ---------- ----------
Total interest income.............................................. 1,157,945 1,072,956 1,080,035
---------- ---------- ----------
Interest expense:
Deposits.............................................................. 408,300 405,182 433,834
Short-term borrowings................................................. 37,591 18,642 108,839
Other borrowings...................................................... 271,430 270,148 204,297
---------- ---------- ----------
Total interest expense............................................. 717,321 693,972 746,970
---------- ---------- ----------
Net interest income................................................ 440,624 378,984 333,065
Provision for loan losses............................................... (1,727) 25,204 40,350
---------- ---------- ----------
Net interest income after provision for loan losses................ 442,351 353,780 292,715
Other income:
Loan servicing income, net............................................ 28,550 33,795 24,208
Other fees and service charges........................................ 69,526 56,901 45,769
Gain (loss) on sale of loans, net..................................... 605 (291) (690)
Gain (loss) on sale of mortgage-backed securities, net................ 4,562 (1,804) (34,222)
Other income (loss), net.............................................. 1,643 62 (707)
---------- ---------- ----------
Total other income................................................. 104,886 88,663 34,358
---------- ---------- ----------
Other expenses:
Compensation and employee benefits.................................... 135,966 114,270 101,502
Computer support and item processing.................................. 37,686 25,545 20,474
Occupancy expense, net................................................ 34,215 31,777 29,698
Advertising and promotion............................................. 21,816 24,416 24,798
Furniture, fixtures and equipment..................................... 15,078 12,585 11,605
Stationery, supplies and postage...................................... 14,228 11,628 10,158
Regulatory insurance.................................................. 7,843 16,317 27,491
Other general and administrative expenses............................. 26,857 26,686 21,209
---------- ---------- ----------
Total general and administrative expenses.......................... 293,689 263,224 246,935
SAIF special assessment............................................... -- 55,519 --
Legal expense--goodwill lawsuit....................................... 19,045 24,058 1,929
Acquisition and restructuring costs................................... 6,939 -- --
Operations of real estate held for sale or investment................. (664) 935 1,242
Operations of real estate acquired in settlement of loans............. (3,111) 6,623 8,426
Amortization of goodwill and other intangible assets.................. 9,151 5,530 5,147
---------- ---------- ----------
Total other expenses............................................... 325,049 355,889 263,679
---------- ---------- ----------
Earnings before income tax provision.................................... 222,188 86,554 63,394
Income tax provision.................................................... 93,113 36,131 21,342
---------- ---------- ----------
Net earnings....................................................... $ 129,075 $ 50,423 $ 42,052
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-123
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
PREFERRED STOCK HOLDING GAIN
SERIES A COMMON STOCK ADDITIONAL (LOSS) ON DEBT AND TOTAL
------------------- ------------------- PAID-IN EQUITY SECURITIES RETAINED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL AVAILABLE FOR SALE EARNINGS* EQUITY
---------- ------- ---------- ------- ---------- ------------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995....... 8,050,000 $ 8,050 40,719,718 $40,720 $ 793,372 $ 37 $ 99,668 $ 941,847
Exchange of Series A
Preferred Stock for common
stock...................... (2,226,118) (2,226) 5,901,771 5,902 (3,676) -- -- --
Net unrealized holding
loss on debt and equity
securities available
for sale................... -- -- -- -- -- (11,428) -- (11,428)
Stock options exercised...... 106,000 106 1,028 -- -- 1,134
5-year warrants exercised.... -- -- 2,209 2 -- -- -- 2
Dividends declared on
Series A preferred stock
($2.188 per share)......... -- -- -- -- -- -- (16,156) (16,156)
Net earnings................. -- -- -- -- -- -- 42,052 42,052
---------- ------- ---------- ------- ---------- -------- --------- -----------
Balance, June 30, 1996....... 5,823,882 5,824 46,729,698 46,730 790,724 (11,391) 125,564 957,451
Exchange of Series A
Preferred Stock for common
stock...................... (1,201,900) (1,202) 3,103,872 3,104 (1,902) -- -- --
Net unrealized holding
gain on debt and equity
securities available
for sale................... -- -- -- -- -- 10,237 -- 10,237
Stock options exercised...... -- -- 512,125 512 4,263 -- -- 4,775
5-year warrants exercised.... -- -- 414 1 -- -- -- 1
7-year warrants exercised.... -- -- 2,400 2 26 -- -- 28
Dividends declared on
Series A preferred stock
($2.188 per share)......... -- -- -- -- -- -- (10,841) (10,841)
Net earnings................. -- -- -- -- -- -- 50,423 50,423
---------- ------- ---------- ------- ---------- -------- --------- -----------
Balance, June 30, 1997....... 4,621,982 4,622 50,348,509 50,349 793,111 (1,154) 165,146 1,012,074
Net unrealized holding
loss on debt and equity
securities available
for sale................... -- -- -- -- -- (458) -- (458)
Stock options exercised...... -- -- 15,376 15 28,883 -- -- 28,898
5-year warrants exercised.... -- -- 38 -- -- -- --
Acquisition of CenFed Bank... -- -- 7,390,557 7,390 186,470 -- -- 193,860
Dividends paid to parent..... -- -- -- -- -- -- (85,050) (85,050)
Net earnings................. -- -- -- -- -- -- 129,075 129,075
---------- ------- ---------- ------- ---------- -------- --------- -----------
Balance, June 30, 1998....... 4,621,982 $ 4,622 57,754,480 $57,754 $1,008,464 $ (1,612) $ 209,171 $ 1,278,399
---------- ------- ---------- ------- ---------- -------- --------- -----------
---------- ------- ---------- ------- ---------- -------- --------- -----------
</TABLE>
- ------------------
* Substantially restricted.
See accompanying Notes to Consolidated Financial Statements
F-124
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................................ $ 129,075 $ 50,423 $ 42,052
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of discounts and accretion of premiums, net......... 7,473 11,064 8,054
Accretion of deferred loan fees.................................. (3,305) (4,355) (5,546)
Provision for loan losses........................................ (1,727) 25,204 40,350
Amortization of mortgage servicing assets........................ 49,245 27,342 22,559
Provision for impairment of mortgage servicing assets............ 6,142 4,047 --
(Gain) loss on sale of loans, net................................ (605) 291 690
(Gain) loss on sale of mortgage-backed securities, net........... (4,562) 1,804 34,222
Depreciation..................................................... 16,186 15,065 16,115
Provision for losses on real estate.............................. 2,670 7,706 11,610
Gain on sale of real estate...................................... (10,641) (7,220) (10,880)
Amortization of goodwill and other intangible assets............. 9,151 5,530 5,147
(Benefit) provision for deferred income taxes.................... (7,685) 10,364 19,132
Net change in loans originated or purchased for resale........... 62,422 39,249 (2,649)
Decrease (increase) in interest receivable....................... 460 (8,851) 7,158
FHLB stock dividend received..................................... (16,096) (13,693) (9,612)
(Increase) decrease in other assets.............................. (127,001) 434 20,298
Increase (decrease) in other liabilities......................... 119,641 177,937 (27,698)
Other items...................................................... (2,669) 630 (24,286)
----------- ----------- ----------
Total adjustments.............................................. 99,099 292,548 104,664
----------- ----------- ----------
Net cash provided by operating activities................... $ 228,174 $ 342,971 $ 146,716
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-125
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from investing activities:
Net change in certificates of deposit with original maturities of
3 months or less................................................ $ 3,805 $ 1,971 $ (5,027)
Net change in other debt and equity securities with original
maturities of 3 months or less.................................. 390 (3,809) 9,268
Purchase of certificates of deposit................................ (2,000) (3,000) (4,800)
Purchase of other debt and equity securities held to maturity...... -- (3,000) (5,000)
Proceeds from maturities of certificates of deposit................ -- 7,810 9,100
Proceeds from maturities of other debt and equity securities held
to maturity..................................................... -- 7,800 20,045
Purchase of other debt and equity securities available for sale.... (361) (2,113) --
Proceeds from sales and maturities of other debt and equity
securities available for sale................................... 6,156 161,760 --
Purchase of mortgage-backed securities held to maturity............ -- -- (2,982)
Principal payments on mortgage-backed securities held to
maturity........................................................ 245,588 190,545 495,999
Purchase of mortgage-backed securities available for sale.......... (588,712) (505,083) (113,218)
Principal payments on mortgage-backed securities available for
sale............................................................ 457,318 285,404 355,975
Proceeds from sale of mortgage-backed securities available for
sale............................................................ 124,811 -- 1,671,934
Loans originated for investment, net of refinances................. (720,064) (590,924) (364,471)
Loans purchased for investment..................................... (2,707,817) (2,430,461) (2,107,509)
Net change in undisbursed loan funds............................... (1,591) (10,353) 7,507
Principal payments on loans held for investment.................... 2,859,780 1,894,857 1,428,501
Proceeds from sale of loans held for investment.................... -- -- 159,079
Cash invested in real estate....................................... (11,735) (12,515) (16,115)
Cash received from real estate investments and sale of real estate
acquired in settlement of loans................................. 98,175 101,679 108,482
Purchase of FHLB stock............................................. (1,067) (53,052) (17,187)
Redemption of FHLB stock........................................... -- -- 19,756
Net (increase) decrease in premises and equipment.................. (18,191) (19,810) 20,559
Payments under agreements to purchase mortgage servicing assets.... (21,558) (197,091) (26,479)
Payment for purchase of CenFed Bank................................ (3,232) -- --
Payment for purchase of TransWorld Bank............................ -- (64,419) --
Payment for purchase of OneCentral Bank............................ -- (11,111) --
----------- ----------- -----------
Net cash (used in) provided by investing activities............. $ (280,305) $(1,254,915) $ 1,643,417
----------- ----------- -----------
----------- ----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits................................ $ (93,221) $ 227,776 $ (10,904)
Net change in short-term borrowings with original maturities of
3 months or less................................................ (717,197) 10,632 (1,937,126)
Proceeds from fundings of FHLB advances............................ 4,024,000 2,300,000 2,988,000
Repayments of FHLB advances........................................ (3,460,000) (1,350,000) (2,645,000)
Repayment of other borrowings...................................... (10,712) (2,492) (18,284)
Proceeds from issuance of common stock............................. 206 4,804 1,136
Payment of dividends on preferred stock............................ -- (11,827) (17,044)
Payment of dividends to parent company............................. (82,524) -- --
----------- ----------- -----------
Net cash (used in) provided by financing activities............. $ (339,448) $ 1,178,893 $(1,639,222)
----------- ----------- -----------
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents................. $ (391,579) $ 266,949 $ 150,911
Cash and cash equivalents at beginning of year....................... 853,557 586,608 435,697
----------- ----------- -----------
Cash and cash equivalents at end of year............................. $ 461,978 $ 853,557 $ 586,608
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-126
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Glendale
Federal Bank, Federal Savings Bank and its subsidiaries ("Glendale Federal" or
the "Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation, including 200,686 common shares of Glendale Federal
held by a subsidiary of the Bank at June 30, 1998. Certain reclassifications
have been made to prior years' consolidated financial statements to conform to
the June 30, 1998 presentation.
Golden State Bancorp Inc. ("Golden State" or the "Company") was formed to
become the holding company for Glendale Federal in a reorganization that was
approved by Glendale Federal's stockholders and completed on July 24, 1997. As
part of the holding company formation, shares of Glendale Federal's common stock
automatically became an equal number of shares of Golden State common stock and
shares of Glendale Federal's Noncumulative Preferred Stock, Series E,
automatically became an equal number of shares of Golden State's Noncumulative
Convertible Preferred Stock, Series A. Glendale Federal's two classes of
warrants became exercisable solely to purchase common stock of Golden State. The
members of the board of directors of Glendale Federal also became the board of
directors of Golden State.
On November 26, 1997, Golden State Financial Corporation ("Golden State
Financial") was formed as a wholly-owned subsidiary of Golden State for the
purpose of becoming an intermediate holding company to effect the acquisition of
CENFED Financial Corporation ("CENFED"), the parent company of CenFed Bank, A
Federal Savings Bank ("CenFed Bank"). CENFED was merged with and into Golden
State Financial on April 21, 1998, with Golden State Financial as the surviving
entity in the merger. On May 8, 1998, Golden State Bancorp contributed its
shares of Glendale Federal to Golden State Financial and CenFed Bank was merged
into Glendale Federal, with Glendale Federal as the surviving entity.
Golden State has no significant assets or business other than its ownership
of Golden State Financial, and Golden State Financial has no significant assets
or business other than its ownership of Glendale Federal. The Bank's business
consists primarily of attracting checking and savings deposits from the public;
originating real estate, business and consumer loans; and purchasing loans
secured by mortgages on residential real estate. The Bank, through its
subsidiaries, also provides general insurance and securities brokerage services.
Risks and Uncertainties
In the normal course of its business, the Bank encounters two significant
types of risk: economic risk and regulatory risk. There are four main components
of economic risk: interest rate risk, credit risk, market risk and
concentrations of credit risk. The Bank is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
speeds, or on different bases, than its interest-earning assets. Credit risk is
the risk of default on the Bank's loan portfolio that results from borrowers'
inability or unwillingness to make contractually required payments. Market risk
refers to the risk of decline in the value of collateral underlying loans
receivable and the value of real estate held by the Bank, and in the valuation
of loans held for sale, mortgage-backed securities available for sale and
mortgage servicing assets. Concentration of credit risk refers to the risk that,
if the Bank extends a significant portion of its total outstanding credit to
borrowers in a specific geographical area or industry or on the security of a
specific form of collateral, the Bank may experience disproportionately high
levels of default and losses if those borrowers, or the value of the type of
collateral, is adversely affected by factors that are particularly applicable to
such borrowers or collateral. Glendale Federal's lending activities are
principally in California, with the largest concentration of the Bank's loan
portfolio being secured by real estate located in Southern California. The
ability of the Bank's borrowers to repay amounts owed is dependent on several
factors, including the economic conditions in the borrower's geographic region
and the borrower's financial condition. The Company and the Bank are subject to
the regulations of various government agencies. Regulatory risk refers, among
other things, to the fact that these regulations can and do change
F-127
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
significantly from period to period. The Bank undergoes periodic examinations by
regulatory agencies, which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgments based on information available to them
at the time of their examination.
The Bank has had an ongoing program that was intended to ensure that its
operational and financial systems would not be adversely affected by Year 2000
data processing hardware and software failures arising from processing errors
involving calculations using the Year 2000 date. Enhancements to the Bank's
mainframe systems have been implemented with completion of all mission critical
repairs having been scheduled for November 1998. The Bank has initiated
renovation of its non-mainframe systems, with completion of all but one mission
critical system having been scheduled for December 1998 and the one remaining
mission critical system was to be completed in February 1999. The Bank halted
further implementation of its own Year 2000 efforts as of August 20, 1998 after
receiving both shareholder and Office of Thrift Supervision approvals for the
Cal Fed Merger. See Note 21: "Subsequent Events" for additional information
regarding the Cal Fed Merger. Future Year 2000 compliance will depend upon the
ongoing systems that will be maintained by Cal Fed. Expenses related to the Year
2000 enhancements amounted to $10.0 million in fiscal 1998, compared to
$0.3 million in fiscal 1997. The Bank expected to incur approximately $37
million on this project, including $2 million to $3 million on software and
hardware expenditures, on its program to modify, redevelop or replace its
computer applications to try to make them "Year 2000" compliant. Year 2000
compliance failures could result in additional expense to the Bank and
significant disruption of its business.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the balance sheets and revenues and expenses for the periods covered,
including the allowance for loan losses, mortgage servicing assets and the
realization of deferred tax assets. Actual results could differ significantly
from those estimates and assumptions.
Short-Term Highly Liquid Investments
The Bank's short-term highly liquid investments consist of federal funds
sold and assets purchased under agreements to resell. The Bank invests in these
assets to maximize its return on liquid funds.
Glendale Federal is required by the Federal Reserve System to maintain
non-interest earning cash reserves against certain of its transaction accounts
and term deposit accounts. At June 30, 1998 and 1997, the required reserves
totaled $92,688,000 and $61,892,000, respectively. Actual reserves totaled
$92,690,000 and $62,454,000 at June 30, 1998 and 1997, respectively.
Investments in Debt and Equity Securities
Glendale Federal's investment in debt securities consists principally of
U.S. Treasury securities, obligations of municipalities and mortgage-backed
securities purchased by the Bank or created when the Bank exchanges pools of
loans for mortgage-backed securities ("securitized loans"). The Bank classifies
its investment in debt and equity securities as held to maturity securities,
trading securities and available for sale securities, as applicable.
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of any
related net deferred origination costs and premiums or the accretion of any
related net deferred origination fees and discounts into interest income using
the interest method over the estimated remaining period until maturity.
Unrealized losses on held to maturity securities, reflecting a decline in value
judged by the Bank to be
F-128
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
other than temporary, are charged to income and reported under the caption "Gain
(loss) on sale of mortgage-backed securities, net" in the Consolidated
Statements of Operations.
Glendale Federal classifies securities as available for sale when at the
time of purchase it determines that such securities may be sold at a future date
or if the Bank does not have the positive intent or ability to hold such
securities to maturity. Securities designated as available for sale are recorded
at fair value. Changes in the fair value of debt and equity securities available
for sale are included in shareholders' equity as unrealized holding gains or
losses net of the related tax effect. Unrealized losses on available for sale
securities reflecting a decline in value judged to be other than temporary are
charged to income in the Consolidated Statement of Operations. Realized gains or
losses on available for sale securities are determined on the specific
identification basis. Deferred net origination costs or fees, and purchased
premiums and discounts, are amortized and accreted to interest income using the
interest method over the estimated remaining period until maturity.
Glendale Federal classifies securities it intends to sell presently as
trading securities. Such securities are generally comprised of securities
created by the Bank to facilitate the sale of loans originated and held for
sale. Trading securities are recorded at fair value, determined by the lesser of
quoted market prices for similar securities or commitment prices for those
securities under mandatory commitments to sell. Changes in fair value of debt
and equity securities are recognized in earnings in the period in which the
change occurs under the caption "Gain (loss) on sale of mortgage-backed
securities, net" in the Consolidated Statements of Operations. The Bank held no
trading securities at June 30, 1998 and 1997.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued implementation guidance for Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The guidance caused the Bank to reassess the appropriateness of
the classifications of its securities and account for resulting
reclassifications at fair value in accordance with SFAS 115. During the second
quarter of fiscal 1996, the Bank, in accordance with the implementation
guidance, reclassified $2.8 billion of mortgage-backed securities from held to
maturity to available for sale. Pursuant to the transfer to available for sale
and the subsequent sale of $1.7 billion of CMOs, the Bank recorded a pre-tax
loss on sale of mortgage-backed securities of $28.2 million during fiscal 1996.
See Note 6: "Mortgage-Backed Securities" for additional information.
Loans Held for Sale
Glendale Federal may designate certain of its loans receivable as being
held for sale. In determining the level of loans held for sale, the Bank
considers whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank originates and/or purchases loans that meet certain yield and
other guidelines for its own portfolio. Such loans are designated as held for
investment at the time of origination or purchase based on a specific
identification method. Loans that do not meet such guidelines are designated as
held for sale.
Loans held for sale are recorded at the lower of aggregate cost or market
value. Unrealized losses are recorded as a reduction in earnings and are
included under the caption "Gain (loss) on sale of loans, net" in the
Consolidated Statements of Operations. Realized gains and losses from the sale
of loans receivable are computed under the specific identification method.
Allowance for Loan Losses
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated inherent losses. In determining the allowance for
loan losses to be maintained, management evaluates many factors, including
management's judgment as to appropriate asset classifications, prevailing and
forecasted economic and market conditions, industry experience, historical loss
experience, loan portfolio composition,
F-129
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
management's assessment of the borrowers' ability to repay and repayment
performance, and the fair value of the underlying collateral.
The determination of the allowance for loan losses is based on estimates
that are particularly susceptible to changes in the economic environment and
market conditions. Management believes that, as of June 30, 1998 and 1997, the
allowance for loan losses is adequate based on information currently available
to it. Deterioration in the economies of the Bank's principal market areas could
adversely impact the Bank's loan portfolios and increases in non-performing
assets and higher charge-offs could result. Such adverse effects could also
require a larger allowance for loan losses.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be unable
to timely collect all amounts due according to the contractual terms of the loan
agreement. Non-accrual income property loans, non-accrual single-family loans or
borrowing relationships with unpaid balances greater than $500,000, non-accrual
business banking loans with unpaid balances of greater than $100,000, troubled
debt restructurings, and certain performing loans are measured individually for
impairment. Loans not included in the preceding categories are collectively
measured for impairment. Specific valuation allowances are established for
impaired collateralized loans at the difference between the loan amount and the
fair value of the related collateral, reduced by estimated selling costs, and
for unsecured loans at either the present value or the expected future cash
flows from the loan, discounted at the loan's effective interest rate, or at the
loan's observable market price. Impairment losses are recognized through an
increase in the allowance for loan losses and a corresponding charge to the
provision for loan losses. Adjustments to impairment losses due to changes in
the fair value of the collateral properties for impaired loans are included in
the provision for loan losses. Impaired loans may be left on accrual status
during the period the Bank is pursuing repayment of the loan. When an impaired
loan is either sold, transferred to REO or written down, any related valuation
allowance is charged off against the allowance for loan losses. Impaired loans
are placed on non-accrual status at the point that either: (1) they become
90 days delinquent; or (2) the Bank determines the borrower is incapable of, or
has ceased efforts toward, continuing performance under the terms of the loan.
Increases to the general allowance are charged to the provision for loan
losses. Specific valuation allowances are provided for when management
identifies a loan or a portion thereof as to which default is deemed probable.
Charge-offs to the allowance for loan losses are made when all, or a portion, of
the loan is confirmed as a loss based upon management's review of the loan or
through repossession of the underlying security or through a troubled debt
restructuring transaction. Recoveries of previously charged-off amounts are
credited to the allowance.
Troubled Debt Restructurings
Loans whose terms are modified due to borrower difficulties in repaying
amounts owed under the loan's original terms are classified as Troubled Debt
Restructurings ("TDRs"). TDRs are reported as such based on whether the
restructuring was made at an interest rate equal to or greater than the rate
that the Bank was willing to accept for loans presenting comparable credit risk
at the time of the restructuring for a loan of comparable risk and whether the
loan is impaired based on the terms of the restructuring agreement. Loans that
are restructured at rates greater than or equal to the rate the Bank was willing
to accept at the time of restructuring and that are not impaired based on the
terms of the restructuring are reported as TDRs only in the year of the
restructuring. All other TDRs are reported in years following the restructuring
until repaid.
Interest Income Recognition--Loans Receivable
Interest income is accrued as it is earned. Loans are placed on non-accrual
status after being delinquent more than 90 days, or earlier if the borrower is
deemed by management to be unable to continue performance. When a loan is placed
on non-accrual status, interest accrued but not received is reversed. While a
loan is on non-accrual
F-130
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
status, interest is recognized only as cash is received and if no portion of the
loan's carrying value is classified "Doubtful". Loans are returned to accrual
status only when the loan is reinstated and ultimate collectibility of current
interest is no longer in doubt. Interest income on impaired loans is recognized
based on the loan's accrual and classification status as discussed above.
Loan origination fees and direct origination costs are deferred at
origination and the net amounts deferred are accreted or amortized to interest
income over the contractual lives of the loans, using the interest method.
Accretion of discounts and net deferred origination fees and amortization of
premiums and net deferred origination costs is discontinued when loans are
placed on non-accrual status.
Gains and Losses from Sale of Loans
Glendale Federal sells whole mortgage loans and participations in mortgage
loans to institutional and private investors. Gains and losses resulting from
the sales of loans are determined on the specific identification method and
reflect the extent that the sales proceeds and the allocated fair value of any
retained interests exceed or are less than the Bank's investment in the loans
(which includes the unpaid principal balance of the loans, unearned discounts,
premiums and deferred fees and costs at the time of sale). To the extent sales
of loans involve the sale of part of a loan or a pool of loans with
disproportionate credit or prepayment risks, the cost basis is allocated based
upon the relative fair market value of the portion sold to the portion retained
on the date of sale.
In most cases, the Bank sells loans and continues to service such loans for
the investor. During fiscal 1997, the Bank adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122"). SFAS 122 was superseded, for transactions recorded after December 31,
1996, by Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). Both SFAS 122 and SFAS 125 require, and the Bank recorded, the
recognition of a servicing asset or liability and other retained interests as an
allocation of the carrying amount of the assets sold between the asset sold and
the servicing obligation and other retained interests based on the relative fair
value of the assets sold to the interests retained. The resulting Mortgage
Servicing Asset ("MSA") or liability is amortized in proportion to and over the
period of estimated net servicing income or loss. The Bank evaluates the MSA for
impairment or increased obligation based on the MSA's fair value.
Glendale Federal estimates fair values by discounting servicing asset cash
flows using discount and prepayment rates that it believes market participants
would use. The assets are summarized by risk attribute strata and a valuation
allowance is recorded as the sum of the impairment amounts for all strata with
impairment. For purposes of defining impairment strata, the Bank groups loans by
interest rate, by whether the loan is government-insured, and by whether the
loan has a fixed or adjustable interest rate.
If loans are sold with recourse, the estimated liability under the recourse
provision is provided for in the computation of the gain or loss. For loan sales
after December 31, 1996, in accordance with the requirements of SFAS 125
(described under the caption "Current Accounting Pronouncements", following),
the liability for loans sold with recourse is recorded at the fair value of the
liability. For loan sales through December 31, 1996, the liability is recorded
at the present value of the future recourse obligation, discounted at a
risk-free rate of return as of the date of the sale. There were no loan sales
with recourse between December 31, 1996 and June 30, 1998.
Loan Servicing and Mortgage Servicing Rights
Glendale Federal services mortgage loans for investors. Fees earned for
servicing loans owned by investors are reported as income when the related
mortgage loan payments are due. Accrued servicing fees relating to loans past
due more than 90 days are reversed. Loan servicing costs are charged to expense
as incurred. Loans serviced
F-131
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
for others are not included with loans receivable or any other asset in the
accompanying Consolidated Statements of Financial Condition.
The Bank from time-to-time enters into transactions to acquire the rights
to service pools of loans for others and collect the servicing and related fees.
The amount paid by the Bank for these rights is capitalized as MSA. The Bank
also sells loans and retains the right to service the loans for the investors.
As discussed in "Gains and Losses from Sale of Loans," preceding, the Bank also
records MSA arising from sales of loans.
MSA is amortized in proportion to, and over the period that the servicing
rights generate net servicing fee income. SFAS 125 also requires that MSA be
evaluated for impairment based on the asset's fair value. The Bank estimates
fair values by discounting servicing asset cash flows using discount and
prepayment rates that it believes market participants would use. For purposes of
measuring impairment, MSA is stratified by the Bank based upon whether the loans
are fixed-rate or adjustable-rate, and whether the loans are government-insured.
Accounting for Real Estate
Real estate acquired in settlement of loans ("REO") is recorded at the
lower of fair value, generally as determined by recent appraisals, reduced by
estimated selling costs, or the recorded investment in the loan at the time of
foreclosure. Thereafter, the property is carried at the lower of acquisition
cost or fair value reduced by estimated selling costs, as reflected by
subsequent appraisals or sales agreements. Specific valuation allowances on REO
are recorded through a charge to operations for estimated costs to sell and if
there is a further deterioration in fair value. The Bank also provides a general
allowance for inherent losses on REO recorded through a charge to operations.
Real estate held for sale or investment ("REI") is carried at the lower of
cost or fair value less estimated costs to sell.
Changes in estimated selling and disposal costs, and declines in fair
values are provided through a valuation allowance. Net gains or losses on
disposal of REO and REI are charged to operations as incurred.
Gains on real estate sales financed by the Bank are recognized only when
the transactions meet the down-payment and continuing investment criteria of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." Losses are recognized when identified.
Premises and Equipment and Depreciation
Depreciation and amortization of premises is included in "Occupancy
expense, net" and depreciation and amortization of equipment is included in
"Other general and administrative expenses" in the Consolidated Statements of
Operations. Depreciation and amortization of premises and equipment is computed
using the straight-line method over the estimated useful lives of the assets.
The cost of leasehold improvements is amortized using the straight-line method
over the lesser of the life of the asset or the remaining term of the related
lease. Maintenance and repairs on premises and equipment are charged to expense
as incurred. Material improvements are capitalized.
Goodwill and Other Intangible Assets
Assets acquired and liabilities assumed in acquisitions accounted for under
the purchase method of accounting were recorded at their fair value as of the
date of the acquisition. The excess cost over fair value of the net assets
acquired was classified as goodwill and is being amortized over periods ranging
from 10 to 40 years on a straight-line basis. The purchase accounting discount
or premium resulting from each acquisition is accreted or amortized into
interest income using the interest method over the loans' remaining contractual
lives, adjusted for actual principal prepayments. At June 30, 1998, goodwill
totaled $149.8 million and had a weighted average remaining life of 15.2 years.
F-132
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
In fiscal 1997, the Bank acquired OneCentral Bank ("OneCentral") with total
assets of $74.3 million for $11.1 million in cash, which includes out-of-pocket
expenses, and TransWorld Bancorp ("TransWorld") with total assets of
$372.4 million for $64.4 million in cash, including out-of-pocket expenses. The
Bank recorded goodwill of $5.8 million and $40.0 million, respectively, in the
OneCentral and TransWorld transactions, which is being amortized over 15 years
using the straight-line method. The goodwill relating to these acquisitions had
a remaining balance of $42.0 million at June 30, 1998.
In fiscal 1998, the Company acquired CENFED. The terms of the transaction
provided for a tax-free exchange of 1.2 shares of Golden State common stock for
each outstanding share of CENFED's common stock. Pursuant to the terms of the
transaction, Golden State issued 7,390,557 shares of its common stock for a
total purchase price of $211.1 million, or $28.563 per share. The Bank recorded
goodwill of $90.5 million, which is being amortized over 15 years using the
straight-line method. The goodwill relating to this acquisition had a remaining
balance of $89.5 million at June 30, 1998.
As discussed in Note 21: "Subsequent Events," on July 11, 1998, the Company
completed its acquisition of RedFed Bancorp, parent company of Redlands Federal
Bank. Redlands Federal Bank was merged with the Bank, with Glendale Federal as
the ongoing entity. Pursuant to this acquisition, the Bank recorded goodwill of
$62.8 million.
In fiscal 1995, the Bank acquired $194 million in deposits of Independence
One Bank of California, Federal Savings Bank ("Independence One") and $812
million in deposits of Union Federal Bank ("Union Federal"). The Bank paid a
purchase premium of $4.4 million for the Independence One deposits and a
purchase premium of $6.9 million for the Union Federal deposits. The Bank
accepted as part of the consideration for assuming Union Federal's deposit
liabilities certain of Union Federal's assets at their existing gross book
values. These purchase premiums, together with an adjustment to record the
assets acquired from Union Federal at fair value, totaled $42.9 million, and are
reflected under the caption "Goodwill and other intangible assets" in the
Consolidated Statements of Financial Condition. These intangible assets are
being amortized over 10 years using the straight-line method. At June 30, 1998,
these intangible assets totaled $30.6 million with a remaining life of seven
years.
Periodically, the Bank evaluates the recoverability of its deposit purchase
premium assets based upon the rate of attrition of deposit relationships
acquired. Goodwill is evaluated for impairment on the basis of the estimated
undiscounted cash flows of the acquired franchise.
Derivative Financial Instruments
Glendale Federal has in the past used various strategies to minimize
interest rate risk, including interest rate futures contracts and interest rate
exchange agreements ("swaps"). The Bank's accounting policy relating to interest
rate futures contracts is to amortize deferred gains and losses on futures
contracts into interest income or expense over the expected remaining life of
the hedged asset or liability. The conditions for obtaining and maintaining
hedge accounting treatment require identification of the asset or liability to
be hedged and linking the swap to the asset or liability being hedged. The
notional amounts of outstanding interest rate swaps are off-balance sheet items
and therefore are not reflected in the Consolidated Statements of Financial
Condition. Any gains or losses from selling the swaps simultaneously with the
underlying assets or liabilities are currently recognized. Any gains or losses
from selling only the swap, without the assets or liabilities, are deferred and
amortized over the life of the assets or liabilities. Net interest income
(expense) resulting from the differential between exchanging floating rate and
fixed rate interest payments is recorded on a current basis and is included with
the interest income or expense of the related asset or liability in the
Consolidated Statements of Operations. The Bank does not hold any derivative
financial instruments for trading purposes. As of June 30, 1998 and 1997, there
were no interest rate swaps outstanding.
F-133
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
As detailed under "Current Accounting Pronouncements" following, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") in June of 1998. As
discussed under "Current Accounting Pronouncements," SFAS 133 will require
adjustments to the Bank's accounting policy during the quarter ending September
30, 1999. As the Bank presently does not use derivative financial instruments in
its hedging practices, changes to Glendale Federal's accounting policies would
have no effect on the Bank's statements of financial position or results of
operations at June 30, 1998 for the year then-ended.
Securities Sold Under Agreements to Repurchase
Glendale Federal enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements") only with selected primary dealers.
These reverse repurchase agreements are treated as financings: the dollar amount
of securities underlying the agreements remains in the asset accounts, and the
obligations to repurchase securities sold are reflected as liabilities in the
Consolidated Statements of Financial Condition.
Income Taxes
The Company and its subsidiaries, including the Bank, file a consolidated
Federal income tax return.
The Bank uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Current Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Financial Information About Capital Structure"
("SFAS 129"). SFAS 129 supersedes capital structure disclosure requirements
found in previous accounting pronouncements and consolidates them into one
statement for ease of retrieval and greater visibility for non-public entities.
These disclosures are required for financial statements for periods ending after
December 15, 1997. SFAS 129 makes no changes to previous accounting
pronouncements that applied to the Bank; accordingly, adoption of SFAS 129 has
no impact on the Bank's results of operations and financial condition.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
130 requires that comprehensive income be presented beginning with net income,
adding the elements of comprehensive income not included in the determination of
net income, to arrive at comprehensive income. SFAS 130 also requires that an
enterprise display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position.
F-134
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES--(CONTINUED)
SFAS 130 is effective for the Bank's fiscal year beginning July 1, 1998.
SFAS 130 requires the presentation of information already contained in the
Bank's financial statements and therefore is not expected to have an impact on
the Bank's financial position or results of operation.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employees' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 changes disclosure requirements,
but does not change measurement standards, of pension and other postretirement
benefit plans. SFAS 132 standardizes the disclosure requirements for retirement
and other postretirement benefit plans that are subject to previous accounting
standards, and requires disclosure of additional information regarding such
plans that will facilitate financial analysis. SFAS 132 is effective for the
Bank's fiscal year ending June 30, 1999. SFAS 132 requires changes in
disclosures only, and therefore is not expected to have an effect on the Bank's
financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 replaces, amends and nullifies previous statements of financial
accounting standards and Emerging Issues Task Force consensuses to provide a
comprehensive framework for accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires recognition of all derivative
instruments as either assets or liabilities in the statement of financial
condition. Gain or loss recognition is determined based on the intended use and
resulting designation of the derivative instrument:
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset, liability or
firm commitment are recognized in earnings in the period of the fair
value change, together with the offsetting fair value loss or gain on the
hedged item.
o Gains or losses on derivative instruments designated as hedging exposure
to variable cash flows arising from a forecasted transaction are
initially reported, to the extent the fair value change is offset by the
change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in excess
of the offsetting change in forecasted cash flows is reported in earnings
in the period of the change.
o Gains or losses on derivative instruments designated as foreign currency
hedges of net investments in foreign operations are reported in other
comprehensive income as part of the foreign currency translation
adjustment.
SFAS 133 precludes the use of nonderivative financial instruments as
hedging instruments, except that nonderivative financial instruments denominated
in a foreign currency may be designated as a hedge of the foreign currency
exposure of an unrecognized firm commitment denominated in a foreign currency or
a net investment in a foreign operation.
SFAS 133 is effective for the Bank's quarter ending September 30, 1999.
During that quarter, all existing derivative instruments identified as hedging
instruments must be re-evaluated and designated and documented in compliance
with SFAS 133. At June 30, 1998, the Bank had no derivative financial
instruments. Therefore, as of June 30, 1998, SFAS 133 would have no impact on
the Bank's statement of financial condition or results of operations. However,
should the Bank enter into derivative instrument transactions during its fiscal
year ended June 30, 1999, there will be an indeterminate effect on the Bank's
financial condition and results of operations for the fiscal quarter ending
September 30, 1999.
F-135
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purpose of the statement of cash flows, cash and cash equivalents
include "Cash and amounts due from banks" and "Federal funds sold and assets
purchased under resale agreements".
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest....................................................... $714,435 $707,087 $ 738,407
Income taxes................................................... 64,024 24,672 12,623
Non-cash investing and financing activities:
Principal reductions to loans due to foreclosure............... 96,448 156,820 186,157
Loans exchanged for mortgage-backed securities................. 171,737 42,222 145,826
Loans made to facilitate the sale of real estate held for
investment and real estate acquired in settlement of
loans....................................................... 35,576 60,118 85,157
Exchange of preferred stock for common stock................... -- 1,202 2,226
Issuance of common stock in exchange for preferred stock....... -- 3,104 5,902
Issuance of common stock to parent in the acquisition of CenFed
Bank........................................................ 193,860 -- --
Transfer of mortgage-backed and other debt and equity
securities to available for sale............................ -- 7,935 2,818,831
Transfers of loans from held for investment to held for sale:
Liquidation of troubled credits............................. 36,598 28,846 24,344
Sale of loans serviced by others............................ 45,824 -- --
Loans originated for investment, subsequently identified to
sale portfolio............................................ -- 1,596 --
Transfers of loans from held for sale to held for investment:
Loans originated for sale, subsequently identified to
investment portfolio...................................... 5,677 -- 1,275
Troubled credits previously transferred to held for sale,
but deemed non-salable.................................... -- 3,768 3,064
Other....................................................... -- -- 73
Fair value of CenFed Bank net assets acquired.................. 106,569 -- --
Fair value of TransWorld net assets acquired................... -- 24,377 --
Fair value of OneCentral net assets acquired................... -- 5,306 --
</TABLE>
The transfers from held for investment loans were primarily of troubled
loans which the Bank sold to remove the credit and/or collateral risk arising
from the credit. The transfer in fiscal 1996 of troubled credits back to held
for investment represents a single loan that was deemed unsalable in fiscal
1996.
During fiscal 1998, 1997 and 1996, the Bank received income tax refunds of
$314,000, $8,383,000 and $6,630,000, respectively.
NOTE 3: ACQUISITIONS
On April 21, 1998, Golden State acquired CENFED. Pursuant to the terms of
the transaction, Golden State issued 7,390,557 shares of its common stock for a
total purchase price of $211.1 million, and CenFed Bank was merged into Glendale
Federal. Under the purchase method of accounting, the goodwill of $90.5 million
recorded by the Bank in this transaction will be amortized over 15 years using
the straight-line method. At April 21, 1998, CenFed Bank operated 18 branches
and had $1.9 billion in assets, including $1.4 billion of loans receivable, net,
F-136
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 3: ACQUISITIONS--(CONTINUED)
and $354 million of mortgage-backed securities, net. CenFed Bank's liabilities
included $1.4 billion of deposits and $385.1 million of borrowings. These
amounts are unaudited. The merger of CenFed Bank with Glendale Federal was
completed on May 8, 1998.
The following table summarizes the composition of loans acquired in the
CenFed Bank merger at April 21, 1998 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
---------- ----------
<S> <C> <C>
Real estate................................................................... $1,404,306 99.2%
---------- ------
Consumer:
Term loans.................................................................. 2,477 0.2
Lines of credit............................................................. 511 --
---------- ------
2,988 0.2
---------- ------
Commercial:
SBA loans................................................................... 8,530 0.6
Lines of credit............................................................. 34 --
---------- ------
8,564 0.6
---------- ------
$1,415,858 100.0%
---------- ------
---------- ------
</TABLE>
The following table summarizes the composition of deposits acquired in the
CenFed Bank merger at April 21, 1998 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
---------- ----------
<S> <C> <C>
Checking...................................................................... $ 110,832 7.7%
Savings....................................................................... 92,170 6.4
Money Market.................................................................. 170,402 11.9
---------- ------
Total daily access....................................................... 373,404 26.0
---------- ------
Short-term certificates (1 year or less)...................................... 458,496 31.9
Long-term certificates (over 1 year).......................................... 513,066 35.7
Jumbo and brokered certificates............................................... 92,410 6.4
---------- ------
Total certificates....................................................... 1,063,972 74.0
---------- ------
$1,437,376 100.0%
---------- ------
---------- ------
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of Glendale Federal and CenFed Bank, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense, and related income tax effects, and assuming the
acquisition occurred at the beginning of the periods presented. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had Glendale Federal and CenFed Bank constituted a
single entity during such periods.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997
-------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Pro forma net interest income..................................... $ 488,591 $ 438,778
Pro forma net earnings............................................ $ 138,929 $ 60,573
</TABLE>
F-137
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 3: ACQUISITIONS--(CONTINUED)
On May 16, 1997, the Bank completed its acquisition of TransWorld Bancorp
("TransWorld") and its principal subsidiary TransWorld Bank, which added nine
bank offices to the Bank's retail network. At that date, TransWorld had $372.4
million in assets, including $163.2 million of U.S. Government and federal
agency debt securities and $135.8 million in gross real estate, commercial and
consumer loans, and $336.3 million in deposits. The Bank paid $64.4 million
which includes out-of-pocket expenses, for the transaction and, under the
purchase method of accounting, recognized goodwill of $40.0 million after
recording the net assets acquired from TransWorld at fair value.
On January 31, 1997, the Bank completed its acquisition of OneCentral Bank
("OneCentral"). At that date, OneCentral had $74.3 million in assets, including
$38.0 million in gross real estate, commercial and consumer loans, and $68.8
million in deposits. The Bank paid $11.1 million which includes out-of-pocket
expenses, for the transaction and, under the purchase method of accounting,
recognized goodwill of $5.8 million after recording the net assets acquired from
OneCentral at fair value.
The following table summarizes, as of the respective acquisition dates, the
composition of loans purchased from TransWorld and OneCentral (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
TRANSWORLD ONECENTRAL TOTAL TOTAL
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Real estate.......................................... $ 62,028 $ 16,741 $ 78,769 45%
-------- -------- -------- ----
Consumer:
Term loans......................................... 6,727 -- 6,727 4
Lines of credit.................................... 6,155 3,699 9,854 6
-------- -------- -------- ----
12,882 3,699 16,581 10
-------- -------- -------- ----
Commercial:
Term loans......................................... 52,780 16,356 69,136 40
SBA loans.......................................... 7,894 -- 7,894 5
Lines of credit.................................... 182 1,196 1,378 --
-------- -------- -------- ----
60,856 17,552 78,408 45
-------- -------- -------- ----
$135,766 $ 37,992 $173,758 100%
-------- -------- -------- ----
-------- -------- -------- ----
</TABLE>
The following table summarizes, as of the respective acquisition dates, the
composition of deposits purchased from TransWorld and OneCentral (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
TRANSWORLD ONECENTRAL TOTAL TOTAL
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Checking............................................. $139,428 $ 33,969 $173,397 43%
Savings.............................................. 11,919 1,697 13,616 3
Money Market......................................... 108,127 26,964 135,091 33
-------- -------- -------- ----
Total daily access.............................. 259,474 62,630 322,104 79
-------- -------- -------- ----
Short-term certificates (1 year or less)............. 52,830 3,356 56,186 14
Long-term certificates (over 1 year)................. 7,631 2,823 10,454 3
Jumbo and brokered certificates...................... 16,413 -- 16,413 4
-------- -------- -------- ----
Total certificates.............................. 76,874 6,179 83,053 21
-------- -------- -------- ----
$336,348 $ 68,809 $405,157 100%
-------- -------- -------- ----
-------- -------- -------- ----
</TABLE>
F-138
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 4: FEDERAL FUNDS SOLD AND ASSETS PURCHASED UNDER RESALE AGREEMENTS
Federal funds sold and assets purchased under resale agreements at the
dates indicated are summarized below at cost, which approximates market (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Federal funds sold.................................................... $ 27,000 $ --
Securities purchased under resale agreements.......................... 145,000 482,000
Whole loans purchased under resale agreements......................... -- 150,000
-------- --------
$172,000 $632,000
-------- --------
-------- --------
</TABLE>
The following table provides further information with respect to assets
purchased under resale agreements at June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Balance at year end........................................... $145,000
Average amount outstanding during the year.................... 554,140
Maximum amount outstanding at any month-end................... 725,000
</TABLE>
No amounts outstanding with individual brokers at June 30, 1998 exceeded
ten percent of stockholder's equity.
The weighted average interest rate on federal funds sold and assets
purchased under resale agreements was 6.36% and 6.49% at June 30, 1998 and 1997,
respectively. Interest receivable on these securities was approximately $31,000
and $115,000 at June 30, 1998 and 1997, respectively, and is included in
"Interest receivable" in the accompanying Consolidated Statements of Financial
Condition.
Assets purchased under resale agreements were collateralized by certain
mortgage-backed securities and whole loans at June 30, 1998 and 1997. At June
30, 1998 and 1997, the Bank held only assets purchased under agreements to
resell identical assets. The assets underlying the agreements are held by a
third party trustee for the Bank until the maturities of the agreements.
F-139
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 5: OTHER DEBT AND EQUITY SECURITIES
The following tables summarize the Bank's other debt and equity securities
available for sale with related remaining maturity data as of the dates
indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and Federal Agency obligations:
Maturing within 1 year............................ $ 12,398 $ 6 $ -- $ 12,404
Maturing in 1-5 years............................. 24,879 161 -- 25,040
Maturing in 5-10 years............................ 1,948 79 -- 2,027
Obligations of municipalities:
Maturing after 10 years........................... 82,372 1,391 -- 83,763
Equity securities.................................... 2,379 495 -- 2,874
--------- ------ ---- --------
Total........................................... $ 123,976 $2,132 $ -- $126,108
--------- ------ ---- --------
--------- ------ ---- --------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and Federal Agency obligations:
Maturing within 1 year............................ $ 14,807 $ 6 $ -- $ 14,813
Maturing in 1-5 years............................. 4,976 3 (5) 4,974
Maturing in 5-10 years............................ 5,924 -- (21) 5,903
Equity securities.................................... 1,758 346 -- 2,104
--------- ------ ---- --------
Total........................................... $ 27,465 $ 355 $(26) $ 27,794
--------- ------ ---- --------
--------- ------ ---- --------
</TABLE>
Fair values at June 30, 1998 and 1997 were based upon quotations for
similar or identical securities.
The weighted average interest rate on other debt and equity securities was
4.21% and 5.32% at June 30, 1998 and 1997, respectively. Interest receivable on
these securities was approximately $1,235,000 and $259,000 at June 30, 1998 and
1997, respectively, and is included in "Interest receivable" in the accompanying
Consolidated Statements of Financial Condition.
During fiscal 1998, the Bank sold $2.0 million of other debt securities
available for sale. No gain or loss was recorded on the sale.
During fiscal 1997, the Bank sold $156,357,000 in securities from the
TransWorld and OneCentral acquisitions at a gross realized loss of $2,000. These
securities were all classified as available for sale at the dates of the
acquisitions. There were no sales of other debt and equity securities during
fiscal 1996.
Other debt securities include net discounts amounting to approximately
$14,700,000 and $91,000 at June 30, 1998 and 1997, respectively.
Approximately $19,883,000 of other debt securities were pledged as
collateral for borrowings at June 30, 1998. No other debt securities were
pledged as collateral for securities sold under agreements to repurchase or
other borrowings at June 30, 1997.
F-140
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 6: MORTGAGE-BACKED SECURITIES
The following tables summarize the Bank's mortgage-backed securities held
to maturity and available for sale as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................................. $ 336,493 $ 9,371 $ (229) $ 345,635
FHLMC............................................ 220,233 4,415 (195) 224,453
GNMA............................................. 183,270 1,177 (694) 183,753
Pass-through securities.......................... 157,338 16 (4,449) 152,905
Other............................................ 17,259 -- (2,450) 14,809
---------- -------- -------- ----------
$ 914,593 $ 14,979 $ (8,017) $ 921,555
---------- -------- -------- ----------
---------- -------- -------- ----------
Available for sale:
Pass-through securities.......................... $ 518,050 $ 543 $ (9,254) $ 509,339
GNMA............................................. 490,263 2,780 (685) 492,358
FHLMC............................................ 243,938 1,526 (541) 244,923
FNMA............................................. 164,195 416 (38) 164,573
Collateralized mortgage obligations.............. 48,722 499 -- 49,221
Other............................................ 516 29 (189) 356
---------- -------- -------- ----------
$1,465,684 $ 5,793 $(10,707) $1,460,770
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................................. $ 423,111 $ 10,462 $ (898) $ 432,675
FHLMC............................................ 264,946 1,631 (413) 266,164
GNMA............................................. 238,862 931 (1,774) 238,019
Pass-through securities.......................... 214,188 2,338 (5,080) 211,446
Other............................................ 21,718 -- (3,081) 18,637
---------- -------- -------- ----------
$1,162,825 $ 15,362 $(11,246) $1,166,941
---------- -------- -------- ----------
---------- -------- -------- ----------
Available for sale:
Pass-through securities.......................... $ 512,983 $ 606 $ (8,202) $ 505,387
GNMA............................................. 521,586 5,500 -- 527,086
FHLMC............................................ 44,837 130 (58) 44,909
FNMA............................................. 14,066 41 (39) 14,068
Collateralized mortgage obligations.............. 24,823 6 (62) 24,767
Other............................................ 634 88 (230) 492
Residual collateralized mortgage obligations..... 100 -- (100) --
---------- -------- -------- ----------
$1,119,029 $ 6,371 $ (8,691) $1,116,709
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
The Bank recorded unrealized losses of $2.8 million and $1.3 million in its
stockholder's equity accounts at June 30, 1998 and 1997, respectively, net of
tax, on the mortgage-backed securities available for sale portfolio.
F-141
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 6: MORTGAGE-BACKED SECURITIES--(CONTINUED)
The carrying values of mortgage-backed securities as of June 30, 1998 and
1997 were net of unamortized premiums of approximately $19,348,000 and
$35,558,000, respectively, and deferred loan origination fees, net of deferred
loan origination costs, on loans securitized by the Bank of approximately
$2,139,000 and $2,636,000 at June 30, 1998 and 1997, respectively.
The weighted average interest rates of mortgage-backed securities were
6.37% and 6.78% at June 30, 1998 and 1997, respectively. Interest receivable
related to mortgage-backed securities outstanding at June 30, 1998 and 1997
totaled $15,825,000 and $15,276,000, respectively. The Bank uses mortgage-backed
securities as collateral for various borrowings. At June 30, 1998 and 1997,
approximately $666,159,000 and $786,976,000, respectively, of mortgage-backed
securities were pledged as collateral for various borrowings.
During fiscal 1996, the Bank sold $1.7 billion of its fixed-rate
collateralized mortgage obligations ("CMOs") and recorded a pre-tax loss of
$28.2 million on the sale. The Bank's decision to sell most of its CMO portfolio
was part of a strategic realignment of the Bank's mortgage-backed securities
portfolio in which $2.8 billion of mortgage-backed securities were reclassified
from "held to maturity" to "available for sale" during the quarter ended
December 31, 1995, in compliance with implementation guidance for SFAS 115. The
reclassification included the Bank's $1.8 billion fixed-rate CMO portfolio and
$1.0 billion of its adjustable-rate pass-through securities portfolio. The Bank
has no immediate plans to sell the remaining CMOs or the pass-through
securities.
The following table presents proceeds from the sale of mortgage-backed
securities and gross realized gains and losses for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
-------- ------- ----------
<S> <C> <C> <C>
Proceeds from sales...................................... $297,029 $41,602 $1,816,876
-------- ------- ----------
-------- ------- ----------
Gross realized gains..................................... $ 8,088 $ 638 $ 7,821
Gross realized losses.................................... (3,526) (2,442) (42,043)
-------- ------- ----------
Net gain (loss).......................................... $ 4,562 $(1,804) $ (34,222)
-------- ------- ----------
-------- ------- ----------
</TABLE>
The net gain (loss) on sale of mortgage-backed securities includes the
following components for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
-------- ------- ----------
<S> <C> <C> <C>
Cash gain (loss)......................................... $ 481 $ (620) $ (29,095)
Deferred fees recognized on sale......................... 1,491 469 1,402
Recourse provision and fees.............................. 3,523 (1,499) (6,568)
Pair-offs gain (loss).................................... (853) (119) 315
Sale expenses............................................ (80) (35) (276)
-------- ------- ----------
$ 4,562 $(1,804) $ (34,222)
-------- ------- ----------
-------- ------- ----------
</TABLE>
See Note 7: "Loans Receivable," for a discussion of loans sold with
recourse.
F-142
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE
Composition
Loans receivable held for investment at the dates indicated are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Residential loans:
Existing structures:
1-4 units................................................. $10,270,699 $ 8,766,536
5-36 units................................................ 1,504,288 1,472,654
37 or more units.......................................... 313,575 345,052
Construction:
1-4 units................................................. -- 7,726
5-36 units................................................ 570 4,895
Non-residential loans:
Existing structures....................................... 1,333,879 1,196,703
Construction.............................................. -- 531
Land loans..................................................... 22,754 9,779
Home equity and improvement loans.............................. 56,335 28,563
----------- -----------
Total real estate loans.............................. 13,502,100 11,832,439
----------- -----------
Commercial loans............................................... 289,459 160,061
Consumer loans:
Equity....................................................... 69,594 45,709
Unsecured.................................................... 50,502 39,712
Deposit account.............................................. 16,737 15,702
Auto and recreational vehicle................................ 8,699 13,838
Mobile home.................................................. 4,518 5,724
----------- -----------
Total consumer loans................................. 150,050 120,685
----------- -----------
Total gross loans receivable......................... 13,941,609 12,113,185
Less:
Unearned discounts (net of premiums)......................... 21,861 38,824
Undisbursed loan funds....................................... 216 1,807
Deferred loan origination fees............................... 20,377 22,705
Allowance for loan losses.................................... 156,482 163,759
----------- -----------
Loans receivable, net................................ $13,742,673 $11,886,090
----------- -----------
----------- -----------
</TABLE>
The Bank had residential real estate loans and SBA loans held for sale
totaling $28.6 million and $3.3 million, respectively, as of June 30, 1998,
compared with $19.0 million of residential real estate loans and no SBA loans as
of June 30, 1997.
The weighted average interest rate of loans receivable (including those
classified as held for sale), giving effect to accretion of discounts and
deferred loan fees, was 7.75% and 7.73% at June 30, 1998 and 1997, respectively.
These rates were reduced by the effect of non-accrual loans, which resulted in a
decrease of the weighted average interest rate on loans of six and nine basis
points at June 30, 1998 and 1997, respectively. Interest receivable on loans
receivable (including interest on loans classified as held for sale) was
approximately $92,125,000 and $82,680,000 at June 30, 1998 and 1997,
respectively, and is included in "Interest receivable" in the accompanying
Consolidated Statements of Financial Condition.
The carrying value of loans pledged to secure certain deposits and
borrowings was $6.4 billion and $5.4 billion at June 30, 1998 and 1997,
respectively.
F-143
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
Credit Risk and Concentration
A summary of activity in the allowance for loan losses during fiscal 1998,
1997 and 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Balance--June 30, 1995................................ $ 200,874 $ 4,092 $ 4,176 $209,142
Provision for loan losses............................. 43,517 926 (4,093) 40,350
Charge-offs........................................... (69,205) (2,842) (974) (73,021)
Recoveries............................................ 3,597 1,098 5,590 10,285
--------- -------- -------- --------
Balance--June 30, 1996................................ 178,783 3,274 4,699 186,756
Provision for loan losses............................. 23,008 6,707 (4,511) 25,204
Charge-offs........................................... (55,385) (3,043) (68) (58,496)
Recoveries............................................ 1,582 1,062 3,575 6,219
Acquisition of OneCentral Bank........................ -- -- 1,030 1,030
Acquisition of TransWorld Bank........................ 219 -- 2,827 3,046
--------- -------- -------- --------
Balance--June 30, 1997................................ 148,207 8,000 7,552 163,759
Provision for loan losses............................. (20,434) 16,859 1,848 (1,727)
Charge-offs........................................... (23,652) (3,408) (1,992) (29,052)
Recoveries............................................ 1,357 901 4,341 6,599
Acquisition of CenFed Bank............................ 16,889 14 -- 16,903
--------- -------- -------- --------
Balance--June 30, 1998................................ $ 122,367 $22,366 $ 11,749 $156,482
--------- -------- -------- --------
--------- -------- -------- --------
Percent of type of gross loans receivable............. 0.90% 14.91% 4.04% 1.12%
</TABLE>
The following is a summary of non-accrual loans, troubled debt
restructurings and other impaired loans (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Non-accrual loans.................................................. $ 95,994 $140,295 $192,445
Troubled debt restructurings....................................... 21,465 31,064 9,194
Recorded investment in other impaired loans........................ 54,060 51,846 70,289
-------- -------- --------
$171,519 $223,205 $271,928
-------- -------- --------
-------- -------- --------
</TABLE>
F-144
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
At June 30, 1998 and 1997, impaired loans and the related specific loan
loss allowances were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR CARRYING RECORDED FOR CARRYING
INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE
---------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances.......... $ 10,220 $ 2,652 $ 7,568 $ 20,036 $ 4,550 $ 15,486
Without specific allowances....... 24,204 -- 24,204 39,845 -- 39,845
-------- ------- -------- -------- ------- --------
34,424 2,652 31,772 59,881 4,550 55,331
-------- ------- -------- -------- ------- --------
TDRs:
With specific allowances.......... 1,581 582 999 16,648 323 16,325
Without specific allowances....... 19,884 -- 19,884 14,416 -- 14,416
-------- ------- -------- -------- ------- --------
21,465 582 20,883 31,064 323 30,741
-------- ------- -------- -------- ------- --------
Other impaired loans:
With specific allowances.......... 42,555 10,175 32,380 42,046 9,078 32,968
Without specific allowances....... 11,505 -- 11,505 9,800 -- 9,800
-------- ------- -------- -------- ------- --------
54,060 10,175 43,885 51,846 9,078 42,768
-------- ------- -------- -------- ------- --------
Total impaired loans................ $109,949 $13,409 $ 96,540 $142,791 $13,951 $128,840
-------- ------- -------- -------- ------- --------
-------- ------- -------- -------- ------- --------
</TABLE>
Other impaired loans without specific allowances, totaling $11.5 million
and $9.8 million as of June 30, 1998 and 1997, respectively, in the table above,
include loans for which a portion of the loan balance has been charged off.
The average carrying value of impaired loans for the years ended June 30,
1998, 1997 and 1996 was $108 million, $164 million and $175 million,
respectively. Interest income of $4.3 million, $7.4 million and $7.8 million for
fiscal 1998, 1997 and 1996, respectively, was recognized on impaired loans
during the period of impairment.
Loans on non-accrual status as of June 30, 1998, 1997 and 1996 had interest
due but not recognized of approximately $6.1 million, $7.1 million and
$10.5 million, respectively. The amount of interest income on these loans that
was included in net earnings in fiscal 1998, 1997 and 1996 was $3.0 million,
$5.3 million and $5.8 million, respectively. Net interest forgone related to
troubled debt restructurings totaled $0.4 million, $0.5 million and $0.2 million
in 1998, 1997 and 1996, respectively. Interest income recorded on troubled debt
restructurings for fiscal 1998, 1997 and 1996 was $1.8 million, $2.4 million and
$0.7 million, respectively. The Bank has no commitments to lend additional funds
to borrowers whose loans were classified as non-performing or troubled debt
restructurings.
F-145
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
The following table identifies the Bank's non-accrual loans by state and by
property type as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Single-family 1-4 units.................................... $ 44,922 $11,754 $13,512 $70,188
Multi-family:
5-36 units............................................... 7,615 -- -- 7,615
37 or more units......................................... 417 -- -- 417
Non-residential:
Office buildings......................................... 6,333 -- -- 6,333
Shopping centers......................................... 3,146 604 -- 3,750
Warehouse/Storage........................................ 24 386 -- 410
Hotels/Motels............................................ 607 -- -- 607
Commercial/industrial.................................... 3,404 -- -- 3,404
-------- ------- ------- -------
Total non-residential................................. 13,514 990 -- 14,504
-------- ------- ------- -------
Commercial................................................. 1,828 -- -- 1,828
Consumer................................................... 1,442 -- -- 1,442
-------- ------- ------- -------
$ 69,738 $12,744 $13,512 $95,994
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
The following table identifies the Bank's non-accrual loans by state and by
property type as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ --------
<S> <C> <C> <C> <C>
Single-family 1-4 units.................................... $ 61,776 $13,815 $7,398 $ 82,989
Multi-family:
5-36 units............................................... 21,087 -- -- 21,087
37 or more units......................................... 3,121 -- -- 3,121
Non-residential:
Office buildings......................................... 5,014 314 -- 5,328
Shopping centers......................................... 21,341 -- -- 21,341
Mobile home park......................................... 1,503 -- -- 1,503
Commercial/industrial.................................... 2,323 177 -- 2,500
-------- ------- ------ --------
Total non-residential................................. 30,181 491 -- 30,672
-------- ------- ------ --------
Commercial................................................. 859 -- -- 859
Consumer................................................... 1,567 -- -- 1,567
-------- ------- ------ --------
$118,591 $14,306 $7,398 $140,295
-------- ------- ------ --------
-------- ------- ------ --------
</TABLE>
As of June 30, 1998 and 1997, except for $222,000 and $516,000 of
single-family restructured loans in Florida, respectively, all of the Bank's
restructured loans were in California.
F-146
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units........................ $ 7,123,809 $610,984 $2,620,845 $10,355,638
Multi-family:
5-36 units................................... 1,464,327 40,531 -- 1,504,858
37 or more units............................. 270,639 40,741 2,195 313,575
Non-residential:
Office buildings............................. 365,532 25,771 901 392,204
Shopping centers............................. 317,364 28,006 5,988 351,358
Warehouse/storage............................ 120,868 12,697 -- 133,565
Hotels/motels................................ 61,613 7,082 1,889 70,584
Industrial parks............................. 89,716 1,692 -- 91,408
Land......................................... 16,343 6,209 202 22,754
Commercial/industrial........................ 271,427 25,580 -- 297,007
----------- -------- ---------- -----------
Total non-residential..................... 1,242,863 107,037 8,980 1,358,880
----------- -------- ---------- -----------
Commercial..................................... 290,515 -- -- 290,515
Consumer....................................... 150,050 -- -- 150,050
----------- -------- ---------- -----------
$10,542,203 $799,293 $2,632,020 $13,973,516
----------- -------- ---------- -----------
----------- -------- ---------- -----------
</TABLE>
- ------------------
(1) The state with the largest loan balance in this category is Virginia
with $232 million, substantially all of which is single-family.
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units......................... $5,898,034 $657,266 $2,266,528 $ 8,821,828
Multi-family:
5-36 units.................................... 1,431,089 46,189 271 1,477,549
37 or more units.............................. 282,970 59,566 2,516 345,052
Non-residential:
Office buildings.............................. 359,341 33,437 6,934 399,712
Shopping centers.............................. 299,034 32,558 8,981 340,573
Warehouse/storage............................. 69,626 17,574 -- 87,200
Hotels/motels................................. 10,487 8,987 7,245 26,719
Industrial parks.............................. 90,563 2,124 -- 92,687
Land.......................................... 6,825 2,745 207 9,777
Mobile home parks............................. 21,771 7,296 2,240 31,307
Commercial/industrial......................... 190,331 28,707 -- 219,038
---------- -------- ---------- -----------
Total non-residential...................... 1,047,978 133,428 25,607 1,207,013
---------- -------- ---------- -----------
Commercial...................................... 156,966 -- 3,095 160,061
Consumer........................................ 118,480 2,174 31 120,685
---------- -------- ---------- -----------
$8,935,517 $898,623 $2,298,048 $12,132,188
---------- -------- ---------- -----------
---------- -------- ---------- -----------
</TABLE>
- ------------------
(1) The state with the largest loan balance in this category is New York
with $245 million, substantially all of which is single-family.
F-147
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
The Bank's collateral requirements are the same, regardless of the region
in which the loans are originated. Loans originated and purchased are secured by
real estate with a principal amount of generally no more than 80% of the
appraised value. Loans with loan-to-value ("LTV") ratios in excess of 80%
require private mortgage insurance ("PMI"), or if they meet certain criteria,
can be made at higher interest rates and fees at the option of the loan
applicant. These loans are priced higher in rate, fee and margin than those for
which mortgage insurance is obtained to recognize the increased credit risk
assumed by the Bank. This option is available only on loans with a maximum loan
amount of $300,000 and an LTV ratio of no more than 90% without negative
amortization features, where the purpose of the loan is to purchase, or to
refinance an existing loan secured by, a one-unit, single-family residence.
The following table summarizes the Bank's first trust deed real estate loan
portfolio by original loan-to-value ratio, including those classified as held
for sale, at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------
1998 1997
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Loans with LTV ratio less than or equal to 80%........ $11,675,044 87% $10,107,249 86%
Loans with LTV ratio greater than 80%:
With PMI............................................ 713,240 5 715,165 6
Without PMI......................................... 1,025,262 8 964,844 8
----------- --- ----------- ---
$13,413,546 100% $11,787,258 100%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
In previous years, the Bank sold certain loans with limited credit loss
recourse provisions. These provisions require the Bank to repurchase loans on
which the borrower has defaulted. The present value of all future estimated loan
losses are provided for at the time of such sales. Subsequent adjustments to
estimates of future losses are charged to gain or loss on sale of
mortgage-backed securities. In fiscal 1991, the Bank entered into certain
transactions whereby its recourse obligations were reduced to reduce risk-based
capital requirements (the "recourse reduction transactions"). In each
transaction, the Bank retained the risk of first loss up to a specified level
for which the Bank maintains a liability for recourse obligations. The remainder
of the Bank's recourse obligations were transferred to an independent third
party. In fiscal 1996, for certain recourse reduction transactions, the recourse
reduction agreements expired or were canceled by the Bank and the full amount of
the recourse obligations reverted back to the Bank from the independent third
party. There were no sales of loans and mortgage-backed securities with recourse
provisions in fiscal 1998, 1997 or 1996. The Bank had recourse obligations for
approximately $886.0 million of loans sold with recourse at June 30, 1998 for
which the Bank is contingently liable for up to $465.5 million in future losses.
The Bank's recorded liability under these obligations was $10.2 million and
$13.7 million at June 30, 1998 and 1997, respectively, and is included in "Other
liabilities and accrued expenses" in the accompanying Consolidated Statements of
Financial Condition.
F-148
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE--(CONTINUED)
A summary of the balance of loans sold with recourse at the dates indicated
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
-------- ----------
<S> <C> <C>
Loans with original LTV ratios less than or equal to 80%...................... $537,589 $ 713,078
Loans with original LTV ratios greater than 80%:
With PMI.................................................................... 40,789 84,675
Without PMI................................................................. 126,045 46,660
-------- ----------
704,423 844,413
Recourse reduction transactions............................................... 181,530 246,282
-------- ----------
$885,953 $1,090,695
-------- ----------
-------- ----------
Recorded liability for recourse............................................... $ 10,210 $ 13,724
-------- ----------
-------- ----------
</TABLE>
NOTE 8: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
A summary of REO, net of specific valuation allowances, by property type is
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Single-family..................................................................... $23,006 $34,116
Multi-family...................................................................... 3,087 10,347
Non-residential................................................................... 12,182 5,955
Land.............................................................................. -- 14,214
------- -------
38,275 64,632
General allowance................................................................. (882) (3,132)
------- -------
$37,393 $61,500
------- -------
------- -------
</TABLE>
A summary of the activity in the allowance for losses on REO, including
specific and general allowances, is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Beginning balance.................................................... $ 22,906 $ 26,688 $ 30,719
Provision for losses................................................. 2,670 7,539 12,110
Addition due to CenFed Bank acquisition.............................. 750 -- --
Charge-offs.......................................................... (21,534) (11,321) (16,141)
-------- -------- --------
Ending balance....................................................... $ 4,792 $ 22,906 $ 26,688
-------- -------- --------
-------- -------- --------
</TABLE>
F-149
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 8: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET--(CONTINUED)
The following table identifies the Bank's REO by state and property type as
of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ -------
<S> <C> <C> <C> <C>
Single-family 1-4 units....................................... $ 16,778 $ 2,758 $3,470 $23,006
Multi-family 5-36 units....................................... 3,087 -- -- 3,087
Non-residential:
Office buildings............................................ 5,208 197 -- 5,405
Shopping centers............................................ 1,929 -- -- 1,929
Mobile home park............................................ 526 -- -- 526
Hotels/motels............................................... 53 -- 3,276 3,329
Commercial/industrial....................................... 993 -- -- 993
-------- ------- ------ -------
Total non-residential.................................... 8,709 197 3,276 12,182
-------- ------- ------ -------
$ 28,574 $ 2,955 $6,746 38,275
-------- ------- ------
-------- ------- ------
General allowance............................................. (882)
-------
$37,393
-------
-------
</TABLE>
The following table identifies the Bank's REO by state and property type as
of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ -------
<S> <C> <C> <C> <C>
Single-family 1-4 units...................................... $ 28,207 $ 4,170 $1,739 $34,116
Multi-family:
5-36 units................................................. 8,309 105 -- 8,414
37 or more units........................................... 1,933 -- -- 1,933
Non-residential:
Office buildings........................................... 1,625 60 -- 1,685
Shopping centers........................................... 298 -- -- 298
Hotels/motels.............................................. 102 -- 3,468 3,570
Land....................................................... 365 13,849 -- 14,214
Industrial park............................................ 402 -- -- 402
-------- ------- ------ -------
Total non-residential................................... 2,792 13,909 3,468 20,169
-------- ------- ------ -------
$ 41,241 $18,184 $5,207 64,632
-------- ------- ------
-------- ------- ------
General allowance............................................ (3,132)
-------
$61,500
-------
-------
</TABLE>
Income (loss) from REO operations is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Gain on sale of REO.................................................... $ 9,866 $ 7,164 $ 10,880
Provision for losses................................................... (2,670) (7,539) (12,110)
Net operating expenses................................................. (4,085) (6,248) (7,196)
------- ------- --------
$ 3,111 $(6,623) $ (8,426)
------- ------- --------
------- ------- --------
</TABLE>
F-150
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 9: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB")
The Bank's investment in capital stock of FHLB, at cost, totaled
$300,339,000 and $259,587,000 at June 30, 1998 and 1997, respectively. The Bank
earned 5.9%, 6.3% and 5.4% from dividends received during fiscal 1998, 1997 and
1996, respectively. Dividends receivable on FHLB stock totaled approximately
$4,096,000 and $3,871,000 at June 30, 1998 and 1997, respectively, and is
included in "Interest receivable" in the accompanying Consolidated Statements of
Financial Condition. As a member of the FHLB system, the Bank is required to
maintain an investment in the capital stock of the FHLB in an amount at least
equal to the greatest of 1% of residential mortgage assets, 5% of outstanding
borrowings (advances) from the FHLB, or 0.3% of total assets. FHLB capital stock
is pledged to secure FHLB advances.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Buildings and leasehold improvements................................ $ 166,680 $ 163,780
Furniture, fixtures and equipment................................... 125,414 105,062
Land................................................................ 22,764 22,726
--------- ---------
314,858 291,568
Less accumulated depreciation and amortization...................... (167,965) (156,632)
--------- ---------
$ 146,893 $ 134,936
--------- ---------
--------- ---------
</TABLE>
In fiscal 1996, the Bank sold its former headquarters facility for
approximately $30 million. The Bank recorded a pre-tax loss on this sale of
$2.5 million during fiscal 1996, which is included in "Other income (loss), net"
in the Consolidated Statements of Operations.
Operating expenses include provisions for depreciation and amortization of
$16,186,000, $14,849,000 and $15,755,000 for fiscal 1998, 1997 and 1996,
respectively.
The Bank leases certain of its office buildings and branch offices, as well
as certain equipment, under non-cancelable operating leases. Rental expense
incurred in fiscal 1998, 1997 and 1996 was $17,266,000, $16,093,000, and
$15,140,000, respectively. Minimum future lease payments on building and
equipment leases at June 30, 1998 were as follows (in thousands):
<TABLE>
<S> <C>
Due in one year.............................................................................. $ 20,435
Due in two years............................................................................. 18,183
Due in three years........................................................................... 15,795
Due in four years............................................................................ 11,703
Due in five years............................................................................ 10,410
Due thereafter............................................................................... 51,105
</TABLE>
F-151
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 11: MORTGAGE SERVICING ASSETS
In accordance with SFAS 125, the Bank combined its mortgage servicing
rights and capitalized servicing fees beginning with the year ended June 30,
1997. The following table summarizes the activity in mortgage servicing assets
and related valuation allowance for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
MORTGAGE SERVICING ASSETS ACTIVITY:
Beginning balance.................................................. $288,519 $127,399 $ 99,122
Purchases.......................................................... 1,021(1) 187,343 50,836
Addition due to CenFed Bank acquisition............................ 8,318 -- --
Servicing rights arising from the sale of loans with servicing
rights retained.................................................. 4,890 1,119 --
Amortization....................................................... (49,245) (27,342) (22,559)
-------- -------- --------
Ending balance..................................................... $253,503 $288,519 $127,399
-------- -------- --------
-------- -------- --------
VALUATION ALLOWANCE ACTIVITY:
Beginning balance.................................................. $ (4,047) $ --
Additions charged to loan servicing income......................... (6,142) (4,047)
-------- --------
Ending balance..................................................... $(10,189) $ (4,047)
-------- --------
-------- --------
</TABLE>
- ------------------
(1) Consists of capitalized costs and adjustments related to prior years'
purchases.
The following table summarizes activity in the portfolio of mortgage loans
serviced for others (in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Beginning portfolio of mortgage loans serviced for others.............. $29,598 $14,168 $11,678
Add: Servicing purchased............................................... 447 17,184 3,696
Servicing retained on loans sold.................................. 386 92 --
Less: Amortization, prepayments and foreclosures....................... (5,162) (1,846) (1,206)
------- ------- -------
Ending portfolio of mortgage loans serviced for others................. $25,269 $29,598 $14,168
------- ------- -------
------- ------- -------
</TABLE>
F-152
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 12: DEPOSITS
Deposits at the dates indicated are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ----------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Checking........................ 0.31% $ 1,815,761 16.9% 0.37% $1,198,011 12.8%
Savings......................... 2.00 477,199 4.5 2.15 452,225 4.8
Money market.................... 3.93 2,379,249 22.2 4.25 2,119,553 22.7
Certificates:
5.00% and lower............... 4.77 1,503,191 14.1 4.83 1,046,824 11.2
5.01%-6.00%................... 5.52 4,095,310 38.3 5.56 4,277,651 45.7
6.01%-7.00%................... 6.28 340,288 3.2 6.24 227,948 2.4
7.01%-8.00%................... 7.28 84,266 0.8 7.24 32,839 0.4
8.01%-9.00%................... 8.59 5,222 0.0 8.27 1,595 0.0
9.01%-10.00%.................. 9.43 671 0.0 9.45 263 0.0
----------- ------ ---------- ------
Total certificates....... 5.41 6,028,948 56.4 5.46 5,587,120 59.7
----------- ------ ---------- ------
4.06% $10,701,157 100.0% 4.37% $9,356,909 100.0%
----------- ------ ---------- ------
----------- ------ ---------- ------
</TABLE>
The average interest rate is based upon stated interest rates without
giving consideration to daily compounding of interest or forfeiture of interest
because of premature withdrawal.
Interest payable on deposits at June 30, 1998 and 1997 was $3,728,000 and
$3,186,000, respectively, which is included in "Other liabilities and accrued
expenses" in the Consolidated Statements of Financial Condition.
The aggregate remaining maturities of deposits at June 30, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
No stated maturity....................................................................... $ 4,672,209
Maturing within one year:
1st quarter............................................................................ 2,073,745
2nd quarter............................................................................ 1,397,799
3rd quarter............................................................................ 627,468
4th quarter............................................................................ 641,943
Maturing within two years................................................................ 1,074,087
Maturing within three years.............................................................. 91,230
Maturing within four years............................................................... 79,496
Maturing within five years............................................................... 31,564
Maturing thereafter...................................................................... 11,616
-------------
Total.................................................................................. $ 10,701,157
-------------
-------------
</TABLE>
Certificates of deposit with balances greater than $100,000 had the
following remaining maturities at June 30, 1998 (in thousands):
<TABLE>
<S> <C>
3 months and under....................................................................... $ 366,975
Over 3 months to 6 months................................................................ 320,416
Over 6 months to 12 months............................................................... 208,376
Over 12 months........................................................................... 251,048
----------
$1,146,815
----------
----------
</TABLE>
F-153
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 12: DEPOSITS--(CONTINUED)
Interest expense on deposits by type is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checking........................................................... $ 4,610 $ 4,099 $ 4,290
Savings............................................................ 9,192 9,848 11,381
Money market....................................................... 88,484 84,149 69,257
Certificates....................................................... 306,014 307,086 348,906
-------- -------- --------
$408,300 $405,182 $433,834
-------- -------- --------
-------- -------- --------
</TABLE>
At June 30, 1998 and 1997, approximately $307,894,000 and $113,564,000,
respectively, of the Bank's real estate loans and mortgage-backed securities
were pledged as collateral for certain public deposits.
NOTE 13: BORROWINGS
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Balance at year end............................................. $ 175,551 $768,682 $ 758,050
Average amount outstanding during the year...................... 660,467 335,809 1,869,194
Maximum amount outstanding at any month-end..................... 1,355,403 776,302 2,987,948
Weighted average interest rate during the year.................. 5.69% 5.55% 5.82%
Weighted average interest rate on year-end balances............. 5.72% 5.66% 5.50%
</TABLE>
Securities sold under agreements to repurchase are collateralized as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------
1998 1997
---------------------- ----------------------
BOOK VALUE BOOK VALUE
INCLUDING INCLUDING
ACCRUED MARKET ACCRUED MARKET
INTEREST VALUE INTEREST VALUE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Mortgage-backed securities; book value includes
interest receivable of $1,189 in 1998 and $5,167 in
1997............................................... $180,614 $180,534 $788,516 $788,638
</TABLE>
The Bank incurred interest expense on securities sold under agreements to
repurchase of $37.6 million, $18.6 million, and $108.8 million during fiscal
1998, 1997 and 1996, respectively.
Mortgage-backed securities sold under agreements to repurchase at June 30,
1998 were contractually due July 1998. These agreements require the Bank to
repurchase identical securities to those which were sold. The securities
underlying the agreements were delivered to the dealers who arranged the
transactions. No amounts outstanding with individual brokers at June 30, 1998
exceeded ten percent of stockholder's equity.
F-154
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 13: BORROWINGS--(CONTINUED)
Federal Home Loan Bank
At June 30, 1998, Glendale Federal had a line of credit with the Federal
Home Loan Bank of San Francisco enabling the Bank to borrow up to 35% of the
amount of its total consolidated assets. Based on the amount of these assets at
June 30, 1998, the Bank's credit limit with the FHLB was approximately
$6.3 billion. At June 30, 1997, the Bank had a fixed amount credit limit of
approximately $5.7 billion. All advances from the FHLB are collateralized with
mortgage loans and FHLB stock.
FHLB advances are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
BALANCE AT AVERAGE BALANCE AT AVERAGE
JUNE 30, 1998 RATE JUNE 30, 1997 RATE
------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Fixed-rate, fixed-term.............................. $ 2,989,000 5.59% $ 1,900,000 5.75%
Variable-rate, fixed-term........................... 2,624,000 5.54 2,888,000 5.70
----------- -----------
Subtotal.......................................... 5,613,000 5.57% 4,788,000 5.72%
Purchase accounting premium....................... 458 -- -- --
----------- -----------
$ 5,613,458 $ 4,788,000
----------- -----------
----------- -----------
</TABLE>
The purchase accounting premium of $458,000 was recorded in connection with
the FHLB advances assumed as part of the April 1998 CenFed Bank acquisition.
The Bank incurred interest expense on FHLB advances of approximately $270
million, $269 million, and $202 million during fiscal 1998, 1997, and 1996,
respectively. These advances are secured by investments in stock of the FHLB
totaling $300.3 million and $259.6 million at June 30, 1998 and 1997,
respectively, as well as certain mortgage loans and mortgage-backed and other
debt securities aggregating approximately $6.6 billion and $5.3 billion at
June 30, 1998 and 1997, respectively.
The maturities of FHLB advances, with corresponding weighted average
interest rates, at June 30, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
---------- --------
<S> <C> <C>
Maturing in one year........................................................... $3,928,000 5.48%
Maturing in two years.......................................................... 245,000 5.53
Maturing in three years........................................................ 1,000,000 5.74
Maturing in five years......................................................... 440,000 5.97
----------
Subtotal..................................................................... 5,613,000 5.57%
Purchase accounting premium.................................................. 458 --
----------
$5,613,458
----------
----------
</TABLE>
Included in the "Maturing in one year" category are $700 million of
fixed-rate FHLB advances with a weighted average interest rate of 5.12% and an
original maturity date of 2003, but which the FHLB has the option to call in
fiscal 1999.
At June 30, 1998, interest rates, both fixed and variable, ranged from
4.86% to 6.42%. At June 30, 1997, the range was 5.39% to 5.98%.
F-155
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 13: BORROWINGS--(CONTINUED)
Other Borrowings
Other borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Notes payable with weighted average interest rates of 8.75% and 7.82%
at June 30, 1998 and 1997, respectively............................. $ 70 $ 276
Convertible subordinated debentures due March 2001, with interest at --
7.75%............................................................... -- 10,506
-------- -------
$ 70 $10,782
-------- -------
-------- -------
</TABLE>
The Bank incurred interest expense on other borrowings of $1.2 million,
$1.5 million and $2 million during fiscal 1998, 1997 and 1996, respectively.
No collateral was pledged for other borrowings at June 30, 1998 or 1997.
Convertible Subordinated Debentures
All of the convertible subordinated debentures outstanding at June 30,
1997, were redeemed in September 1997 at a redemption price equal to 100% of the
principal amount, together with accrued and unpaid interest.
NOTE 14: INCOME TAXES
Following is a summary of the Bank's income tax expense (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal............................................................. $ 77,973 $14,481 $ 2,210
State............................................................... 22,825 11,286 --
-------- ------- -------
$100,798 $25,767 $ 2,210
-------- ------- -------
Deferred taxes:
Federal............................................................. (9,435) 12,153 12,755
State............................................................... 1,750 (1,789) 6,377
-------- ------- -------
(7,685) 10,364 19,132
-------- ------- -------
Income tax provision.................................................. $ 93,113 $36,131 $21,342
-------- ------- -------
-------- ------- -------
</TABLE>
The following is a summary of the income tax liability (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Current taxes......................................................... $ 8,048 $15,150
Deferred taxes........................................................ 37,110 45,122
-------- -------
$ 45,158 $60,272
-------- -------
-------- -------
</TABLE>
F-156
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSILIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 14: INCOME TAXES--(CONTINUED)
A reconciliation from the statutory Federal income tax provision rate to
the consolidated effective income tax provision rate follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate............................................. 35.0% 35.0% 35.0%
Increases (reductions) in taxes resulting from:
State franchise tax rate, net of Federal income tax effect.................. 6.9 7.2 6.6
Valuation allowance on deferred tax assets.................................. -- (0.1) (12.5)
Other....................................................................... -- (0.4) 4.6
---- ----- -----
Consolidated effective income tax rate........................................ 41.9% 41.7% 33.7%
---- ----- -----
---- ----- -----
</TABLE>
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Loan fees....................................................................... $46,737 $50,367
Settlement of pension obligations............................................... 8,442 8,204
FHLB stock dividends............................................................ 45,692 35,109
Gains on sales of loans......................................................... 11,110 7,253
Other........................................................................... 14,195 9,146
------- -------
Gross deferred tax liabilities.................................................... 126,176 110,079
------- -------
Deferred tax assets:
State franchise tax............................................................. 8,071 5,432
Net operating loss and tax credit carryovers.................................... 4,571 9,764
Provision for losses on loans................................................... 45,531 28,169
Mortgage servicing assets....................................................... 12,089 6,285
Net unrealized holding loss on mortgage-backed securities available
for sale..................................................................... 1,166 839
Other........................................................................... 17,638 14,468
------- -------
Gross deferred tax assets......................................................... 89,066 64,957
------- -------
Net deferred tax liability........................................................ $37,110 $45,122
------- -------
------- -------
</TABLE>
Management has assessed the realizability of the Bank's deferred tax assets
and has concluded that it is more likely than not that all deferred tax assets
will be realized.
For taxable years beginning prior to January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was permitted
to establish reserves for bad debts, and to make annual additions thereto under
the "experience" method. Alternatively, a qualifying savings institution could
elect, on an annual basis, to use the "percentage of taxable income" method to
compute its allowable addition to its bad debt reserve on qualifying real
property loans (generally loans secured by an interest in improved real estate).
The applicable percentage was 8% for tax periods after 1987. The Bank utilized
the experience method in these years.
F-157
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 14: INCOME TAXES--(CONTINUED)
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. One provision of the Act repealed the reserve method
of accounting for bad debts for savings institutions effective for taxable years
beginning after 1995. The Bank, therefore, is required to use the "specific
charge-off" method on its 1996 and subsequent federal income tax returns. The
Bank is required to recapture its "applicable excess reserves", which are its
federal tax bad debt reserves in excess of the base year reserve amount
described in the following paragraph. The Bank will include one-sixth of its
applicable excess reserves in taxable income in each year from 1996 through
2001. As of December 31, 1995, the Bank had approximately $72 million of
applicable excess reserves. As of June 30, 1996, the Bank had fully provided for
the tax related to this recapture. The base year reserves will continue to be
subject to recapture and the Bank could be required to recognize a tax liability
if: (1) the Bank fails to qualify as a "bank" for federal income tax purposes;
(2) certain distributions are made with respect to the stock of the Bank;
(3) the bad debt reserves are used for any purpose other than to absorb bad debt
losses; or (4) there is a change in federal tax law. The enactment of this
legislation is expected to have no material impact on the Bank's operations or
financial position.
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," a deferred tax liability has not been recognized
for the tax bad debt base year reserves of the Bank. The base year reserves are
generally the balance of reserves as of December 31, 1987 reduced
proportionately for reductions in the Bank's loan portfolio since that date. The
amount of those reserves was approximately $153 million at December 31, 1987.
The amount of the unrecognized deferred tax liability at June 30, 1998 was
approximately $54 million. This deferred tax liability could be recognized in
the future under the conditions described in the preceding paragraph.
In July 1993, GLENFED, Inc., the former holding company of the Bank,
received notices from the California Franchise Tax Board proposing to assess
taxes for the years 1988, 1989 and 1990 in the amount of $5.3 million. GLENFED,
Inc. protested the proposed taxes and, in September 1996, made a payment to the
Franchise Tax Board in settlement of the disputed amount. The payment was
charged to existing reserves.
NOTE 15: FINANCIAL INSTRUMENTS
FAIR VALUE
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments.
Short-Term Investments and Debt and Equity Securities
The fair value of short-term investments and debt and equity securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
F-158
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 15: FINANCIAL INSTRUMENTS--(CONTINUED)
The following table represents the carrying amount and fair value of
investments and mortgage-backed securities at June 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments.............................. $ 174,200 $ 174,200 $ 636,005 $ 651,254
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Debt securities:
Maturing within 1 year............................ $ 12,404 $ 12,404 $ 14,813 $ 14,813
Maturing in 1-5 years............................. 25,040 25,040 4,974 4,974
Maturing in 5-10 years............................ 2,027 2,027 5,903 5,903
Maturing after 10 years........................... 83,763 83,763 -- --
Equity securities................................... 2,874 2,874 2,104 2,104
---------- ---------- ---------- ----------
$ 126,108 $ 126,108 $ 27,794 $ 27,794
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Mortgage-backed securities:
Adjustable-rate................................... $2,033,912 $2,038,363 $1,975,116 $1,977,454
Fixed-rate........................................ 341,451 343,962 304,418 306,196
---------- ---------- ---------- ----------
$2,375,363 $2,382,325 $2,279,534 $2,283,650
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family residential
mortgage, multi-family, non-residential, commercial and consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and non-performing categories.
The fair value of performing loans is calculated by discounting cash flows
through their estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, adjusted to
reflect differences in servicing costs. The estimate of maturity is based on
market prepayment estimates for each loan classification.
Fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined by using available market information.
F-159
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 15: FINANCIAL INSTRUMENTS--(CONTINUED)
The following table presents information for loans, including loans held
for sale and net of allowance for loan losses as of June 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units:.................. $10,307,070 $10,333,005 $ 8,769,249 $ 8,821,167
Multi-family:
5-36 units.............................. 1,473,771 1,439,368 1,433,697 1,354,117
37 or more units........................ 301,851 296,006 328,556 313,512
Non-residential........................... 1,327,892 1,307,366 1,171,733 1,127,805
Consumer.................................. 127,684 127,187 112,685 112,262
Commercial................................ 278,766 278,455 152,509 153,585
----------- ----------- ----------- -----------
13,817,034 13,781,387 11,968,429 11,882,448
Less unearned discounts, undisbursed loan
funds and deferred loan fees............ (42,454) -- (63,336) --
----------- ----------- ----------- -----------
$13,774,580 $13,781,387 $11,905,093 $11,882,448
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Deposit Liabilities
The fair value of deposits with no stated maturity, such as savings
accounts, checking and NOW accounts, and money market checking/savings accounts,
is equal to the amount payable on demand as of June 30, 1998 and 1997. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows using estimated market rates that reflect certificates of deposit
with similar terms and maturities.
The following table presents information for deposit liabilities (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Checking..................................... $ 1,815,761 $ 1,815,761 $1,198,011 $1,198,011
Savings...................................... 477,199 477,199 452,225 452,225
Money market................................. 2,379,249 2,379,249 2,119,553 2,119,553
Certificates with remaining maturities:
In six months or less...................... 3,471,544 3,471,560 2,551,447 2,552,549
Between six months and one year............ 1,269,411 1,268,341 1,628,382 1,629,630
Between one and three years................ 1,165,317 1,168,130 1,336,395 1,337,201
Beyond three years......................... 122,676 123,505 70,896 69,330
----------- ----------- ---------- ----------
$10,701,157 $10,703,745 $9,356,909 $9,358,499
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
F-160
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 15: FINANCIAL INSTRUMENTS--(CONTINUED)
Borrowings
The estimate of the fair value of the Bank's borrowings was based on the
discounted value of the future cash flows expected to be paid on such borrowings
using estimated market discount rates that reflect borrowings with similar terms
and maturities.
The following table represents the carrying amount and fair value of the
Bank's borrowings at June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase...... $ 175,551 $ 174,879 $ 768,682 $ 766,068
Borrowings from the FHLB............................ 5,613,458 5,614,652 4,788,000 4,765,643
Convertible subordinated debentures................. -- -- 10,506 10,506
Notes payable....................................... 70 70 276 276
---------- ---------- ---------- ----------
$5,789,079 $5,789,601 $5,567,464 $5,542,493
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Mortgage Servicing Assets
The carrying amount and fair value of the Bank's MSA at June 30, 1998 were
$243 million and $298 million, respectively. The carrying amount and fair value
of the Bank's MSA at June 30, 1997 were $284 million and $353 million,
respectively.
The fair value of the Bank's servicing portfolio is estimated by applying
market assumptions for the serviced loans to estimate servicing-related income
and expenses over the underlying loans' estimated lives, and discounting the
estimated future net servicing income at the current market discount rate. Fair
value is significantly influenced by market prepayment expectations. Prepayment
expectations are influenced by the difference between the loans' interest rates
and current market interest rates. During periods of decreasing interest rates,
the market anticipates that homeowners will be more likely to refinance their
existing mortgage loans; during periods of increasing interest rates, the market
anticipates that homeowners will be less inclined to refinance their existing
mortgage loans. The slower prepayments anticipated in times of rising interest
rates result in a longer estimated period of net servicing income for the
existing servicing portfolio, and therefore increases its value. Conversely, the
faster prepayments anticipated in times of declining interest rates result in a
shorter estimated period of net servicing income and therefore decreases the
value of the Bank's servicing portfolio.
Other Financial Instruments
Financial instruments of the Bank, as included in the Consolidated
Statements of Financial Condition, for which fair value approximates the
carrying amount at June 30, 1998 and 1997 include "Cash and amounts due from
banks", "Interest receivable", "Investment in capital stock of Federal Home Loan
Bank", recourse liability, and accounts payable and accrued expenses.
F-161
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 15: FINANCIAL INSTRUMENTS--(CONTINUED)
Commitments
As discussed further in Note 16: "Commitments and Contingent Liabilities,"
the Bank had various commitments outstanding as of June 30, 1998 and 1997 which
are not reflected in the accompanying consolidated financial statements. The
fair value of the commitments is estimated to approximate the fees currently
charged or paid to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The uncertainty involving the attempt to determine the
likelihood, as well as the timing of a commitment being drawn upon, coupled with
the lack of established markets and the diversity of fee structures that exist,
would not result in what the Bank believes to be a meaningful estimate of fair
value.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment, mortgage servicing assets and goodwill. In addition, the
tax ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding various commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Commitments to sell loans and mortgage-backed securities............... $122,820 $14,000
Standby and commercial letters of credit............................... 4,767 1,432
Unused lines of credit................................................. 556,777 363,203
Commitments to originate loans receivable:
Adjustable-rate...................................................... 20,173 18,961
Fixed-rate........................................................... 77,243 24,884
Commitments to purchase loans receivable:
Adjustable-rate...................................................... -- 90,419
Fixed-rate........................................................... 75,000 207,162
</TABLE>
F-162
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES--(CONTINUED)
Agreements to sell loans and mortgage-backed securities contain
representations and warranties regarding the underwriting and documentation of
the underlying loans. To the extent the Bank is deemed to have breached any of
these representations and warranties, the sales agreement allows the purchaser
to demand repurchase of the loans causing the breach. The Bank does not
anticipate it will be required to make material repurchases or incur material
losses related to loans and mortgage-backed securities it has sold or committed
to sell at June 30, 1998.
As more fully discussed in Note 7: "Loans Receivable," in the past, the
Bank sold loans and mortgage-backed securities with recourse for credit losses.
The Bank provided for the estimated recourse losses at the time of sale, and
evaluates, on a quarterly basis, the adequacy of the liability for recourse
losses. However, significant changes in future losses may require additions to
the recourse liability recorded in the caption "Other liabilities and accrued
expenses" in the Consolidated Statements of Financial Condition.
Commitments to sell residential mortgage loans for a fixed price are
generally entered into between the date the application is taken and the date
the loans are sold into the secondary market. Risks arise from the possible
inability of counter-parties to meet the terms of commitments and movement in
interest rates and related prices.
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank applies its credit standards when
underwriting and extending these commitments, and periodically reassesses the
customers' credit worthiness through ongoing credit reviews. Additional risks
associated with providing these commitments arise when these commitments are
drawn upon, such as the demands on liquidity that the Bank would experience if a
significant portion were drawn down at once. However, this is considered
unlikely, as many commitments expire without having been drawn upon.
Upon approval of a loan application, the Bank normally gives the applicant
a commitment that the Bank will make the approved loan within a specified time
period, normally 10 to 45 days, at a rate of interest and on other terms
determined on the basis of market conditions as of the date of the commitment.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable;
inventory, property, plant and equipment; income-producing commercial
properties; and agricultural products. For single-family lending, collateral
consists of trust-deeds on one-to four-unit residential real estate. The Bank
does not anticipate any significant loss as a result of its commitments to
originate loans as of June 30, 1998.
On February 1, 1994, the Bank entered into a five-year contract for the
outsourcing of its data processing and item processing operations. The contract
is based on certain volume levels. If the contract is terminated prior to its
expiration, a termination charge would be incurred, the amount of which would be
dependent upon the nature of the termination and the time remaining on the
contract.
The Bank and certain of its subsidiaries are involved in litigation arising
in the normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently be
ascertained, the Bank does not anticipate that the final resolution of these
matters will result in the payment of monetary damages that would be material in
relation to the consolidated financial condition or results of operations of the
Bank.
F-163
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 17: REGULATORY CAPITAL
FIRREA and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items. An institution
that fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At June 30, 1998, the minimum regulatory capital
requirements were:
o Tangible and core capital, consisting principally of stockholder's
equity, but excluding most intangible assets such as goodwill and any net
unrealized holding gains or losses on debt securities available for sale
equal to 1.5% and 3% of assets, respectively.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8 percent of
the amount of risk-weighted assets.
At June 30, 1998, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Bank must maintain minimum core capital,
Tier I risk-based capital and risk-based capital ratios as set forth in the
table below. The Bank's capital amounts and classification are subject to review
by federal regulators about components, risk-weightings and other factors. There
are no conditions or events since June 30, 1998 that management believes have
changed the institution's category.
F-164
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 17: REGULATORY CAPITAL--(CONTINUED)
The following table summarizes the Bank's actual capital and required
capital as of June 30, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
JUNE 30, 1998
Actual capital:
Amount....................................... $1,077,884 $1,077,884 $1,077,884 $1,177,116
Ratio........................................ 6.02% 6.02% 10.57% 11.54%
FIRREA minimum required capital:
Amount....................................... $ 268,427 $ 536,854 N/A $ 816,080
Ratio........................................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required capital:
Amount....................................... N/A $ 894,756 $ 612,060 $1,020,099
Ratio........................................ N/A 5.00% 6.00% 10.00%
JUNE 30, 1997
Actual capital:
Amount....................................... $ 913,333 $ 913,333 $ 913,333 $1,017,226
Ratio........................................ 5.67% 5.67% 10.02% 11.17%
FIRREA minimum required capital:
Amount....................................... $ 241,781 $ 483,562 N/A $ 731,890
Ratio........................................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required capital:
Amount....................................... N/A $ 805,936 $ 551,818 $ 911,963
Ratio........................................ N/A 5.00% 6.00% 10.00%
</TABLE>
F-165
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 17: REGULATORY CAPITAL--(CONTINUED)
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital as of June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Capital of Glendale Federal in accordance with GAAP......................... $1,278,399 $1,012,074
Adjustments for tangible and core capital:
Net unrealized holding loss on available for sale securities.............. 1,612 1,154
Goodwill and other intangible assets...................................... (180,463) (99,533)
Disallowed mortgage servicing............................................. (10,788) --
Disallowed capitalized software........................................... (10,094) --
Investments in and advances to non-permissible subsidiaries............... (782) (362)
---------- ----------
Total tangible capital...................................................... 1,077,884 913,333
Adjustments for core capital................................................ -- --
---------- ----------
Total core capital.......................................................... 1,077,884 913,333
Adjustments for risk-based capital:
Allowance for general loan losses(1)...................................... 127,705 113,006
Equity risk investments required to be deducted........................... (17,735) (9,113)
Low level recourse deduction.............................................. (10,738) --
---------- ----------
Total risk-based capital.................................................... $1,177,116 $1,017,226
---------- ----------
---------- ----------
</TABLE>
- ------------------
(1) Limited to 1.25% of risk-weighted assets.
F-166
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 18: STOCKHOLDER'S EQUITY
On July 23, 1997, shareholders of Glendale Federal Bank, Federal Savings
Bank approved the formation of Golden State Bancorp Inc. as the holding company
for the Bank. The formation of the holding company became effective on July 24,
1997 and the Bank became a wholly-owned subsidiary of Golden State on that date.
Shares of Glendale Federal's common stock automatically became an equal number
of shares of Golden State common stock and shares of Glendale Federal's
Noncumulative Preferred Stock, Series E, automatically became an equal number of
shares of Golden State's Noncumulative Convertible Preferred Stock, Series A.
Glendale Federal's two classes of warrants became exercisable solely to purchase
common stock of Golden State. The board of directors of Glendale Federal are
also the board of directors of Golden State. Golden State was funded with a
dividend of $14.9 million from Glendale Federal to be used for general working
capital purposes and for payment of dividends on Golden State's preferred stock.
DESCRIPTION OF BANK SECURITIES
Common Stock
The Bank's Charter authorizes the issuance of 100 million shares of common
stock with a par value of $1.00 per share. Holders of common stock are entitled
to receive dividends when, as and if declared by the Board of Directors of the
Bank out of assets of the Bank legally available for payment, subject to the
superior rights of the holders of any series of preferred stock that may be
issued.
Preferred Stock
As described in Note 1: "Basis of Presentation and Summary of Significant
Accounting and Reporting Policies," all of the Series A Preferred Stock
(formerly Series E) was acquired by Golden State on July 24, 1997. The Series A
Preferred Stock has a par value of $1.00 per share and a liquidation preference
of $25 per share. The Series A Preferred Stock provides for noncumulative
dividends, when, as and if declared, at an annual rate of 8.75% of its
liquidation preference and is convertible, at the option of the holders thereof,
into common stock at any time at a conversion price of $10.40 per share, subject
to adjustment in certain events. Subject to applicable laws and regulations, the
Series A Preferred Stock will be redeemable, in whole or in part, at the option
of the Bank, on 20 to 45 days notice, from time to time at any 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 SHARE
OF SERIES A CONVERTIBLE
YEAR 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>
The Bank intends to redeem all of its Series A Preferred Stock on
October 1, 1998 at a redemption price of $26.09375 per share. As of June 30,
1998, there were 4,617,484 shares of Series A Preferred Stock issued and
outstanding.
During fiscal 1997 the Bank entered into separately negotiated agreements
with certain holders of its then Series E (now Series A) preferred stock
providing, in the aggregate, for exchanges of 1,201,900 shares of the preferred
stock for 3,103,872 shares of the Bank's common stock. The exchanges were made
at premiums above the stated conversion rate of 2.404 shares of the Bank's
common stock for each share of the preferred stock.
F-167
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 18: STOCKHOLDER'S EQUITY--(CONTINUED)
Restriction on Stockholder's Equity and Dividends
Dividends on the Bank's common stock may not be paid unless full cash
dividends on the Bank's Series A Preferred Stock have been declared and paid or
set aside for payment for the immediately preceding dividend period. OTS
regulations limit a savings institution's ability to make capital distributions,
which include the payment of dividends, based on the institution's capital
position. The rule establishes "safe-harbor" amounts of capital distributions
that institutions can make after providing notice to the OTS, but without
needing prior approval. Institutions can distribute amounts in excess of the
safe harbor only with the prior approval of the OTS.
An institution that exceeds its minimum capital requirements is permitted
to make capital distributions in specified amounts based on its regulatory
capital levels without prior OTS approval unless it is deemed to be "in need of
more than normal supervision," in which case OTS approval of the distribution
may be required. The OTS retains the authority in all cases, however, to
prohibit any capital distribution that would otherwise be authorized under its
regulations if the OTS determines that the capital distribution would constitute
an unsafe or unsound practice and in each case requires prior notification of
any proposed dividend or other capital distribution. The Bank does not currently
expect to pay cash dividends on its common stock or make other capital
distributions, other than preferred stock dividends and the aforementioned
redemption of the Series A Preferred Stock, in the foreseeable future.
Retained earnings at June 30, 1998 and 1997 include approximately $48
million for which no provision for Federal income tax has been made. These
amounts represent allocations of earnings to bad debt reserves for tax purposes
and are a restriction upon retained earnings. If, in the future, this portion of
retained earnings and an additional approximately $105 million of similar tax
basis reserves from acquired associations are reduced for any purpose other than
tax bad debt losses, Federal income taxes may be imposed at the then applicable
rates.
NOTE 19. EMPLOYEE BENEFIT PLAN
The Bank has several pension plans (collectively, the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and the employees' average earnings in the five highest consecutive Plan years
for the last 10 years of employment.
The Bank uses, for financial reporting purposes, the projected unit credit
method and continues to base its funding policy on the individual entry age
normal method.
The following table sets forth the Plan's funded status as of March 31,
1998 and 1997 and amounts recognized in the Bank's statements of financial
condition at June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits.................................................... $58,958 $46,896
Non-vested accumulated benefits................................................ 2,366 1,780
------- -------
Total accumulated benefits.................................................. $61,324 $48,676
------- -------
------- -------
Projected benefit obligation for service rendered to date........................ $73,033 $57,902
Plan assets at fair value; primarily listed stocks, U.S. Government obligations
and savings certificates of the Bank........................................... 96,493 80,129
------- -------
Funded status--Plan assets in excess of projected benefit obligation ............ 23,460 22,227
Items not yet recognized in earnings:
Unrecognized net gain.......................................................... (5,421) (4,724)
Prior service cost not yet recognized in net periodic pension cost............. 176 193
------- -------
Prepaid pension cost included in "Other assets" at end of period................. $18,215 $17,696
------- -------
------- -------
</TABLE>
F-168
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 19: EMPLOYEE BENEFIT PLAN--(CONTINUED)
Net periodic pension income for fiscal 1998, 1997 and 1996 included the
following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the period........................ $ 2,325 $ 2,376 $ 2,246
Interest cost on projected benefit obligation......................... 4,874 4,483 4,306
Actual return on Plan assets.......................................... (18,895) (2,621) (11,566)
Net amortization and deferral......................................... 11,177 (5,095) 3,732
-------- ------- --------
Net periodic pension income........................................... $ (519) $ (857) $ (1,282)
-------- ------- --------
-------- ------- --------
</TABLE>
The following table presents certain significant assumptions used in
determining plan obligations and net pension expense at the dates indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Weighted average discount rate used to calculate benefit
obligations......................................................... 7.00% 8.25% 8.00%
Assumed rate of increase in future compensation....................... 4.00% 4.50% 4.50%
Expected long-term rate of return on plan assets...................... 9.50% 9.50% 9.50%
</TABLE>
The Bank has established a savings plan for its employees which allows
participants to make contributions by salary deduction equal to 15% or less of
their salary pursuant to section 401(k) of the Internal Revenue Code. Employees'
contributions vest immediately; the Bank's partial matching contributions vest
over five years. The Bank's contributions to the plan in fiscal 1998, 1997 and
1996 were $1,981,000, $1,713,000 and $739,000, respectively.
Key Executive Retirement Supplement Plans
During fiscal 1992, GLENFED, Inc., the former holding company of Glendale
Federal, substantially terminated two non-qualified post-retirement pension
supplement plans previously maintained for certain senior executive officers of
GLENFED, Inc., as well as one other such plan assumed by the Bank in its
acquisition of another association. Participants fully vested at the time of
such substantial termination (as well as one officer scheduled to vest within
four months of such date) were offered the opportunity to receive a lump-sum
settlement in lieu of the contractual benefits under the plans. Three non-vested
participants will receive no benefits under the plans. During fiscal 1998, five
vested participants were receiving benefits under the plans.
Directors' Retirement Plans
The Bank maintains directors' retirement plans for non-employee directors
who serve on its Board of Directors (the "Directors' Plan"). The Directors' Plan
provides that a non-employee director shall, after termination of Board
membership, be entitled to receive a monthly payment equal to: (1) the monthly
Board retainer in effect at the time of termination; plus (2) the fee paid at
such time for attending a Board meeting, for the number of years equal to the
number of years of Board service, but not to exceed twenty years. Payments of
such amounts normally commence at the later of the director's termination date
or the director's attainment of age 65.
NOTE 20: STOCK OPTION PLAN
Golden State has a stock option plan (the "Option Plan") that provides for
the granting of options of Golden State common stock to employees and directors.
The Option Plan has a term of five years and allows for awards totaling up to
7.2 million shares of common stock. Options granted generally have terms of ten
years each. All options granted will become exercisable upon a change in control
of the Golden State. The following information applies to the Golden State
Bancorp Inc. stock option plan.
F-169
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 20: STOCK OPTION PLAN--(CONTINUED)
In October 1994, the Bank's shareholders approved amendments to the Option
Plan which, among other things: (1) provide for annual grants of options to
acquire 5,000 shares to each non-employee Director; and (2) provide for
equitable adjustments of the exercise or purchase price and the number or class
of shares covered by outstanding awards to preserve the benefit of such awards
in the event of payment of a dividend or distribution to shareholders of the
Company in property or cash in an amount in excess of the Company's normal
dividend or distribution policy in effect at the time. Grants to directors are
made on the first day following each annual meeting of the Company's
shareholders with an exercise price equal to the closing price on the New York
Stock Exchange of the Company's common stock on such date and vest on the date
of the next succeeding annual meeting.
The following is a summary of the transactions under Golden State's stock
option plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
SHARES OPTION PRICES EXERCISE PRICE
---------- -------------- --------------
<S> <C> <C> <C>
Outstanding at June 30, 1995............................ 3,316,250 $6.375-$12.625 $ 9.99
Granted................................................. 742,000 14.50-16.125 14.58
Canceled or expired..................................... (73,750) 9.00-14.50 13.16
Exercised............................................... (106,000) 6.375-14.50 10.71
----------
Outstanding at June 30, 1996............................ 3,878,500 6.375-16.125 10.79
Granted................................................. 1,830,000 17.50-17.75 17.57
Canceled or expired..................................... (51,250) 12.625-17.75 14.11
Exercised............................................... (512,125) 6.375-16.125 9.00
----------
Outstanding at June 30, 1997............................ 5,145,125 6.375-17.75 13.34
Granted................................................. 925,500 28.50-35.00 28.78
Canceled or expired..................................... (36,166) 14.50-28.50 21.39
Exercised............................................... (2,344,951) 6.375-17.75 11.22
----------
Outstanding at June 30, 1998............................ 3,689,508 $ 6.375-$35.00 $18.49
----------
----------
</TABLE>
The number of options exercisable at June 30, 1998, 1997 and 1996 was
1,453,884, 2,869,750 and 2,244,293, respectively, and the weighted average
exercise price of those exercisable options was $13.17, $10.57 and $9.76,
respectively. All options will become exercisable at the completion of the Cal
Fed Merger, which is expected to take place on September 11, 1998.
The number of options available for future grants under Golden State's
stock option plan at June 30, 1998, 1997 and 1996 was 493,041, 1,382,375 and
661,125, respectively.
Information about stock options outstanding at June 30, 1998 was as
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
WEIGHTED ------------------------------ ------------------------------
AVERAGE REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE CONTRACTUAL LIFE AVERAGE EXERCISE AVERAGE EXERCISE
PRICES (IN YEARS) NUMBER PRICE NUMBER PRICE
- ----------------- ----------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$6.375-$9.00 5.2 206,250 $ 8.68 206,250 $ 8.68
9.75-14.50 6.6 1,029,234 12.79 891,234 12.53
15.50-17.75 8.1 1,543,024 17.52 356,400 17.36
28.50-35.00 9.2 911,000 28.79 -- --
--------- ---------
$6.375-$35.00 8.2 3,689,508 $18.49 1,453,884 $13.17
--------- ---------
--------- ---------
</TABLE>
F-170
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 20: STOCK OPTION PLAN--(CONTINUED)
Golden State applies APB Opinion 25 in accounting for its stock-based
compensation plan. Accordingly, no compensation expense has been recognized for
its stock options. Had Golden State determined compensation cost based on the
fair value at the grant dates of its stock options consistent with SFAS 123,
Golden State's net earnings would have been reduced to the pro forma amounts as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net earnings:
As reported......................................................... $129,075 $50,423 $42,052
Pro forma........................................................... 122,141 45,223 39,634
</TABLE>
The weighted average grant-date fair value of stock options granted during
fiscal 1998, 1997 and 1996 was $14.99, $9.41 and $8.06, respectively. The fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield........................................................... 0% 0% 0%
Expected volatility...................................................... 37.7% 38.6% 42.1%
Risk-free interest rate.................................................. 6.4% 6.8% 6.5%
Expected life of option.................................................. 7 years 7 years 7 years
</TABLE>
During the initial phase-in period, the effects of applying SFAS 123 for
these pro forma disclosures are not likely to be representative of the effects
on reported income for future years as options vest over several years and
additional awards are generally made each year.
NOTE 21: SUBSEQUENT EVENTS
On July 11, 1998, Golden State acquired RedFed Bancorp Inc. ("RedFed") and
its federal savings bank subsidiary, Redlands Federal Bank, in a tax-free,
stock-for-stock merger. Pursuant to the terms of the transaction, Golden State
issued 5,221,995 shares of its common stock, resulting in a total recorded
purchase price of $158.3 million. Pursuant to the merger, Redlands Federal Bank
was merged into the Bank. Under the purchase method of accounting, the goodwill
of $62.8 million recorded in this transaction by the Bank will be amortized over
15 years using the straight-line method. At July 11, 1998, RedFed operated 15
branches and had $1.0 billion in assets, including $893.7 million of loans
receivable, net. RedFed's liabilities included $864.1 million of deposits and
$78.7 million of borrowings. These amounts are unaudited.
On February 4, 1998, and as amended as of July 13, 1998, Golden State
entered into an Agreement and Plan of Reorganization (the "Cal Fed Merger
Agreement") with First Nationwide (Parent) Holdings, Inc. ("First Nationwide"),
First Nationwide Holdings, Inc. ("FNH"), and certain other parent entities of
California Federal Bank, A Federal Savings Bank ("Cal Fed"). FNH is controlled,
through intermediate entities, by MacAndrews and Forbes Holdings Inc. ("MAF")
and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief Executive
Officer of Cal Fed. After giving effect to the Cal Fed Merger, the combined
parent company, Golden State, will continue to be a publicly traded company, FNH
will be merged with and into Golden State Financial, and Glendale Federal will
be merged with and into Cal Fed.
At June 30, 1998, First Nationwide, through its subsidiary Cal Fed,
operated 225 branches and had $34.1 billion in assets, including $20.4 billion
in loans receivable, net and $16.0 billion in deposits. These amounts are
unaudited.
The Cal Fed Merger received Office of Thrift Supervision approval on
August 12, 1998 and the approval of the stockholders of the Company on
August 17, 1998, and is expected to close on September 11, 1998.
F-171
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE ISSUER SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information......................... 4
Prospectus Summary............................ 5
Risk Factors.................................. 29
Use of Proceeds............................... 35
The Golden State Acquisition.................. 35
Consolidated Capitalization................... 37
The Refinancing Transactions.................. 38
Pro Forma Financial Data...................... 41
Selected Historical Financial Data............ 54
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 59
The Exchange Offer............................ 120
Business...................................... 127
Regulation.................................... 196
Management.................................... 204
Ownership of the Common Stock................. 211
Certain Relationships and Related
Transactions................................ 211
Description of the Notes...................... 216
Certain U.S. Federal Income Tax
Considerations.............................. 244
Plan of Distribution.......................... 245
Legal Matters................................. 246
Experts....................................... 246
Index of Defined Terms........................ 247
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$2,000,000,000
GOLDEN STATE
HOLDINGS INC.
$250,000,000
FLOATING RATE NOTES DUE 2003
$350,000,000
6 3/4% SENIOR NOTES DUE 2001
$600,000,000
7% SENIOR NOTES DUE 2003
$800,000,000
7 1/8% SENIOR NOTES DUE 2005
------------
PROSPECTUS
------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the Commission registration fee and estimates
of all other expenses to be incurred in connection with the issuance and
distribution of the secuities described in this Registration Statement:
<TABLE>
<S> <C>
Commission registration fee................................... $590,000
Exchange Agent fees and expenses.............................. $ *
Printing and engraving expenses............................... $ *
Legal fees and expenses....................................... $ *
Accounting fees and expenses.................................. $ *
Miscellaneous................................................. $ *
--------
Total.................................................... $ *
--------
--------
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation, as amended, (the
"Certificate"), a copy of which is filed as Exhibit 3.1 to this Registration
Statement, provides that the Registrant shall indemnify each person who is or
was a director, officer or employee of the Registrant to the fullest extent
permitted under Section 145 of the Delaware General Corporation Law.
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including attorneys'
fees) incurred by any officer or director in defending such action, provided
that the director or officer undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually and
reasonably incurred in connection therewith. The indemnification provided is not
deemed to be exclusive of any other rights to which an officer or director may
be entitled under any corporation's bylaw, agreement, vote or otherwise.
The Certificate provides that a director of the Registrant will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, which concerns unlawful payments of dividends,
stock purchases or redemption, or (iv) for any transaction from which the
director derived an improper personal benefit.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her
II-1
<PAGE>
duty of care. The provisions of the Certificate described above apply to an
officer of the Registrant only if he or she is a director of the Registrant and
is acting in his or her capacity as director, and do not apply to officers of
the Registrant who are not directors.
Article VIII of the By-laws of the Registrant, a copy of which is filed as
Exhibit 3.2 to this Registration Statement, allows the Registrant to maintain
director and officer liability insurance on behalf of any person who is or was a
director or officer of the Registrant or such person who serves or served as a
director, officer, employee or agent, of another corporation, partnership or
other enterprise at the request of the Registrant. Article VIII of the
Registrant's By-Laws provides for indemnification of the officers and directors
of the Registrant to the fullest extent permitted by applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the organization of the Registrant, on February 20,
1998, the Registrant issued 1,000 shares of its common stock to First Nationwide
Holdings Inc. for $1,000. Such transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
in reliance on Section 4(2) of the Securities Act on the basis that such
transaction did not involve a public offering.
On August 6, 1998, GS Escrow Corp. (which was merged into the Registrant on
September 14, 1998) sold $2,000,000,000 aggregate principal amount at maturity
of the Old Notes to the Initial Purchasers less an aggregate discount to the
Initial Purchasers of $26,125,000. Such transactions were exempt from the
registration requirements of the Securities Act in reliance on Rule 144A
promulgated by the Commission under the Securities Act. In accordance with the
agreement pursuant to which the Initial Purchasers purchased the Old Notes, such
Initial Purchasers agreed to offer and sell such notes only to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act). Except
for the transactions described above there have not been any recent sales of
unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
3. -- CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 -- Certificate of Incorporation of the Issuer.
3.2 -- Certificate of Amendment to the Certificate of Incorporation of the Issuer.
3.3 -- By-Laws of the Issuer.
4. -- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES.
4.1 -- Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as
Trustee.
4.2 -- First Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of
New York, as Trustee.
4.3 -- Second Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of
New York, as Trustee.
4.4 -- Third Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of
New York, as Trustee.
4.5 -- Fourth Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of
New York, as Trustee.
4.6 -- Fifth Supplemental Indenture dated as of September 11, 1998 between Golden State Holdings Inc.
and The Bank of New York, as Trustee.
4.7 -- Registration Agreement, dated as of August 6, 1998, by and among the Registrant and the Initial
Purchasers named therein.
5. -- OPINIONS.
5.1+ -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the New Notes.
10. -- MATERIAL CONTRACTS.
10.1 -- Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison Bank, FSB,
First Nationwide Holdings Inc. and Mafco Holdings, Inc. (Incorporated by reference to Exhibit
10.10 to FNH's Registration Statement on Form S-1 (File No. 33-82654).)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.2 -- Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank, FSB, and First
Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 2.1 to FNH's
Current Report on Form 8-K dated October 3, 1994.)
10.3 -- Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference
to Exhibit 2.3 to FNH's Current Report on Form 8-K dated October 3, 1994.)
10.4 -- Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Saving Bank. (Incorporated by reference
to Exhibit 2.4 to FNH's Current Report on Form 8-K dated October 3, 1994.)
10.5 -- Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, the Registrant and
NationsBank of Texas, N.A. (Incorporated by reference to Exhibit 10.12 to Amendment No. 2 to
FNH's Registration Statement on Form S-1 (File No. 33-82654).)
10.6 -- Exchange Agreement dated October 20, 1994 between Carl B. Webb and the Registrant. (Incorporated
by reference to Exhibit 10.11 to FNH's Registration Statement on Form S-1 (File No. 333-00854).)
10.7 -- Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, the Registrant and
First Nationwide (Parent) Holdings Inc. (Incorporated by reference to Exhibit 10.16 to Amendment
No. 2 to FNH's Registration Statement on Form S-1 (File No. 33-82654).)
10.8 -- Office Lease, dated as of November 15, 1990, between Webb/San Francisco Ventures, Ltd. and First
Nationwide Bank, A Federal Savings Bank. Confidential treatment has been granted for portions of
this document. (Incorporated by reference to Exhibit 10.6 to Amendment No. 3 to FNH's
Registration Statement on Form S-1 (File No. 33-82654).)
10.9 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Gerald J. Ford,
dated as of October 1, 1994. (Incorporated by reference to Exhibit 10.13 to FNH's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.10 -- Amendment to Employment Agreement between California Federal Bank, A Federal Savings Bank, and
Gerald J. Ford, dated as of January 1, 1998. (Incorporated by reference to Exhibit 10.10 to FNH's
Annual Report on Form 10-K for the year ended December 31, 1997.)
10.11 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb, II,
dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.14 to FNH's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.12 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Carl B. Webb, II. (Incorporated by reference to Exhibit 10.1 to FNH's
Current Report on Form 8-K dated August 30, 1996.
10.13 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A Federal
Savings Bank, and Carl B. Webb II. (Incorporated by reference to Exhibit 10.13 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.14 -- Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings
Bank, and Christie S. Flanagan. (Incorporated by reference to Exhibit 10.4 to FNH's Current
Report on Form 8-K dated August 30, 1996.)
10.15 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and James R. Staff,
dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.16 to FNH's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.16 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and James R. Staff. (Incorporated by reference to Exhibit 10.3 to FNH's
Current Report on Form 8-K dated August 30, 1996.)
10.17 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A Federal
Savings Bank, and J. Randy Staff. (Incorporated by reference to Exhibit 10.17 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1997.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.18 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy G. Newman,
Jr. dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.17 to FNH's
Registration Statement on Form S-1 (File No. 333-00854).)
10.19 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to Exhibit 10.5 to FNH's
Current Report on Form 8-K dated August 30, 1996.)
10.20 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A Federal
Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to Exhibit 10.20 to FNH's
Annual Report on Form 10-K for the year ended December 31, 1997.)
10.21 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Roger L. Gordon
as of January 20, 1996. (Incorporated by reference to Exhibit 10.15 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1995.)
10.22 -- Employment Agreement dated as of January 1, 1996, between First Nationwide, A Federal Savings
Bank and Richard P. Hodge. (Incorporated by reference to Exhibit 10.16 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1995.)
10.23 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Richard P. Hodge (Incorporated by reference to Exhibit 10.2 to FNH's
Current Report on Form 8-K dated August 30, 1996.)
10.24 -- Employment Agreement between First Nationwide Mortgage Corporation, and Walter C. Klein, Jr.,
dated as of January 8, 1996. (Incorporated by reference to Exhibit 10.43 to Amendment No. 1 to
FNH's Registration Statement on Form S-1 (File No. 333-21015).)
10.25 -- Amendment to Employment Agreement dated as of July 10, 1997, between First Nationwide Mortgage
Corporation and Walter C. Klein, Jr. (Incorporated by reference to Exhibit 10.25 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.26 -- Post-Employment Consulting Agreement between California Federal Bank, A Federal Savings Bank and
Edward G. Harshfield, dated January 6, 1997. (Incorporated by reference to Exhibit 10.44 to
Amendment No. 1 to FNH's Registration Statement on Form S-1 (File No. 333-21015).)
10.27 -- Special Bonus Agreement, dated as of November 25, 1996, by and between the Registrant and Carl B.
Webb II. (Incorporated by reference to Exhibit 10.22 to FNH's Annual Report on Form 10-K for the
year ended December 31, 1996.)
10.28 -- Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as conservator
for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company,
America's Lending Network, Inc., and Stanfed Financial Services, Inc.; and First Nationwide
Mortgage Corporation dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.18 to
FNH's Annual Report on Form 10-K for the year ended December 31, 1994.)
10.29 -- Receivables Sale Agreement by and among Resolution Trust Corporation as conservator for Standard
Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company, and
America's Lending Network, Inc.; and First Nationwide Mortgage Corporation, dated as of
December 1, 1994. (Incorporated by reference to Exhibit 10.19 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1994.)
10.30 -- Purchase and Sale Agreement by and between Resolution Trust Corporation in its corporate capacity
and First Nationwide Mortgage Corporation, dated as of December 1, 1994. (Incorporated by
reference to Exhibit 10.20 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.31 -- Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of or
conservator for certain associations and First Nationwide Mortgage Corporation, dated as of
December 1, 1994. (Incorporated by reference to Exhibit 10.21 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1994.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.32 -- Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated December 2, 1994,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, dated as of December 1, 1994. (Incorporated by reference
to Exhibit 10.22 to FNH's Annual Report on Form 10-K for the year ended December 31, 1994.)
10.33 -- Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 23, 1995,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, dated as of December 1, 1994. (Incorporated by reference
to Exhibit 10.23 to FNH's Annual Report on Form 10-K for the year ended December 31, 1994.)
10.34 -- Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 24, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1,
1994. (Incorporated by reference to Exhibit 10.24 to FNH's Annual Report on Form 10-K for the
year ended December 31, 1994.)
10.35 -- Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1,
1994 (power of attorney matters). (Incorporated by reference to Exhibit 10.25 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1994.)
10.36 -- Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1,
1994 (amendments to schedules). (Incorporated by reference to Exhibit 10.26 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1994.)
10.37 -- Agreement for Provision of Services between First Nationwide Bank, A Federal Savings Bank and
Trans Network Insurance Services, Inc. (then named "First Gibraltar (Parent) Holdings Inc.")
dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.27 to FNH's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.38 -- Assignment from Trans Network Insurance Services Inc. to First Nationwide Management Corp. of
Agreement for Provision of Services. (Incorporated by reference to Exhibit 10.37 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.39 -- Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC Insurance Agency,
Inc. dated effective June 1, 1995. (Incorporated by reference to Exhibit 10.24 to Post-Effective
Amendment No. 1 to FNH's Registration Statement on Form S-1 (File No. 33-82654).)
10.40 -- Trans Network Marketing and Support Services Agreement between First Nationwide Bank, A Federal
Savings Bank, and Trans Network Insurance Services Inc. dated effective June 1, 1995.
(Incorporated by reference to Exhibit 10.25 to Post-Effective Amendment No. 1 to FNH's
Registration Statement on Form S-1 (File No. 33-82654).)
10.41 -- Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and RNM 135 Main,
L.P. dated April 6, 1995. (Incorporated by reference to Exhibit 10.26 to Post-Effective Amendment
No. 1 to FNH's Registration Statement on Form S-1 (File No. 33-82654).)
10.42 -- Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of
October 1, 1994 (Incorporated by reference to Exhibit 10.27 to Post-Effective Amendment No. 1 to
FNH's Registration Statement on Form S-1 (File No. 33-82654).)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.43 -- Amendment to Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford,
dated effective December 17, 1997. (Incorporated by reference to Exhibit 10.43 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.44 -- First Amendment, dated as of January 1, 1995, by and among First Nationwide Management Corp.,
Diamond A-Ford Corporation, Trans Network Insurance Services, Inc. and Gerald J. Ford,
supplementing the Consulting Agreement between First Nationwide Management Corp. and Gerald J.
Ford dated as of October 1, 1994 (Incorporated by reference to Exhibit 10.33 to FNH's
Registration Statement on Form S-1 (File No. 333-00854).)
10.45 -- Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal Savings Bank.
(Incorporated by reference to Exhibit 10.34 to FNH's Registration Statement on Form S-1 (File No.
333-00854).)
10.46 -- Deferred Executive Compensation Program. (Incorporated by reference to Exhibit 10.46 to FNH's
Annual Report on Form 10-K for the year ended December 31, 1997.)
10.47 -- Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and between First
Nationwide Management Corp. and the Registrant. (Incorporated by reference to Exhibit 10.35 to
FNH's Registration Statement on Form S-1 (File No. 333-00854).)
10.48 -- Amended and Restated Agreement and Plan of Merger dated as of the 27th day of July, 1996 by and
among the Registrant, CFB Holdings, Inc., Cal Fed Bancorp Inc. and California Federal Bank, A
Federal Savings Bank. (Incorporated by reference to Exhibit 2.1 to FNH's Registration Statement
on Form S-1 (File No. 333-21015).)
10.49 -- Stock Option Agreement, dated as of February 4, 1998, by and between Golden State Bancorp Inc.
and First Nationwide (Parent) Holdings Inc. (Incorporated by reference to Exhibit 99.1 to FNH's
Current Report on Form 8-K dated February 4, 1998.)
10.50 -- Litigation Management Agreement, dated as of February 4, 1998, by and among Golden State Bancorp
Inc., Glendale Federal Bank, Federal Savings Bank, California Federal Bank, A Federal Savings
Bank, Stephen J. Trafton and Richard A. Fink. (Incorporated by reference to Exhibit 99.2 to FNH's
Current Report on Form 8-K dated February 4, 1998.)
10.51 -- Registration Agreement, dated September 13, 1996, among FNH, First Nationwide Escrow Corp. and
the initial purchasers named therein relating to the New Notes. (Incorporated by reference to
Exhibit 4.20 to Amendment No. 1 to FNH's Registration Statement on Form S-1 (File
No. 333-21015).)
10.52 -- Agreement and Plan of Reorganization, dated as of February 4, 1998, by and among First Nationwide
(Parent) Holdings Inc., First Nationwide Holdings Inc., First Gibraltar Holdings Inc., Hunter's
Glen/Ford, Ltd., Golden State Bancorp Inc. and Golden State Financial Corporation. (Incorporated
by reference to Exhibit 2.1 to Golden State's Current Report on Form 8-K dated February 4, 1998.)
10.53 -- Amendment No. 1, dated as of July 13, 1998, to the Agreement and Plan of Reorganization, dated as
of February 4, 1998, by and among First Nationwide (Parent) Holdings Inc., First Nationwide
Holdings Inc., First Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc.
and Golden State Financial Corporation. (Incorporated by reference to Exhibit 2.2 to Golden
State's Current Report on Form 8-K dated September 11, 1998.)
10.54 -- Asset Purchase and Sale Agreement between California Federal Bank, A Federal Savings Bank and
Union Planters Bank of Florida, dated March 29, 1998. (Incorporated by reference to Exhibit 10.1
to FNH's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.)
10.55 -- Amendment No. 1 to Tax Sharing Agreement, dated as of September 11, 1998, by and among Mafco
Holdings Inc., Golden State Bancorp Inc., First Nationwide Holdings Inc., California Federal
Bank, A Federal Savings Bank and Golden State Holdings Inc.
12. -- STATEMENTS RE COMPUTATION OF RATIOS.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
12.1 -- Statement re Ratio of Earnings to Combined Fixed Charges, Minority Interest and Preferred Stock
Dividends.
21. -- SUBSIDIARIES.
21.1 -- Subsidiaries of the Registrant.
23 -- CONSENTS.
23.1 -- Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).+
24. -- POWERS OF ATTORNEY.
24.1 -- Power of Attorney executed by Ronald O. Perelman.
24.2 -- Power of Attorney executed by Gerald J. Ford.
24.3 -- Power of Attorney executed by Howard Gittis.
24.4 -- Power of Attorney executed by Carl B. Webb.
24.5 -- Power of Attorney executed by Richard H. Terzian.
24.6 -- Power of Attorney executed by Renee Nichols Tucei.
25. -- FORM T-1.
25.1 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as Trustee under
the Indenture relating to the Floating Rate Notes.
25.2 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as Trustee under
the Indenture relating to the 2001 Notes.
25.3 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as Trustee under
the Indenture relating to the 2003 Notes.
25.4 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as Trustee under
the Indenture relating to the 2005 Notes.
99. -- MISCELLANEOUS.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
99.4 -- Form of Letter to Clients.
</TABLE>
- ------------------
+ To be filed by amendment.
(b) Financial Statement Schedules: None
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement,
II-7
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN FRANCISCO, STATE OF
CALIFORNIA, ON SEPTEMBER 29, 1998.
GOLDEN STATE HOLDINGS, INC.
By: /s/ RICHARD H. TERZIAN
-------------------------
Richard H. Terzian
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
* Chairman of the Board, Chief September 29, 1998
- ------------------------------------------ Executive Officer and Director (Principal
Gerald J. Ford Executive Officer)
* President, Chief Operating Officer and September 29, 1998
- ------------------------------------------ Director
Carl B. Webb
/s/ RICHARD H. TERZIAN Executive Vice President and Chief September 29, 1998
- ------------------------------------------ Financial Officer (Principal Financial
Richard H. Terzian Officer)
/s/ RENEE NICHOLS TUCEI Senior Vice President and Controller September 29, 1998
- ------------------------------------------ (Principal Accounting Officer)
Renee Nichols Tucei
* Director September 29, 1998
- ------------------------------------------
Ronald O. Perelman
* Director September 29, 1998
- ------------------------------------------
Howard Gittis
</TABLE>
* Eric K. Kawamura, by signing his name hereto, does hereby execute this
Registration Statement on behalf of the directors and officers of the Registrant
indicated above by asterisks, pursuant to powers of attorney duly executed by
such directors and officers and filed as exhibits to the Registration Statement.
By: /s/ ERIC K. KAWAMURA
--------------------------
Eric K. Kawamura
Attorney-in-fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
3. -- CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 -- Certificate of Incorporation of the Issuer.
3.2 -- Certificate of Amendment to the Certificate of Incorporation of the Issuer.
3.3 -- By-Laws of the Issuer.
4. -- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES.
4.1 -- Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New
York, as Trustee.
4.2 -- First Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and
The Bank of New York, as Trustee.
4.3 -- Second Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and
The Bank of New York, as Trustee.
4.4 -- Third Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and
The Bank of New York, as Trustee.
4.5 -- Fourth Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and
The Bank of New York, as Trustee.
4.6 -- Fifth Supplemental Indenture dated as of September 11, 1998 between Golden State
Holdings Inc. and The Bank of New York, as Trustee.
4.7 -- Registration Agreement, dated as of August 6, 1998, by and among the Registrant and
the Initial Purchasers named therein.
5. -- OPINIONS.
5.1+ -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant,
regarding the legality of the New Notes.
10. -- MATERIAL CONTRACTS.
10.1 -- Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison
Bank, FSB, First Nationwide Holdings Inc. and Mafco Holdings, Inc. (Incorporated by
reference to Exhibit 10.10 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
10.2 -- Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank,
FSB, and First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to
Exhibit 2.1 to FNH's Current Report on Form 8-K dated October 3, 1994.)
10.3 -- Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994,
between First Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank.
(Incorporated by reference to Exhibit 2.3 to FNH's Current Report on Form 8-K dated
October 3, 1994.)
10.4 -- Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994,
between First Madison Bank, FSB, and First Nationwide Bank, A Federal Saving Bank.
(Incorporated by reference to Exhibit 2.4 to FNH's Current Report on Form 8-K dated
October 3, 1994.)
10.5 -- Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, the
Registrant and NationsBank of Texas, N.A. (Incorporated by reference to
Exhibit 10.12 to Amendment No. 2 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.6 -- Exchange Agreement dated October 20, 1994 between Carl B. Webb and the Registrant.
(Incorporated by reference to Exhibit 10.11 to FNH's Registration Statement on Form
S-1 (File No. 333-00854).)
10.7 -- Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, the
Registrant and First Nationwide (Parent) Holdings Inc. (Incorporated by reference to
Exhibit 10.16 to Amendment No. 2 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
10.8 -- Office Lease, dated as of November 15, 1990, between Webb/San Francisco Ventures,
Ltd. and First Nationwide Bank, A Federal Savings Bank. Confidential treatment has
been granted for portions of this document. (Incorporated by reference to
Exhibit 10.6 to Amendment No. 3 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
10.9 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and
Gerald J. Ford, dated as of October 1, 1994. (Incorporated by reference to
Exhibit 10.13 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.10 -- Amendment to Employment Agreement between California Federal Bank, A Federal Savings
Bank, and Gerald J. Ford, dated as of January 1, 1998. (Incorporated by reference to
Exhibit 10.10 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
10.11 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and
Carl B. Webb, II, dated as of February 1, 1995. (Incorporated by reference to
Exhibit 10.14 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.12 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide
Bank, A Federal Savings Bank, and Carl B. Webb, II. (Incorporated by reference to
Exhibit 10.1 to FNH's Current Report on Form 8-K dated August 30, 1996.
10.13 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A
Federal Savings Bank, and Carl B. Webb II. (Incorporated by reference to
Exhibit 10.13 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
10.14 -- Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Christie S. Flanagan. (Incorporated by reference to
Exhibit 10.4 to FNH's Current Report on Form 8-K dated August 30, 1996.)
10.15 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and
James R. Staff, dated as of February 1, 1995. (Incorporated by reference to
Exhibit 10.16 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.16 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide
Bank, A Federal Savings Bank, and James R. Staff. (Incorporated by reference to
Exhibit 10.3 to FNH's Current Report on Form 8-K dated August 30, 1996.)
10.17 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A
Federal Savings Bank, and J. Randy Staff. (Incorporated by reference to
Exhibit 10.17 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.18 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy
G. Newman, Jr. dated as of February 1, 1995. (Incorporated by reference to
Exhibit 10.17 to FNH's Registration Statement on Form S-1 (File No. 333-00854).)
10.19 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide
Bank, A Federal Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to
Exhibit 10.5 to FNH's Current Report on Form 8-K dated August 30, 1996.)
10.20 -- Employment Agreement dated as of January 1, 1998 between California Federal Bank, A
Federal Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to
Exhibit 10.20 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
10.21 -- Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Roger
L. Gordon as of January 20, 1996. (Incorporated by reference to Exhibit 10.15 to
FNH's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.22 -- Employment Agreement dated as of January 1, 1996, between First Nationwide, A Federal
Savings Bank and Richard P. Hodge. (Incorporated by reference to Exhibit 10.16 to
FNH's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.23 -- Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide
Bank, A Federal Savings Bank, and Richard P. Hodge (Incorporated by reference to
Exhibit 10.2 to FNH's Current Report on Form 8-K dated August 30, 1996.)
10.24 -- Employment Agreement between First Nationwide Mortgage Corporation, and Walter C.
Klein, Jr., dated as of January 8, 1996. (Incorporated by reference to Exhibit 10.43
to Amendment No. 1 to FNH's Registration Statement on Form S-1 (File
No. 333-21015).)
10.25 -- Amendment to Employment Agreement dated as of July 10, 1997, between First Nationwide
Mortgage Corporation and Walter C. Klein, Jr. (Incorporated by reference to
Exhibit 10.25 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
10.26 -- Post-Employment Consulting Agreement between California Federal Bank, A Federal
Savings Bank and Edward G. Harshfield, dated January 6, 1997. (Incorporated by
reference to Exhibit 10.44 to Amendment No. 1 to FNH's Registration Statement on Form
S-1 (File No. 333-21015).)
10.27 -- Special Bonus Agreement, dated as of November 25, 1996, by and between the Registrant
and Carl B. Webb II. (Incorporated by reference to Exhibit 10.22 to FNH's Annual
Report on Form 10-K for the year ended December 31, 1996.)
10.28 -- Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as
conservator for Standard Federal Savings Association, America's Mortgage Servicing,
Inc., A Mortgage Company, America's Lending Network, Inc., and Stanfed Financial
Services, Inc.; and First Nationwide Mortgage Corporation dated as of December 1,
1994. (Incorporated by reference to Exhibit 10.18 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1994.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.29 -- Receivables Sale Agreement by and among Resolution Trust Corporation as conservator
for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A
Mortgage Company, and America's Lending Network, Inc.; and First Nationwide Mortgage
Corporation, dated as of December 1, 1994. (Incorporated by reference to
Exhibit 10.19 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.30 -- Purchase and Sale Agreement by and between Resolution Trust Corporation in its
corporate capacity and First Nationwide Mortgage Corporation, dated as of
December 1, 1994. (Incorporated by reference to Exhibit 10.20 to FNH's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.31 -- Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of
or conservator for certain associations and First Nationwide Mortgage Corporation,
dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.21 to FNH's
Annual Report on Form 10-K for the year ended December 31, 1994.)
10.32 -- Letter agreement between the Resolution Trust Corporation, as conservator for
Standard Federal Savings Association, et al., and First Nationwide Mortgage
Corporation, dated December 2, 1994, regarding the Mortgage Company Asset Sale
Agreement, Receivable Sales Agreement, and two Purchase and Sales Agreements among
such parties, dated as of December 1, 1994. (Incorporated by reference to
Exhibit 10.22 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.33 -- Letter agreement between the Resolution Trust Corporation, as conservator for
Standard Federal Savings Association, et al., and First Nationwide Mortgage
Corporation, dated February 23, 1995, regarding the Mortgage Company Asset Sale
Agreement, Receivable Sales Agreement, and two Purchase and Sales Agreements among
such parties, dated as of December 1, 1994. (Incorporated by reference to Exhibit
10.23 to FNH's Annual Report on Form 10-K for the year ended December 31, 1994.)
10.34 -- Letter agreement between the Resolution Trust Corporation, as conservator for
Standard Federal Savings Association, et al., and First Nationwide Mortgage
Corporation, dated February 24, 1995, regarding the Mortgage Company Asset Sale
Agreement among such parties, dated as of December 1, 1994. (Incorporated by
reference to Exhibit 10.24 to FNH's Annual Report on Form 10-K for the year ended
December 31, 1994.)
10.35 -- Letter agreement between the Resolution Trust Corporation, as conservator for
Standard Federal Savings Association, et al., and First Nationwide Mortgage
Corporation, dated February 28, 1995, regarding the Mortgage Company Asset Sale
Agreement among such parties, dated as of December 1, 1994 (power of attorney
matters). (Incorporated by reference to Exhibit 10.25 to FNH's Annual Report on
Form 10-K for the year ended December 31, 1994.)
10.36 -- Letter agreement between the Resolution Trust Corporation, as conservator for
Standard Federal Savings Association, et al., and First Nationwide Mortgage
Corporation, dated February 28, 1995, regarding the Mortgage Company Asset Sale
Agreement among such parties, dated as of December 1, 1994 (amendments to schedules).
(Incorporated by reference to Exhibit 10.26 to FNH's Annual Report on Form 10-K for
the year ended December 31, 1994.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.37 -- Agreement for Provision of Services between First Nationwide Bank, A Federal Savings
Bank and Trans Network Insurance Services, Inc. (then named "First Gibraltar (Parent)
Holdings Inc.") dated as of December 1, 1994. (Incorporated by reference to
Exhibit 10.27 to FNH's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.38 -- Assignment from Trans Network Insurance Services Inc. to First Nationwide Management
Corp. of Agreement for Provision of Services. (Incorporated by reference to
Exhibit 10.37 to FNH's Annual Report on Form 10-K for the year ended December 31,
1995.)
10.39 -- Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC
Insurance Agency, Inc. dated effective June 1, 1995. (Incorporated by reference to
Exhibit 10.24 to Post-Effective Amendment No. 1 to FNH's Registration Statement on
Form S-1 (File No. 33-82654).)
10.40 -- Trans Network Marketing and Support Services Agreement between First Nationwide Bank,
A Federal Savings Bank, and Trans Network Insurance Services Inc. dated effective
June 1, 1995. (Incorporated by reference to Exhibit 10.25 to Post-Effective Amendment
No. 1 to FNH's Registration Statement on Form S-1 (File No. 33-82654).)
10.41 -- Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and
RNM 135 Main, L.P. dated April 6, 1995. (Incorporated by reference to Exhibit 10.26
to Post-Effective Amendment No. 1 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
10.42 -- Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford
dated as of October 1, 1994 (Incorporated by reference to Exhibit 10.27 to
Post-Effective Amendment No. 1 to FNH's Registration Statement on Form S-1 (File
No. 33-82654).)
10.43 -- Amendment to Consulting Agreement between First Nationwide Management Corp. and
Gerald J. Ford, dated effective December 17, 1997. (Incorporated by reference to
Exhibit 10.43 to FNH's Annual Report on Form 10-K for the year ended December 31,
1997.)
10.44 -- First Amendment, dated as of January 1, 1995, by and among First Nationwide
Management Corp., Diamond A-Ford Corporation, Trans Network Insurance Services, Inc.
and Gerald J. Ford, supplementing the Consulting Agreement between First Nationwide
Management Corp. and Gerald J. Ford dated as of October 1, 1994 (Incorporated by
reference to Exhibit 10.33 to FNH's Registration Statement on Form S-1 (File
No. 333-00854).)
10.45 -- Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal
Savings Bank. (Incorporated by reference to Exhibit 10.34 to FNH's Registration
Statement on Form S-1 (File No. 333-00854).)
10.46 -- Deferred Executive Compensation Program. (Incorporated by reference to Exhibit 10.46
to FNH's Annual Report on Form 10-K for the year ended December 31, 1997.)
10.47 -- Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and
between First Nationwide Management Corp. and the Registrant. (Incorporated by
reference to Exhibit 10.35 to FNH's Registration Statement on Form S-1 (File
No. 333-00854).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.48 -- Amended and Restated Agreement and Plan of Merger dated as of the 27th day of July,
1996 by and among the Registrant, CFB Holdings, Inc., Cal Fed Bancorp Inc. and
California Federal Bank, A Federal Savings Bank. (Incorporated by reference to
Exhibit 2.1 to FNH's Registration Statement on Form S-1 (File No. 333-21015).)
10.49 -- Stock Option Agreement, dated as of February 4, 1998, by and between Golden State
Bancorp Inc. and First Nationwide (Parent) Holdings Inc. (Incorporated by reference
to Exhibit 99.1 to FNH's Current Report on Form 8-K dated February 4, 1998.)
10.50 -- Litigation Management Agreement, dated as of February 4, 1998, by and among Golden
State Bancorp Inc., Glendale Federal Bank, Federal Savings Bank, California Federal
Bank, A Federal Savings Bank, Stephen J. Trafton and Richard A. Fink. (Incorporated
by reference to Exhibit 99.2 to FNH's Current Report on Form 8-K dated February 4,
1998.)
10.51 -- Registration Agreement, dated September 13, 1996, among FNH, First Nationwide Escrow
Corp. and the initial purchasers named therein relating to the New Notes.
(Incorporated by reference to Exhibit 4.20 to Amendment No. 1 to FNH's Registration
Statement on Form S-1 (File No. 333-21015).)
10.52 -- Agreement and Plan of Reorganization, dated as of February 4, 1998, by and among
First Nationwide (Parent) Holdings Inc., First Nationwide Holdings Inc., First
Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc. and
Golden State Financial Corporation. (Incorporated by reference to Exhibit 2.1 to
Golden State's Current Report on Form 8-K dated February 4, 1998.)
10.53 -- Amendment No. 1, dated as of July 13, 1998, to the Agreement and Plan of
Reorganization, dated as of February 4, 1998, by and among First Nationwide (Parent)
Holdings Inc., First Nationwide Holdings Inc., First Gibraltar Holdings Inc.,
Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc. and Golden State Financial
Corporation. (Incorporated by reference to Exhibit 2.2 to Golden State's Current
Report on Form 8-K dated September 11, 1998.)
10.54 -- Asset Purchase and Sale Agreement between California Federal Bank, A Federal Savings
Bank and Union Planters Bank of Florida, dated March 29, 1998. (Incorporated by
reference to Exhibit 10.1 to FNH's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.)
10.55 -- Amendment No. 1 to Tax Sharing Agreement, dated as of September 11, 1998, by and
among Mafco Holdings Inc., Golden State Bancorp Inc., First Nationwide Holdings Inc.,
California Federal Bank, A Federal Savings Bank and Golden State Holdings Inc.
12. -- STATEMENTS RE COMPUTATION OF RATIOS.
12.1 -- Statement re Ratio of Earnings to Combined Fixed Charges, Minority Interest and
Preferred Stock Dividends.
21. -- SUBSIDIARIES.
21.1 -- Subsidiaries of the Registrant.
23 -- CONSENTS.
23.1 -- Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).+
24. -- POWERS OF ATTORNEY.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
24.1 -- Power of Attorney executed by Ronald O. Perelman.
24.2 -- Power of Attorney executed by Gerald J. Ford.
24.3 -- Power of Attorney executed by Howard Gittis.
24.4 -- Power of Attorney executed by Carl B. Webb.
24.5 -- Power of Attorney executed by Richard H. Terzian.
24.6 -- Power of Attorney executed by Renee Nichols Tucei.
25. -- FORM T-1.
25.1 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as
Trustee under the Indenture relating to the Floating Rate Notes.
25.2 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as
Trustee under the Indenture relating to the 2001 Notes.
25.3 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as
Trustee under the Indenture relating to the 2003 Notes.
25.4 -- Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as
Trustee under the Indenture relating to the 2005 Notes.
99. -- MISCELLANEOUS.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees.
99.4 -- Form of Letter to Clients.
</TABLE>
- ------------------
+ To be filed by amendment.
(b) Financial Statement Schedules: None
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
FIRST: The name of the Corporation is New First Nationwide Holdings
Inc. (hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage is any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 1,000 shares of Common Stock, each having a par value
of one dollar ($1.00).
FIFTH: The name and mailing address of the Sole Incorporator is as
follows:
Deborah M. Reusch
P.O. Box 636
Wilmington, DE 19899
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the By-Laws of the
Corporation.
(3) The number of directors of the Corporation shall be as from time to
time fixed by, or in the manner provided in, the By-laws of the
Corporation. Election of directors need not be by written ballot unless the
By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the the GCL or (iv) for
any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this Article SIXTH by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
2
<PAGE>
(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
<PAGE>
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of the Corporation.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand this
17th day of February, 1998.
/s/ Deborah M. Reusch
----------------------
Deborah M. Reusch
Sole Incorporator
3
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
-----------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
-----------------------------------------
New First Nationwide Holdings Inc., a Delaware corporation
(hereinafter called the "Corporation"), does hereby certify as follows:
FIRST: The Board of Directors of the Corporation duly approved
and adopted a resolution setting forth the following proposed amendment to the
Corporation's Certificate of Incorporation and directed that said amendment be
submitted to the sole stockholder of the Corporation for approval:
Article FIRST of the Corporation's Certificate of
Incorporation is hereby amended to read in its entirety as set forth
below:
FIRST: The name of the corporation is Golden State
Holdings Inc. (hereinafter the "Corporation").
SECOND: The foregoing amendment was duly adopted in accordance
with Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be duly executed in its corporate name this 11th day of
September, 1998.
NEW FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Richard H. Terzian
--------------------------------------
Name: Richard H. Terzian
Title: Executive Vice President
<PAGE>
Exhibit 3.3
BY-LAWS
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
<PAGE>
Section 2. Annual Meetings. The Annual Meetings of
Stockholders shall be held on such date and at such time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting, at which meetings the stockholders shall elect by a plurality vote a
Board of Directors, and transact such other business as may properly be brought
before the meeting. Written notice of the Annual Meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 3. Special Meetings. Unless otherwise prescribed by
law or by the Certificate of Incorporation, Special Meetings of Stockholders,
for any purpose or purposes, may be called by either (i) the Chairman, if there
be one, or (ii) the President, (iii) any Vice President, if there be one, (iv)
the Secretary or (v) any Assistant Secretary, if there be one, and shall be
called by any such officer at the request in writing of a majority of the Board
of Directors or at the request in writing of stockholders owning a majority of
the capital stock of the Corporation issued and outstanding and entitled to
vote. Such request shall state the purpose
2
<PAGE>
or purposes of the proposed meeting. Written notice of a Special Meeting stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Quorum. Except as otherwise provided by law or by
the Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned
3
<PAGE>
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the
Certificate of Incorporation or these By-Laws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. Each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder. Such votes may be cast in person or by proxy but no proxy shall be
voted on or after three years from its date, unless such proxy provides for a
longer period. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without
4
<PAGE>
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer
of the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stock holders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at
5
<PAGE>
the place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and may
be inspected by any stockholder of the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 7 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of
Directors shall consist of not less than one nor more than fifteen members, the
exact number of which shall initially be fixed by the Incorporator and
thereafter from time to time by the Board of Directors. Except as provided in
Section 2 of this Article, directors shall be elected by a plurality of the
votes cast at Annual Meetings of Stockholders, and each director so elected
shall hold office until the next Annual Meeting and until his successor is duly
elected and qualified, or until his
6
<PAGE>
earlier resignation or removal. Any director may resign at any time upon notice
to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and qualified, or until their earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined by
the Board of Directors.
7
<PAGE>
Special meetings of the Board of Directors may be called by the Chairman, if
there be one, the President, or any directors. Notice thereof stating the place,
date and hour of the meeting shall be given to each director either by mail not
less than forty-eight (48) hours before the date of the meeting, by telephone or
telegram on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 5. Quorum. Except as may be otherwise specifically
provided by law, the Certificate of Incorporation or these By-Laws, at all
meetings of the Board of Directors, a majority of the entire Board of Directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
8
<PAGE>
Section 6. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Certificate of Incorporation or these By-Laws, members
of the Board of Directors of the Corporation, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors
or such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
9
<PAGE>
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any absent or disqualified member. Any committee,
to the extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation.
Each committee shall keep regular minutes and report to the Board of Directors
when required.
Section 9. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any
10
<PAGE>
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
Section 10. Interested Directors. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
dis-
11
<PAGE>
closed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a Chairman
of the Board of Directors (who must be a director) and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited
by law, the Certificate of Incorporation or these By-Laws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the
12
<PAGE>
case of the Chairman of the Board of Directors, need such officers be directors
of the Corporation.
Section 2. Election. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors; and all officers of the Corporation shall hold
office until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers
of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all
13
<PAGE>
such action as any such officer may deem advisable to vote in person or by proxy
at any meeting of security holders of any corporation in which the Corporation
may own securities and at any such meeting shall possess and may exercise any
and all rights and power incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He shall be the Chief Executive
Officer of the Corporation, and except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may
14
<PAGE>
exercise such other powers as from time to time may be assigned to him by these
By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the
control of the Board of Directors and, if there be one, the Chairman of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors
or the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. If there be no Chairman of the
Board of Directors, the President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to
15
<PAGE>
time may be assigned to him by these By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or
in his absence or in the event of his inability or refusal to act (and if there
be no Chairman of the Board of Directors), the Vice President or the Vice
Presidents if there is more than one (in the order designated by the Board of
Directors) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of stockholders and record all the
proceedings
16
<PAGE>
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he shall be. If the Secretary shall be unable or shall refuse to
cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary,
then either the Board of Directors or the President may choose another officer
to cause such notice to be given. The Secretary shall have custody of the seal
of the Corporation and the Secretary or any Assistant Secretary, if there be
one, shall have authority to affix the same to any instrument requiring it and
when so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to
17
<PAGE>
be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and
18
<PAGE>
other property of whatever kind in his possession or under his control belonging
to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise
provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his disability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in
19
<PAGE>
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of his office and for
the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
Section 11. Other Officers. Such other officers as the Board
of Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secre-
20
<PAGE>
tary of the Corporation, certifying the number of shares owned by him in the
Corporation.
Section 2. Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as the Board of Directors shall require and/or to give the
Corporation a bond
21
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in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty days nor less
than ten days before the date of such
22
<PAGE>
meeting, nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee
23
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or stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Written notice
may also be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required
by law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as
24
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the Board of Directors from time to time, in its absolute discretion, deems
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for any proper purpose, and the Board of Directors may modify or abolish any
such reserve.
Section 2. Disbursements. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
25
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings
other Than Those by or in the Right of the Corporation. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
26
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The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settle-
27
<PAGE>
ment of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any
indemnification under this Article VIII (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct set forth
in Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if
28
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there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iii) by the stockholders. To the
extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith, without the necessity
of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any
determination under Section 3 of this Article VIII, a person shall be deemed to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe his
conduct was unlawful, if his action is based on the records or books of account
of the Corporation or another enterprise, or on information supplied to him by
the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records
29
<PAGE>
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this Section 4 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Sections 1 or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible under
Sections 1 and 2 of this Article VIII. The basis of such indemnification by a
court shall be a determination by such court that indemnification of the
director or officer is proper
30
<PAGE>
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a
contrary determination in the specific case under Section 3 of this Article VIII
nor the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
31
<PAGE>
Section 7. Nonexclusivity of Indemnification and Advancement
of Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation,
32
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or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power or the obligation to indemnify him against such
liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same
33
<PAGE>
position under the provisions of this Article VIII with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued. For purposes of this
Article VIII, references to "fines" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to
34
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the benefit of the heirs, executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for proceedings
to enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended
or repealed, in whole or in part, or new
35
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By-Laws may be adopted by the stockholders or by the Board of Directors,
provided, however, that notice of such alteration, amendment, repeal or adoption
of new By-Laws be contained in the notice of such meeting of stockholders or
Board of Directors as the case may be. All such amendments must be approved by
either the holders of a majority of the outstanding capital stock entitled to
vote thereon or by a majority of the entire Board of Directors then in office.
Section 2. Entire Board of Directors. As used in this Article
IX and in these By-Laws generally, the term "entire Board of Directors" means
the total number of directors which the Corporation would have if there were no
vacancies.
36
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Exhibit 4.1
===============================================================================
GS ESCROW CORP.
to be merged with and into
GOLDEN STATE HOLDINGS INC.
Issuer
and
THE BANK OF NEW YORK
Trustee
----------------------
INDENTURE
Dated as of August 6, 1998
---------------------------
Providing for Issuance of Senior Securities in Series
===============================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Definitions and Incorporation by Reference
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Other Definitions........................................................................23
SECTION 1.03. Incorporation by Reference of Trust Indenture Act........................................23
SECTION 1.04. Rules of Construction....................................................................24
ARTICLE II
The Securities
SECTION 2.01. Form of Securities.......................................................................25
SECTION 2.02. Form of Trustee's Certificate of Authentication..........................................26
SECTION 2.03. General Limitations; Issuable in Series; Terms of Particular Series......................26
SECTION 2.04. Denominations............................................................................29
SECTION 2.05. Execution and Authentication.............................................................29
SECTION 2.06. Registrar and Paying Agent...............................................................30
SECTION 2.07. Paying Agent To Hold Money in Trust......................................................31
SECTION 2.08. Holder Lists.............................................................................31
SECTION 2.09. Transfer and Exchange....................................................................31
SECTION 2.10. Replacement Securities...................................................................33
SECTION 2.11. Outstanding Securities...................................................................33
SECTION 2.12. Temporary Securities.....................................................................34
SECTION 2.13. Cancellation.............................................................................34
SECTION 2.14. Payment of Interest; Defaulted Interest..................................................34
SECTION 2.15. Delayed Issuance of Securities...........................................................35
SECTION 2.16. CUSIP Numbers............................................................................35
ARTICLE III
Redemption
SECTION 3.01. Applicability of Article.................................................................36
SECTION 3.02. Election to Redeem; Notices to Trustee...................................................36
SECTION 3.03. Selection of Securities To Be Redeemed...................................................36
i
<PAGE>
Page
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SECTION 3.04. Notice of Redemption.....................................................................37
SECTION 3.05. Effect of Notice of Redemption...........................................................38
SECTION 3.06. Deposit of Redemption Price..............................................................38
SECTION 3.07. Securities Redeemed in Part..............................................................39
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities....................................................................39
SECTION 4.02. SEC Reports .............................................................................39
SECTION 4.03. Limitation on Debt.......................................................................39
SECTION 4.04. Limitation on Restricted Payments........................................................41
SECTION 4.05. Limitation on Transactions with Affiliates...............................................43
SECTION 4.06. Change of Control........................................................................45
SECTION 4.07. Limitation on Other Business Activities of Escrow Corp...................................46
SECTION 4.08. Limitations on Restrictions on Distributions by Subsidiaries.............................46
SECTION 4.09. Limitation on Liens......................................................................47
SECTION 4.10. Limitation on Sale of Capital Stock of, and Merger or Sale of Assets by, the Bank........48
SECTION 4.11. Maintenance of Status of the Bank as an Insured Depository Institution; Capital
Maintenance............................................................................49
SECTION 4.12. Compliance Certificates..................................................................49
SECTION 4.13. Applicability of Article IV; Investment Grade Covenant Changes...........................50
SECTION 4.14. Waiver of Certain Covenants..............................................................50
SECTION 4.15. Further Instruments and Acts.............................................................50
ARTICLE V
Successor Company
SECTION 5.01. When Holdings and Escrow Corp. May Merge or Transfer Assets..............................50
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default........................................................................52
SECTION 6.02. Acceleration.............................................................................54
SECTION 6.03. Other Remedies...........................................................................55
ii
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Page
----
SECTION 6.04. Waiver of Past Defaults..................................................................55
SECTION 6.05. Control by Majority of Securityholders...................................................55
SECTION 6.06. Limitation on Suits......................................................................55
SECTION 6.07. Rights of Holder To Receive Payment......................................................56
SECTION 6.08. Collection Suit by Trustee...............................................................56
SECTION 6.09. Trustee May File Proofs of Claim.........................................................56
SECTION 6.10. Priorities .............................................................................57
SECTION 6.11. Undertaking for Costs....................................................................57
SECTION 6.12. Waiver of Stay or Extension Laws.........................................................57
ARTICLE VII
The Trustee
SECTION 7.01. Duties of Trustee........................................................................58
SECTION 7.02. Rights of Trustee........................................................................59
SECTION 7.03. Individual Rights of Trustee.............................................................60
SECTION 7.04. Trustee's Disclaimer.....................................................................60
SECTION 7.05. Notice of Defaults.......................................................................60
SECTION 7.06. Reports by Trustee to Holders............................................................60
SECTION 7.07. Compensation and Indemnity...............................................................61
SECTION 7.08. Replacement of Trustee...................................................................61
SECTION 7.09. Successor Trustee by Merger..............................................................63
SECTION 7.10. Eligibility; Disqualification............................................................63
SECTION 7.11. Preferential Collection of Claims Against the Issuer.....................................63
SECTION 7.12. Money Held in Trust......................................................................63
ARTICLE VIII
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance.........................................64
SECTION 8.02. Conditions to Defeasance.................................................................65
SECTION 8.03. Application of Trust Money...............................................................66
SECTION 8.04. Repayment to the Issuer..................................................................66
SECTION 8.05. Indemnity for Government Obligations.....................................................67
SECTION 8.06. Reinstatement............................................................................67
iii
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Page
----
ARTICLE IX
Amendments and Supplemental Indentures
SECTION 9.01. Without Consent of Holders...............................................................67
SECTION 9.02. With Consent of Holders..................................................................68
SECTION 9.03. Compliance with Trust Indenture Act......................................................69
SECTION 9.04. Revocation and Effect of Consents and Waivers............................................69
SECTION 9.05. Notation on or Exchange of Securities....................................................70
SECTION 9.06. Trustee To Sign Amendments and Supplemental Indentures...................................70
SECTION 9.07. Effect of Amendment or Supplemental Indenture............................................71
SECTION 9.08. Payment for Consent......................................................................71
ARTICLE X
Miscellaneous
SECTION 10.01. Trust Indenture Act Controls............................................................71
SECTION 10.02. Notices .............................................................................71
SECTION 10.03. Communication by Holders with other Holders.............................................72
SECTION 10.04. Certificate and Opinion as to Conditions Precedent......................................72
SECTION 10.05. Statements Required in Certificate or Opinion...........................................72
SECTION 10.06. When Securities Disregarded.............................................................73
SECTION 10.07. Rules by Trustee, Paying Agent and Registrar............................................73
SECTION 10.08. Legal Holidays..........................................................................73
SECTION 10.09. Governing Law...........................................................................73
SECTION 10.10. No Recourse Against Others..............................................................74
SECTION 10.11. Successors .............................................................................74
SECTION 10.12. Multiple Originals......................................................................74
SECTION 10.13. Table of Contents; Headings.............................................................74
SECTION 10.14. Separability Clause.....................................................................74
</TABLE>
iv
<PAGE>
INDENTURE, dated as of August 6, 1998, between GS ESCROW
CORP., a Delaware corporation (the "Issuer"), and THE BANK OF NEW YORK, a New
York banking corporation (the "Trustee").
The Issuer deems it necessary to issue from time to time for
its lawful purposes senior debt securities (hereinafter called the "Securities")
evidencing its unsecured and unsubordinated indebtedness, and has duly
authorized the execution and delivery of this Indenture to provide for the
issuance from time to time of the Securities, unlimited as to principal amount,
to bear interest at the rates or formulas, to mature at such times and to have
such other provisions as shall be fixed as hereinafter provided.
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Issuer's
Securities:
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Adjusted Consolidated Net Worth" of any Person means, as of
any date of determination in respect of an Issuance of Debt, the Consolidated
Net Worth of such Person as of the end of the most recent fiscal quarter ending
at least 45 days prior to such determination date; provided, however, that pro
forma effect shall be given (x) to any of the following that shall have occurred
since the end of such fiscal quarter or that shall occur simultaneously with or
immediately following such Issuance and (y) to the use of the proceeds of such
Issuance to effect any of the following (in each case without duplication and as
if the following had occurred on the last day of such fiscal quarter): (i) all
Issuances of Capital Stock by such Person and equity contributions to such
Person, (ii) all Investments in or acquisitions of a Subsidiary or Person that
becomes a Subsidiary as a result of such Investment or acquisition or in
property which constitutes all or substantially all of an operating unit of a
business, (iii) all Restricted Payments and Permitted Investments and (iv) all
Asset Dispositions. For purposes of this definition, whenever pro forma effect
is to be given to an Issuance of Capital Stock or an equity contribution, an
Investment in any Person, an acquisition of assets, an Asset Disposition, a
Restricted Payment, a Permitted Investment, the amount of revenue or earnings
relating thereto, or any other circumstance, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of
Holdings.
"Affiliate" of any specified Person means: (i) any other
Person which, directly or indirectly, is in control of, is controlled by or is
under common control with such specified Person or (ii) any other Person who is
a director or executive
<PAGE>
2
officer (A) of such specified Person, (B) of any Subsidiary of such specified
Person or (C) of any Person described in clause (i) above. For purposes of this
definition, control of a Person means the power, direct or indirect, to direct
or cause the direction of the management and policies of such Person whether by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Affiliated Permitted Holder" means any member of a Permitted
Holder Group if the members of such Group own, in the aggregate, legally or
beneficially 5% or more of the voting power of the Voting Stock of Escrow Corp.
or Holdings.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
shares of Capital Stock of a Subsidiary of Holdings, or property or other assets
of Holdings or any Subsidiary of Holdings (each referred to for the purposes of
this definition as a "disposition") by Holdings or any of its Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Wholly Owned Subsidiary of
Holdings to Holdings or by Holdings or a Wholly Owned Subsidiary of Holdings to
a Wholly Owned Subsidiary of Holdings, (ii) a disposition of property or assets
by Holdings or its Subsidiaries at fair market value in the ordinary course of
business, and (iii) an issuance of employee stock options.
"Average Life" means, with respect to any Debt, the quotient
obtained by dividing (i) the sum of the products of (a) the number of years from
the date of the transaction or event giving rise to the need to calculate the
Average Life of such Debt to the date, or dates, of each successive scheduled
principal payment of such Debt multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Bank" means California Federal Bank, a Federal Savings Bank,
and its successors, except as otherwise provided in Section 4.10.
"Bank Dividend" means, to the extent required, a cash dividend
from the Bank of up to $122.9 million to finance in part the Debt Tender Offers,
the Bank Preferred Stock Tender Offers and the Parent Holdings Defeasance.
"Bank Preferred Stock" means (i) the 11-1/2% Noncumulative
Perpetual Preferred Stock issued by the Bank, (ii) the 10-5/8% Noncumulative
Perpetual Preferred Stock issued by the Bank, (iii) the 9-1/8% Noncumulative
Exchangeable Preferred Stock, Series A, issued by California Federal Preferred
Capital Corporation, (iv) the Preferred Stock, Series E, issued by Glendale
Federal and (v) at Holdings' election, other Preferred Stock of the Bank or any
Subsidiary of the Bank issued to Refinance stock described in the foregoing
clauses (i) through (iv) in an aggregate liquidation value at no time exceeding
the sum of the liquidation value
<PAGE>
3
of the stock to be Refinanced on the Issue Date plus reasonable fees and
expenses incurred in connection with such Refinancing and accrued dividends and
premium, if any.
"Bank Preferred Stock Tender Offers" means the cash tender
offers by Holdings (or an Affiliate of Holdings other than Escrow Corp.) for
each of the Bank's two outstanding series of Bank Preferred Stock referred to in
clauses (i) and (ii) of the definition thereof.
"Board of Directors" means, with respect to any Person, the
Board of Directors of such Person or any committee thereof duly authorized to
act on behalf of such Board.
"Business Day" means, with respect to any series of
Securities, unless otherwise specified in a supplemental indenture or Certified
Board Resolution and any related Officer's Certificate with respect to a
particular series of Securities, each day which is not a Legal Holiday.
"CALGLs" means the Secondary Contingent Litigation Recovery
Participation Interests issued by the Bank.
"CALGZs" means the Contingent Litigation Recovery
Participation Interests issued by the Bank.
"Capital Lease Obligation" of a Person means any obligation
which is required to be classified and accounted for as a capital lease on the
face of a balance sheet of such Person prepared in accordance with GAAP; the
amount of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares,
interests (including partnership interests), rights to purchase, warrants,
options, participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred Stock, but excluding
any debt securities convertible into or exchangeable for such equity and, in the
case of the Bank, excluding any CALGZs and CALGLs.
"Certified Board Resolution" means a copy of a resolution
certified by the Secretary or an Assistant Secretary of the Issuer to have been
duly adopted by the Board of Directors of the Issuer and to be in full force and
effect on the date of such certification, and delivered to the Trustee.
<PAGE>
4
"Change of Control" means the occurrence of any of the
following events on or after the Issue Date:
(i) any Person other than a Permitted Holder shall be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of a majority in the aggregate
of the total voting power of the Voting Stock of Holdings, whether as a
result of the Issuance of securities of Holdings, any merger,
consolidation, liquidation or dissolution of Holdings, any direct or
indirect transfer of securities by a Permitted Holder or otherwise; or
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of Holdings or Golden State (together with any new directors whose
election by such Board of Directors or whose nomination for election by
the shareholders of Holdings or of Golden State was approved by a vote
of 66-2/3% of the directors of Holdings or Golden State then still in
office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors
of Holdings or Golden State then in office;
provided, however, that at and after the occurrence of a transaction referred to
in Section 4.10(d), all references to Holdings in the foregoing clauses (i) and
(ii) shall be deemed to be references to Holdings or the Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" of any Person means the common stock of such
Person, but in the case of the Bank means the common stock of the Bank excluding
any CALGZs and CALGLs.
"Consolidated Common Shareholders' Equity" of the Bank means,
at any date, all amounts which would, in conformity with GAAP, be included under
shareholders' equity on a consolidated balance sheet of the Bank as at such
date, less any amounts included therein attributable to, without duplication,
(i) Redeemable Stock, (ii) Exchangeable Stock and (iii) Preferred Stock held by
Persons other than Holdings and its Wholly Owned Subsidiaries.
"Consolidated Net Income" of Holdings means for any period the
consolidated net income (or loss) of Holdings and its consolidated Subsidiaries
for such period determined in accordance with GAAP, less, without duplication,
the amount of dividends declared during such period in respect of any Bank
Preferred Stock and Qualified Preferred Stock held by Persons other than
Holdings and its Wholly Owned Subsidiaries (to the extent not deducted from
Consolidated Net Income
<PAGE>
5
in accordance with GAAP); provided, however, that there shall be excluded
therefrom (to the extent included in calculating such net income (or loss)):
(a) any net income (or loss) of any Person if such Person is
not a Subsidiary, except that (A) Holdings' equity in the net income of
any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by
such Person during such period to Holdings or a Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution to a Subsidiary, to the limitations contained in
clause (c) below) and (B) Holdings' equity in a net loss of any such
Person for such period shall be included in determining such
Consolidated Net Income;
(b) any net income (or loss) of any Person acquired by
Holdings or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
(c) any net income (or loss) of any Subsidiary (other than the
Bank, any other Depository Institution or any Subsidiaries of any of
the foregoing) if such Subsidiary is subject to restrictions, directly
or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to Holdings
(other than restrictions contained in any Qualified Preferred Stock),
except that (A) Holdings' equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Subsidiary during such period to Holdings or another Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution to another Subsidiary, to the limitation contained
in this clause) and (B) Holdings' equity in a net loss of any such
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(d) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of Holdings or its
consolidated Subsidiaries (other than in connection with the sale of
insured deposits) (including pursuant to any sale-and-leaseback
arrangement) and any gain (but not loss) realized upon the sale or
other disposition of any Capital Stock of any Person;
(e) the cumulative effect of a change in accounting
principles;
(f) the gain (but not the loss) from the sale, transfer,
conveyance or other disposition (other than to Holdings or any of its
Subsidiaries) in a single transaction or in a series of related
transactions, in either case occurring outside the ordinary course of
business, of more than 75% of the assets of the Mortgage Bank shown on
a balance sheet of the Mortgage Bank as of the end
<PAGE>
6
of the most recent fiscal quarter ending at least 45 days prior to such
transaction (or the first transaction in such related series of
transactions); and
(g) all non-recurring charges or benefits incurred or recorded
in connection with the Transactions.
"Consolidated Net Worth" of any Person means, at any date, all
amounts which would, in conformity with GAAP, be included under shareholders'
equity on a consolidated balance sheet of such Person as at such date, less any
amounts included therein attributable to (x) Redeemable Stock and (y)
Exchangeable Stock.
"Debt" of any Person means, on any date of determination,
without duplication,
(i) the principal of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and other
accrued current liabilities arising in the ordinary course of
business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the third Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect
to the redemption, repayment (including liquidation preference) or
other repurchase of any Preferred Stock of any Subsidiary or any
Redeemable Stock of Holdings (but excluding in each case any accrued
dividends);
<PAGE>
7
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
Guarantees of such obligations and dividends; and
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured.
"Debt Tender Offers" means the cash tender offers and consent
solicitations by Holdings (or an Affiliate of Holdings other than Escrow Corp.)
for each of the three outstanding issues of FNH Notes.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Depository" means, unless otherwise specified by the Issuer
pursuant to Section 2.03, with respect to Securities of any series issuable or
issued as a Global Security, The Depository Trust Company or any successor
clearing agency registered under the Exchange Act and designated to act as
Depository for such Global Securities by the Trustee.
"Depository Institution" shall have the meaning attributed
thereto in Section 3(c)(1) of the FDIA, 12 U.S.C. ss. 1813(c)(1), or a similar
definition under any successor statute.
"Earnings Available for Fixed Charges" means, for any period,
an amount equal to, for Holdings and its consolidated Subsidiaries, the sum of
Consolidated Net Income for such period, plus the following to the extent
reducing Consolidated Net Income for such period: (i) the provision for taxes
based on income or profits or utilized in computing net loss, (ii) Fixed Charges
and (iii) amortization of goodwill. Notwithstanding the foregoing, the provision
for taxes based on the income or profits of, and amortization of goodwill of, a
Subsidiary shall be added to Consolidated Net Income to compute Earnings
Available for Fixed Charges only to the extent (and in the same proportion) that
the net income of such Subsidiary was included in calculating Consolidated Net
Income and, in the case of any Subsidiary other than the Bank, any other
Depository Institution or any Subsidiaries of any of the foregoing, only if a
corresponding amount would be permitted at the date of determination to be
dividended to Holdings by such Subsidiary without prior approval (that has not
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its shareholders.
<PAGE>
8
"Escrow Agreement" means the Escrow Agreement, dated as of
August 6, 1998, between Escrow Corp. and The Bank of New York, as Escrow
Agent, as amended from time to time.
"Escrow Corp." means GS Escrow Corp., a Delaware corporation,
not including Holdings or any other successors thereof.
"Escrow Corp. Merger" means the merger of Escrow Corp. with
and into Golden State Holdings pursuant to the Escrow Corp. Merger Agreement.
"Escrow Corp. Merger Agreement" means the Merger Agreement,
dated as of August 6, 1998, between Golden State Holdings and Escrow Corp., as
amended from time to time.
"Escrow Debt" means Debt of the Issuer that is not secured by
any Lien on any assets, property or Capital Stock owned by the Issuer or any of
its Subsidiaries, the proceeds of which Debt are used solely for deposit (or the
purchase of U.S. Government Obligations to be deposited) with the Escrow Agent
in an amount not to exceed the amount necessary, together with the net proceeds
to the Issuer of the issuance of the Initial Securities, to enable the Issuer to
make the Initial Deposit (as defined in the Escrow Agreement).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Securities" means, with respect to any series of
Initial Securities, Securities of the same series issued in exchange for a like
principal amount of such Initial Securities.
"Exchangeable Stock" means any Capital Stock of a Person which
by its terms or otherwise is required to be exchanged or converted or is
exchangeable or convertible at the option of the holder into another security
(other than Capital Stock of such Person which is neither Exchangeable Stock nor
Redeemable Stock).
"FDIA" means the Federal Deposit Insurance Act.
"Financial Services Subsidiary" means any Subsidiary of
Holdings which conducts any financial asset origination, securitization,
underwriting, financing or servicing business or any other financial services
business.
"Fixed Charge Coverage Ratio" means, as of any date of
determination, the ratio of (a) the aggregate amount of Earnings Available for
Fixed Charges for the most recent four consecutive fiscal quarters ending at
least 45 days prior to such determination date to (b) Fixed Charges for such
four fiscal quarters; provided, however, that (i) if (A) since the beginning of
such period Holdings has
<PAGE>
9
Issued any Debt that remains outstanding or Repaid any Debt or (B) the
transaction giving rise to the need to calculate the Fixed Charge Coverage Ratio
is an Issuance or Repayment of Debt, Fixed Charges for such period shall be
calculated after giving effect on a pro forma basis to such Issuance or
Repayment as if such Debt was Issued or Repaid on the first day of such period,
provided that, in the event of any such Repayment of Debt, Earnings Available
for Fixed Charges for such period shall be calculated as if Holdings or such
Subsidiary had not earned any interest income actually earned during such period
in respect of the funds used to Repay such Debt, and (ii) if (A) since the
beginning of such period Holdings or any Subsidiary shall have made any Asset
Disposition or an Investment (by merger or otherwise) in any Subsidiary (or any
Person which becomes a Subsidiary) or an acquisition of property which
constitutes all or substantially all of an operating unit of a business, (B) the
transaction giving rise to the need to calculate the Fixed Charge Coverage Ratio
is occurring in connection with such an Asset Disposition, Investment or
acquisition or (C) since the beginning of such period any Person (that
subsequently became a Subsidiary or was merged with or into Holdings or any
Subsidiary since the beginning of such period) shall have made such an Asset
Disposition, Investment or acquisition, Earnings Available for Fixed Charges for
such period shall be calculated after giving pro forma effect to such Asset
Disposition, Investment or acquisition as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. If any Debt bears a
floating rate of interest and its Issuance is being given pro forma effect, the
interest expense on such Debt shall be calculated as if the base interest rate
in effect for such floating rate of interest on the date of determination had
been the applicable base interest rate for the entire period (taking into
account any interest rate agreement applicable to such Debt if such interest
rate agreement has a remaining term in excess of 12 months). In the event the
Capital Stock of any Subsidiary is sold during the period, Holdings shall be
deemed, for purposes of clause (i) above, to have Repaid as of the beginning of
such period the Debt of such Subsidiary to the extent Holdings and its
continuing Subsidiaries are no longer liable for such Debt after such sale. For
purposes of this definition, whenever pro forma effect is to be given to an
Asset Disposition, an Investment in any Person, an acquisition of assets, the
amount of revenue or earnings relating thereto, the amount of Fixed Charges
associated with any Debt, or any other circumstance, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
officer of Holdings.
"Fixed Charges" means, for any period, the sum of (i) the
total interest expense of Holdings on an unconsolidated basis determined in
accordance with GAAP for such period and (ii) dividends payable on any
Redeemable Stock of Holdings for such period.
"FNH" means First Nationwide Holdings Inc., a Delaware
corporation.
"FNH Asset Transfer" means the contribution by FNH of all of
its assets to Golden State Holdings and the assumption by Golden State Holdings
of all of the obligations of FNH.
<PAGE>
10
"FNH Notes" means (i) the 12-1/4% Senior Notes Due 2001 and
12-1/4% Senior Exchange Notes Due 2001 issued by FNH pursuant to an Indenture,
dated as of July 15, 1994, as supplemented, between FNH and The First National
Bank of Boston, as the original Trustee, as such Indenture may be amended from
time to time, (ii) the 9-1/8% Senior Subordinated Notes Due 2003 and the 9-1/8%
Senior Subordinated Exchange Notes due 2003 issued by FNH pursuant to an
Indenture, dated as of January 31, 1996, between FNH and The Bank of New York,
as Trustee, as such Indenture may be amended from time to time, and (iii) and
the 10-5/8% Senior Subordinated Notes Due 2003 and 10-5/8% Senior Subordinated
Exchange Notes Due 2003 issued by FNH pursuant to an Indenture, dated as of
September 19, 1996, as supplemented, between FNH and The Bank of New York, as
Trustee, as such Indenture may be amended from time to time.
"Generally Accepted Accounting Principles" or "GAAP" means
generally accepted accounting principles in the United States, as in effect from
time to time, except that, for purposes of calculating Consolidated Net Income,
Consolidated Net Worth and Consolidated Common Shareholders' Equity, it shall
mean generally accepted accounting principles in the United States as in effect
on the Issue Date.
"Glendale Federal" means Glendale Federal Bank, Federal
Savings Bank.
"Global Security", when used with respect to any series of
Securities issued hereunder, means the certificate(s) representing the
Securities of a series, which are deposited with, or on behalf of, the
Depository or pursuant to the Depository's instruction, all in accordance with
this Indenture and an indenture supplemental hereto, if any, or Certified Board
Resolution and pursuant to an Issuer Request, which shall be registered in the
name of the Depository or its nominee.
"Golden State" means Golden State Bancorp Inc., a Delaware
corporation.
"Golden State Acquisition" refers collectively to the
following transactions pursuant to the Merger Agreement: (i) the FNH Asset
Transfer, (ii) the merger of Parent Holdings with and into Golden State, (iii)
the merger of FNH with and into Golden State Financial Corporation and (iv) the
merger of Glendale Federal with and into the Bank.
"Golden State Holdings" means New First Nationwide Holdings
Inc. (to be renamed Golden State Holdings Inc. upon the consummation of the
Golden State Acquisition).
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person:
<PAGE>
11
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or other obligation of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holder", when used with respect to any Security, means a
Securityholder.
"Holdings" means (i) prior to consummation of the Golden State
Acquisition, FNH and, (ii) from and after consummation of the Golden State
Acquisition, Golden State Holdings and its successors, except as otherwise
provided in Section 4.10 or 5.01.
"Indenture" means this instrument, as it may from time to time
be supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof and shall include the terms of
particular series of Securities established as contemplated by Section 2.03;
provided, however, that, if at any time more than one Person is acting as
Trustee under this instrument, "Indenture" shall mean, with respect to any one
or more series of Securities for which such Person is Trustee, this instrument,
as it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof
and shall include the terms of the particular series of Securities for which
such Person is Trustee established as contemplated by Section 2.03, exclusive,
however, of any provisions or terms which relate solely to other series of
Securities for which such Person is not Trustee, regardless of when such terms
or provisions were adopted.
"Initial Securities" means the Floating Rate Notes Due 2003,
the 6 3/4% Senior Notes Due 2001, the 7% Senior Notes Due 2003 and the 71/8%
Senior Notes Due 2005, each issued by Escrow Corp. pursuant to this Indenture.
"Interest Payment Date", when used with respect to any series
of Securities, means the date specified in such security as the fixed date on
which any installment of interest on those Securities is due and payable.
"Investment" in any Person means any loan or advance to, any
net payment on a Guarantee of, any acquisition of Capital Stock, equity
interest, obligation or other security of, or capital contribution or other
investment in, such
<PAGE>
12
Person. Investments shall exclude loans or advances to customers and suppliers
in the ordinary course of business. The term "Invest" has a corresponding
meaning.
"Investment Grade" means, in respect of any series of
Securities, a rating of the Securities of such series by both S&P and Moody's,
each such rating being in one of such agency's four highest generic ratings
categories that signifies investment grade (i.e. BBB- (or the equivalent) or
higher by S&P and Baa3 (or the equivalent) or higher by Moody's); provided, in
each case, such ratings are publicly available; provided further that in the
event Moody's or S&P is no longer in existence, for purposes of determining
whether such Securities are rated "Investment Grade," such organization may be
replaced by a nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) designated by the Issuer, notice of which
designation shall be given to the Trustee.
"Issue" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Debt or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary of another Person (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Subsidiary at the time it becomes a Subsidiary of such other Person.
"Issue Date" means the date of the original issue of the
Initial Securities.
"Issuer" means (i) prior to the consummation of the Escrow
Corp. Merger, Escrow Corp., and (ii) from and after consummation of the Escrow
Corp. Merger, Holdings until a successor replaces it and, thereafter, means the
successor and, for purposes of any provision contained herein and required by
the TIA, each other obligor on the indenture securities.
"Issuer Request," "Issuer Order" and "Issuer Consent" mean a
written request, order or consent, respectively, signed in the name of the
Issuer by its Chairman of the Board, President or a Vice President, and by its
Treasurer, an Assistant Treasurer, Controller, an Assistant Controller,
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are required or permitted to be closed in the State of New
York or in the state where the principal office of the Trustee is located.
"Lien" means any mortgage, pledge, security interest,
conditional sale or other title retention agreement or other similar lien.
"Litigations" means (i) the claim against the United States
in the lawsuit California Federal Bank v. United States, Civil Action No.
92-138C, (ii) the claim against the United States in the lawsuit Glendale
Federal Bank, F.S.B. v.
<PAGE>
13
United States, No. 90-772C, in the United States Court of Federal Claims, filed
August 15, 1990, and (iii) the claim against the United States in the lawsuit
First Nationwide Bank, et al. v. United States, Civil Action No. 96-590C,
filed on September 20, 1996.
"Mafco Holdings" means Mafco Holdings Inc., a Delaware
corporation, and its successors.
"Merger Agreement" means the Agreement and Plan of
Reorganization dated as of February 4, 1998 by and among Golden State, Golden
State Financial Corporation, Parent Holdings, FNH, First Gibraltar Holdings Inc.
and Hunter's Glen/Ford, Ltd., as amended from time to time.
"Minimum Common Equity Amount" means, as of the end of any
fiscal quarter, an amount equal to the sum of (i) $800 million and (ii) the
excess, if any, of amounts attributable to goodwill and core deposit intangible
on the consolidated balance sheet of the Bank as at the end of such fiscal
quarter, over $100 million.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Bank" means the Subsidiary of Holdings which on the
Issue Date is a Subsidiary of the Bank that is engaged in the mortgage banking
business, including the business of originating or carrying mortgage loans.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
estimated in good faith to be payable as a result thereof.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible common
stock of such corporation; provided, however, that Non-Convertible Capital Stock
shall not include any Redeemable Stock or Exchangeable Stock.
"Offering" means the offering by Escrow Corp. of the Initial
Securities.
"Officer" means the Chairman of the Board, the Vice Chairman,
the President, any Vice President, the Treasurer, an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Issuer.
<PAGE>
14
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, the Vice Chairman, the President or a Vice President
(regardless of Vice Presidential designation), and by the Treasurer, an
Assistant Treasurer, Secretary or an Assistant Secretary, of the Issuer, and
delivered to the Trustee. One of the Officers signing an Officers' Certificate
given pursuant to Section 4.12 shall be the principal executive, financial or
accounting officer of the Issuer.
"Opinion of Counsel" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may be an
employee of or counsel to the Issuer (or Holdings, Mafco Holdings, Parent or one
of its Subsidiaries) or the Trustee.
"Original Issue Discount Security" means (i) any Security
which provides for an amount less than the principal amount thereof to be due
and payable upon a declaration of acceleration of the Stated Maturity thereof,
and (ii) any other security which is issued with "original issue discount"
within the meaning of Section 1273(a) of the Code and the regulations
thereunder.
"Parent" means Golden State and any other person which
acquires or owns, after the consummation of the Golden State Acquisition,
directly or indirectly 80% or more of the voting power of the Voting Stock of
Holdings.
"Parent Holdings" means First Nationwide (Parent) Holdings
Inc., a Delaware corporation.
"Parent Holdings Defeasance" means the mailing of a 30-day
notice of redemption for all of the outstanding Parent Holdings Notes and the
irrevocable deposit in trust of money or U.S. Government Obligations in an
amount sufficient to pay the redemption price therefor, together with any
accrued and unpaid interest to the date of redemption, for the purpose of
defeasing the Parent Holdings Notes.
"Parent Holdings Notes" means the 12-1/2% Senior Notes Due
2003 issued by Parent Holdings pursuant to an Indenture, dated as of April 15,
1996, between Parent Holdings and The Bank of New York, as Trustee, as such
Indenture may be amended from time to time.
"Permitted Acquisition Debt" shall mean Debt of Holdings the
proceeds of which are used for the acquisition of a Depository Institution or a
Financial Services Subsidiary or which are used by a Subsidiary that is either a
Depository Institution or Financial Services Subsidiary to acquire assets
outside the ordinary course of business that extend the geographic scope or
product lines of such Depository Institution or Financial Services Subsidiary,
and a Refinancing of any such Debt.
<PAGE>
15
"Permitted Affiliate" means any individual that is a director
or executive officer of Holdings, of a Subsidiary of Holdings, of an
Unrestricted Affiliate or of Golden State, any Person controlled by Golden State
or any successor to any of the foregoing; provided, however, that such
individual is not also a director or executive officer of Mafco Holdings, any
Person that controls Mafco Holdings or any successor to any of the foregoing.
"Permitted Holder Group" means either (i) Ronald O. Perelman
and his Related Persons, collectively, or (ii) Gerald J. Ford and his Related
Persons (including, without limitation, Hunter's Glen/Ford, Ltd.), collectively.
"Permitted Holders" means the members of the Permitted Holder
Groups.
"Permitted Investments" means: (i) Investments consisting of
loans to directors and executive officers (other than any such director or
executive officer that is the beneficial owner of 5% or more of the voting power
of the Voting Stock of Holdings) of any Subsidiary of Holdings made in the
ordinary course of its business and in compliance with all regulatory
restrictions on such loans, (ii) Investments consisting of loans to Affiliates
of Holdings so long as (in the case of this clause (ii) only) the Consolidated
Common Shareholders' Equity of the Bank as of the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Investment was at
least equal to the Minimum Common Equity Amount as of the end of such fiscal
quarter, (iii) Investments in Holdings, in any Subsidiary of Holdings or in any
Person which would become a Subsidiary of Holdings as a result of such
Investment and (iv) Investments in Unrestricted Affiliates.
"Permitted Refinancing Debt" means any Debt that Refinances
any other Debt, including any successive Refinancings, so long as (a) the new
Debt is in an aggregate principal amount (or if Issued with original issue
discount, an aggregate issue price) not in excess of the sum of (i) the
aggregate principal amount then outstanding (or if Issued with original issue
discount, the aggregate accreted value on the date of the Refinancing) of the
Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses,
including underwriters' discounts and commissions, premiums and defeasance
costs, related to such Refinancing, (b) the Average Life of such Debt is equal
to or greater than the Average Life of the Debt being Refinanced, (c) the Stated
Maturity of such Debt is no earlier than the Stated Maturity of the Debt being
Refinanced and (d) if the Debt being Refinanced consists of Subordinated
Obligations, the new Debt shall consist of Subordinated Obligations.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
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16
"Predecessor Securities" of any particular Security means
every previous Security evidencing all or a portion of the same debt as that
evidenced by such particular Security; and, for the purposes of this definition,
any Security authenticated and delivered under Section 2.10 in lieu of a lost,
destroyed or stolen Security shall be deemed to evidence the same debt as the
lost, destroyed or stolen Security.
"Preferred Stock" as applied to the Capital Stock of any
corporation means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of a Security as of any date means the principal
of the Security as of such date or, in the case of an Original Issue Discount
Security, the amount of the principal thereof that would be due and payable upon
a declaration of acceleration of the Stated Maturity thereof pursuant to Section
6.02 as of such date plus, in the case of any redemption or an offer to
repurchase Securities pursuant to Section 4.06, the premium, if any, payable on
the Security which is due or overdue or is to become due on such date.
"Qualified Preferred Stock" means (x) any Preferred Stock of
any Subsidiary of Holdings that is a Depository Institution or a Subsidiary
thereof (other than Bank Preferred Stock) which meets the requirements set forth
in clauses (a), (b) and (c) below, (y) any Preferred Stock of any Subsidiary of
Holdings (other than any Subsidiary of Holdings that is a Depository Institution
or a Subsidiary thereof) which meets the requirements set forth in clauses (a),
(b), (c) and (d) below, and (z) any Preferred Stock of any Subsidiary of
Holdings (other than the Bank Preferred Stock) issued to Refinance any other
Qualified Preferred Stock or, at Holdings' election, to Refinance any Bank
Preferred Stock, provided that the Preferred Stock issued in such Refinancing
meets the requirements set forth in clauses (a), (b), (c) and (e) below:
(a) such Preferred Stock does not contain any mandatory
redemption provisions which would require it to be redeemed prior to
the first anniversary of the Stated Maturity of all the Securities
outstanding on the date such Preferred Stock is Issued;
(b) the terms of such Preferred Stock do not impose any
consensual encumbrance or restriction on the ability of the issuer
thereof to pay dividends or make distributions on its common stock
except in a manner that is no more restrictive in any material respect
than the following, as determined in good faith by the Board of
Directors of Holdings and evidenced by a resolution adopted by such
Board;
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17
(i) dividends and distributions on common stock or
other capital stock of the issuer may not be declared or paid
or set apart for payment at any time when the issuer has not
declared and paid any dividends or distributions on such
Preferred Stock which are required to be declared and paid as
a precondition to dividends or distributions on other capital
stock of the issuer;
(ii) distributions upon the liquidation, dissolution
or winding up of the issuer, whether voluntary or involuntary
("Liquidating Distributions"), may not be made on the common
stock or other capital stock of the issuer at any time when
such Preferred Stock is entitled to receive Liquidating
Distributions which have not been paid; and
(iii) dividends and distributions on common stock or
other capital stock of the issuer may not be declared or paid
or set apart for payment at any time when such Preferred Stock
is required to be, but has not been, redeemed pursuant to
redemption provisions which meet the requirements of clause
(a) above;
(c) the terms of such Preferred Stock do not impose any
consensual encumbrance or restriction on the ability of the issuer
thereof (i) to pay any Debt or other obligation owed to Holdings; (ii)
to make loans or advances to Holdings; or (iii) to transfer any of its
property or assets to Holdings, except, in any such case, any
encumbrance or restriction permitted under Section 4.08 (other than
clause (h) thereof);
(d) in the case of Preferred Stock issued pursuant to clause
(y) above, Consolidated Net Income of Holdings for the Relevant Period
(as defined in the next sentence) on a pro forma basis, after giving
effect to (i) the issuance of such Preferred Stock (including fees and
expenses incurred in connection with such issuance), (ii) the use of
the proceeds thereof, if any, (iii) any acquisition of capital stock or
assets of another Person occurring in connection with the issuance of
such Preferred Stock (including the anticipated revenue and earnings
relating thereto) and (iv) any dividend or other payment obligations
with respect to such Preferred Stock, in each case as if such Preferred
Stock had been issued and any such acquisition had been made on the
first day of the Relevant Period, is no less than the actual
Consolidated Net Income of Holdings for the Relevant Period. "Relevant
Period" means, with respect to any issuance of Preferred Stock, the
four full fiscal quarters most recently ended at least 45 days prior to
the date of such issuance. For purposes of this clause (d), whenever
pro forma effect is to be given to an acquisition of capital stock or
assets, the amount of revenue and earnings relating thereto, or any
other circumstance, the pro forma calculations shall be determined in
good faith by a responsible financial or accounting officer of
Holdings; and
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18
(e) in the case of Preferred Stock issued in a Refinancing
pursuant to clause (z) above, the aggregate liquidation value of such
Preferred Stock shall not exceed the sum of the liquidation value of
the Preferred Stock being Refinanced on the date it was originally
issued plus reasonable fees and expenses incurred in connection with
such Refinancing and accrued dividends and premium, if any.
"Redeemable Stock" means, with respect to any Person, Capital
Stock of such Person that by its terms or otherwise is required to be redeemed
on or prior to the first anniversary of the Stated Maturity of all the
Securities outstanding on the date such Capital Stock is Issued or is redeemable
at the option of the holder thereof at any time on or prior to the first
anniversary of the Stated Maturity of such Securities; provided, however, that
any Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to purchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the first anniversary of the Stated Maturity of such
Securities shall not constitute Redeemable Stock if (x) the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the terms applicable to the
Securities in Sections 4.06 and 4.10, as determined in good faith by the Board
of Directors of Holdings, the determination of which shall be evidenced by a
resolution of such Board of Directors, and (y) any such requirement only becomes
operative after compliance with such covenants, including the purchase of any
Securities tendered pursuant thereto.
"Refinance" or "Repay" means, in respect of any Debt or
Preferred Stock, to refinance, extend, renew, refund, repay, prepay, repurchase,
redeem, defease or retire, or to issue Debt or Preferred Stock in exchange or
replacement for, such Debt or Preferred Stock. "Refinanced" and "Refinancing"
and "Repayment" and "Repaid" shall have correlative meanings.
"Refinancing Transactions" means the Offering, the Bank
Dividend, the Debt Tender Offers, the Bank Preferred Stock Tender Offers and
the Parent Holdings Defeasance.
"Regular Record Date" for the interest payable on any Security
on any Interest Payment Date means the date specified in such Security as the
regular record date relating to such Interest Payment Date.
"Related Person" in respect of any specified Person means (i)
in the event of his incompetence or death, his estate, heirs, executor,
administrator, committee or other personal representative (collectively,
"heirs"), (ii) any Person controlled, directly or indirectly, by such specified
Person or his heirs, and (iii) any trust, corporation, limited liability company
or partnership more than 50% of the beneficial interests of which are held in
the aggregate by such specified Person or one
<PAGE>
19
or more members of his immediate family (which shall include his parents,
spouse, children, grandchildren and siblings) or any combination of the
foregoing.
"Responsible Officer," when used with respect to the Trustee,
means any officer of the Trustee with direct responsibility for the
administration of this Indenture and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Restricted Payment" means, as to any Person making a
Restricted Payment: (i) the declaration or payment of any dividend or any
distribution on or in respect of the Capital Stock of such Person (including any
payment in connection with any merger or consolidation involving such Person) or
to the holders of the Capital Stock of such Person (except (x) dividends or
distributions payable solely in the Non-Convertible Capital Stock of such Person
or in options, warrants or other rights to purchase the Non-Convertible Capital
Stock of such Person, and (y) dividends or distributions on Capital Stock of a
Subsidiary of Holdings payable to Holdings or a Subsidiary of Holdings and to
any minority shareholders of a Subsidiary of Holdings), (ii) any purchase,
redemption or other acquisition or retirement for value of any Capital Stock of
Holdings or any Subsidiary, (iii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Subordinated Obligation (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) and (iv) any Investment (other
than a Permitted Investment) in any Affiliate of Holdings.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security" has the meaning stated in the first recital of this
Indenture and, more particularly, means any Security or Securities authenticated
and delivered under this Indenture; provided, however, that, if at any time
there is more than one Person acting as Trustee under this Indenture,
"Securities" with respect to the Indenture as to which such Person is Trustee
shall have the meaning stated in the first recital of this Indenture and shall
more particularly mean Securities authenticated and delivered under this
Indenture, exclusive, however, of Securities of any series as to which such
Person is not Trustee.
"Securityholder" means a Person in whose name a security is
registered in the Security Register.
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20
"Significant Subsidiary" means: (i) any Subsidiary of Holdings
which at the time of determination either (A) had assets which, as of the date
of Holdings' most recent quarterly consolidated balance sheet, constituted at
least 5% of Holdings' total assets on a consolidated basis as of such date, in
each case determined in accordance with GAAP, or (B) had revenues for the
12-month period ending on the date of Holdings' most recent quarterly
consolidated statement of income which constituted at least 5% of Holdings'
total revenues on a consolidated basis for such period or (ii) any Subsidiary of
Holdings which, if merged with all Defaulting Subsidiaries (as defined below) of
Holdings, would at the time of determination either (A) have had assets which,
as of the date of Holdings' most recent quarterly consolidated balance sheet,
would have constituted at least 10% of Holdings' total assets on a consolidated
basis as of such date or (B) have had revenues for the 12-month period ending on
the date of Holdings' most recent quarterly consolidated statement of income
which would have constituted at least 10% of Holdings' total revenues on a
consolidated basis for such period (each such determination being made in
accordance with GAAP). "Defaulting Subsidiary" means any Subsidiary of Holdings
with respect to which an event described under Section 6.01(5), 6.01(6), 6.01(7)
or 6.01(8) has occurred and is continuing.
"S&P" means Standard and Poor's Corporation.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency).
"Subordinated Obligation" means, with respect to any series of
Securities, any Debt of Holdings (whether outstanding on the Issue Date or
thereafter Issued) which is subordinate or junior in right of payment to the
Securities of such series.
"Subsidiary" means as to any Person any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interest but, in the case of the Bank, excluding any CALGZs and
CALGLs) entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the time owned,
directly or indirectly, by: (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means: (i) the Tax Sharing Agreement
as in effect as of the Issue Date to which Holdings, certain of its Subsidiaries
and Mafco Holdings are parties (as the same may be amended to the extent
required in connection with the Transactions) and (ii) any other tax sharing or
allocation
<PAGE>
21
agreement to which Holdings or any of its Subsidiaries or any direct or indirect
shareholder of Holdings or any predecessor entity thereto are parties with
respect to consolidated or combined tax returns which include Holdings or any of
its Subsidiaries or any predecessor entity thereto but only to the extent that
amounts payable from time to time by Holdings or any such Subsidiary under any
such agreement do not exceed the corresponding tax payments that Holdings or
such Subsidiary or any predecessor entity thereto would have been required to
make to any relevant taxing authority had Holdings or such Subsidiary or any
predecessor entity thereto not joined in such consolidated or combined returns,
but instead had filed returns including only Holdings or its Subsidiaries or any
predecessor entity thereto, provided that any such agreement may provide that,
if Holdings or any such Subsidiary or any predecessor entity thereto ceases to
be a member of the affiliated or consolidated group of corporations to which
such tax sharing or allocation agreement applies (such cessation, a
"Deconsolidation Event"), then Holdings or such Subsidiary or any predecessor
entity thereto shall indemnify such direct or indirect shareholder with respect
to any Federal, state or local income, franchise or other tax liability
(including any related interest, additions or penalties) imposed on such
shareholder as the result of an audit or other adjustment with respect to any
period prior to such Deconsolidation Event that is attributable to Holdings,
such Subsidiary or any predecessor entity thereto (computed as if Holdings, such
Subsidiary or such predecessor entity, as the case may be, were a stand-alone
entity that filed tax returns including only Holdings or its Subsidiaries or any
predecessor entity thereto), but only to the extent that any such tax liability
exceeds any liability for taxes recorded on the books of Holdings or such
Subsidiary or such predecessor entity with respect to any such period.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or any
agency thereof, in each case, maturing within 360 days of the date of
acquisition thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company (including the Trustee)
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States having capital,
surplus and undivided profits aggregating in excess of $250,000,000 and whose
debt is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined for purposes
of Rule 436 under the Securities Act) or any money-market fund sponsored by any
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a nationally
recognized broker-dealer, (iv) investments in commercial paper, maturing not
more than 90 days after the date of acquisition, issued by a corporation (other
than an Affiliate or Subsidiary of Holdings or the Issuer) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a
<PAGE>
22
rating at the time as of which any investment therein is made of "P-2" (or
higher) according to Moody's or "A-2" (or higher) according to S&P and (v)
securities with maturities of six months or less from the date of acquisition
backed by standby or direct pay letters of credit issued by any bank satisfying
the requirements of clause (ii) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss.77aaa-77bbbb) as in effect on the Issue Date except as required by
Section 9.03 hereof; provided, however, that in the event the TIA is amended
after such date, "TIA" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"Transactions" means the Refinancing Transactions, the Golden
State Acquisition and the Escrow Corp. Merger.
"Trustee" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor. If at any
time there is more than one such Person, "Trustee" as used with respect to
Securities of any series shall mean the Trustee with respect to Securities of
that series.
"Trust Officer" means any officer or assistant officer of the
Trustee assigned by the Trustee to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Affiliate" means a Person (other than a
Subsidiary of Holdings) controlled (as defined in the definition of "Affiliate")
by Holdings, in which no Affiliate of Holdings (other than (x) a Wholly Owned
Subsidiary, (y) a Permitted Affiliate and (z) another Unrestricted Affiliate)
has an Investment.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests but, in the case of the
Bank, excluding any CALGZs and CALGLs) of such Person then outstanding and
normally entitled (without regard to any contingency) to vote in the election of
directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means the Bank and any Subsidiary of
Holdings all the Capital Stock of which (other than directors' qualifying
shares, Bank
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23
Preferred Stock or Qualified Preferred Stock) is owned by Holdings, the Bank or
another Wholly Owned Subsidiary thereof or any combination of the foregoing.
SECTION 1.02. Other Definitions.
Defined in
Term Section
---- ----------
"Bankruptcy Law".............................................. 6.01
"covenant defeasance option".................................. 8.01(b)
"Custodian"................................................... 6.01
"Default Amount".............................................. 6.02
"Event of Default............................................. 6.01
"legal defeasance option"..................................... 8.01(b)
"New Holding Company"......................................... 4.10
"OTS"......................................................... 4.04
"Outstanding"................................................. 2.11
"Paying Agent"................................................ 2.06
"Registrar"................................................... 2.06
"Security Register" .......................................... 2.06
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"default" means any Default or Event of Default.
"indenture securities" means the Securities.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Issuer and an
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule have
the meanings assigned to them by such definitions.
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24
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP and all accounting calculations
will be determined in accordance with such principles;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the
plural include the singular;
(6) unsecured debt shall not be deemed to be subordinate or
junior to secured debt merely by virtue of its nature as unsecured
debt;
(7) the principal amount of any noninterest bearing or other
discount security at any date of Issuance shall be the principal amount
thereof that would be shown on a balance sheet of the issuer dated such
date prepared in accordance with GAAP and accretion of principal on
such security shall be deemed to be the Issuance of Debt; provided,
however, that the accretion of principal on such security shall not be
deemed to be the Issuance of Debt if the issuer elects, at the time of
original Issuance of such security, to treat such accretion as if, on
such date of original Issuance, there were an additional Issuance of
Debt in an aggregate principal amount equal to the excess of the
principal amount at maturity of such security over the principal amount
thereof that would be shown on a balance sheet of the issuer dated such
date prepared in accordance with GAAP (except to the extent otherwise
provided in the definition of Permitted Refinancing Debt), and, unless
repaid or redeemed, the amount of such additional Issuance of Debt
shall be treated as being outstanding for all purposes under this
Indenture until such security is paid in full; and
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with respect
to such Preferred Stock, whichever is greater.
<PAGE>
25
ARTICLE II
The Securities
SECTION 2.01. Form of Securities. (a) The Securities shall
have such appropriate insertions, omissions, substitutions and other variations
as are required or permitted by this Indenture and may have such letters,
numbers or other marks of identification and such legends or endorsements placed
thereon, as may be required to comply with the rules of any securities exchange,
or as may, consistently herewith, be determined by the officers executing such
Securities, as evidenced by their execution of the Securities. Any portion of
the text of any Security may be set forth on the reverse thereof, with an
appropriate reference thereto on the face of the Security.
The definitive Securities shall be printed, lithographed or
engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner, all as determined by the
officers executing such Securities, as evidenced by their execution of such
Securities, subject, with respect to the Securities of any series, to the rules
of any securities exchange on which such Securities are listed.
(b) Each Security shall be in one of the forms approved from
time to time by or pursuant to a Certified Board Resolution, or established in
one or more indentures supplemental hereto. Prior to the delivery of a Security
to the Trustee for authentication in any form approved by or pursuant to a
Certified Board Resolution, the Issuer shall deliver to the Trustee the
Certified Board Resolution by or pursuant to which such form of Security has
been approved, which Certified Board Resolution shall have attached thereto a
true and correct copy of the form of Security which has been approved thereby
or, if a Certified Board Resolution authorizes a specific officer or officers to
approve a form of Security, a certificate of such officer or officers approving
the form of Security attached thereto. Any form of Security approved by or
pursuant to a Certified Board Resolution must be acceptable as to form to the
Trustee, such acceptance to be evidenced by the Trustee's authentication of
Securities in that form or a certificate signed by a Responsible Officer of the
Trustee and delivered to the Issuer.
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26
SECTION 2.02. Form of Trustee's Certificate of Authentication.
The form of Trustee's Certificate of Authentication for any Security issued
pursuant to this Indenture shall be substantially as follows:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated: By:
---------------------------- ------------------------------
Authorized Signatory
SECTION 2.03. General Limitations; Issuable in Series; Terms
of Particular Series. The aggregate principal amount of Securities which may be
authenticated and delivered and Outstanding under this Indenture is not limited.
The Securities may be issued in one or more series as from
time to time may be authorized by the Board of Directors of the Issuer. There
shall be established in or pursuant to a Certified Board Resolution or in a
supplemental indenture, subject to Section 2.15, prior to the issuance of
Securities of any such series:
(1) the title of the Securities of such series (which shall
distinguish the Securities of such series from Securities of any other
series);
(2) the Person to whom any interest on a Security of such
series shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest;
(3) the date or dates on which the principal of the Securities
of such series is payable;
(4) the rate or rates at which the Securities of such series
shall bear interest, if any, the date or dates from which such interest
shall accrue, the Interest Payment Dates on which any such interest
shall be payable and the Regular Record Date for any interest payable
on any Interest Payment Date;
(5) the place or places where the principal of and any premium
and interest on Securities of such series shall be payable;
<PAGE>
27
(6) the period or periods within which the redemption price or
prices or the Repayment price or prices, as the case may be, at which,
and the terms and conditions upon which, Securities of such series may
be redeemed or repaid, as the case may be, in whole or in part, at the
option of the Issuer or the Holder;
(7) the obligation, if any, of the Issuer to purchase
Securities of such series pursuant to any sinking fund or analogous
provisions or at the option of a Holder thereof and the period or
periods within which, the price or prices at which and the terms and
conditions upon which Securities of such series shall be purchased, in
whole or in part, pursuant to such obligation;
(8) if other than denominations of $1,000 and any integral
multiple thereof, the denominations in which Securities of such series
shall be issuable;
(9) the obligation, if any, of the Issuer to permit the
conversion of the Securities of such series into the Issuer's Common
Stock or Preferred Stock, as the case may be, and the terms and
conditions upon which such conversion shall be effected (including,
without limitation, the initial conversion price or rate, the
conversion period, any adjustment of the applicable conversion price
and any requirements relative to the reservation of such shares for
purposes of conversion);
(10) if other than U.S. dollars, the currency or currencies or
units based on or related to currencies in which the Securities of such
series shall be denominated and in which payments of principal of, and
any premium and interest on, such Securities shall or may be payable;
(11) if the principal of (and premium, if any) or interest, if
any, on the Securities of such series are to be payable, at the
election of the Issuer or a Holder thereof, in a coin or currency
(including a composite currency) other than that in which the
Securities are stated to be payable, the period or periods within
which, and the terms and conditions upon which, such election may be
made;
(12) if the amount of payments of principal of (and premium,
if any) or interest, if any, on the Securities of such series may be
determined with reference to an index based on a coin or currency
(including a composite currency) other than that in which the
Securities are stated to be payable, the manner in which such amounts
shall be determined;
(13) any limit upon the aggregate principal amount of the
Securities of such series which may be authenticated and delivered
under this Indenture (except for Securities authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of,
other Securities of such series pursuant to
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28
Section 2.09, 2.10, 2.12, 3.07 and 9.05 and except for any Securities
which, pursuant to Section 2.05, are deemed never to have been
authenticated and delivered hereunder);
(14) provisions, if any, with regard to the exchange of
Securities of such series, at the option of the Holders thereof, for
other Securities of the same series of the same aggregate principal
amount or of a different authorized series or different authorized
denomination or denominations, or both;
(15) provisions, if any, with regard to the appointment by the
Trustee of an authenticating agent in one or more places other than the
location of the office of the Trustee with power to act on behalf of
the Trustee and subject to its direction in the authentication and
delivery of the Securities of any one or more series in connection with
such transactions as shall be specified in the provisions of this
Indenture or in or pursuant to such Certified Board Resolution or
supplemental indenture;
(16) the portion of the principal amount of Securities of the
series, if other than the principal amount thereof, which shall be
payable upon declaration of acceleration of the Stated Maturity thereof
pursuant to Section 6.02 or provable in bankruptcy pursuant to Section
6.09;
(17) any Event of Default with respect to the Securities of
such series, if not set forth herein, and any additions, deletions or
other changes to the Events of Default set forth herein that shall be
applicable to the Securities of such series;
(18) any covenant solely for the benefit of the Securities of
such series and any additions, deletions or other changes to the
provisions of Article IV or V or Section 1.01 or any definitions
relating to such Articles that would otherwise be applicable to the
Securities of such series;
(19) if Section 8.01(b) of this Indenture shall not be
applicable to the Securities of such series and if Section 8.01(b)
shall be applicable to any covenant or Event of Default established in
or pursuant to a Certified Board Resolution or in a supplemental
indenture as described above that has not already been established
herein;
(20) if the Securities of such series shall be issued in whole
or in part in the form of a Global Security or Securities, the terms
and conditions, if any, upon which such Global Security or Securities
may be exchanged in whole or in part for other individual Securities in
definitive registered form; the Depository for such Global Security or
Securities; and the form of any legend or legends to be borne by any
such Global Security or Securities; and
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29
(21) any other terms of such series;
all upon such terms as may be determined in or pursuant to such Certified Board
Resolution or supplemental indenture with respect to such series.
The form of the Securities of each series shall be established
pursuant to the provisions of this Indenture in or pursuant to the Certified
Board Resolution or in the supplemental indenture creating such series. The
Securities of each series shall be distinguished from the Securities of each
other series in such manner, reasonably satisfactory to the Trustee, as the
Board of Directors may determine.
Unless otherwise provided with respect to Securities of a
particular series, the Securities of any series may only be issuable in
registered form, without coupons.
Any terms or provisions in respect of the Securities of any
series issued under this Indenture may be determined pursuant to this Section by
providing for the method by which such terms or provisions shall be determined.
SECTION 2.04. Denominations. The Securities of each series
shall be issuable in such denominations and currency as shall be provided in the
provisions of this Indenture or in or pursuant to the Certified Board Resolution
or the supplemental indenture creating such series. In the absence of any such
provisions with respect to the Securities of any series, the Securities of that
series shall be issuable only in fully registered form in denominations of
$1,000 and any integral multiple thereof.
SECTION 2.05. Execution and Authentication. Two Officers
shall sign the Securities for the Issuer by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
At any time and from time to time after the execution and
delivery of this Indenture, the Issuer may deliver Securities executed by the
Issuer to the Trustee for authentication; and the Trustee shall, upon Issuer
Order, authenticate and deliver such Securities as in this Indenture provided
and not otherwise.
Prior to any such authentication and delivery, the Trustee
shall be entitled to receive, in addition to any Officers' Certificate and
Opinion of Counsel required to be furnished to the Trustee pursuant to Sections
10.04 and 10.05, and the Certified Board Resolution and any certificate relating
to the issuance of the series of Securities if required to be furnished pursuant
to Section 2.01(b), an Opinion of Counsel stating that the form and terms of
such Securities have been established in
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30
conformity with the provisions of this Indenture, and such other matters as the
Trustee may reasonably request.
The Trustee shall not be required to authenticate such
Securities if the issue thereof will adversely affect the Trustee's own rights,
duties or immunities under the Securities and this Indenture.
Unless otherwise provided in the form of Security for any
series, all Securities shall be dated the date of their authentication.
No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein or in the applicable Certified Board Resolution or supplemental indenture
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder. Notwithstanding the
foregoing, if any Security shall have been authenticated and delivered hereunder
but never issued and sold by the Issuer, and the Issuer shall deliver such
Security to the Trustee for cancellation as provided in Section 2.13, for all
purposes of this Indenture such Security shall be deemed never to have been
authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Issuer to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or agent
for service of notices and demands. The Issuer agrees to pay to any
authenticating agent compensation for its services hereunder.
SECTION 2.06. Registrar and Paying Agent. The Issuer shall
maintain an office or agency where Securities, or Securities of a particular
series, may be presented for registration of transfer or for exchange (the
"Registrar") and an office or agency where Securities, or Securities of such
series, may be presented for payment (the "Paying Agent"). The Registrar shall
keep a register (herein sometimes referred to as the "Security Register") of the
Securities, or Securities of a particular series, and of their transfer and
exchange. There shall be only one Security Register for each series of
Securities. The Issuer may have one or more co-registrars and one or more
additional paying agents. The term "Paying Agent" shall include any additional
paying agent.
The Issuer shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this Indenture,
which shall incorporate the terms of the TIA. The agreement shall implement the
provisions of
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this Indenture that relate to such agent. The Issuer shall notify the Trustee of
the name and address of any such agent. If the Issuer fails to maintain a
Registrar or Paying Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 7.07. The Issuer or any
of its domestically incorporated Wholly Owned Subsidiaries may act as Paying
Agent, Registrar, co-registrar or transfer agent.
The Issuer hereby initially appoints the Trustee as Registrar
and Paying Agent in connection with the Securities.
SECTION 2.07. Paying Agent To Hold Money in Trust. On or prior
to each due date of the Principal and interest on any Security of any series,
the Issuer shall deposit with the Paying Agent a sum sufficient to pay such
Principal and interest when so becoming due. The Issuer shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying Agent
shall hold in trust for the benefit of Holders or the Trustee all money held by
the Paying Agent for the payment of Principal of or interest on the Securities
of such series and shall notify the Trustee of any default by the Issuer in
making any such payment. If the Issuer or a Subsidiary acts as Paying Agent, it
shall segregate the money held by it as Paying Agent and hold it as a separate
trust fund. The Issuer at any time may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed by the Paying
Agent. Upon complying with this Section, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION 2.08. Holder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Holders of Securities of each series. If the
Trustee is not the Registrar with respect to any series, the Issuer shall
furnish to the Trustee, in writing at least five Business Days before each
Interest Payment Date for such series and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Holders of Securities of such
series.
SECTION 2.09. Transfer and Exchange. Upon surrender for
registration of transfer of any Security of any series to the Registrar or a
co-registrar, the Issuer shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of such series of any authorized denominations, of a like
aggregate principal amount and Stated Maturity and of like tenor and terms. When
any Security of any series is presented to the Registrar or a co-registrar with
a request to register a transfer, the Registrar shall register the transfer as
requested if the requirements of Section 8-401(1) of the Uniform Commercial Code
(or any successor provisions, as applicable) are met.
At the option of the Holder, Securities of any series may be
exchanged for other Securities of such series of any authorized denominations,
of a like
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32
aggregate principal amount and Stated Maturity and of like tenor and terms, upon
surrender to the Registrar or a co-registrar of the Securities to be exchanged.
Whenever any Securities are so surrendered for exchange, the Issuer shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Securityholder making the exchange is entitled to receive. When Securities
of any series are presented to the Registrar or a co-registrar with a request to
exchange them, the Registrar shall make the exchange as requested if the
requirements of Section 8-401(1) of the Uniform Commercial Code (or any
successor provisions, as applicable) are met.
Every Security presented or surrendered for registration of
transfer or exchange shall (if so required by the Issuer or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Trustee duly executed, by the Holder thereof
or his attorney duly authorized in writing.
Unless otherwise provided in the Security to be registered for
transfer or exchanged, no service charge shall be made on any Securityholder for
any registration of transfer or exchange of Securities. The Issuer may (unless
otherwise provided in such Security) require payment of a sum sufficient to pay
all taxes, assessments or other governmental charges in connection with any
transfer or exchange pursuant to this Section.
The Issuer shall not be required (i) to issue, register the
transfer of or exchange any Security of any series during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption of Securities of such series selected for redemption and ending at
the close of business on the date of such mailing, or (ii) to register the
transfer of or exchange any Security so selected for redemption in whole or in
part.
Prior to the due presentation for registration of transfer of
any Security, the Issuer, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the Person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of Principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Issuer, the
Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected
by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant
to this Section 2.09 will evidence the same debt and shall be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
None of the Issuer, the Trustee, any agent of the Trustee, any
Paying Agent or the Registrar will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of a
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33
Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
SECTION 2.10. Replacement Securities. If a mutilated Security
is surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Issuer shall issue
and the Trustee shall authenticate a replacement Security of like tenor, series,
Stated Maturity and principal amount if the requirements of Section 8-405 of the
Uniform Commercial Code (or any successor provisions, as applicable) are met and
the Holder satisfies any other reasonable requirements of the Trustee. If
required by the Trustee or the Issuer, such Holder shall furnish an indemnity
bond sufficient in the judgment of the Issuer and the Trustee to protect the
Issuer, the Trustee, the Paying Agent, the Registrar and any co-registrar from
any loss which any of them may suffer if a Security is replaced. The Issuer and
the Trustee may charge the Holder for their expenses in replacing a Security.
In case any such mutilated, destroyed, lost or stolen Security
has become due and payable, the Issuer, in its discretion, may, instead of
issuing a new Security, pay such Security.
Every new Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities of the same series duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.11. Outstanding Securities. Securities outstanding
("Outstanding") at any time are all Securities authenticated and delivered by
the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section as not Outstanding. A Security
does not cease to be Outstanding because the Issuer or an Affiliate of the
Issuer holds the Security.
If a Security is paid or replaced pursuant to Section 2.10, it
shall cease to be Outstanding unless the Trustee and the Issuer receive proof
satisfactory to them that the replaced Security is held by a bona fide
purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all Principal and interest payable on that date with respect
to the Securities of a particular series (or portions thereof) to be redeemed or
maturing, as the case may be, then on
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34
and after that date such Securities of such series (or portions thereof) cease
to be Outstanding and interest on them ceases to accrue.
SECTION 2.12. Temporary Securities. Until definitive
Securities of any series are ready for delivery, the Issuer may execute and upon
receipt of the documents required by Section 2.05, together with an Issuer
Order, the Trustee shall authenticate and deliver temporary Securities.
Temporary Securities shall be substantially in the form of definitive Securities
but may have variations that the Issuer considers appropriate for temporary
Securities. Without unreasonable delay, the Issuer shall execute and the Trustee
shall authenticate definitive Securities of such series and deliver them in
exchange for temporary Securities upon surrender of such temporary Securities of
such series at the office or agency of the Issuer, without charge to the Holder.
SECTION 2.13. Cancellation. The Issuer at any time may deliver
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver such canceled Securities to the Issuer upon the
Issuer's written request. The Issuer may not Issue new Securities to replace
Securities it has redeemed, paid or delivered to the Trustee for cancellation
unless otherwise provided with respect to such Securities pursuant to Section
2.03.
SECTION 2.14. Payment of Interest; Defaulted Interest. Unless
otherwise provided with respect to such Security pursuant to Section 2.03,
interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest.
If the Issuer defaults in a payment of interest on the
Securities of any series, the Issuer shall pay defaulted interest (plus interest
on such defaulted interest to the extent lawful) in any lawful manner. The
Issuer may pay the defaulted interest to the Persons who are Holders of the
Securities of such series on a subsequent special record date, which date shall
be at least five Business Days prior to the payment date. The Issuer shall fix
or cause to be fixed any such special record date and payment date, and, at
least 15 days before any such special record date, the Issuer shall mail to each
Holder of Securities of such series a notice that states the special record
date, the payment date and the amount of defaulted interest to be paid.
If any installment of interest the Interest Payment Date for
which is on or prior to the redemption date for any Security called for
redemption pursuant to Article III is not paid or duly provided for on or prior
to the redemption date in
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35
accordance with the foregoing provisions of this Section, such interest shall be
payable as part of the redemption price of such Securities.
Subject to the foregoing provisions of this Section and unless
otherwise provided with respect to any Securities pursuant to Section 2.03, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 2.15. Delayed Issuance of Securities. Notwithstanding
any contrary provision herein, if all Securities of a series are not to be
originally issued at one time, it shall not be necessary for the Issuer to
deliver to the Trustee an Officers' Certificate, Certified Board Resolution,
supplemental indenture, opinion of counsel or Issuer Order otherwise required
pursuant to Sections 2.01(b), 2.03, 2.05 and 10.04 at or prior to the time of
authentication of each Security of such series if such documents are delivered
to the Trustee or its agent at or prior to the authentication upon original
issuance of the first Security of such series to be issued; provided that any
subsequent request by the Issuer to the Trustee to authenticate Securities of
such series upon original issuance shall constitute a representation and
warranty by the Issuer that as of the date of such request, the statements made
in the Officers' Certificate or other certificates delivered pursuant to
Sections 2.01(b) and 10.04 shall be true and correct as if made on such date.
An Issuer Order, Officers' Certificate or Certified Board
Resolution or supplemental indenture delivered by the Issuer to the Trustee in
the circumstances set forth in the preceding paragraph may provide that
Securities which are the subject thereof will be authenticated and delivered by
the Trustee or its agent on original issue from time to time in the aggregate
principal amount, if any, established for such series pursuant to such
procedures acceptable to the Trustee as may be specified from time to time by
Issuer Order upon the telephonic, electronic or written order of Persons
designated in such Issuer Order, Officers' Certificate, supplemental indenture
or Certified Board Resolution (any such telephonic or electronic instructions to
be promptly confirmed in writing by such Persons) and that such Persons are
authorized to determine, consistent with such Issuer Order, Officers'
Certificate, supplemental indenture or Certified Board Resolution, such terms
and conditions of said Securities as are specified in such Issuer Order,
Officers' Certificate, supplemental indenture or Certified Board Resolution.
SECTION 2.16. CUSIP Numbers. The Issuer in issuing Securities
of any series may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the
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36
other identification numbers printed on the Securities, and any such redemption
shall not be affected by any defect in or omission of such numbers.
ARTICLE III
Redemption
SECTION 3.01. Applicability of Article. The Issuer may reserve
the right to redeem and pay before Stated Maturity all or any part of the
Securities of any series, either by optional redemption, sinking or purchase
fund or analogous obligation or otherwise, by provision therefor in the form of
Security for such series established and approved pursuant to Section 2.01(b)
and on such terms as are specified in such form or in the indenture supplemental
hereto with respect to Securities of such series as provided in Section 2.03.
Redemption of Securities of any series shall be made in accordance with the
terms of such Securities and, to the extent that this Article does not conflict
with such terms, the succeeding Sections of this Article.
SECTION 3.02. Election to Redeem; Notices to Trustee. If the
Issuer elects to redeem Securities or is required to redeem Securities, it shall
notify the Trustee in writing of such election, the redemption date, the
Principal amount of Securities and the series to be redeemed and the paragraph
of the Securities of such series pursuant to which the redemption will occur. If
the Issuer is required to redeem any of the Initial Securities the Issuer shall
also notify the Escrow Agent concurrently with its notification of the Trustee.
The Issuer shall give each notice to the Trustee provided for
in this Section at least 60 days before the redemption date, or if the Issuer is
required to redeem Securities, promptly after the occurrence of the event
requiring such redemption, unless the Trustee consents to a shorter period. In
the case of any redemption of Securities (i) prior to the expiration of any
restriction on such redemption provided in the terms of such Securities or
elsewhere in this Indenture, or (ii) pursuant to an election of the Issuer which
is subject to a condition specified in the terms of such Securities, the Issuer
shall furnish the Trustee with an Officers' Certificate evidencing compliance
with such restriction or condition. If fewer than all the Securities of any
series are to be redeemed, the record date relating to such redemption for
determining the Holders to whom notice of redemption will be sent pursuant to
Section 3.04 shall be selected by the Issuer and given to the Trustee, which
record date shall be not less than 15 days after the date of notice to the
Trustee unless the Trustee consents to a shorter period.
SECTION 3.03. Selection of Securities To Be Redeemed. If less
than all the Securities of any series issued on the same day with the same terms
are to be redeemed, the particular Securities to be redeemed shall be selected
not more than
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37
60 days prior to the redemption date by the Trustee, from the Outstanding
Securities of such series issued on such date with the same terms not previously
called for redemption pro rata, by lot, or by such other method as the Trustee
shall deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to the minimum authorized denomination for
Securities of that series or any integral multiple thereof) of the principal
amount of Securities of such series of a denomination larger than the minimum
authorization denomination for Securities of that series.
The Trustee shall promptly notify the Company and the Security
Registrar (if other than itself) in writing of the Securities selected for
redemption and, in the case of any Securities selected for partial redemption,
the principal amount thereof to be redeemed.
Securities shall be excluded from eligibility for selection
for redemption if they are identified by registration and certificate number in
a written statement signed by an authorized officer of the Issuer and delivered
to the Trustee at least 60 days prior to the redemption date as being owned of
record and beneficially by, and not pledged or hypothecated by either, (a) the
Issuer or (b) an entity specifically identified in such written statement as
being an Affiliate of the Issuer.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Securities
shall relate, in the case of any Security redeemed or to be redeemed only in
part, to the portion of the Principal amount of such Security which has been or
is to be redeemed.
SECTION 3.04. Notice of Redemption. At least 30 (or such
shorter period if so provided in the supplemental indenture or Certified Board
Resolution establishing the relevant series) days but not more than 60 days
before a date for redemption of Securities, the Issuer shall mail or cause to be
mailed a notice of redemption by first-class mail to each Holder of Securities
to be redeemed at his address appearing in the Security Register.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
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(5) if fewer than all the Outstanding Securities of any series
are to be redeemed, the identification of the particular Securities to
be redeemed as well as the aggregate Principal amount of Securities to
be redeemed and, if any Security is being redeemed in part, the portion
of the Principal amount of such Security to be redeemed and that after
the redemption date and upon surrender of such Security a new Security
or Securities of the same series will be issued having a Principal
amount equal to the Principal amount of the Security surrendered less
the Principal amount of the portion of the Security redeemed;
(6) that, unless the Issuer defaults in making such redemption
payment, interest on the Securities (or portion thereof) called for
redemption ceases to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the
Securities called for redemption are being redeemed;
(8) the CUSIP number, if any, printed on the Securities being
redeemed; and
(9) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Securities.
At the Issuer's request, the Trustee shall give the notice of
redemption in the Issuer's name and at the Issuer's expense. In such event, the
Issuer shall provide the Trustee with the information required by this Section.
SECTION 3.05. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice and from
and after such date (unless the Issuer shall default in the payment of all or
part of the redemption price) cease to bear interest. Upon surrender to the
Paying Agent, such Securities shall be paid at the redemption price stated in
the notice, plus accrued and unpaid interest, if any, to the redemption date.
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
SECTION 3.06. Deposit of Redemption Price. On or prior to the
redemption date, the Issuer shall deposit with the Paying Agent (or, if the
Issuer or a Subsidiary is the Paying Agent, shall segregate and hold in trust)
money sufficient to pay the redemption price of and accrued and unpaid interest
on all Securities to be redeemed on the redemption date, other than Securities
or portions of Securities called for redemption which have been delivered by the
Issuer to the Trustee for cancellation.
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SECTION 3.07. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part (with, if the Issuer and the Trustee so
requires, due endorsement by, or a written instrument of transfer in the form
satisfactory to the Issuer and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing), the Issuer shall execute and the
Trustee shall authenticate and deliver to the Holder (at the Issuer's expense) a
new Security or Securities of the same series of any authorized denomination as
requested by such Holder in aggregate Principal amount equal to the Principal
amount of the Security surrendered less the Principal amount of the portion of
the Security so redeemed.
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities. With respect to each
series of Securities, the Issuer shall promptly pay the Principal of and
interest on such Securities on the dates and in the manner provided in such
Securities and in this Indenture. Principal and interest shall be considered
paid on the date due if on such date the Trustee or the Paying Agent holds in
accordance with this Indenture money sufficient to pay all Principal and
interest then due. The Issuer shall pay interest on overdue Principal and, to
the extent lawful, interest on overdue installments of interest, at the rate
specified therefor in the Securities.
SECTION 4.02. SEC Reports. Notwithstanding that Holdings may
not be required to be subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, Holdings shall file or cause to be filed with the SEC
and provide the Trustee and Holders with the information, documents and other
reports (or copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) specified in Sections 13 and 15(d) of the
Exchange Act. The Issuer also shall comply with the other provisions of TIA ss.
314(a).
SECTION 4.03. Limitation on Debt. Escrow Corp. shall not Issue
any Debt other than the Initial Securities or any Escrow Debt. Holdings will not
Issue any Debt and Holdings will not permit any Subsidiary to Issue any Debt;
provided, however, that the foregoing shall not prohibit the Issuance of the
following Debt:
(a) the Initial Securities and Exchange Securities;
(b) Debt of Holdings if, immediately after giving effect to
any such Issuance, the aggregate principal amount of Debt (including the
aggregate accreted value as of such date of any Debt Issued at a discount) of
Holdings outstanding would not exceed an amount equal to the Adjusted
Consolidated Net Worth of Holdings;
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(c) Subordinated Obligations of Holdings if, immediately after
giving effect to any such Issuance, the Fixed Charge Coverage Ratio would be
greater than 3.00 to 1.00; provided, however, that the Subordinated Obligations
so Issued (A) shall not mature prior to the Stated Maturity of all the
Securities outstanding on the date of such Issuance and (B) shall have an
Average Life to their Stated Maturity equal to or greater than the remaining
Average Life to the Stated Maturity of such Securities;
(d) Permitted Refinancing Debt Issued by Holdings to Refinance
Debt Issued pursuant to the foregoing clauses (a), (b) and (c) and clause (i)
below;
(e) any Debt of any Subsidiary of Holdings that is a
Depository Institution or a Subsidiary of such Depository Institution;
(f) in the case of any Financial Services Subsidiary which is
not a Depository Institution or a Subsidiary of a Depository Institution, (x)
any Debt Issued by such Financial Services Subsidiary in the ordinary course of
funding its assets, (y) any additional Debt of such Financial Services
Subsidiary if, immediately after giving effect to the Issuance of such
additional Debt, the aggregate principal amount of Debt (including the aggregate
accreted value as of such date of any Debt Issued at a discount) of such
Financial Services Subsidiary outstanding (other than any Debt described in
clause (x) above) would not exceed an amount equal to the product of 2.0 and the
Adjusted Consolidated Net Worth of such Financial Services Subsidiary, and (z)
any Permitted Refinancing Debt Issued by Holdings, such Subsidiary or a
Subsidiary thereof to Refinance any Debt Issued pursuant to clause (y) above;
(g) Debt of Holdings in an aggregate principal amount not to
exceed $200 million incurred in connection with the Refinancing Transactions
provided that such Debt shall not mature after December 31, 1999;
(h) Debt of a Subsidiary of Holdings Issued and outstanding on
or prior to the date on which such Subsidiary was acquired by Holdings (other
than Debt Issued as consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became a Subsidiary of
Holdings or was acquired by Holdings) and any Permitted Refinancing Debt Issued
by Holdings, such Subsidiary or a Subsidiary thereof to Refinance such Debt;
(i) FNH Notes assumed by Holdings in connection with the
Transactions; or
(j) Permitted Acquisition Debt of Holdings in an aggregate
amount at any time outstanding not in excess of $300 million.
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41
SECTION 4.04. Limitation on Restricted Payments.
(a) Escrow Corp. shall not, directly or indirectly, make any
Restricted Payment; provided that Escrow Corp. may make Restricted Payments
following a mandatory redemption of all of the Initial Securities pursuant to
the terms thereof. Holdings shall not, and shall not permit any of its
Subsidiaries, directly or indirectly, to, make any Restricted Payment if, at the
time of the making of such Restricted Payment, and after giving effect thereto:
(1) a Default shall have occurred and be continuing (or would
result therefrom); or
(2) the Bank does not qualify as "well capitalized" under
Section 28 of the FDIA (or any successor provision) and the regulations
of the Office of Thrift Supervision ("OTS") thereunder; or
(3) the Consolidated Common Shareholders' Equity of the Bank
as of the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment would have been less than
the Minimum Common Equity Amount as of the end of such fiscal quarter;
or
(4) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made from and after July 1, 1998
would exceed the sum of (without duplication):
(i) 75% (or, in the case of that portion of
Consolidated Net Income of Holdings which is attributable to
the Litigations, 100%) of Holdings' aggregate Consolidated Net
Income (or, if such aggregate Consolidated Net Income is a
deficit, minus 100% of such deficit) since July 1, 1998 to the
end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment;
(ii) the aggregate Net Cash Proceeds from sales of
Capital Stock of Holdings (other than Redeemable Stock or
Exchangeable Stock) or cash capital contributions made to
Holdings and any earnings or proceeds thereof to the extent
invested in Temporary Cash Investments, to the extent
received, made or realized on or after the Issue Date (other
than an issuance or sale to a Subsidiary of Holdings);
(iii) the amount by which Debt of Holdings is reduced
on Holdings' balance sheet on or after the Issue Date upon the
conversion or exchange (other than by a Subsidiary of
Holdings) of Debt of Holdings into Capital Stock (other than
Redeemable Stock or Exchangeable Stock) of Holdings (less the
amount of any cash or other
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42
property distributed by Holdings or any Subsidiary of Holdings
upon such conversion or exchange); and
(iv) $320,000,000.
(b) Section 4.04(a) shall not prohibit the following (none of
which shall be included in the calculation of the amount of Restricted Payments,
except to the extent expressly provided in clause (i) below):
(i) dividends paid within 60 days after the date of
declaration thereof, or Restricted Payments made within 60 days after
the making of a binding commitment in respect thereof, if at such date
of declaration or commitment such dividend or other Restricted Payment
would have complied with this Section; provided, however, that, at the
time of payment of such dividend or the making of such Restricted
Payment, no other Default shall have occurred and be continuing (or
would result therefrom); provided further, however, that such dividend
or other Restricted Payment shall be included in the calculation of the
amount of Restricted Payments;
(ii) dividends on, or any purchase, redemption or other
acquisition or retirement for value of, the Bank Preferred Stock or
Qualified Preferred Stock;
(iii) any purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value of Capital Stock or
Subordinated Obligations by exchange for or out of the proceeds from
the substantially concurrent sale of Capital Stock or of a cash capital
contribution; provided, however, that the Net Cash Proceeds from such
sale or such capital contribution, to the extent they are used to
purchase, repurchase, redeem, defease, acquire or retire for value
Capital Stock or Subordinated Obligations, shall be excluded from
Section 4.04(a)(4)(ii);
(iv) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations by
exchange for or out of the proceeds from the substantially concurrent
sale of Subordinated Obligations permitted to be issued under Section
4.03;
(v) any purchase or repurchase of any Subordinated Obligations
pursuant to an option given to a holder of such Subordinated
Obligations pursuant to a "change of control" covenant which is no more
favorable to the holders of such Subordinated Obligations than the
provisions of Section 4.06 are to holders of the Securities as
determined in good faith by the Board of Directors of Holdings, the
determination of which shall be evidenced by a resolution adopted by
such Board of Directors; provided, however, that no such purchase shall
be permitted prior to the time when Holdings shall have
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43
purchased all Securities tendered for purchase by holders electing to
have their Securities purchased pursuant to Section 4.06;
(vi) so long as no Default has occurred and is continuing,
amounts paid to Parent, to the extent necessary to enable Parent to pay
actual expenses, other than those paid to Affiliates of Holdings,
incidental to being a publicly reporting, but non-operating, company;
or
(vii) any Restricted Payments to the extent necessary to
consummate the Transactions or to redeem or purchase any Bank Preferred
Stock or FNH Notes not purchased in connection with the Transactions or
to the extent resulting from the Transactions.
(c) Holdings or any Subsidiary of Holdings may take actions to
make a Restricted Payment in anticipation of the occurrence of any of the events
described in Sections 4.04(a) or (b); provided, however, that the making of such
Restricted Payment shall be conditioned upon the occurrence of such event.
SECTION 4.05. Limitation on Transactions with Affiliates.
(a) Escrow Corp. shall not conduct any business or enter into
any transaction or series of similar transactions (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of Escrow Corp. or any Affiliated Permitted Holder, except to the
extent necessary to consummate the Transactions.
(b) Holdings shall not, and shall not permit any of its
Subsidiaries to, conduct any business or enter into any transaction or series of
similar transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate of Holdings or any
Affiliated Permitted Holder unless:
(i) the terms of such business, transaction or series of
transactions are (A) set forth in writing and (B) at least as favorable
to Holdings or such Subsidiary as terms that would be obtainable at the
time for a comparable transaction or series of similar transactions in
arm's-length dealings with an unrelated third Person; and
(ii) to the extent that such business, transaction or series
of transactions is known by the Board of Directors of Holdings or such
Subsidiary to involve an Affiliate of Holdings or any Affiliated
Permitted Holder, then:
(A) with respect to a transaction or series of
related transactions involving aggregate payments or other
consideration in excess of $5,000,000, such transaction or
series of related transactions has been
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44
approved (and the value of any non-cash consideration has been
determined) by a majority of those members of the Board of
Directors of Holdings or such Subsidiary having no personal
stake in such business, transaction or series of transactions;
and
(B) with respect to a transaction or series of
related transactions involving aggregate payments or other
consideration in excess of $75,000,000 (with the value of any
non-cash consideration being determined by a majority of those
members of the Board of Directors of Holdings or such
Subsidiary having no personal stake in such business,
transaction or series of transactions), such transaction or
series of related transactions has been determined, in the
written opinion of a nationally recognized investment banking
firm, to be fair, from a financial point of view, to Holdings
or such Subsidiary.
(c) The provisions of Section 4.05(b) shall not prohibit:
(i) any Restricted Payment permitted to be paid pursuant to
Section 4.04;
(ii) any transaction between Holdings and any of its
Subsidiaries or between Subsidiaries of Holdings; provided, however,
that no portion of any minority interest in any such Subsidiary is
owned by any Affiliate of Holdings or any Affiliated Permitted Holder
(in each case, other than a Wholly Owned Subsidiary, an Unrestricted
Affiliate or a Permitted Affiliate);
(iii) transactions pursuant to which Mafco Holdings will
provide Holdings and its Subsidiaries at the request of Holdings with
certain allocated services to be purchased from third party providers,
such as legal and accounting services, insurance coverage and other
services;
(iv) any transaction with a Permitted Affiliate entered into
in the ordinary course of business (including compensation or employee
benefit arrangements with any such Permitted Affiliate); provided,
however, that such Permitted Affiliate holds, directly or indirectly,
no more than 5% of the outstanding Capital Stock of Holdings;
(v) any transaction pursuant to the Tax Sharing Agreement;
(vi) any transaction with an Unrestricted Affiliate; and
(vii) any transactions pursuant to the Escrow Corp. Merger
Agreement or otherwise necessary to consummate the Transactions.
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45
SECTION 4.06. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder of Securities of each series with respect to
which this Section 4.06 is applicable shall have the right to require that the
Issuer repurchase all or any part of such Holder's Securities at a repurchase
price in cash equal to 101% of the Principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that notwithstanding the
occurrence of a Change in Control, the Issuer shall not be obligated to purchase
the Securities of any series pursuant to this Section 4.06 in the event that it
has exercised any right it may have to redeem all the Securities of such series
pursuant to the terms thereof.
(b) Within 45 days following any Change of Control, the Issuer
shall mail a notice to each Holder of Securities of each such series (other than
any series with respect to which the Issuer has mailed a notice of redemption)
with a copy to the Trustee stating:
(i) that a Change of Control has occurred and that such Holder
has the right to require the Issuer to repurchase all or any part of
such Holder's Securities of such series at a purchase price in cash
equal to 101% of the Principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of
Holders of record on the relevant record date to receive interest due
on the relevant interest payment date);
(ii) the circumstances and relevant facts regarding such
Change of Control;
(iii) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(iv) the instructions, determined by the Issuer consistent
with this Section, that a Holder must follow in order to have its
Securities repurchased.
(c) Holders electing to have a Security repurchased will be
required to surrender the Security, with an appropriate form duly completed, to
the Issuer at the address specified in the notice at least 10 Business Days
prior to the repurchase date. Holders will be entitled to withdraw their
election if the Trustee or the Issuer receives not later than three Business
Days prior to the repurchase date, a facsimile transmission or letter setting
forth the name of the Holder, the Principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the repurchase date, all Securities repurchased by the
Issuer under this Section shall be delivered to the Trustee for cancellation,
and the Issuer shall pay the repurchase price to the Holders entitled thereto.
Upon surrender of a
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46
Security that is repurchased under this Section in part, the Issuer shall
execute and the Trustee shall authenticate for the Holder thereof (at the
Issuer's expense) a new Security of the same series having a Principal amount
equal to the Principal amount of the Security surrendered less the portion of
the Principal amount of the Security repurchased.
(e) The Issuer shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other applicable
securities laws or regulations in connection with the repurchase of Securities
pursuant to this Section. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this Section, the Issuer shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligation under this Section by virtue thereof.
SECTION 4.07. Limitation on Other Business Activities of
Escrow Corp. Prior to the Escrow Corp. Merger, Escrow Corp. shall not engage in
any trade or business other than the original issuance of the Initial Securities
under this Indenture and any such activities as are specifically required
pursuant to this Indenture, such Securities, the Escrow Agreement, the
Registration Agreement referred to in the supplemental indentures pursuant to
which the Initial Securities were Issued, and the Escrow Corp. Merger Agreement
and any activities directly related thereto and will not own any Investment
(other than Temporary Cash Investments) in any other Person.
SECTION 4.08. Limitations on Restrictions on Distributions by
Subsidiaries. Holdings shall not, and shall not permit any Subsidiary of
Holdings to, suffer to exist any consensual encumbrance or restriction on the
ability of any Subsidiary of Holdings (i) to pay, directly or indirectly,
dividends or make any other distributions in respect of its Capital Stock or to
pay any Debt owed to Holdings; (ii) to make loans or advances to Holdings; or
(iii) to transfer any of its property or assets to Holdings, except, in any such
case, any encumbrance or restrictions:
(a) pursuant to any agreement in effect or entered into on the
Issue Date or in connection with the Transactions;
(b) pursuant to an agreement in effect or entered into by such
Subsidiary prior to the date on which such Subsidiary was acquired by Holdings
(other than an agreement in respect of Debt Issued as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by Holdings and other than
any agreement entered into in anticipation of the acquisition of such Subsidiary
by Holdings) and outstanding on such date;
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47
(c) pursuant to an agreement effecting a Refinancing of Debt
or Preferred Stock Issued pursuant to an agreement referred to in clause (a) or
(b) above or this clause (c) or contained in any amendment to an agreement
referred to in clauses (a) and (b) or this clause (c); provided, however, that
the provisions contained in such Refinancing agreement or in such amendment
relating to such encumbrance or restriction are no more restrictive than the
provisions contained in the agreement which is the subject of such Refinancing
or amendment, as determined in good faith by the Board of Directors of Holdings
and evidenced by a resolution adopted by such Board;
(d) any encumbrance or restriction (A) that restricts in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of Holdings or any Subsidiary of
Holdings not otherwise prohibited by this Indenture or (C) arising or agreed to
in the ordinary course of business and that does not, individually or in the
aggregate, detract from the value of property or assets of Holdings or any
Subsidiary of Holdings in any manner material to Holdings or such Subsidiary;
(e) restrictions contained in security agreements securing
Debt of Holdings or any Subsidiary of Holdings to the extent such restrictions
restrict the transfer of the collateral covered by such security agreements or,
upon default, restrict the payment of dividends or distributions on Capital
Stock, and restrictions contained in agreements relating to a disposition of
property or Capital Stock of any Subsidiary, to the extent such restrictions
restrict the transfer of the property or Capital Stock subject to such
agreements;
(f) any encumbrance or restriction relating to a Financial
Services Subsidiary contained in an agreement providing for or relating to the
Issuance of Debt by such Subsidiary pursuant to Section 4.03(f);
(g) any encumbrance or restriction imposed by, or otherwise
agreed to with, any governmental agency having regulatory supervision over the
Bank or any other Subsidiary of Holdings; and
(h) pursuant to the terms of any Qualified Preferred Stock
issued after the Issue Date.
SECTION 4.09. Limitation on Liens. Escrow Corp. shall not
create or permit to exist any Lien on any of its property or assets, whether
owned on the date of this Indenture or thereafter acquired, securing any
obligations of Escrow Corp. except to the extent provided in the Escrow
Agreement. Holdings shall not create or permit to exist any Lien on any of its
property or assets (including Capital Stock), whether owned on the date of this
Indenture or thereafter acquired, securing
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48
any Debt of Holdings without making effective provision to secure the Securities
then outstanding (and, if the Issuer so elects, any other Debt ranking pari
passu with such Securities) equally and ratably with or prior to such Debt with
a Lien on the assets securing such Debt for so long as such Debt is secured by
such Lien.
SECTION 4.10. Limitation on Sale of Capital Stock of, and
Merger or Sale of Assets by, the Bank. (a) Except in the case of the
Transactions, Holdings shall not, and shall not permit the Bank to, issue, sell,
transfer, assign or otherwise dispose of any shares of Voting Stock or Common
Stock of the Bank, or any securities convertible into or exchangeable for shares
of Voting Stock or Common Stock of the Bank, unless after giving effect to such
transaction and to shares issuable upon conversion or exchange of outstanding
securities convertible into or exchangeable for shares of such Voting Stock or
Common Stock (including such securities, if any, which may be the subject of
such transaction) at least 80% of the Voting Stock and Common Stock of the Bank
will be owned at that time by Holdings or a person who expressly assumes by
supplemental indenture all the obligations of the Issuer under this Indenture
and the Securities ("New Holding Company") or any Wholly Owned Subsidiary of
Holdings or of a New Holding Company.
(b) Except in the case of the Transactions, Holdings shall not
permit the Bank to merge or consolidate or convey or transfer all or
substantially all its assets unless at least 80% of the Voting Stock and Common
Stock (after giving effect to such transaction and to shares issuable upon
conversion or exchange of outstanding securities convertible into or
exchangeable for shares of such Voting Stock or Common Stock, including such
securities, if any, which may be issued in such transaction) of the resulting or
surviving corporation in the case of a merger or consolidation or of the
transferee corporation in the case of a conveyance or transfer will be owned at
that time by Holdings or a New Holding Company or any Wholly Owned Subsidiary of
Holdings or of a New Holding Company.
(c) For purposes of Section 4.10(b) the phrase "convey or
transfer all or substantially all its assets" in respect of the Bank means to
convey or transfer in a single transaction or in a series of related
transactions, in either case occurring outside the ordinary course of business,
more than 75% of the assets and 75% of the deposit liabilities of the Bank in
each case as shown on a consolidated balance sheet of the Bank as of the end of
the most recent fiscal quarter ending at least 45 days prior to such transaction
(or the first transaction in any such related series of transactions); provided,
however, that in the case of such a conveyance or transfer, if Holdings at any
time holds any assets other than (1) the Capital Stock of the Bank, (2)
Temporary Cash Investments and (3) Permitted Investments described in clause
(ii) of the definition thereof, such other assets shall be deemed to be assets
of the Bank and to have been reflected on such consolidated balance sheet.
(d) Notwithstanding the foregoing, Holdings may engage in a
transaction otherwise prohibited by Section 4.10(a) or (b) if prior to any such
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49
transaction the Bank unconditionally guarantees payment when due of the
principal of, premium, if any, and interest on the Securities of each series,
the Bank obtains all regulatory approvals, if any, required to permit such
guarantee, and the Bank obtains an Opinion of Counsel as to the enforceability
of such guarantee.
(e) After consummation of any transaction permitted by Section
4.10(b), the term "Bank" when used in this Indenture and the Securities shall
mean the resulting, surviving or transferee person in such transaction and not
any other entity which previously had been covered by such term. After
consummation of any transaction permitted by Section 4.10(a) or (b) involving a
New Holding Company in which the requirements of Section 5.01(a) are satisfied
with respect to such New Holding Company as if it were the transferee
corporation referred to in Section 5.01(a), the term "Holdings" when used in
this Indenture and the Securities shall mean the New Holding Company in such
transaction and not any other entity which previously had been covered by such
term, and the New Holding Company will be the successor company and will succeed
to, and be substituted for, and may exercise every right and power of, the
Issuer under this Indenture, and thereafter the Issuer will be discharged from
all obligations and covenants under this Indenture and the Securities.
SECTION 4.11. Maintenance of Status of the Bank as an Insured
Depository Institution; Capital Maintenance. (a) Holdings will do or cause to be
done all things necessary to preserve and keep in full force and effect the
status of the Bank as an insured depository institution and do all things
necessary to ensure that deposits of the Bank are insured by the Federal Deposit
Insurance Corporation or any successor organization up to the maximum amount
permitted by 12 U.S.C. ss. 1811 et seq. and the regulations thereunder or any
succeeding federal law, except as to individual accounts or interests in
employee benefit plans that are not entitled to "pass-through" insurance under
12 U.S.C. ss. 1821(a)(1)(D).
(b) Holdings shall cause the Bank to maintain or exceed the
status of an "adequately capitalized" institution as defined in the FDIA and OTS
regulations.
SECTION 4.12. Compliance Certificates. (a) The Issuer shall
deliver to the Trustee within 120 days after the end of each fiscal year of the
Issuer, commencing with the fiscal year ended December 31, 1998, an Officers'
Certificate stating that in the course of the performance by the signers of
their duties as Officers of the Issuer they would normally have knowledge of any
Default by the Issuer and whether or not the signers know of any Default or
Event of Default that occurred during such period. If they do, the certificate
shall describe the Default, its status and what action the Issuer is taking or
proposes to take with respect thereto. The Issuer also shall comply with TIA ss.
314(a)(4).
(b) The Issuer shall deliver to the Trustee, as soon as
possible and in any event within 30 days after the Officers of the Issuer become
aware of the
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50
occurrence of a Default or Event of Default, an Officers' Certificate setting
forth the details of such Default or Event of Default and the action that the
Issuer proposes to take with respect thereto.
SECTION 4.13. Applicability of Article IV; Investment Grade
Covenant Changes. Except as provided in the next sentence and except as
otherwise provided with respect to any series of Securities in the supplemental
indenture or Certified Board Resolution pursuant to which such series is Issued,
all of the covenants set forth in this Article IV shall be applicable to all
series of Securities. If at any time the Securities of any series are rated
Investment Grade, at the election of the Issuer, each of Sections 4.03, 4.04,
4.07 and 4.08 shall be of no further force and effect in respect of such series
and shall cease to apply to the Issuer, Holdings and, if applicable, its
Subsidiaries in respect of such series.
SECTION 4.14. Waiver of Certain Covenants. The Issuer may omit
in respect of any series of Securities, in any particular instance, to comply
with any covenant or condition set forth in this Article IV (other than Section
4.01) or set forth in a Certified Board Resolution or supplemental indenture
with respect to the Securities of such series, unless otherwise specified in
such Certified Board Resolution or supplemental indenture, if before or after
the time for such compliance the Holders of not less than a majority in
Principal amount of the Outstanding Securities of each series affected by such
waiver shall either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Issuer and
the duties of the Trustee in respect of any such covenant or condition shall
remain in full force and effect. Nothing in this Section 4.14 shall permit the
waiver of compliance with any covenant or condition set forth in such Certified
Board Resolution or supplemental indenture which, if in the form of an indenture
supplemental hereto, would not be permitted by Section 9.02 without the consent
of the Holder of each Outstanding Security affected thereby.
SECTION 4.15. Further Instruments and Acts. Upon request of
the Trustee, the Issuer will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE V
Successor Company
SECTION 5.01. When Holdings and Escrow Corp. May Merge or
Transfer Assets. (a) Except in the case of the Transactions and except as
otherwise provided with respect to any series of Securities in the supplemental
indenture or
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51
Certified Board Resolution pursuant to which such series is Issued, Holdings
shall not consolidate with or merge with or into, or convey, transfer or lease
all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (if not
Holdings) shall be a Person organized and existing under the laws of
the United States of America, any State thereof or the District of
Columbia and, in the case of any transaction covered by this Section
5.01(a) occurring after the Escrow Corp. Merger in which Holdings is
not the resulting, surviving or transferee Person, such Person shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Issuer under this Indenture and all the Securities;
(ii) immediately after giving effect to such transaction (and
treating any Debt which becomes an obligation of the resulting,
surviving or transferee Person or any of its Subsidiaries as a result
of such transaction as having been Issued by such Person or such
Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing;
(iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee Person shall have a Consolidated Net
Worth in an amount which is not less than the Consolidated Net Worth of
Holdings immediately prior to such transaction; and
(iv) the Issuer shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) complies with this Indenture.
(b) In the case of the Escrow Corp. Merger or any other
transaction covered by Section 5.01(a), the term "Holdings" when used in this
Indenture and the Securities shall mean the resulting, surviving or transferee
Person in such transaction and not any other entity which previously had been
covered by such term. In addition, in the case of the Escrow Corp. Merger or any
other transaction covered by Section 5.01(a) occurring after the Escrow Corp.
Merger, the resulting, surviving or transferee Person shall be the successor
company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Issuer under this Indenture, and thereafter, except in
the case of a lease, the Issuer shall be discharged from all obligations and
covenants under this Indenture and the Securities.
(c) Escrow Corp. shall not consolidate with or merge with or
into, or convey, transfer or lease any of its assets to, any Person, other than
in connection with the Escrow Corp. Merger pursuant to the Escrow Corp. Merger
Agreement. After the consummation of the Escrow Corp. Merger and upon execution
and delivery by Holdings to the Trustee of an indenture supplemental hereto
pursuant to which
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52
Holdings shall expressly assume all the obligations of the Issuer under this
Indenture and the Securities, Holdings will succeed to, and be substituted for,
and will exercise every right and power of the Issuer hereunder.
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default" with
respect to any series of Securities occurs (unless such event is either
inapplicable to a particular series or it is specifically deleted or modified in
or pursuant to the supplemental indenture or Certified Board Resolution creating
such series of Securities or in the form of Security for such series) if:
(1) the Issuer (i) defaults in the payment of the Principal of
any Security of that series when the same becomes due and payable at its Stated
Maturity, upon redemption, upon required purchase, upon declaration or
otherwise, (ii) defaults in any payment of interest on any Security of that
series when the same becomes due and payable and such default continues for a
period of 30 days or (iii) fails to purchase or redeem Securities of that series
when required pursuant to this Indenture or such Securities;
(2) the Issuer fails to comply with Section 5.01;
(3) the Issuer, Holdings or Holdings' Subsidiaries defaults in
the performance of, or breaches, any of Sections 4.02, 4.03, 4.04, 4.05, 4.06
(other than a failure to purchase the Securities), 4.07, 4.08, 4.09, 4.10 and
4.11, as applicable in this Indenture in respect of the Securities of such
series (all of such Sections which are not expressly stated to be for the
benefit of a particular series of Securities being deemed to be in respect of
the Securities of all series for this purpose), and in any such case such
default or breach continues for 30 days after the notice specified below;
(4) the Issuer or Holdings fails to comply with any of its
agreements in this Indenture in respect of the Securities of such series, other
than those referred to in (1), (2) or (3) above (all of such agreements in this
Indenture which are not expressly stated to be for the benefit of a particular
series of Securities being deemed in respect of the Securities of all series for
this purpose), and in any such case such failure continues for 60 days after the
notice specified below;
(5) Debt of the Issuer, Holdings or any Significant Subsidiary
of Holdings is not paid within any applicable grace period after final maturity
or is accelerated by the holders thereof because of a default and the total
principal amount of the portion of such Debt that is unpaid or accelerated
exceeds $25,000,000 or its
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53
foreign currency equivalent and such default continues for five days after the
notice specified below;
(6) Any of the Issuer, Holdings or any Significant Subsidiary
of Holdings, pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property;
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(7) a court of competent jurisdiction shall enter an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Issuer, Holdings or any
Significant Subsidiary of Holdings in an involuntary case;
(B) appoints a Custodian of the Issuer, Holdings or
any Significant Subsidiary of Holdings or for any substantial
part of its property; or
(C) orders the winding up or liquidation of the
Issuer, Holdings or any Significant Subsidiary of Holdings;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days; or
(8) any judgment or decree for the payment of money in excess
of $25,000,000 is entered against the Issuer, Holdings or any Significant
Subsidiary of Holdings and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or decree or
(B) there is a period of 60 days following the entry of such judgment or decree
during which such judgment or decree is not discharged, waived or the execution
thereof stayed, and, in the case of (B), such default continues for 10 days
after the notice specified below; or
(9) any other Event of Default provided in the supplemental
indenture or Certified Board Resolution under which such series of Securities is
issued or in the form of Security for such series.
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The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
The term "Bankruptcy Law" means Title 11, United States Code,
or any similar Federal or state law for the relief of debtors or, with respect
to any Depository Institution, Sections 11-13 of the Federal Deposit Insurance
Act, 12 U.S.C. ss.ss. 1821-23, or any similar Federal or state law relating to
conservatorships or receiverships of Depository Institutions. The term
"Custodian" means any receiver, conservator, trustee, assignee, liquidator,
custodian or similar official under any Bankruptcy Law.
A Default under clause (3), (4), (5) or (8)(B) is not an Event
of Default with respect to a series of Securities until the Trustee or the
Holders of at least 25% in Principal amount of the Outstanding Securities of
such series notify the Issuer of the Default and the Issuer does not cure such
Default within the time specified after receipt of such Notice. Such Notice must
specify the Default and the series with respect to which such Default relates,
demand that it be remedied and state that such notice is a "Notice of Default"
hereunder with respect to such series.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(6) or (7) with respect to the
Issuer) occurs and is continuing with respect to any series of Securities, then
in each and every such case, unless the Principal of all of the Securities of
such series shall have already become due and payable, either the Trustee by
notice to the Issuer or the Holders of at least 25% in Principal amount of the
Securities of such series then Outstanding hereunder (each such series acting as
a separate class) by notice to the Issuer (and the Trustee if given by Holders)
may declare the Principal amount (or, if the Securities of such series are
Original Issue Discount Securities, such portion of the Principal amount as may
be specified in the terms of that series) of all the Securities of such series
and all accrued interest thereon as of the date of such declaration
(collectively, the "Default Amount") to be due and payable immediately, and upon
any such declaration the same shall become and shall be immediately due and
payable. If an Event of Default specified in Section 6.01(6) or (7) with respect
to the Issuer occurs, the Default Amount on all the Securities as of the date of
such Event of Default shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in Principal amount of the Securities of a series by
notice to the Trustee may rescind an acceleration with respect to such series
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default with respect to such series of
Securities have been cured or waived except nonpayment of Principal of the
Securities of such series or interest thereon that has become due solely because
of such acceleration. No such rescission shall affect any subsequent Default or
impair any right consequent thereto.
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SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing with respect to any series of Securities, the Trustee may
pursue any available remedy to collect the payment of Principal of or interest
on the Securities of such series or to enforce the performance of any provision
of the Securities of such series or this Indenture.
The Trustee may maintain a proceeding with respect to a series
of Securities even if it does not possess any of the Securities of such series
or does not produce any of them in the proceeding. A delay or omission by the
Trustee or any Holder in exercising any right or remedy accruing upon an Event
of Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. No remedy is exclusive of any other
remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in Principal amount of the Securities of any series by notice to the
Trustee and the Issuer may waive an existing Default and its consequences in
respect of such series, except (i) a Default in the payment of the Principal of
the Securities of such series or interest thereon or (ii) a Default in respect
of a provision that under Section 9.02 cannot be amended without the consent of
each Holder of the Securities of such series affected. When a Default is waived,
it is deemed cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.05. Control by Majority of Securityholders. The
Holders of a majority in Principal amount of the Securities of any series may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee with respect to the Securities of such series or of
exercising any trust or power conferred on the Trustee with respect to the
Securities of such series. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture or, subject to Section 7.01,
that the Trustee determines is unduly prejudicial to the rights of other Holders
of Securities of such series or would involve the Trustee in personal liability;
provided, however, that the Trustee may take any other action deemed proper by
the Trustee that is not inconsistent with such direction. Prior to taking any
action hereunder, the Trustee shall be entitled to indemnification satisfactory
to it in its sole discretion against any loss, liability or expense caused by
taking or not taking such action.
SECTION 6.06. Limitation on Suits. No Holder of any Security
of any series shall have the right to pursue any remedy with respect to this
Indenture or the Securities of such series unless:
(a) such Holder has previously given to the Trustee written
notice stating that an Event of Default with respect to Securities of such
series is continuing;
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(b) the Holders of at least 25% in Principal amount of the
Outstanding Securities of such series shall have made a written request to the
Trustee to pursue the remedy;
(c) such Holder or Holders have offered to the Trustee
reasonable security or indemnity against any loss, liability or expense to be
incurred in compliance with such request;
(d) the Trustee has not complied with such request within 60
days after receipt of the request and the offer of security or indemnity; and
(e) the Holders of a majority in Principal amount of the
Outstanding Securities of such series have not given the Trustee a direction
inconsistent with such request during such 60-day period.
A Holder of Securities of any series may not use this
Indenture to prejudice the rights of another Holder of Securities of such series
or to obtain a preference or priority over another Holder, except in the manner
herein provided and for the equal and proportionate benefit of Holders of all
Securities of such series.
SECTION 6.07. Rights of Holder To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of Principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default in payment of interest or Principal specified in Section 6.01(1) occurs
and is continuing, the Trustee may recover judgment in its own name and as
trustee of an express trust against the Issuer for the whole amount of Principal
and interest remaining unpaid (together with interest on such unpaid interest to
the extent lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may, but shall have no obligation to, file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of the
Trustee and the Holders allowed in any judicial proceedings relative to the
Issuer, its creditors or its property and, unless prohibited by law or
applicable regulations, may, but shall have no obligation to, vote on behalf of
the Holders in any election of a trustee in bankruptcy or other Person
performing similar functions, and any Custodian in any such judicial proceeding
is hereby authorized by each Holder to make payments to the Trustee and, in the
event that the Trustee shall consent to the making of such payments directly to
the Holders, to pay to the Trustee any amount due it for
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the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and its counsel, and any other amounts due the Trustee under
Section 7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
property with respect to a series of Securities pursuant to this Article VI, it
shall pay out the money or property in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Holders for amounts due and unpaid on the
Securities of such series for Principal and interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Securities of such series for Principal and interest, if
any, respectively; and
THIRD: to the Issuer.
The Trustee may fix a record date and payment date for any
payment to Holders of Securities of any series pursuant to this Section. At
least 15 days before such record date, the Issuer shall mail to each Holder of
Securities of such series and the Trustee a notice that states the record date,
the payment date (which shall be not less than one Business Day following the
record date) and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section does not apply
to a suit by the Trustee, a suit by a Holder for the enforcement of the payment
of the Principal of, or interest on, any Security on or after the respective due
dates expressed in such Security or a suit by Holders of more than 10% in
Principal amount of the Outstanding Securities of any series to which the suit
relates.
SECTION 6.12. Waiver of Stay or Extension Laws. The Issuer (to
the extent it may lawfully do so) shall not at any time insist upon, or plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay
or extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Indenture; and the Issuer
(to the extent that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law, and shall not hinder, delay or impede the
execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
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ARTICLE VII
The Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
with respect to any series of Securities has occurred and is continuing, the
Trustee shall exercise with respect to the Securities of such series such of the
rights and powers vested in it by this Indenture, and use the same degree of
care and skill in its exercise, as a prudent man would exercise or use under the
circumstances in the conduct of such man's own affairs.
(b) Except during the continuance of an Event of Default with
respect to any series of Securities:
(i) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture with
respect to the Securities of such series and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the
Trustee may, with respect to Securities of such series, conclusively
rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture.
However, in the case of any such opinions or certificates which by any
provision hereof are specifically required to be furnished to the
Trustee, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
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(d) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Issuer.
(e) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(g) Every provision of this Indenture relating in any way to
the Trustee or its conduct or affecting the liability of or affording protection
to the Trustee shall be subject to the provisions of each paragraph of this
Section and Section 7.02 (unless expressly not applicable) and to the provisions
of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may
conclusively rely on and shall be protected in acting or refraining from acting
in accordance with any document believed by it to be genuine and to have been
signed or presented by the proper Person. The Trustee need not investigate any
fact or matter stated in the document;
(b) before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
the Officers' Certificate or Opinion of Counsel;
(c) the Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care;
(d) the Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers, provided that the Trustee's conduct does not constitute
willful misconduct, negligence or bad faith;
(e) the Trustee may consult with counsel of its selection, and
the advice or opinion of counsel with respect to legal matters relating to this
Indenture and the Securities shall be full and complete authorization and
protection from liability in respect of any action taken, omitted or suffered by
it hereunder in good faith and in accordance with the advice or opinion of such
counsel;
(f) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such Holders
shall have offered to the
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Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in acting in accordance with such
request or direction; and
(g) any request or direction of the Issuer mentioned herein
shall be sufficiently evidenced by an Issuer Request or Issuer Order and any
resolution of the Board of Directors of the Issuer may be sufficiently evidenced
by a Certified Board Resolution.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Issuer or its Affiliates with the same rights it
would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or
co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Issuer's
use of the Securities or of the proceeds from the Securities, and it shall not
be responsible for any statement in this Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default with respect to
Securities of any series occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to all Securityholders of such series, as their
names and addresses appear in the Security Register, notice of the Default
within 90 days after it occurs. Except in the case of a Default in payment of
Principal of or interest, if any, on any Security of any series, the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interests of the
Securityholders of such series.
SECTION 7.06. Reports by Trustee to Holders. The Trustee shall
transmit to Holders by May 15 of each year, commencing May 15, 1999, such
reports concerning the Trustee and its actions under this Indenture as may be
required pursuant to the TIA at the times and in the manner provided pursuant
thereto. The Trustee also shall comply with TIA ss.313(b).
A copy of each report at the time of its mailing to Holders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The Issuer agrees to notify promptly the Trustee whenever
the Securities become listed on any stock exchange and of any delisting thereof.
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SECTION 7.07. Compensation and Indemnity. The Issuer shall pay
to the Trustee from time to time such compensation as shall be agreed to in
writing from time to time by the Issuer and the Trustee for its services. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuer shall reimburse the Trustee upon request
for all reasonable out-of-pocket expenses incurred or made by it, including
costs of collection, in addition to the compensation for its services. Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Trustee's agents, counsel, accountants and experts. The
Issuer shall indemnify each of the Trustee or any predecessor Trustee and each
of the Trustee's agents, officers, directors, employees and stockholders (each
an "indemnitee") against any and all loss, liability, damage, claim or expense
(including attorneys' fees and expenses) incurred by each indemnitee in
connection with the acceptance or administration of this trust and the
performance of its duties hereunder. As security for the performance of the
obligations of the Issuer under this Section the Trustee shall have a lien prior
to the Securities upon all property and funds collected by the Trustee as such,
except funds held in trust for the payment of Principal or interest on any
particular Securities. Each indemnitee shall notify the Issuer promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Issuer shall not relieve the Issuer of its obligations hereunder. The Issuer
shall defend the claim and any or all indemnitees may have separate counsel and
the Issuer shall pay the fees and expenses of any such counsel. The Issuer need
not reimburse any expense or indemnify against any loss, liability or expense
incurred by any indemnitee through its own willful misconduct, negligence or bad
faith.
The Issuer's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(6) or (7) with
respect to the Issuer, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign
with respect to any series of Securities at any time by so notifying the Issuer.
The Holders of a majority in Principal amount of the Securities of any series
may remove the Trustee with respect to that series of Securities by so notifying
the Trustee and may appoint a successor Trustee. The Issuer shall remove the
Trustee with respect to any series or, in the case of clauses (2) and (3) below,
with respect to all series if at any time:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
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(4) the Trustee otherwise becomes incapable of acting with
respect to any series of Securities.
If the Trustee resigns, is removed by the Issuer, is removed
by Holders of a majority in Principal amount of the Securities of any series and
they do not promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee with respect to any series of Securities for any reason (the
Trustee in such event being referred to herein as the retiring Trustee), the
Issuer shall promptly appoint a successor Trustee for that series of Securities.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Issuer. Thereupon the resignation
or removal of the retiring Trustee shall become effective with respect to any
series as to which it is resigning or being removed as Trustee, and the
successor Trustee shall become vested with all the rights, powers and duties of
the Trustee with respect to any such series under this Indenture. The successor
Trustee shall mail a notice of its succession to Holders of Securities of that
series as their names and addresses appear in the Security Register. The
retiring Trustee shall promptly transfer all property held by it as Trustee
hereunder with respect to all or any such series to the successor Trustee,
subject to the lien provided for in Section 7.07.
In case of the appointment hereunder of a successor Trustee
with respect to the Securities of one or more (but not all) series, the Issuer,
the predecessor Trustee and each successor Trustee with respect to the
Securities of any applicable series shall execute and deliver an indenture
supplemental hereto which shall contain such provisions as shall be deemed
necessary or desirable to confirm that all the rights, powers, trusts and duties
of the predecessor Trustee with respect to the Securities of any series as to
which the predecessor Trustee is not being succeeded shall continue to be vested
in the predecessor Trustee, and shall add to or change any of the provisions of
this Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be Trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee.
No successor Trustee with respect to any series of Securities
shall accept its appointment unless at the time of such acceptance such
successor Trustee shall be qualified and eligible with respect to that series
under this Article.
If a successor Trustee with respect to any series of
Securities does not accept appointment within 60 days after the retiring Trustee
tenders its resignation or is removed, the retiring Trustee, the Issuer or the
Holders of a majority in Principal amount of the Securities of such series may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
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If the Trustee with respect to any series of Securities fails
to comply with Section 7.10, any Holder of a Security of that series may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee with respect to such series.
Notwithstanding the replacement of the Trustee pursuant to
this Section, the Issuer's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor Trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee for
the Securities of any series issued hereunder shall at all times satisfy the
requirements of TIA ss.310(a). The Trustee shall have a combined capital and
surplus of at least $50,000,000 as set forth in its most recent published annual
report of condition. The Trustee shall comply with TIA ss.310(b); provided,
however, that there shall be excluded from the operation of TIA ss.310(b)(1)
any indenture or indentures under which other securities or certificates of
interest or participation in other securities of the Issuer are outstanding if
the requirements for such exclusion set forth in TIA ss.310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against the
Issuer. The Trustee shall comply with TIA ss.311(a), excluding any creditor
relationship listed in TIA ss.311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss.311(a) to the extent indicated therein.
SECTION 7.12. Money Held in Trust. Money held by the Trustee
in trust hereunder need not be segregated from other funds except to the extent
required by law. The Trustee shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed in writing with the
Issuer.
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ARTICLE VIII
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) With respect to any series of Securities, when (i) the Issuer
delivers to the Trustee all Outstanding Securities of such series (other than
Securities of such series replaced pursuant to Section 2.10) for cancellation or
(ii) all Outstanding Securities of such series have become due and payable and
the Issuer irrevocably deposits with the Trustee funds sufficient to pay at
maturity all Outstanding Securities of such series, including interest thereon
(other than Securities of such series replaced pursuant to Section 2.10), and if
in either case the Issuer pays all other sums payable hereunder by the Issuer
with respect to the Securities of such series, then this Indenture shall,
subject to Sections 8.01(c) and 8.06, cease to be of further effect with respect
to such series. The Trustee shall acknowledge satisfaction and discharge of this
Indenture as to such series on demand of the Issuer accompanied by an Officers'
Certificate and an Opinion of Counsel as to the satisfaction of all conditions
to such satisfaction and discharge of this Indenture as to such series and at
the cost and expense of the Issuer.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the Issuer at
any time may terminate with respect to any series (i) all its obligations under
the Securities of such series and this Indenture in respect of such series
("legal defeasance option") or (ii) its obligations under Sections 4.02 to 4.11,
inclusive, and 5.01(a)(iii) and the operation of Sections 6.01(5), 6.01(6) (with
respect to Significant Subsidiaries of Holdings only), 6.01(7) (with respect to
Significant Subsidiaries of Holdings only) and 6.01(8) and mandatory redemption
provisions, if any, of the Securities of such series ("covenant defeasance
option"). The Issuer may exercise its legal defeasance option notwithstanding
its prior exercise of its covenant defeasance option.
If the Issuer exercises its legal defeasance option with
respect to any series, payment of the Securities of such series may not be
accelerated because of an Event of Default. If the Issuer exercises its covenant
defeasance option with respect to any series, payment of the Securities of such
series may not be accelerated because of an Event of Default specified in
6.01(3), 6.01(5), 6.01(6) (with respect to Significant Subsidiaries only),
6.01(7) (with respect to Significant Subsidiaries only) and 6.01(8) or because
of the failure of Holdings to comply with clause (a)(iii) of Section 5.01.
Upon satisfaction of the conditions set forth herein and upon
request of the Issuer, the Trustee shall acknowledge in writing the discharge of
those obligations that the Issuer terminates.
(c) Notwithstanding the satisfaction and discharge of this
Indenture with respect to any series of Securities, the Issuer's obligations in
Sections 2.06,
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2.07, 2.08, 2.09, 2.10, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the
Securities have been paid in full. Thereafter, the Issuer's obligations in
Sections 7.07, 8.04 and 8.05 shall survive.
SECTION 8.02. Conditions to Defeasance. Unless otherwise
provided in the supplemental indenture or Certified Board Resolution pursuant to
which a series of Securities is Issued, the Issuer may exercise its legal
defeasance option or its covenant defeasance option with respect to any series
only if:
(1) the Issuer irrevocably deposits in trust with the
Trustee money or U.S. Government Obligations for the payment of
Principal and interest on the Securities of such series to
maturity or redemption, as the case may be;
(2) the Issuer delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing
their opinion that the payments of principal and interest when
due and without reinvestment on the deposited U.S. Government
Obligations plus any deposited money without investment will
provide cash at such times and in such amounts as will be
sufficient to pay Principal and interest when due on all the
Outstanding Securities of such series to maturity or redemption,
as the case may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default described in Section 6.01(6) or (7)
with respect to the Issuer occurs which is continuing at the end
of the period;
(4) the deposit does not constitute a default under any
other agreement binding on the Issuer;
(5) the Issuer delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Issuer
shall have delivered to the Trustee an Opinion of Counsel stating
that (i) the Issuer has received from, or there has been
published by, the Internal Revenue Service a ruling, or (ii)
since the date of this Indenture there has been a change in the
applicable Federal income tax law, in either case to the effect
that, and based thereon such Opinion of Counsel shall confirm
that, the Holders of the Securities of such series will not
recognize income, gain or loss for Federal income tax purposes as
a result of such defeasance and will be subject to Federal income
tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance had not occurred;
<PAGE>
66
(7) in the case of the covenant defeasance option, the
Issuer shall have delivered to the Trustee an Opinion of Counsel
to the effect that the Holders of the Securities of such series
will not recognize income, gain or loss for Federal income tax
purposes as a result of such covenant defeasance and will be
subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
defeasance had not occurred; and
(8) the Issuer delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the
Securities of such series as contemplated by this Article VIII
have been complied with.
Notwithstanding the foregoing provisions of this Section, the
conditions set forth in the foregoing paragraphs (2), (3), (4), (5), (6) and (7)
need not be satisfied with respect to any series so long as, at the time the
Issuer makes the deposit described in paragraph (1), (i) no Default or Event of
Default referred to in Section 6.01(1), 6.01(6) or 6.01(7) has occurred and is
continuing with respect to such series on the date of such deposit and after
giving effect thereto and (ii) either (x) a notice of redemption has been mailed
pursuant to Section 3.04 providing for redemption of all the Securities of such
series not later than 60 days after such mailing and the provisions of Section
3.02 with respect to such redemption shall have been complied with or (y) the
Stated Maturity of the Securities of such series will occur within 60 days. If
the conditions in the preceding sentence are satisfied, the Issuer shall be
deemed to have exercised its covenant defeasance option with respect to such
series.
Before or after a deposit described in this Section 8.02 with
respect to any series, the Issuer may make arrangements satisfactory to the
Trustee for the redemption of Securities of such series at a future date in
accordance with Article III.
SECTION 8.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant to
this Article VIII. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of Principal of and interest on the Securities of the
applicable series.
SECTION 8.04. Repayment to the Issuer. The Trustee and the
Paying Agent shall promptly turn over to the Issuer upon request any excess
money or securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Issuer upon request any money held by them
for the payment of Principal or interest of any series of Securities that
remains unclaimed for
<PAGE>
67
two years, and, thereafter, Holders of the Securities of such series entitled to
the money must look to the Issuer for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The Issuer
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article VIII in respect of any series of Securities by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Issuer's Obligations under this Indenture and the Securities in respect of such
series shall be revived and reinstated as though no deposit had occurred
pursuant to this Article VIII until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with this Article VIII; provided, however, that, if the Issuer has made any
payment of interest on or Principal of any Securities because of the
reinstatement of its Obligations, the Issuer shall be subrogated to the rights
of the Holders of such Securities to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX
Amendments and Supplemental Indentures
SECTION 9.01. Without Consent of Holders. The Issuer and the
Trustee, at any time and from time to time, may enter into one or more
amendments or indentures supplemental hereto without notice to or consent of any
Holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article V or Section 4.10;
(3) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities are Issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add Guarantees with respect to the Securities of any
series, or to remove any such Guarantee, when permitted by the terms
hereof or to secure (or provide additional security for) the Securities
of any series;
<PAGE>
68
(5) to establish any form of Security and to provide for the
issuance of any series of Securities as provided in Article II and to
set forth the terms thereof, and/or to add to the rights of the Holders
of the Securities of any series;
(6) to add to the covenants of the Issuer or Holdings for the
benefit of the Holders of the Securities of any series or to surrender
any right or power herein conferred upon the Issuer for the benefit of
the Holders of the Securities of any series (and if such covenants or
the surrender of such right or power are to be for the benefit of less
than all series of Securities, stating that such covenants are
expressly being included or such surrenders are expressly being made
solely for the benefit of one or more specified series);
(7) to comply with any requirements of the SEC in connection
with qualifying this Indenture under the TIA or otherwise comply with
the TIA;
(8) to evidence and provide for the acceptance of appointment
by another corporation as a successor Trustee hereunder with respect to
one or more series of Securities and to add to or change any of the
provisions of this Indenture as shall be necessary to provide for or
facilitate the administration of the trusts hereunder by more than one
Trustee, pursuant to Section 7.08;
(9) to add any additional Events of Default in respect of the
Securities of any series (and if such additional Events of Default are
to be in respect of less than all series of Securities, stating that
such Events of Default are expressly being included solely for the
benefit of one or more specified series);
(10) to provide for the issuance of Securities in coupon as
well as fully registered form; or
(11) to make any change with respect to the Securities of any
one or more series that does not adversely affect the rights of any
Holder of the Outstanding Securities of any such series.
SECTION 9.02. With Consent of Holders. The Issuer and the
Trustee may enter into one or more amendments or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders of Securities of any series under this
Indenture without notice to any Holder but with the written consent of the
Holders of at least a majority in Principal amount of the Outstanding Securities
of each series affected by such amendment or supplemental indenture. However,
without the consent of the Holder of each Outstanding Security affected, an
amendment or a supplemental indenture may not:
<PAGE>
69
(1) reduce the Principal amount of Outstanding Securities of
any series whose Holders must consent to any amendment or supplemental
indenture, or whose Holders must consent to any waiver of compliance
with certain provisions of this Indenture or certain defaults hereunder
and their consequences, provided for in this Indenture;
(2) reduce the rate of or extend the time for payment of
interest on any Security;
(3) reduce the Principal of or extend the Stated Maturity of
any Security or reduce the Default Amount of any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed at
the option of the Issuer;
(5) make any Security or premium or interest thereon payable
in money other than that stated in the Security;
(6) make any change in Section 4.06 relating to the date by
which the Issuer must purchase, or in the obligation of the Issuer to
purchase, tendered Securities, the definition of Change of Control,
Section 6.04 or 6.07 or the second sentence of this Section; or
(7) make any change in mandatory redemption provisions, if
any, of the Securities of any series.
An amendment or a supplemental indenture which changes or
eliminates any covenant or other provision of this Indenture which has expressly
been included solely for the benefit of one or more particular series of
Securities, or which modifies the rights of the Holders of Securities of such
series with respect to such covenant or other provision, shall be deemed not to
affect the rights under this Indenture of Holders of Securities of any other
series.
It shall not be necessary for the consent of the Holders under
this Section to approve the particular form of any amendment or supplemental
indenture, but it shall be sufficient if such consent approves the substance
thereof.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment or supplemental indenture executed pursuant to this Article shall
comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers.
Any amendment or supplemental indenture shall become effective in accordance
with its terms when executed and delivered by the Issuer and the Trustee,
provided that the
<PAGE>
70
Issuer has received the requisite consents prior thereto. The Issuer shall not
be obligated to execute any such amendment or supplemental indenture regardless
of whether such consents have been received. Any waiver shall become effective
when the requisite consents have been received or such later time as the Issuer
may elect by notice to the Trustee. A consent to an amendment, supplemental
indenture or waiver by a Holder of a Security shall bind the Holder and every
subsequent Holder of that Security or portion of the Security that evidences the
same Debt as the consenting Holder's Security, even if notation of the consent
or waiver is not made on the Security. However, any such Holder or subsequent
Holder may revoke the consent or waiver as to such Holder's Security or portion
of the Security if the Trustee receives the notice of revocation prior to the
time that the Issuer receives the requisite number of consents to such proposed
amendment, supplemental indenture or waiver. After an amendment, supplemental
indenture or waiver becomes effective, it shall bind every Holder. A consent to
any amendment, supplemental indenture or waiver hereunder by any Holder given in
connection with a tender of such Holder's Securities shall not be rendered
invalid by such tender.
The Issuer may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to give their consent
or take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment or supplemental indenture changes the terms of a Security, the Trustee
may require the Holder of the Security to deliver it to the Trustee. The Trustee
may place an appropriate notation in form approved by the Trustee on the
Security regarding the changed terms and return it to the Holder. Alternatively,
if the Issuer or the Trustee so determines, the Issuer in exchange for the
Security shall Issue and the Trustee shall authenticate a new Security that
reflects the changed terms. Failure to make the appropriate notation or to Issue
a new Security shall not affect the validity of such amendment or supplemental
indenture.
SECTION 9.06. Trustee To Sign Amendments and Supplemental
Indentures. The Trustee shall sign any amendment or supplemental indenture
authorized pursuant to this Article IX if the amendment or supplemental
indenture does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. If it does, the Trustee may but need not sign it. In
signing such amendment or supplemental indenture the Trustee shall be entitled
to receive indemnity reasonably satisfactory to it and to receive, and (subject
to Section 7.01) shall be fully protected
<PAGE>
71
in relying upon, an Officers' Certificate and an Opinion of Counsel stating that
such amendment or supplemental indenture is authorized or permitted by this
Indenture.
SECTION 9.07. Effect of Amendment or Supplemental Indenture.
Upon the execution of any amendment or supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
amendment or supplemental indenture shall form a part of this Indenture for all
purposes; and every Holder of Securities theretofore or thereafter authenticated
and delivered hereunder shall be bound thereby to the extent provided therein.
SECTION 9.08. Payment for Consent. Neither the Issuer, any
Affiliate of the Issuer nor any Subsidiary shall, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of this Indenture or the Securities
of any series unless such consideration is offered to be paid or agreed to be
paid to all Holders or Holders of Securities of such series, as the case may be,
which so consent, waive or agree to amend in the time frame set forth in
solicitation documents relating to such consent, waiver or amendment.
ARTICLE X
Miscellaneous
SECTION 10.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 10.02. Notices. Any notice or communication shall be
in writing and delivered in Person or mailed by first-class mail addressed as
follows:
if to Escrow Corp. or Holdings:
35 East 62nd Street
New York, NY 10021
Attention of General Counsel
<PAGE>
72
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, NY 10286
Attention of Corporate Trust Trustee Administration
The Issuer or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Holder shall be sent
by first-class mail to the Holder at the Holder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed to a Holder in the manner provided above, it
is duly given, whether or not the addressee receives it.
SECTION 10.03. Communication by Holders with other Holders.
Holders may communicate in accordance with TIA ss.312(b) with other Holders
with respect to their rights under this Indenture or the Securities. The Issuer,
the Trustee, the Registrar and anyone else shall have the protection of TIA
ss.312(c).
SECTION 10.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Issuer to the Trustee to take
or refrain from taking any action under this Indenture, the Issuer shall furnish
to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with;
provided, however, that, in the case of such application or request as to which
the furnishing of such documents, certificates or opinions is specifically
required by any provision of this Indenture relating to such particular
application or request, no additional certificate or opinion need be furnished.
SECTION 10.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition
<PAGE>
73
provided for in this Indenture (other than the Officer's Certificate required by
Section 4.12) shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
Person, such covenant or condition has been complied with.
SECTION 10.06. When Securities Disregarded. In determining
whether the Holders of the required Principal amount of Outstanding Securities
have concurred in any request, demand, authorization, direction, waiver or
consent, Securities owned by the Issuer or by any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Issuer shall be disregarded and deemed not to be Outstanding, except that, for
the purpose of determining whether the Trustee shall be protected in relying on
any such request, demand, authorization, direction, waiver or consent, only
Securities which the Trustee knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Securities Outstanding at the time shall be
considered in any such determination.
SECTION 10.07. Rules by Trustee, Paying Agent and Registrar.
Subject to Section 10.06, the Trustee may make reasonable rules for action by or
a meeting of Holders. The Registrar and the Paying Agent may make reasonable
rules for their functions.
SECTION 10.08. Legal Holidays. Unless otherwise provided in
the supplemental indenture or Certified Board Resolution pursuant to which a
series of Securities is Issued, if a payment date with respect to any series of
Securities is a Legal Holiday, payment shall be made on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period. If a regular record date with respect to any series of Securities is a
Legal Holiday, the record date shall not be affected.
SECTION 10.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws of
the State of New
<PAGE>
74
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 10.10. No Recourse Against Others. A director,
officer, employee or stockholder, as such, of the Issuer or the Trustee shall
not have any liability for any obligations of the Issuer or the Trustee under
the Securities or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Holder shall waive and release all such liability. The waiver and release shall
be part of the consideration for the Issue of the Securities.
SECTION 10.11. Successors. All agreements of the Issuer in
this Indenture and the Securities shall bind its successors. All agreements of
the Trustee in this Indenture shall bind its successors.
SECTION 10.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough to
prove this Indenture.
SECTION 10.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any of
the terms or provisions hereof.
SECTION 10.14. Separability Clause. In case any provision in
this Indenture or in the Securities shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
<PAGE>
75
IN WITNESS WHEREOF, the parties have caused this Indenture to
be duly executed as of the date first written above.
GS ESCROW CORP.
By: /s/ Glenn Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
THE BANK OF NEW YORK,
as Trustee,
By: /s/ Robert A. Massimillo
-----------------------------------
Name: Robert Massimillo
Title: Assistant Vice President
<PAGE>
================================================================================
GS ESCROW CORP.
to be merged with and into
GOLDEN STATE HOLDINGS INC.
Issuer
and
THE BANK OF NEW YORK
Trustee
-------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of August 6, 1998
-------------------------------------
Floating Rate Notes Due 2003
================================================================================
<PAGE>
1
FIRST SUPPLEMENTAL INDENTURE (this "First Supplemental Indenture"),
dated as of August 6, 1998, between GS ESCROW CORP., a Delaware corporation (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking corporation, as trustee
(the "Trustee").
WHEREAS the Issuer has executed and delivered to the Trustee an
Indenture (the "Original Indenture"), dated as of August 6, 1998, providing for
the issuance and sale by the Issuer from time to time of its senior debt
securities (the "Securities"), which term shall include any Securities issued
under the Indenture (as defined below) after the date hereof;
WHEREAS Section 9.01(5) of the Indenture permits the Issuer and the
Trustee, at any time and from time to time, to enter into one or more indentures
supplemental to the Indenture for the purpose of establishing any form of
Security and providing for the issuance of any series of Securities, as provided
in Article II of the Indenture, and setting forth the terms thereof, and/or
adding to the rights of the Holders of the Securities of any series;
WHEREAS the Issuer proposes in and by this First Supplemental Indenture
to supplement and amend the Original Indenture (as so amended, the "Indenture")
in certain respects to establish a series of Securities issued pursuant to the
Indenture designated as the Floating Rate Notes Due 2003 limited in aggregate
principal amount to $250,000,000 (the "Initial Notes") and if and when issued
pursuant to an Exchange Offer or a Private Exchange (each as defined in Appendix
A hereto) for a like principal amount of the Initial Notes, the Issuer's
Floating Rate Notes due 2003 (the "Exchange Notes") (the Initial Notes and the
Exchange Notes together shall constitute one series of Securities for purposes
of the Indenture and are sometimes referred to herein as the "Notes"); and
WHEREAS the Issuer has requested that the Trustee execute and deliver
this First Supplemental Indenture and has certified that all requirements
necessary to make this First Supplemental Indenture a valid instrument in
accordance with its terms have been satisfied, and that the execution and
delivery of this First Supplemental Indenture has been duly authorized in all
respects.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer
and the Trustee hereby covenant and agree for the equal and ratable benefit of
the holders of that series of Securities which consists of Initial Notes and
Exchange Notes as follows:
1. Creation of Series of Securities. Pursuant to Section 2.03 of the
Indenture, there is hereby created a new series of Securities designated as the
"Floating Rate Notes Due 2003" limited in aggregate principal amount to
$250,000,000 and consisting of the Initial Notes and the Exchange Notes. The
Initial
<PAGE>
2
Notes and the Exchange Notes together shall constitute one series of Securities
for purposes of the Indenture.
2. Form, Terms, Issuance and Transfer of Securities. Provisions
relating to the Initial Notes and the Exchange Notes are set forth in Appendix A
hereto, which is hereby incorporated in and expressly made a part of this First
Supplemental Indenture. The Initial Notes shall be substantially in the form
annexed hereto as Exhibit A. The terms and provisions contained in the form of
the Initial Notes annexed hereto as Exhibit A shall constitute, and are hereby
expressly made, a part of this First Supplemental Indenture. The Exchange Notes
shall be substantially in the form annexed hereto as Exhibit B. The terms and
provisions contained in the form of the Exchange Notes annexed hereto as Exhibit
B shall constitute, and are hereby expressly made, a part of this First
Supplemental Indenture. To the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this First Supplemental Indenture, expressly
agree to such terms and provisions and to be bound thereby.
3. Amendment to Section 2.06 (Registrar and Paying Agent). Section 2.06
of Article II of the Indenture is hereby supplemented and amended, solely with
respect to that series of Securities which consists of the Notes, by adding
thereto at the end thereof the following:
"The Trustee shall act as the calculation agent (the "Calculation
Agent") in respect of the series of Securities designated as the "Floating Rate
Notes Due 2003" pursuant to the First Supplemental Indenture hereto and shall
make all determinations of the Applicable LIBOR Rate (as defined in such
Securities), the Treasury Rate (as defined in such Securities) and any
Applicable Premium (as defined in such Securities) in respect of such Securities
(the "Calculations"). The Calculation Agent will, upon the request of the Holder
of any such Security, provide the interest rate then in effect with respect to
such Security. All Calculations made by the Calculation Agent shall in the
absence of manifest error be conclusive for all purposes and binding on the
Issuer and the holders of such Securities. So long as any Calculation is
required to be determined with respect to such Securities, there will at all
times be a Calculation Agent. In the event that any acting Calculation Agent
shall be unable or unwilling to act, or that such Calculation Agent shall fail
to establish the Applicable LIBOR Rate for any Interest Period or fail to make a
Calculation, or that the Issuer proposes to remove such Calculation Agent, the
Issuer shall appoint itself or another person which is a bank, trust company,
investment banking firm or other financial institution to act as the Calculation
Agent."
4. Amendment to Section 8.02 (Defeasance). Section 8.02 of the
Indenture is hereby supplemented and amended, solely with respect to that series
of Securities which consists of the Notes, by adding thereto at the end thereof
the last paragraph of paragraph 12 of the Notes.
<PAGE>
3
5. Applicability of Defined Terms and Provisions. The definitions of
terms defined in, and the provisions set forth in, this First Supplemental
Indenture and the Appendix and Exhibits attached hereto, shall apply only to the
series of Securities established pursuant to this First Supplemental Indenture.
6. This First Supplemental Indenture. This First Supplemental
Indenture, together with the Appendix and the Exhibits hereto shall be construed
as supplemental to the Original Indenture and shall form a part of it. The
Original Indenture is hereby incorporated by reference herein and, except as
expressly amended hereby, is hereby ratified, approved and confirmed and all
terms, conditions and provisions thereof shall remain in full force and effect.
7. GOVERNING LAW. THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT
WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT
THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED
THEREBY.
8. Counterparts. This First Supplemental Indenture may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
9. Headings. The headings of this First Supplemental Indenture are for
reference only and shall not limit or otherwise affect the meaning hereof.
10. Trustee Not Responsible for Recitals. The recitals herein contained
are made by the Issuer, and not by the Trustee, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee shall not be responsible
in any manner whatsoever for or in respect of the validity or sufficiency of
this First Supplemental Indenture.
11. Separability. In case any one or more of the provisions contained
in this First Supplemental Indenture or in the series of Securities created
hereby shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of the First Supplemental Indenture or of such series of
Securities, but this First Supplemental Indenture and such series of the
Securities shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
GS ESCROW CORP.
By _________________________________
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By _________________________________
Name:
Title:
<PAGE>
1
APPENDIX A TO FIRST
SUPPLEMENTAL INDENTURE
GS ESCROW CORP.
FLOATING RATE NOTES DUE 2003
FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO
RULE 144A, TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN
RELIANCE ON REGULATION S AND, SUBJECT TO THE APPLICABLE
PURCHASE AGREEMENT, TO INSTITUTIONAL ACCREDITED
INVESTORS.
PROVISIONS RELATING TO INITIAL NOTES
AND EXCHANGE NOTES
1. Definitions
1.1 Definitions.
(a) Capitalized terms used herein and not defined have the meaning
ascribed to such terms in the Indenture, including the First Supplemental
Indenture to which this Appendix A is attached (the "Applicable Supplemental
Indenture").
(b) For the purposes of this Appendix A the following terms shall have
the meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Temporary Regulation S Global Note or beneficial
interest therein, the rules and procedures of the Depository, Euroclear and
Cedel for such Global Note, in each case to the extent applicable to such
transaction and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Note or Exchange
Note bearing, if required, the restricted securities legend set forth in Section
2.3(e).
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Exchange Offer" means an offer by the Issuer pursuant to the
Registration Agreement or otherwise, to certain Holders of Initial Notes, to
issue and deliver to such Holders, in exchange for the Initial Notes, a like
aggregate principal amount of Exchange Notes registered under the Securities
Act.
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"Exchange Offer Registration Statement" means a registration statement
of the Issuer on an appropriate form under the Securities Act with respect to
the Exchange Offer, all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
"IAI" means an institutional "accredited investor" as described in Rule
501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Salomon Brothers Inc., Goldman, Sachs & Co.,
Bear, Stearns & Co., Inc., and Lehman Brothers Inc.
"Private Exchange" means the offer by the Issuer, pursuant to Section 1
of the Registration Agreement, or pursuant to any similar provision of any other
Registration Agreement, to issue and deliver to certain purchasers, in exchange
for the Initial Notes held by such purchasers as part of their initial
distribution, a like aggregate principal amount of Private Exchange Notes.
"Private Exchange Notes" means the Floating Rate Notes Due 2003 to be
issued pursuant to this Indenture in connection with a Private Exchange pursuant
to a Registration Agreement.
"Purchase Agreement" means the Purchase Agreement, dated July 30, 1998,
among the Issuer, the Initial Purchasers, Chase Securities Inc. and NationsBanc
Montgomery Securities LLC relating to the Initial Notes, or any similar
agreement relating to any future sale of Initial Notes by the Issuer.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registration Agreement" means the Registration Agreement dated July
30, 1998, among Escrow Corp., Golden State Holdings and the Initial Purchasers
relating to the Initial Securities.
"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depository), or any successor person thereto who
shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement issued by
the Issuer in connection with the offer and sale of Initial Notes or Exchange
Notes pursuant to the Registration Agreement.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the legend set forth in
Section 2.3(e) hereto.
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3
1.2 Other Definitions.
Defined in
Term Section:
---- ----------
"Agent Members"......................................... 2.1(b)
"Global Security"....................................... 2.1(a)
"Permanent Regulation S Global Security"................ 2.1(a)
"Regulation S".......................................... 2.1
"Restricted Period"..................................... 2.1(a)
"Rule 144A"............................................. 2.1
"Rule 144A Global Security"............................. 2.1(a)
"Temporary Regulation S Global Security"................ 2.1(a)
2. The Notes
2.1 Form and Dating.
The Initial Notes will be offered and sold by the Issuer, from time to
time, pursuant to one or more Purchase Agreements. The Initial Notes will be
resold, initially only to QIBs in reliance on Rule 144A under the Securities Act
("Rule 144A") and in reliance on Regulation S under the Securities Act
("Regulation S"). Initial Notes may thereafter be transferred to, among others,
QIBs, purchasers in reliance on Regulation S and IAIs under Rule
501(a)(1),(2),(3) or (7) under the Securities Act.
(a) Global Securities. Rule 144A Notes shall be issued initially in the
form of one or more permanent global Notes in definitive, fully registered form
(collectively, the "Rule 144A Global Security") and Regulation S Notes shall be
issued initially in the form of one or more temporary global Notes
(collectively, the "Temporary Regulation S Global Security"), in each case
without interest coupons with the global securities legend and restricted
securities legend set forth in Exhibit A to the Applicable Supplemental
Indenture, which shall be deposited on behalf of the purchasers of the Initial
Notes represented thereby with the Securities Custodian, and registered in the
name of the Depository or a nominee of the Depository, duly executed by the
Issuer and authenticated by the Trustee as provided in the Indenture. Beneficial
ownership interests in the Temporary Regulation S Global Security will not be
exchangeable for interests in the Rule 144A Global Security, a permanent global
security (the "Permanent Regulation S Global Security"), or any other security
without a legend containing restrictions on transfer of such Note prior to the
expiration of the 40-day distribution compliance period as set forth under Rule
9.03(b) (the "Restricted Period") under the Securities Act and then only upon
certification in form reasonably satisfactory to the Trustee that beneficial
ownership interests in such Temporary Regulation S Global Security are owned
either by non-U.S. persons or U.S. persons who purchased such interests in a
transaction that did not require registration under the Securities Act. The Rule
144A Global Securities, Temporary Regulation S Global Security and Permanent
Regulation S Global Security are
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4
collectively referred to herein as "Global Securities." The aggregate principal
amount of the Global Securities may from time to time be increased or decreased
by adjustments made on the records of the Trustee and the Depository or its
nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depository.
The Issuer shall execute and the Trustee shall, in accordance with this
Section 2.1(b) and pursuant to an Issuer Order, authenticate and make available
for delivery initially one or more Global Securities that (a) shall be
registered in the name of the Depository for such Global Security or Global
Securities or the nominee of such Depository and (b) shall be delivered by the
Trustee to such Depository or pursuant to such Depository's instructions or held
by the Trustee as Securities Custodian.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under the Indenture with respect to any Global Security held on
their behalf by the Depository or by the Trustee as Securities Custodian or
under such Global Security, and the Depository may be treated by the Issuer, the
Trustee and any agent of the Issuer or the Trustee as the absolute owner of such
Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer
or the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices of such Depository
governing the exercise of the rights of a holder of a beneficial interest in any
Global Security.
(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of certificated Notes.
2.2 Authentication. The Trustee shall authenticate and make available
for delivery: (1) Initial Notes for original issue in an aggregate principal
amount of $250,000,000 and (2) Exchange Notes for issue from time to time only
in an Exchange Offer or a Private Exchange pursuant to a Registration Agreement,
for a like principal amount of Initial Notes, upon an Issuer Order. Such order
shall specify the amount of the Notes to be authenticated and the date on which
the original issue of Notes is to be authenticated and, if such order is being
delivered other than on the Issue Date, whether the Notes are to be Initial
Notes or Exchange Notes. The aggregate principal amount of Notes Outstanding at
any time may not exceed the amount set forth in the first sentence of this
Section 2.2, except as provided in Section 2.10 of the Indenture.
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5
2.3 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Definitive
Securities are presented to the Registrar or a co-registrar with a request for
transfer or exchange, the Registrar or co-registrar shall register the transfer
or make the exchange as provided in Section 2.09 of the Indenture; provided,
however, that the Definitive Securities surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer and the Registrar or
co-registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(ii) are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act, pursuant to Section 2.3(b)
or pursuant to clause (A), (B) or (C) below, and are accompanied by the
following additional information and documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
with out transfer, a certification from such Holder to that effect (in
the form set forth in the Definitive Security); or
(B) if such Definitive Securities are being transferred to the
Issuer, a certification to that effect (in the form set forth in the
Definitive Security ); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act, (i) a certification to that effect and (ii) if the
Issuer so requests, an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in Section 2.3(e)(i).
(b) Restrictions on Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged for a
beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by a written instrument of transfer in
form reasonably satisfactory to the Issuer and the Registrar or co-registrar,
together with:
(i) certification (in the form set forth in the Definitive Security)
that such Definitive Security is being transferred (A) to a QIB in
accordance with Rule 144A, (B) to an IAI that has furnished to the Trustee
a signed letter or (C) outside the United States in an offshore transaction
within the meaning of Regulation S and in compliance with Rule 904 under
the Securities Act; and
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6
(ii) written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an adjustment on its books and records
with respect to such Global Security to reflect an increase in the
aggregate principal amount of the Securities represented by the Global
Security, such instructions to contain information regarding the Depository
account to be credited with such increase;
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depository and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged pursuant to Section 2.4, the Issuer shall issue and the
Trustee shall authenticate, upon written order of the Issuer in the form of an
Officers' Certificate, a new Global Security in the appropriate principal
amount.
(c) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depository, in accordance with the Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depository therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depository's
procedures containing information regarding the participant account of the
Depository to be credited with a beneficial interest in the Global Security and
such account shall be credited in accordance with such instructions with a
beneficial interest in the Global Security and the account of the Person making
the transfer shall be debited by an amount equal to the beneficial interest in
the Global Security being transferred. In the case of a transfer of a beneficial
interest in a Global Security to an IAI, the transferee must furnish a signed
letter to the Trustee containing certain representations and agreements (the
form of which letter can be obtained from the Trustee or the Issuer).
(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Security to a beneficial interest in another Global Security,
the Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security to which such
interest is being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall reflect on its
books and records the date and a corresponding decrease in the principal
amount of Global Security from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix A (other
than the provisions set forth in Section 2.4), a Global Security may not be
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7
transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(iv) In the event that a Global Security is exchanged for Notes in
definitive registered form pursuant to Section 2.4 prior to the
consummation of an Exchange Offer or the effectiveness of a Shelf
Registration Statement with respect to such Notes, such Notes may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the Initial Notes
intended to ensure that such transfers comply with Rule 144A, Regulation S
or such other applicable exemption from registration under the Securities
Act, as the case may be) and such other procedures as may from time to time
be adopted by the Issuer.
(d) Restrictions on Transfer of Temporary Regulation S Global
Securities. During the Restricted Period, beneficial ownership interests in
Temporary Regulation S Global Securities may only be sold, pledged or
transferred through Euroclear or Cedel in accordance with the Applicable
Procedures and only (i) to the Issuer, (ii) so long as such security is eligible
for resale pursuant to Rule 144A, to a person whom the selling holder reasonably
believes is a QIB that purchases for its own account or for the account of a QIB
to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S, (iv) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 (if applicable) under the Securities Act, or
(v) pursuant to an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States. During the Restricted Period, interests in the Temporary
Regulation S Global Security may not be transferred to institutions that are
"Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
(e) Legend.
(i) Except as permitted by the following paragraphs (ii), (iii) and
(iv), each Note certificate evidencing the Global Securities and the
Definitive Securities (and all Notes issued in exchange therefor or in
substitution thereof) shall bear a legend in substantially the following
form:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS
NOTE'S DATE OF ORIGINAL ISSUANCE
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8
OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE
ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO
THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE WHICH MAY
BE OBTAINED FROM THE ISSUER OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE
TO THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN
THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT TO THIS CLAUSE (4) PRIOR
TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION COMPLIANCE PERIOD" (WITHIN
THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE SECURITIES ACT)), (5)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS
NOTE AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES
AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY
TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHAS ING THIS NOTE, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED
INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT AND THAT IT
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9
IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR
(3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR
AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902
UNDER) REGULATION S UNDER THE SECURITIES ACT."
Each Definitive Security will also bear the following additional
legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR
AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER
AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE
FOREGOING RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global
Security) pursuant to Rule 144 under the Securities Act:
(A) in the case of any Transfer Restricted Security that is a
Definitive Security, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Security
that does not bear the legends set forth above and rescind any
restriction on the transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security that is
represented by a Global Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legends set forth above and
rescind any restriction on the transfer of such Transfer Restricted
Security,
in either case, if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such certification
to be in the form set forth on the reverse of the Initial Note).
(iii) After a transfer of any Initial Notes during the period of the
effectiveness of a Shelf Registration Statement with respect to such
Initial Notes, all requirements pertaining to legends on such Initial Note
will cease to apply, the requirements requiring that any such Initial Note
be issued in global form will cease to apply, and an Initial Note in
certificated or global form without legends will be available to the
transferee of the Holder of such Initial Notes upon exchange of such
transferring Holder's certificated Initial Note. Upon the occurrence of any
of the circumstances described in this paragraph, the Issuer will deliver
an Officers' Certificate to the Trustee instructing the Trustee to issue
Notes without legends.
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(iv) Upon the consummation of an Exchange Offer with respect to the
Initial Notes pursuant to which certain Holders of such Initial Notes are
offered Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes be issued
in global form will cease to apply, and certificated Initial Notes with the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture will be available to Holders of such Initial Notes
that do not exchange their Initial Notes, and Exchange Notes in
certificated or global form will be available to Holders that exchange such
Initial Notes in such Exchange Offer. Upon the occurrence of any of the
circumstances described in this paragraph, the Issuer will deliver an
Officers' Certificate to the Trustee instructing the Trustee to issue
Securities without legends.
(v) Upon the consummation of a Private Exchange with respect to the
Initial Notes pursuant to which Holders of such Initial Notes are offered
Private Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes issued to
certain Holders be issued in global form will continue to apply, and
Private Exchange Notes in global form will be available to Holders that
exchange such Initial Notes in such Private Exchange.
(f) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depository to the Trustee for
cancelation or retained and canceled by the Trustee. At any time prior to such
cancelation, if any beneficial interest in a Global Security is exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, the
principal amount of Notes represented by such Global Security shall be reduced
and an adjustment shall be made on the books and records of the Trustee (if it
is then the Securities Custodian for such Global Security) with respect to such
Global Security, by the Trustee or the Securities Custodian, to reflect such
reduction.
(g) Obligations with Respect to Transfers and Exchanges of Securities.
Terms and provisions for registration of transfer or exchange of the Notes shall
be as set forth in Section 2.09 of the Indenture.
(h) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant in the
Depository or any other Person with respect to the accuracy of the records
of the Depository or its nominee or of any participant or member thereof,
with respect to any ownership interest in the Notes or with respect to the
delivery to any participant, member, beneficial owner or other Person
(other than the Depository) of any notice (including any notice of
redemption or repurchase)
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11
or the payment of any amount, under or with respect to such Notes. All
notices and communications to be given to the Holders and all payments to
be made to Holders under the Notes shall be given or made only to the
registered Holders (which shall be the Depository or its nominee in the
case of a Global Security). The rights of beneficial owners in any Global
Security shall be exercised only through the Depository subject to the
applicable rules and procedures of the Depository. The Trustee may rely and
shall be fully protected in relying upon information furnished by the
Depository with respect to its members, participants and any beneficial
owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Note (including any transfers between or
among Depository participants, members or beneficial owners in any Global
Security) other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and
when expressly required by, the terms of the Indenture, and to examine the
same to determine substantial compliance as to form with the express
requirements hereof.
2.4 Certificated Securities.
(a) A Global Security deposited with the Depository or with the Trustee
as Securities Custodian pursuant to Section 2.1 shall be transferred to the
beneficial owners thereof in the form of certificated Notes in an aggregate
principal amount equal to the principal amount of such Global Security, in
exchange for such Global Security, only if such transfer complies with Section
2.3 and (i) the Depository notifies the Issuer that it is unwilling or unable to
continue as a Depository for such Global Security or if at any time the
Depository ceases to be a "clearing agency" registered under the Exchange Act,
and a successor depositary is not appointed by the Issuer within 90 days of such
notice, or (ii) an Event of Default has occurred and is continuing or (iii) the
Issuer, in its sole discretion, notifies the Trustee in writing that it elects
to cause the issuance of certificated Securities under the Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depository to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of certificated Notes of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depository shall direct.
Any certificated Initial Note delivered in exchange for an interest in the
Global Security shall, except as otherwise provided by Section 2.3(e), bear the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture.
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(c) Subject to the provisions of Section 2.4(b), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.
(d) In the event of the occurrence of either of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Issuer will promptly make available to the
Trustee a reasonable supply of certificated Securities in definitive, fully
registered form without interest coupons.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
GS ESCROW CORP.
By /s/ Glenn P. Dickes
------------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
THE BANK OF NEW YORK, as Trustee
By /s/ Robert A. Massimillo
------------------------------------
Name: Robert Massimillo
Title: Assistant Vice President
<PAGE>
EXHIBIT A TO FIRST
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF INITIAL NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS NOTE'S DATE OF
ORIGINAL ISSUANCE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON
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THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH
REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE) PROVIDED
THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER IS DELIVERED BY CERTAIN
TRANSFEREES SPECIFIED IN THE INDENTURE TO THE ISSUER, (4) TO AN INSTITUTION THAT
IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER
THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE
FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE WHICH MAY BE
OBTAINED FROM THE ISSUER OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE
ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE
MAY NOT TRANSFER THIS NOTE PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION
OF THE "40 DAY DISTRIBUTION COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE
903(b) OF REGULATION S UNDER THE SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE)
UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED
INVESTOR HOLDING THIS NOTE AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE
SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO
CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING
RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES
FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED
INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT
AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARA GRAPH (k)(2) OF
RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT.
[Definitive Securities Legend]
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH
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CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE
TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.
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[FORM OF FACE OF INITIAL NOTE]
No. $
GS ESCROW CORP.
Floating Rate Note due 2003
CUSIP No.
GS Escrow Corp., a Delaware corporation, promises to pay to ,
or registered assigns, the principal sum of Dollars on August 1, 2003.
Interest Payment Dates: February 1, May 1, August 1 and November 1,
commencing February 1, 1999.
Record Dates: January 15, April 15, July 15 and October 15.
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Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
GS ESCROW CORP.
By:_________________________________
Name:
Title:
By:_________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated: ________________ By:_________________________________
Authorized Signatory
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[FORM OF REVERSE SIDE OF INITIAL NOTE]
GS ESCROW CORP.
Floating Rate Note due 2003
1. Interest
GS Escrow Corp., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Issuer"), promises to pay interest on the principal amount of this
Note at the rate per annum equal to the Applicable LIBOR Rate (as defined below)
determined as provided below; provided, however, that if (a) by the 75th day
following the date of consummation of both the Golden State Acquisition and the
Refinancing Transactions (or if such day is not a Business Day, the first
Business Day thereafter), neither the Shelf Registration Statement nor the
Exchange Offer Registration Statement has been filed with the SEC, the rate per
annum at which interest will accrue on the Notes will increase by 0.5% from and
including such date until but excluding the earlier of (i) the date the Shelf
Registration Statement or the Exchange Offer Registration Statement is filed and
(ii) the 180th day following the date of consummation of both the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a Business
Day, the first Business Day thereafter) and (b) by the 180th day following the
date of consummation of both the Golden State Acquisition and the Refinancing
Transactions (or if such day is not a Business Day, the first Business Day
thereafter), neither (i) the Exchange Offer is consummated nor (ii) the Shelf
Registration Statement with respect to the resale of the Notes is declared
effective, the rate per annum at which interest will accrue on the Notes will
increase by 0.5% from and including such date until but excluding the earlier of
(i) the consummation of the Exchange Offer and (ii) the effective date of the
Shelf Registration Statement. The Issuer will pay interest in arrears on
February 1, 1999 and thereafter quarterly in arrears on May 1, August 1,
November 1, and February 1 of each year (each such date, subject to adjustment
as provided below, a "Floating Rate Interest Payment Date"). Interest on this
Note will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from August 6, 1998. The Issuer shall pay interest
on overdue principal at the rate borne by the Notes plus 1% per annum, and it
shall pay interest on overdue installments of interest at the same rate to the
extent lawful.
For each Interest Period, interest will be calculated by multiplying
the outstanding principal amount of this Note by the Applicable LIBOR Rate for
such Interest Period, multiplying such product by the LIBOR Fraction for such
Interest Period; provided that if the outstanding principal amount of this Note
changes during such Interest Period, then the amount of interest for such
Interest Period shall be the
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sum of the amounts of interest calculated for each portion of such Interest
Period for which a particular principal amount was outstanding, or a particular
Applicable LIBOR Rate was in effect, using, in each such case, an adjusted LIBOR
Fraction for each such portion that reflects the length of time that such
portion of the principal amount of this Note was outstanding or such Applicable
LIBOR Rate was in effect during such Interest Period. The Applicable LIBOR Rate
for each Interest Period (other than the initial Interest Period and other than
to the extent provided under paragraph 5(a) below) will be set on February 1,
May 1, August 1, and November 1 of each year, commencing with February 1, 1999
(each such date, subject to adjustment as provided below, an "Interest Reset
Date") until maturity or earlier redemption. If any Interest Reset Date and
Floating Rate Interest Payment Date would otherwise be a day that is not a LIBOR
Business Day, such Interest Reset Date and Floating Rate Interest Payment Date
shall be the next succeeding LIBOR Business Day, unless the next succeeding
LIBOR Business Day is in the next succeeding calendar month, in which case such
Interest Reset Date and Floating Rate Interest Payment Date shall be the
immediately preceding LIBOR Business Day. "LIBOR Business Day" means any day
that is not a Saturday or Sunday and that, in the City of New York or the City
of London, is not a day on which banking institutions are generally authorized
or obligated by law to close.
"Interest Period" shall mean the period from and including an Interest
Reset Date (or in the case of the initial Interest Period, the Issue Date) to
but excluding the next succeeding Interest Reset Date and, in the case of the
last such period, from and including the Interest Reset Date immediately
preceding the maturity date or a redemption date, as the case may be, to but not
including the maturity date or such redemption date, as the case may be. If the
redemption date or maturity date with respect to the Notes is not a LIBOR
Business Day, then the principal amount of the Notes plus accrued and unpaid
interest thereon shall be paid on the next succeeding Floating Rate Business Day
and no interest shall accrue for such maturity date, such redemption date or any
date thereafter. "Floating Rate Business Day" shall mean any day that is not a
Saturday or Sunday and that, in the City of New York, is not a day on which
banking institutions are generally authorized or obligated by law to close.
The "Applicable LIBOR Rate," with respect to an Interest Period (except
in the circumstances provided under paragraph 5(a) below) means 100 basis points
(the "Spread") over the rate (the "Base LIBOR Rate") (expressed as a percentage
per annum) for deposits in United States dollars for a three-month period
beginning on the second London Banking Day after the Interest Rate Determination
Date for such Interest Period that appears on Telerate Page 3750 as of 11:00
a.m., London time, on the Interest Rate Determination Date. If Telerate Page
3750 does not include such a rate or is unavailable on an Interest Rate
Determination Date, the Base LIBOR Rate for the Interest Period shall be the
arithmetic mean of the rates (expressed as a percentage per annum) for deposits
of $1,000,000 for a three-month
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period beginning on the second London Banking Day after the Interest Rate
Determination Date that appears on Reuters Screen LIBO Page as of 11:00 a.m.,
London time, on the Interest Rate Determination Date. If Reuters Screen LIBO
Page does not include two or more rates or is unavailable on an Interest Rate
Determination Date, the Trustee shall request the principal London office of
each of four major banks in the London interbank market to provide such bank's
offered quotation (expressed as a percentage per annum), as of approximately
11:00 a.m., London time, on such Interest Rate Determination Date, to prime
banks in the London interbank market for deposits of $1,000,000 for a
three-month period beginning on the second London Banking Day after the Interest
Rate Determination Date. If at least two such offered quotations are so
provided, the Base LIBOR Rate for the Interest Period shall be the arithmetic
mean of such quotations. If fewer than two such quotations are so provided, the
Trustee shall request each of three major banks in New York City to provide such
bank's rate (expressed as a percentage per annum), as of approximately 11:00
a.m., New York City time, on such Interest Rate Determination Date, for loans of
$1,000,000 to leading European banks for a three-month period beginning on the
second London Banking Day after the Interest Rate Determination Date. If at
least two such rates are so provided, the Base LIBOR Rate for the Interest
Period will be the arithmetic mean of such rates. If fewer than two such rates
are so provided, then the Base LIBOR Rate for the Interest Period will be the
Base LIBOR Rate in effect with respect to the immediately preceding Interest
Period. Notwithstanding the foregoing, the Applicable LIBOR Rate for the initial
Interest Period shall be 6 3/4%.
"Interest Rate Determination Date" means, with respect to each Interest
Period, the second London Banking Day prior to the Interest Reset Date that
commences such Interest Period or, in the circumstances provided under paragraph
5(a) below, the second London Banking Day prior to the relevant Notice Date.
"LIBOR Fraction" means the actual number of days in the Interest Period
(or the relevant portion thereof) divided by 360.
"London Banking Day" means any day in which dealings in U.S. dollars
are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Reuters Screen LIBO Page" means the display designated as page "LIBO"
on The Reuters Monitor Money Rates Service (or such other page as may replace
the LIBO page on that service).
"Telerate Page 3750" means the display designated as "Page 3750" on the
Dow Jones Telerate Service (or such other page as may replace page 3750 on that
service).
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All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% being rounded to 9.87655%), and all dollar amounts used in or
resulting from such calculations will be rounded to the nearest cent (with
one-half cent being rounded upwards).
The interest rate on the Notes will in no event be higher than the
maximum rate permitted by New York law as the same may be modified by United
States law of general application.
The Calculation Agent will, upon the request of the Holder of any Note,
provide the interest rate then in effect with respect to the Notes. All
calculations made by the Calculation Agent in the absence of manifest error will
be conclusive for all purposes and binding on the Issuer and the Holder of this
Note.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15, April 15, July 15 or October 15 next preceding the Floating Rate
Interest Payment Date even if the Notes are canceled after the record date and
on or before the Interest Payment Date; provided, however, that interest
accruing on this Note prior to the consummation of the Exchange Offer or Private
Exchange will be paid to the holder of this Note or the Exchange Note, as the
case may be, on the record date next preceding the Floating Rate Interest
Payment Date following the consummation of the Exchange Offer or Private
Exchange. Defaulted interest will be paid in the manner set forth in the
Indenture. Holders must surrender the Notes to a Paying Agent to collect
principal payments. The Issuer will pay principal and interest in money of the
United States of America that at the time of payment is legal tender for payment
of public and private debts. Payments in respect of the Notes represented by a
Global Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
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3. Paying Agent, Registrar and Calculation Agent
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent, Registrar and Calculation Agent. The Issuer may appoint and change any
Paying Agent, Registrar, co-registrar or Calculation Agent without notice. The
Issuer or any of its domestically incorporated Wholly Owned Subsidiaries may act
as Paying Agent, Registrar or co-registrar and the Issuer may act as Calculation
Agent.
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the Indenture
dated August 6, 1998 between the Issuer and the Trustee (the "Indenture"), to
which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes include those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as
in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
This Note is one of a series designated pursuant to the First
Supplemental Indenture dated as of August 6, 1998 as the Floating Rate Notes Due
2003 (the "Notes"), limited in aggregate principal amount to $250,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to, among other things, (i) incur
Debt, (ii) make certain Restricted Payments, (iii) enter into consensual
restrictions upon the payment of certain dividends and distributions by such
Subsidiaries, (iv) issue or sell shares of capital stock of the Bank, (v) enter
into or permit certain transactions with Affiliates and (vi) create or incur
Liens on assets of Holdings. Certain of these limitations may not be applicable
if the Notes are rated Investment Grade. The Indenture also imposes certain
limitations on the ability of Holdings or the Bank to consolidate or merge with
or into any other Person or convey or transfer all or substantially all of its
assets.
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5. Redemption
(a) Except as provided below in connection with a Change of Control,
the Notes may not be redeemed prior to August 1, 2000. Thereafter, the Notes may
be redeemed at the option of the Issuer, at any time as a whole, or from time to
time in part, on any Business Day at the following redemption prices (expressed
as percentages of principal amount), plus accrued and unpaid interest (if any)
to the date of redemption (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant Floating Rate
Interest Payment Date), if redeemed during the 12-month period commencing on
August 1 of the years set forth below:
Redemption
Period Price
------ ----------
2000......................... 101.50%
2001......................... 101.00%
2002......................... 100.50%
In the event that the redemption date will occur following the next
scheduled Interest Reset Date, the rate of interest on the Notes for the period
from the date on which a notice of redemption is given in accordance with the
Indenture (the "Notice Date") to the redemption date will be the higher of (x)
the Applicable LIBOR Rate in effect on the Notice Date and (y) the Applicable
LIBOR Rate that is determined by using the second London Banking Day preceding
the Notice Date as the Interest Rate Determination Date. In such case, the
Applicable LIBOR Rate will not be reset on the Interest Reset Date which follows
the Notice Date and precedes the redemption date, although accrued interest will
remain due and payable on the related Floating Rate Interest Payment Date.
Additionally, in the event of a Change of Control occurring prior to
August 1, 2000, the Notes may be redeemed (a "Change of Control Call Event"), in
whole but not in part, at the option of the Issuer at the redemption price set
forth below (the "Change of Control Price"). The Change of Control Price shall
equal the sum of: (i) the principal amount of the Notes to be redeemed plus (ii)
the accrued and unpaid interest (if any) to the date of redemption (subject to
the right of the holders of record on the relevant record date to receive
interest due on the relevant Floating Rate Interest Payment Date), plus (iii)
the Applicable Premium. In the event the redemption date will occur following
the next scheduled Interest Reset Date, the rate of interest on the Notes for
the period from the Notice Date to the redemption date will be determined as
provided in the preceding paragraph.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the sum of the present values at such
time of
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(i) the redemption price for such Note on August 1, 2000 and (ii) the scheduled
interest payments that would be required from the redemption date to August 1,
2000 in respect of such Note to be redeemed, if the Applicable LIBOR Rate were
the Designated Fixed Rate (as defined below), using in each case a discount rate
equal to the Treasury Rate plus 50 basis points, over (B) the then outstanding
principal amount of such Note to be redeemed. For purposes of the foregoing, the
Designated Fixed Rate shall be a rate per annum equal to the sum of (a) the
Treasury Rate plus (b) the Spread plus (c) 47 basis points.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit or, in
the case of a Change of Control Call Event, prior to the relevant Notice Date
(or, if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if the Average
Life to Stated Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used; provided, however, that with
respect to the Notes, for purposes of calculating the Applicable Premium in the
event of a Change of Control Call Event, the Treasury Rate shall be determined
assuming a Stated Maturity of August 1, 2000 for such Notes.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15, 1999 or (ii) the Merger Agreement or
the related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Floating
Rate Interest Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
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Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
at least 30 days but not more than 60 days before any redemption date, and
notice of mandatory redemption pursuant to paragraph 5(b) will be mailed
promptly after the occurrence of the event triggering such redemption, but in no
event less than 10 days prior to the Mandatory Redemption Date, in each case to
each Holder of Notes to be redeemed at his or her address appearing in the
Security Register; provided, however, that in the event the redemption date will
occur following the next scheduled Interest Reset Date, notice of redemption
will be given in accordance with the Indenture at least 30 but not more than 35
days before the applicable redemption date. Notes in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of all Notes (or portions thereof) to be
redeemed on the redemption date is deposited with the Paying Agent (or if the
Issuer or a Subsidiary of the Issuer acts as the Paying Agent, it segregates the
money held by it as Paying Agent and holds it as a separate trust fund) on or
before the redemption date and certain other conditions are satisfied, then on
and after such date interest ceases to accrue on such Notes (or such portions
thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of
Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Floating Rate Interest Payment Date) as
provided in, and subject to the terms of, the Indenture; provided, however, that
notwithstanding the occurrence of a Change in Control, the Issuer shall not be
obligated to purchase the Notes in the event that it
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has exercised its right to redeem all the Notes pursuant to the provisions under
paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorsements or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
12. Discharge and Defeasance
Subject to certain conditions and except as otherwise provided below,
the Issuer at any time may terminate some of or all its obligations under the
Notes and the Indenture in respect of the Notes if the Issuer deposits with the
Trustee money or U.S. Government Obligations for the payment of principal and
interest on the Notes to redemption or maturity, as the case may be.
The Notes will not be subject to any defeasance option prior to August
1, 2000 unless at the time the Issuer is entitled to exercise a right of
redemption resulting from the occurrence of a Change of Control Call Event. In
connection with the exercise of any defeasance option in respect of the Notes,
the Issuer must make irrevocable arrangements with the Trustee to call such
notes for redemption on a redemption date not later than the next scheduled
Interest Reset Date;
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provided, however, that such redemption date may be after the next scheduled
Interest Reset Date if it is not later than 35 days following the required
deposit in the defeasance trust and delivery of the Opinions of Counsel required
by the Indenture.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due
A-15
<PAGE>
and payable. Certain events of bankruptcy or insolvency are Events of Default
and shall result in the Notes being immediately due and payable upon the
occurrence of such Events of Default without any further act of the Trustee or
any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their crea tion. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
A-16
<PAGE>
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
A-17
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of
the Issuer. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
----------------- ---------------------------------------
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Note.
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act of 1933 after the later of the date of original
issuance of such Notes and the last date, if any, on which such Notes were owned
by the Issuer or any Affiliate of the Issuer, the undersigned confirms that such
Notes are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) / / to the Issuer; or
(2) / / pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) / / inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that such transfer is
being made in reliance on Rule 144A, in each case pursuant to
A-18
<PAGE>
and in compliance with Rule 144A under the Securities Act of
1933; or
(4) / / outside the United States in an offshore transaction within the
meaning of Regulation S under the Securities Act in compliance
with Rule 904 under the Securities Act of 1933; or
(5) / / to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933) that
has furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee or the Issuer); or
(6) / / pursuant to another available exemption from registration
provided by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register
any of the Notes evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however,
that if box (4), (5) or (6) is checked, the Trustee may require, prior
to registering any such transfer of the Notes, such legal opinions,
certifications and other information as the Issuer has reasonably
requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
--------------------------------
Your Signature
Signature Guarantee:
Date:
---------------------- --------------------------------
Signature must be guaranteed Signature of Signature Guarantee
by a participant in a recognized
signature guaranty medallion
program or other signature
guarantor acceptable to the
Trustee
- --------------------------------------------------------------------------------
A-19
<PAGE>
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Issuer as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated:
-------------------- ------------------------------
NOTICE: To be executed by an
executive officer
A-20
<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $ . The
following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
<S> <C> <C> <C> <C>
</TABLE>
A-21
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount: $
Date: __________________ Your Signature:_____________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:___________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
A-22
<PAGE>
EXHIBIT B TO FIRST
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF EXCHANGE NOTE]
No. $
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
Floating Rate Note due 2003
CUSIP No. ______
[GS Escrow Corp.] [Golden State Holdings Inc.],(1) a Delaware
corporation, promises to pay to ________________, or registered assigns, the
principal sum of ______________ Dollars on August 1, 2003.
Interest Payment Dates: February 1, May 1, August 1 and November 1,
commencing February 1, 1999.
Record Dates: January 15, April 15, July 15 and October 15.
- -----------------
(1) Golden State Holdings Inc. if the Exchange Offer occurs after the Escrow
Corp. Merger.
B-1
<PAGE>
Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
[GS ESCROW CORP.]
[GOLDEN STATE HOLDINGS INC.]
By:_________________________________
Name:
Title:
By:_________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated: __________________ By:_________________________________
Authorized Signatory
- ------------
* If the Security is to be issued in global form, add the Global Securities
Legend from Exhibit A to the Applicable Supplemental Indenture and the
attachment from such Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES -
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY."
** If the Security is a Private Exchange Note issued in a Private Exchange to
an Initial Purchaser holding an unsold portion of its initial allotment, add the
Restricted Securities Legend from Exhibit A and replace the Assignment Form
included in this Exhibit B with the Assignment Form included in such Exhibit A.
B-2
<PAGE>
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
Floating Rate Note due 2003
1. Interest
[GS Escrow Corp.] [Golden State Holdings Inc.], a Delaware corporation
(such corporation, and its successors and assigns under the Indenture, being
herein called the "Issuer"), promises to pay interest on the principal amount of
this Note at the rate per annum equal to the Applicable LIBOR Rate (as defined
below) determined as provided below. The Issuer will pay interest in arrears on
February 1, 1999 and thereafter quarterly in arrears on May 1, August 1,
November 1, and February 1 of each year (each such date, subject to adjustment
as provided below, a "Floating Rate Interest Payment Date"); provided, however,
that interest accruing on the Initial Note prior to the consummation of the
Exchange Offer or Private Exchange will be paid to the holder of the Initial
Note or the Exchange Note, as the case may be, on the record date next preceding
the Floating Rate Interest Payment Date following the consummation of the
Exchange Offer or Private Exchange. Interest on this Note will accrue from the
most recent date to which interest has been paid on the Initial Notes or, if no
interest has been paid on the Initial Notes, on the Exchange Notes from August
6, 1998. The Issuer shall pay interest on overdue principal at the rate borne by
the Notes plus 1% per annum, and it shall pay interest on overdue installments
of interest at the same rate to the extent lawful.
For each Interest Period, interest will be calculated by multiplying
the outstanding principal amount of this Note by the Applicable LIBOR Rate for
such Interest Period, multiplying such product by the LIBOR Fraction for such
Interest Period (without duplication of the interest that accrued on the Initial
Note in exchange for which this Note was issued); provided that if the
outstanding principal amount of this Note changes during such Interest Period,
then the amount of interest for such Interest Period shall be the sum of the
amounts of interest calculated for each portion of such Interest Period for
which a particular principal amount was outstanding, or a particular Applicable
LIBOR Rate was in effect, using, in each such case, an adjusted LIBOR Fraction
for each such portion that reflects the length of time that such portion of the
principal amount of this Note was outstanding or such Applicable LIBOR Rate was
in effect during such Interest Period. The Applicable LIBOR Rate for each
Interest Period (other than the initial Interest Period and other than to the
extent provided under paragraph 5(a) below) will be set on February 1, May 1,
August 1, and November 1 of each year, commencing with February 1, 1999 (each
such date, subject to adjustment as provided below, an "Interest Reset Date")
until maturity or earlier redemption. If any Interest Reset Date and Floating
Rate Interest Payment
B-3
<PAGE>
Date would otherwise be a day that is not a LIBOR Business Day, such Interest
Reset Date and Floating Rate Interest Payment Date shall be the next succeeding
LIBOR Business Day, unless the next succeeding LIBOR Business Day is in the next
succeeding calendar month, in which case such Interest Reset Date and Floating
Rate Interest Payment Date shall be the immediately preceding LIBOR Business
Day. "LIBOR Business Day" means any day that is not a Saturday or Sunday and
that, in the City of New York or the City of London, is not a day on which
banking institutions are generally authorized or obligated by law to close.
"Interest Period" shall mean the period from and including an Interest
Reset Date (or in the case of the initial Interest Period, the Issue Date) to
but excluding the next succeeding Interest Reset Date and, in the case of the
last such period, from and including the Interest Reset Date immediately
preceding the maturity date or a redemption date, as the case may be, to but not
including the maturity date or such redemption date, as the case may be. If the
redemption date or maturity date with respect to the Notes is not a LIBOR
Business Day, then the principal amount of the Notes plus accrued and unpaid
interest thereon shall be paid on the next succeeding Floating Rate Business Day
and no interest shall accrue for such maturity date, such redemption date or any
date thereafter. "Floating Rate Business Day" shall mean any day that is not a
Saturday or Sunday and that, in the City of New York, is not a day on which
banking institutions are generally authorized or obligated by law to close.
The "Applicable LIBOR Rate," with respect to an Interest Period (except
in the circumstances provided under paragraph 5(a) below) means 100 basis points
(the "Spread") over the rate (the "Base LIBOR Rate") (expressed as a percentage
per annum) for deposits in United States dollars for a three-month period
beginning on the second London Banking Day after the Interest Rate Determination
Date for such Interest Period that appears on Telerate Page 3750 as of 11:00
a.m., London time, on the Interest Rate Determination Date. If Telerate Page
3750 does not include such a rate or is unavailable on an Interest Rate
Determination Date, the Base LIBOR Rate for the Interest Period shall be the
arithmetic mean of the rates (expressed as a percentage per annum) for deposits
of $1,000,000 for a three-month period beginning on the second London Banking
Day after the Interest Rate Determination Date that appears on Reuters Screen
LIBO Page as of 11:00 a.m., London time, on the Interest Rate Determination
Date. If Reuters Screen LIBO Page does not include two or more rates or is
unavailable on an Interest Rate Determination Date, the Trustee shall request
the principal London office of each of four major banks in the London interbank
market to provide such bank's offered quotation (expressed as a percentage per
annum), as of approximately 11:00 a.m., London time, on such Interest Rate
Determination Date, to prime banks in the London interbank market for deposits
of $1,000,000 for a three-month period beginning on the second London Banking
Day after the Interest Rate Determination Date. If at least two such offered
quotations are so provided, the Base LIBOR Rate for the
B-4
<PAGE>
Interest Period shall be the arithmetic mean of such quotations. If fewer than
two such quotations are so provided, the Trustee shall request each of three
major banks in New York City to provide such bank's rate (expressed as a
percentage per annum), as of approximately 11:00 a.m., New York City time, on
such Interest Rate Determination Date, for loans of $1,000,000 to leading
European banks for a three-month period beginning on the second London Banking
Day after the Interest Rate Determination Date. If at least two such rates are
so provided, the Base LIBOR Rate for the Interest Period will be the arithmetic
mean of such rates. If fewer than two such rates are so provided, then the Base
LIBOR Rate for the Interest Period will be the Base LIBOR Rate in effect with
respect to the immediately preceding Interest Period. Notwithstanding the
foregoing, the Applicable LIBOR Rate for the initial Interest Period shall
be 6-3/4%.
"Interest Rate Determination Date" means, with respect to each Interest
Period, the second London Banking Day prior to the Interest Reset Date that
commences such Interest Period or, in the circumstances provided under paragraph
5(a) below, the second London Banking Day prior to the relevant Notice Date.
"LIBOR Fraction" means the actual number of days in the Interest Period
(or the relevant portion thereof) divided by 360.
"London Banking Day" means any day in which dealings in U.S. dollars
are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Reuters Screen LIBO Page" means the display designated as page "LIBO"
on The Reuters Monitor Money Rates Service (or such other page as may replace
the LIBO page on that service).
"Telerate Page 3750" means the display designated as "Page 3750" on the
Dow Jones Telerate Service (or such other page as may replace page 3750 on that
service).
All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% being rounded to 9.87655%), and all dollar amounts used in or
resulting from such calculations will be rounded to the nearest cent (with
one-half cent being rounded upwards).
The interest rate on the Notes will in no event be higher than the
maximum rate permitted by New York law as the same may be modified by United
States law of general application.
B-5
<PAGE>
The Calculation Agent will, upon the request of the Holder of any Note,
provide the interest rate then in effect with respect to the Notes. All
calculations made by the Calculation Agent in the absence of manifest error will
be conclusive for all purposes and binding on the Issuer and the Holder of this
Note.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15, April 15, July 15 or October 15 next preceding the Floating Rate
Interest Payment Date even if the Notes are canceled after the record date and
on or before the Interest Payment Date. The Issuer will pay interest referred to
in paragraph 1 of the Initial Notes (except defaulted interest) on the Initial
Notes in exchange for which the Exchange Notes were issued to the Persons who,
at the close of business on the January 15, April 15, July 15 or October 15 next
preceding the applicable Interest Payment Date, are registered holders of such
Initial Notes, if such record date occurs prior to such exchange, or registered
holders of the Exchange Notes, if such record date occurs on or after the date
of such exchange, even if such Initial Notes or Exchange Notes are canceled
after the record date and on or before such Interest Payment Date. Defaulted
interest will be paid in the manner set forth in the Indenture. Holders must
surrender the Notes to a Paying Agent to collect principal payments. The Issuer
will pay principal and interest in money of the United States of America that at
the time of payment is legal tender for payment of public and private debts.
Payments in respect of the Notes represented by a Global Security (including
principal, premium and interest) will be made by wire transfer of immediately
available funds to the accounts specified by The Depository Trust Company. The
Issuer will make all payments in respect of a certificated Note (including
principal, premium and interest), by mailing a check to the registered address
of each Holder thereof; provided, however, that payments on the Notes will be
made, in the case of a Holder of at least $1,000,000 aggregate principal amount
of Notes, by wire transfer to a U.S. dollar account maintained by the payee with
a bank in the United States if such Holder elects payment by wire transfer by
giving written notice to the Trustee or the Paying Agent to such effect
designating such account no later than 30 days immediately preceding the
relevant due date for payment (or such other date as the Trustee may accept in
its discretion).
3. Paying Agent, Registrar and Calculation Agent
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent, Registrar and Calculation Agent. The Issuer may appoint and change any
Paying Agent, Registrar, co-registrar or Calculation Agent without notice. The
Issuer or any of its domestically incorporated Wholly Owned Subsidiaries may act
as Paying Agent, Registrar or co-registrar and the Issuer may act as Calculation
Agent.
B-6
<PAGE>
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the Indenture
dated August 6, 1998 between the Issuer and the Trustee (the "Indenture"), to
which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes include those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as
in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
This Note is one of a series designated pursuant to the First
Supplemental Indenture dated as of August 6, 1998 as the Floating Rate Notes Due
2003 (the "Notes"), limited in aggregate principal amount to $250,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to, among other things, (i) incur
Debt, (ii) make certain Restricted Payments, (iii) enter into consensual
restrictions upon the payment of certain dividends and distributions by such
Subsidiaries, (iv) issue or sell shares of capital stock of the Bank, (v) enter
into or permit certain transactions with Affiliates and (vi) create or incur
Liens on assets of Holdings. Certain of these limitations may not be applicable
if the Notes are rated Investment Grade. The Indenture also imposes certain
limitations on the ability of Holdings or the Bank to consolidate or merge with
or into any other Person or convey or transfer all or substantially all of its
assets.
5. Redemption
(a) Except as provided below in connection with a Change of Control,
the Notes may not be redeemed prior to August 1, 2000. Thereafter, the Notes may
be redeemed at the option of the Issuer, at any time as a whole, or from time to
time in part, on any Business Day at the following redemption prices (expressed
as percentages of principal amount), plus accrued and unpaid interest (if any)
to the date of redemption (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant Floating Rate
Interest Payment Date), if redeemed during the 12-month period commencing on
August 1 of the years set forth below:
B-7
<PAGE>
Redemption
Period Price
------ ----------
2000........................... 101.50%
2001........................... 101.00%
2002........................... 100.50%
In the event that the redemption date will occur following the next
scheduled Interest Reset Date, the rate of interest on the Notes for the period
from the date on which a notice of redemption is given in accordance with the
Indenture (the "Notice Date") to the redemption date will be the higher of (x)
the Applicable LIBOR Rate in effect on the Notice Date and (y) the Applicable
LIBOR Rate that is determined by using the second London Banking Day preceding
the Notice Date as the Interest Rate Determination Date. In such case, the
Applicable LIBOR Rate will not be reset on the Interest Reset Date which follows
the Notice Date and precedes the redemption date, although accrued interest will
remain due and payable on the related Floating Rate Interest Payment Date.
Additionally, in the event of a Change of Control occurring prior to
August 1, 2000, the Notes may be redeemed (a "Change of Control Call Event"), in
whole but not in part, at the option of the Issuer at the redemption price set
forth below (the "Change of Control Price"). The Change of Control Price shall
equal the sum of: (i) the principal amount of the Notes to be redeemed plus (ii)
the accrued and unpaid interest (if any) to the date of redemption (subject to
the right of the holders of record on the relevant record date to receive
interest due on the relevant Floating Rate Interest Payment Date), plus (iii)
the Applicable Premium. In the event the redemption date will occur following
the next scheduled Interest Reset Date, the rate of interest on the Notes for
the period from the Notice Date to the redemption date will be determined as
provided in the preceding paragraph.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the sum of the present values at such
time of (i) the redemption price for such Note on August 1, 2000 and (ii) the
scheduled interest payments that would be required from the redemption date to
August 1, 2000 in respect of such Note to be redeemed, if the Applicable LIBOR
Rate were the Designated Fixed Rate (as defined below), using in each case a
discount rate equal to the Treasury Rate plus 50 basis points, over (B) the then
outstanding principal amount of such Note to be redeemed. For purposes of the
foregoing, the Designated Fixed Rate shall be a rate per annum equal to the sum
of (a) the Treasury Rate plus (b) the Spread plus (c) 47 basis points.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has
B-8
<PAGE>
become publicly available at least two Business Days prior to the date fixed for
repayment or, in the case of defeasance, prior to the date of deposit or, in the
case of a Change of Control Call Event, prior to the relevant Notice Date (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if the Average
Life to Stated Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used; provided, however, that with
respect to the Notes, for purposes of calculating the Applicable Premium in the
event of a Change of Control Call Event, the Treasury Rate shall be determined
assuming a Stated Maturity of August 1, 2000 for such Notes.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15, 1999 or (ii) the Merger Agreement or
the related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Floating
Rate Interest Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
B-9
<PAGE>
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
at least 30 days but not more than 60 days before any redemption date, and
notice of mandatory redemption pursuant to paragraph 5(b) will be mailed
promptly after the occurrence of the event triggering such redemption, but in no
event less than 10 days prior to the Mandatory Redemption Date, in each case to
each Holder of Notes to be redeemed at his or her address appearing in the
Security Register; provided, however, that in the event the redemption date will
occur following the next scheduled Interest Reset Date, notice of redemption
will be given in accordance with the Indenture at least 30 but not more than 35
days before the applicable redemption date. Notes in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of all Notes (or portions thereof) to be
redeemed on the redemption date is deposited with the Paying Agent (or if the
Issuer or a Subsidiary of the Issuer acts as the Paying Agent, it segregates the
money held by it as Paying Agent and holds it as a separate trust fund) on or
before the redemption date and certain other conditions are satisfied, then on
and after such date interest ceases to accrue on such Notes (or such portions
thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of
Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Floating Rate Interest Payment Date) as
provided in, and subject to the terms of, the Indenture; provided, however, that
notwithstanding the occurrence of a Change in Control, the Issuer shall not be
obligated to purchase the Notes in the event that it has exercised its right to
redeem all the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorsements or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for
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<PAGE>
redemption and ending at the close of business on the date of such mailing, or
(ii) to register the transfer of or exchange any Note so selected for redemption
in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
12. Discharge and Defeasance
Subject to certain conditions and except as otherwise provided below,
the Issuer at any time may terminate some of or all its obligations under the
Notes and the Indenture in respect of the Notes if the Issuer deposits with the
Trustee money or U.S. Government Obligations for the payment of principal and
interest on the Notes to redemption or maturity, as the case may be.
The Notes will not be subject to any defeasance option prior to August
1, 2000 unless at the time the Issuer is entitled to exercise a right of
redemption resulting from the occurrence of a Change of Control Call Event. In
connection with the exercise of any defeasance option in respect of the Notes,
the Issuer must make irrevocable arrangements with the Trustee to call such
notes for redemption on a redemption date not later than the next scheduled
Interest Reset Date; provided, however, that such redemption date may be after
the next scheduled Interest Reset Date if it is not later than 35 days following
the required deposit in the defeasance trust and delivery of the Opinions of
Counsel required by the Indenture.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to
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<PAGE>
certain exceptions set forth in the Indenture, without the consent of any Holder
of the Notes or any other series of Securities, the Issuer and the Trustee may
enter into one or more amendments or indentures supplemental to the Indenture
for, among others, one or more of the following purposes: (i) to cure any
ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 or
Section 4.10 of the Indenture; (iii) to provide for uncertificated Securities in
addition to or in place of certificated Securities; (iv) to add Guarantees with
respect to the Securities of any series, or to remove such Guarantees, when
permitted by the terms of the Indenture or to secure (or provide additional
security for) the Securities of any series; (v) to establish any form of
Security and provide for the issuance of Securities in series and to set forth
the terms thereof, and/or to add to the rights of the holders of the Securities
of any series; (vi) to add additional covenants or to surrender rights or powers
conferred on the Issuer; (vii) to evidence and provide for the acceptance of
appointment by another corporation as a successor Trustee under the Indenture
with respect to one or more series of Securities and to add to or change any of
the provisions of the Indenture as shall be necessary to provide for or
facilitate the administration of the trusts thereunder by more than one Trustee;
(viii) to add any additional Events of Default in respect of Securities of any
series; (ix) to provide for the issuance of Securities in coupon as well as
fully registered form; (x) to comply with any requirements of the Commission in
connection with the qualification of the Indenture under the TIA or to otherwise
comply with the TIA; or (xi) to make any change that does not adversely affect
the rights of any Holder of the Securities of any series. A consent to any
amendment or waiver of any provision in the Indenture or in the Securities of
any series by any Holder given in connection with a tender of such Holder's
Securities shall not be rendered invalid by such tender.
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived
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<PAGE>
except nonpayment of principal or interest that has become due solely because of
such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their crea tion. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to
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<PAGE>
be printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of
the Issuer. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
-------------- -----------------------------------------
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Note. Signature must
be guaranteed by a participant in a recognized signature guaranty medallion
program or other signature guarantor acceptable to the Trustee.
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount: $
Date: __________________ Your Signature: ________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:______________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
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<PAGE>
================================================================================
GS ESCROW CORP.
to be merged with and into
GOLDEN STATE HOLDINGS INC.
Issuer
and
THE BANK OF NEW YORK
Trustee
-------------------------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of August 6, 1998
-------------------------------------
6 3/4% Senior Notes Due 2001
================================================================================
<PAGE>
1
SECOND SUPPLEMENTAL INDENTURE (this "Second Supplemental Indenture"), dated
as of August 6, 1998, between GS ESCROW CORP., a Delaware corporation (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking corporation, as trustee
(the "Trustee").
WHEREAS the Issuer has executed and delivered to the Trustee an Indenture,
dated as of August 6, 1998, as amended by the First Supplemental Indenture,
dated August 6, 1998, the "Original Indenture", providing for the issuance and
sale by the Issuer from time to time of its senior debt securities (the
"Securities"), which term shall include any Securities issued under the
Indenture (as defined below) after the date hereof;
WHEREAS Section 9.01(5) of the Indenture permits the Issuer and the
Trustee, at any time and from time to time, to enter into one or more indentures
supplemental to the Indenture for the purpose of establishing any form of
Security and providing for the issuance of any series of Securities, as provided
in Article II of the Indenture, and setting forth the terms thereof, and/or
adding to the rights of the Holders of the Securities of any series;
WHEREAS the Issuer proposes in and by this Second Supplemental Indenture to
supplement and amend the Original Indenture (as so amended, the "Indenture") in
certain respects to establish a series of Securities issued pursuant to the
Indenture designated as the 6 3/4% Senior Notes Due 2001 limited in aggregate
principal amount to $350,000,000 (the "Initial Notes") and, if and when issued
pursuant to an Exchange Offer or a Private Exchange (each as defined in Appendix
A hereto) for a like principal amount of the Initial Notes, the Issuer's 6 3/4%
Senior Notes due 2001 (the "Exchange Notes") (the Initial Notes and the Exchange
Notes together shall constitute one series of Securities for purposes of the
Indenture and are sometimes referred to herein as the "Notes"); and
WHEREAS the Issuer has requested that the Trustee execute and deliver this
Second Supplemental Indenture and has certified that all requirements necessary
to make this Second Supplemental Indenture a valid instrument in accordance with
its terms have been satisfied, and that the execution and delivery of this
Second Supplemental Indenture has been duly authorized in all respects.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer
and the Trustee hereby covenant and agree for the equal and ratable benefit of
the holders of that series of Securities which consists of Initial Notes and
Exchange Notes as follows:
1. Creation of Series of Securities. Pursuant to Section 2.03 of the
Indenture, there is hereby created a new series of Securities designated as the
"6 3/4%
<PAGE>
2
Senior Notes Due 2001" limited in aggregate principal amount to $350,000,000 and
consisting of the Initial Notes and the Exchange Notes. The Initial Notes and
the Exchange Notes together shall constitute one series of Securities for
purposes of the Indenture.
2. Form, Terms, Issuance and Transfer of Securities. Provisions relating to
the Initial Notes and the Exchange Notes are set forth in Appendix A hereto,
which is hereby incorporated in and expressly made a part of this Second
Supplemental Indenture. The Initial Notes shall be substantially in the form
annexed hereto as Exhibit A. The terms and provisions contained in the form of
the Initial Notes annexed hereto as Exhibit A shall constitute, and are hereby
expressly made, a part of this Second Supplemental Indenture. The Exchange Notes
shall be substantially in the form annexed hereto as Exhibit B. The terms and
provisions contained in the form of the Exchange Notes annexed hereto as Exhibit
B shall constitute, and are hereby expressly made, a part of this Second
Supplemental Indenture. To the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this Second Supplemental Indenture, expressly
agree to such terms and provisions and to be bound thereby.
3. Applicability of Defined Terms and Provisions. The definitions of terms
defined in, and the provisions set forth in, this Second Supplemental Indenture
and the Appendix and Exhibits attached hereto, shall apply only to the series of
Securities established pursuant to this Second Supplemental Indenture.
4. This Second Supplemental Indenture. This Second Supplemental Indenture,
together with the Appendix and the Exhibits hereto shall be construed as
supplemental to the Indenture and shall form a part of it. The Indenture is
hereby incorporated by reference herein and, except as expressly amended hereby,
is hereby ratified, approved and confirmed and all terms, conditions and
provisions thereof shall remain in full force and effect.
5. GOVERNING LAW. THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
6. Counterparts. This Second Supplemental Indenture may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
7. Headings. The headings of this Second Supplemental Indenture are for
reference only and shall not limit or otherwise affect the meaning hereof.
<PAGE>
3
8. Trustee Not Responsible for Recitals. The recitals herein contained are
made by the Issuer, and not by the Trustee, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee shall not be responsible
in any manner whatsoever for or in respect of the validity or sufficiency of
this Second Supplemental Indenture.
9. Separability. In case any one or more of the provisions contained in
this Second Supplemental Indenture or in the series of Securities created hereby
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of the Second Supplemental Indenture or of such series of
Securities, but this Second Supplemental Indenture and such series of the
Securities shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed by their respective authorized officers as of the
date first written above.
GS ESCROW CORP.
By ___________________________________
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By ___________________________________
Name:
Title:
<PAGE>
1
APPENDIX A TO SECOND
SUPPLEMENTAL INDENTURE
GS ESCROW CORP.
6 3/4% SENIOR NOTES DUE 2001
FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO
RULE 144A, TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN
RELIANCE ON REGULATION S AND, SUBJECT TO THE APPLICABLE
PURCHASE AGREEMENT, TO INSTITUTIONAL ACCREDITED
INVESTORS.
PROVISIONS RELATING TO INITIAL NOTES
AND EXCHANGE NOTES
1. Definitions
1.1 Definitions.
(a) Capitalized terms used herein and not defined have the meaning
ascribed to such terms in the Indenture, including the Second Supplemental
Indenture to which this Appendix A is attached (the "Applicable Supplemental
Indenture").
(b) For the purposes of this Appendix A the following terms shall have
the meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Temporary Regulation S Global Note or beneficial
interest therein, the rules and procedures of the Depository, Euroclear and
Cedel for such Global Note, in each case to the extent applicable to such
transaction and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Note or Exchange
Note bearing, if required, the restricted securities legend set forth in Section
2.3(e).
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Exchange Offer" means an offer by the Issuer pursuant to the
Registration Agreement or otherwise, to certain Holders of Initial Notes, to
issue and deliver to such Holders, in exchange for the Initial Notes, a like
aggregate principal amount of Exchange Notes registered under the Securities
Act.
"Exchange Offer Registration Statement" means a registration statement
of the Issuer on an appropriate form under the Securities Act with respect to
the
<PAGE>
2
Exchange Offer, all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"IAI" means an institutional "accredited investor" as described in Rule
501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Salomon Brothers Inc., Goldman, Sachs & Co.,
Bear, Stearns & Co., Inc., Chase Securities Inc., Lehman Brothers Inc. and
NationsBanc Montgomery Securities LLC.
"Private Exchange" means the offer by the Issuer, pursuant to Section 1
of the Registration Agreement, or pursuant to any similar provision of any other
Registration Agreement, to issue and deliver to certain purchasers, in exchange
for the Initial Notes held by such purchasers as part of their initial
distribution, a like aggregate principal amount of Private Exchange Notes.
"Private Exchange Notes" means the 6 3/4% Senior Notes Due 2001 to be
issued pursuant to this Indenture in connection with a Private Exchange pursuant
to a Registration Agreement.
"Purchase Agreement" means the Purchase Agreement, dated July 30, 1998,
between the Issuer and the Initial Purchasers relating to the Initial Notes, or
any similar agreement relating to any future sale of Initial Notes by the
Issuer.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registration Agreement" means the Registration Agreement dated July
30, 1998 among Escrow Corp., Golden State Holdings and the Initial Purchasers
relating to the Initial Securities.
"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depository), or any successor person thereto who
shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement issued by
the Issuer in connection with the offer and sale of Initial Notes or Exchange
Notes pursuant to the Registration Agreement.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the legend set forth in
Section 2.3(e) hereto.
<PAGE>
3
1.2 Other Definitions.
Defined in
Term Section:
---- ----------
"Agent Members"........................................................ 2.1(b)
"Global Security"...................................................... 2.1(a)
"Permanent Regulation S Global Security"............................... 2.1(a)
"Regulation S" ........................................................ 2.1
"Restricted Period".................................................... 2.1(a)
"Rule 144A"............................................................ 2.1
"Rule 144A Global Security"............................................ 2.1(a)
"Temporary Regulation S Global Security"............................... 2.1(a)
2. The Notes
2.1 Form and Dating.
The Initial Notes will be offered and sold by the Issuer, from time to
time, pursuant to one or more Purchase Agreements. The Initial Notes will be
resold, initially only to QIBs in reliance on Rule 144A under the Securities Act
("Rule 144A") and in reliance on Regulation S under the Securities Act
("Regulation S"). Initial Notes may thereafter be transferred to, among others,
QIBs, purchasers in reliance on Regulation S and IAIs under Rule
501(a)(1),(2),(3) or (7) under the Securities Act.
(a) Global Securities. Rule 144A Notes shall be issued initially in the
form of one or more permanent global Notes in definitive, fully registered form
(collectively, the "Rule 144A Global Security") and Regulation S Notes shall be
issued initially in the form of one or more temporary global Notes
(collectively, the "Temporary Regulation S Global Security"), in each case
without interest coupons with the global securities legend and restricted
securities legend set forth in Exhibit A to the Applicable Supplemental
Indenture, which shall be deposited on behalf of the purchasers of the Initial
Notes represented thereby with the Securities Custodian, and registered in the
name of the Depository or a nominee of the Depository, duly executed by the
Issuer and authenticated by the Trustee as provided in the Indenture. Beneficial
ownership interests in the Temporary Regulation S Global Security will not be
exchangeable for interests in the Rule 144A Global Security, a permanent global
security (the "Permanent Regulation S Global Security"), or any other security
without a legend containing restrictions on transfer of such Note prior to the
expiration of the 40-day distribution compliance period as set forth under Rule
9.03(b) (the "Restricted Period") under the Securities Act and then only upon
certification in form reasonably satisfactory to the Trustee that beneficial
ownership interests in such Temporary Regulation S Global Security are owned
either by non-U.S. persons or U.S. persons who purchased such interests in a
transaction that did not require registration under the Securities Act. The Rule
144A Global Securities, Temporary Regulation S Global Security and Permanent
Regulation S Global Security are
<PAGE>
4
collectively referred to herein as "Global Securities." The aggregate principal
amount of the Global Securities may from time to time be increased or decreased
by adjustments made on the records of the Trustee and the Depository or its
nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depository.
The Issuer shall execute and the Trustee shall, in accordance with this
Section 2.1(b) and pursuant to an Issuer Order, authenticate and make available
for delivery initially one or more Global Securities that (a) shall be
registered in the name of the Depository for such Global Security or Global
Securities or the nominee of such Depository and (b) shall be delivered by the
Trustee to such Depository or pursuant to such Depository's instructions or held
by the Trustee as Securities Custodian.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under the Indenture with respect to any Global Security held on
their behalf by the Depository or by the Trustee as Securities Custodian or
under such Global Security, and the Depository may be treated by the Issuer, the
Trustee and any agent of the Issuer or the Trustee as the absolute owner of such
Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer
or the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices of such Depository
governing the exercise of the rights of a holder of a beneficial interest in any
Global Security.
(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of certificated Notes.
2.2 Authentication. The Trustee shall authenticate and make available for
delivery: (1) Initial Notes for original issue in an aggregate principal amount
of $350,000,000 and (2) Exchange Notes for issue from time to time only in an
Exchange Offer or a Private Exchange pursuant to a Registration Agreement, for a
like principal amount of Initial Notes, upon an Issuer Order. Such order shall
specify the amount of the Notes to be authenticated and the date on which the
original issue of Notes is to be authenticated and, if such order is being
delivered other than on the Issue Date, whether the Notes are to be Initial
Notes or Exchange Notes. The aggregate principal amount of Notes Outstanding at
any time may not exceed the amount set forth in the first sentence of this
Section 2.2, except as provided in Section 2.10 of the Indenture.
<PAGE>
5
2.3 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Definitive
Securities are presented to the Registrar or a co-registrar with a request for
transfer or exchange, the Registrar or co-registrar shall register the transfer
or make the exchange as provided in Section 2.09 of the Indenture; provided,
however, that the Definitive Securities surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer and the Registrar or
co-registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(ii) are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act, pursuant to Section 2.3(b)
or pursuant to clause (A), (B) or (C) below, and are accompanied by the
following additional information and documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect (in
the form set forth in the Definitive Security); or
(B) if such Definitive Securities are being transferred to the
Issuer, a certification to that effect (in the form set forth in the
Definitive Security); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act, (i) a certification to that effect and (ii) if the
Issuer so requests, an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in Section 2.3(e)(i).
(b) Restrictions on Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged for a
beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by a written instrument of transfer in
form reasonably satisfactory to the Issuer and the Registrar or co-registrar,
together with:
(i) certification (in the form set forth in the Definitive Security)
that such Definitive Security is being transferred (A) to a QIB in
accordance with Rule 144A, (B) to an IAI that has furnished to the Trustee
a signed letter or (C) outside the United States in an offshore transaction
within the meaning of Regulation S and in compliance with Rule 904 under
the Securities Act; and
<PAGE>
6
(ii) written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an adjustment on its books and records
with respect to such Global Security to reflect an increase in the
aggregate principal amount of the Securities represented by the Global
Security, such instructions to contain information regarding the Depository
account to be credited with such increase;
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depository and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged pursuant to Section 2.4, the Issuer shall issue and the
Trustee shall authenticate, upon written order of the Issuer in the form of an
Officers' Certificate, a new Global Security in the appropriate principal
amount.
(c) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depository, in accordance with the Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depository therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depository's
procedures containing information regarding the participant account of the
Depository to be credited with a beneficial interest in the Global Security and
such account shall be credited in accordance with such instructions with a
beneficial interest in the Global Security and the account of the Person making
the transfer shall be debited by an amount equal to the beneficial interest in
the Global Security being transferred. In the case of a transfer of a beneficial
interest in a Global Security to an IAI, the transferee must furnish a signed
letter to the Trustee containing certain representations and agreements (the
form of which letter can be obtained from the Trustee or the Issuer).
(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Security to a beneficial interest in another Global Security,
the Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security to which such
interest is being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall reflect on its
books and records the date and a corresponding decrease in the principal
amount of Global Security from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix A (other
than the provisions set forth in Section 2.4), a Global Security may not be
<PAGE>
7
transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(iv) In the event that a Global Security is exchanged for Notes in
definitive registered form pursuant to Section 2.4 prior to the
consummation of an Exchange Offer or the effectiveness of a Shelf
Registration Statement with respect to such Notes, such Notes may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the Initial Notes
intended to ensure that such transfers comply with Rule 144A, Regulation S
or such other applicable exemption from registration under the Securities
Act, as the case may be) and such other procedures as may from time to time
be adopted by the Issuer.
(d) Restrictions on Transfer of Temporary Regulation S Global
Securities. During the Restricted Period, beneficial ownership interests in
Temporary Regulation S Global Securities may only be sold, pledged or
transferred through Euroclear or Cedel in accordance with the Applicable
Procedures and only (i) to the Issuer, (ii) so long as such security is eligible
for resale pursuant to Rule 144A, to a person whom the selling holder reasonably
believes is a QIB that purchases for its own account or for the account of a QIB
to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S, (iv) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 (if applicable) under the Securities Act, or
(v) pursuant to an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States. During the Restricted Period, interests in the Temporary
Regulation S Global Security may not be transferred to institutions that are
"Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
(e) Legend.
(i) Except as permitted by the following paragraphs (ii), (iii) and
(iv), each Note certificate evidencing the Global Securities and the
Definitive Securities (and all Notes issued in exchange therefor or in
substitution thereof) shall bear a legend in substantially the following
form:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS
NOTE'S DATE OF ORIGINAL ISSUANCE
<PAGE>
8
OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE
ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO
THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE WHICH MAY
BE OBTAINED FROM THE ISSUER OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE
TO THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN
THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT TO THIS CLAUSE (4) PRIOR
TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION COMPLIANCE PERIOD" (WITHIN
THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE SECURITIES ACT)), (5)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS
NOTE AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES
AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY
TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED
INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES
<PAGE>
9
ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2)
OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT."
Each Definitive Security will also bear the following additional
legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR
AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER
AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE
FOREGOING RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global
Security) pursuant to Rule 144 under the Securities Act:
(A) in the case of any Transfer Restricted Security that is a
Definitive Security, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Security
that does not bear the legends set forth above and rescind any
restriction on the transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security that is
represented by a Global Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legends set forth above and
rescind any restriction on the transfer of such Transfer Restricted
Security,
in either case, if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such certification
to be in the form set forth on the reverse of the Initial Note).
(iii) After a transfer of any Initial Notes during the period of the
effectiveness of a Shelf Registration Statement with respect to such
Initial Notes, all requirements pertaining to legends on such Initial Note
will cease to apply, the requirements requiring that any such Initial Note
be issued in global form will cease to apply, and an Initial Note in
certificated or global form without legends will be available to the
transferee of the Holder of such Initial Notes upon exchange of such
transferring Holder's certificated Initial Note. Upon the occurrence of any
of the circumstances described in this paragraph, the Issuer will deliver
an Officers' Certificate to the Trustee instructing the Trustee to issue
Notes without legends.
<PAGE>
10
(iv) Upon the consummation of an Exchange Offer with respect to the
Initial Notes pursuant to which certain Holders of such Initial Notes are
offered Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes be issued
in global form will cease to apply, and certificated Initial Notes with the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture will be available to Holders of such Initial Notes
that do not exchange their Initial Notes, and Exchange Notes in
certificated or global form will be available to Holders that exchange such
Initial Notes in such Exchange Offer. Upon the occurrence of any of the
circumstances described in this paragraph, the Issuer will deliver an
Officers' Certificate to the Trustee instructing the Trustee to issue
Securities without legends.
(v) Upon the consummation of a Private Exchange with respect to the
Initial Notes pursuant to which Holders of such Initial Notes are offered
Private Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes issued to
certain Holders be issued in global form will continue to apply, and
Private Exchange Notes in global form will be available to Holders that
exchange such Initial Notes in such Private Exchange.
(f) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depository to the Trustee for
cancelation or retained and canceled by the Trustee. At any time prior to such
cancelation, if any beneficial interest in a Global Security is exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, the
principal amount of Notes represented by such Global Security shall be reduced
and an adjustment shall be made on the books and records of the Trustee (if it
is then the Securities Custodian for such Global Security) with respect to such
Global Security, by the Trustee or the Securities Custodian, to reflect such
reduction.
(g) Obligations with Respect to Transfers and Exchanges of Securities.
Terms and provisions for registration of transfer or exchange of the Notes shall
be as set forth in Section 2.09 of the Indenture.
(h) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant in the
Depository or any other Person with respect to the accuracy of the records
of the Depository or its nominee or of any participant or member thereof,
with respect to any ownership interest in the Notes or with respect to the
delivery to any participant, member, beneficial owner or other Person
(other than the Depository) of any notice (including any notice of
redemption or repurchase)
<PAGE>
11
or the payment of any amount, under or with respect to such Notes. All
notices and communications to be given to the Holders and all payments to
be made to Holders under the Notes shall be given or made only to the
registered Holders (which shall be the Depository or its nominee in the
case of a Global Security). The rights of beneficial owners in any Global
Security shall be exercised only through the Depository subject to the
applicable rules and procedures of the Depository. The Trustee may rely and
shall be fully protected in relying upon information furnished by the
Depository with respect to its members, participants and any beneficial
owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Note (including any transfers between or
among Depository participants, members or beneficial owners in any Global
Security) other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and
when expressly required by, the terms of the Indenture, and to examine the
same to determine substantial compliance as to form with the express
requirements hereof.
2.4 Certificated Securities.
(a) A Global Security deposited with the Depository or with the Trustee
as Securities Custodian pursuant to Section 2.1 shall be transferred to the
beneficial owners thereof in the form of certificated Notes in an aggregate
principal amount equal to the principal amount of such Global Security, in
exchange for such Global Security, only if such transfer complies with Section
2.3 and (i) the Depository notifies the Issuer that it is unwilling or unable to
continue as a Depository for such Global Security or if at any time the
Depository ceases to be a "clearing agency" registered under the Exchange Act,
and a successor depositary is not appointed by the Issuer within 90 days of such
notice, or (ii) an Event of Default has occurred and is continuing or (iii) the
Issuer, in its sole discretion, notifies the Trustee in writing that it elects
to cause the issuance of certificated Securities under the Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depository to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of certificated Notes of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depository shall direct.
Any certificated Initial Note delivered in exchange for an interest in the
Global Security shall, except as otherwise provided by Section 2.3(e), bear the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture.
<PAGE>
12
(c) Subject to the provisions of Section 2.4(b), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.
(d) In the event of the occurrence of either of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Issuer will promptly make available to the
Trustee a reasonable supply of certificated Securities in definitive, fully
registered form without interest coupons.
<PAGE>
13
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed by their respective authorized officers as of the
date first written above.
GS ESCROW CORP.
By /s/ Glenn Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
THE BANK OF NEW YORK, as Trustee
By /s/ Robert A. Massimillo
-----------------------------------
Name: Robert Massimillo
Title: Assistant Vice President
<PAGE>
EXHIBIT A TO SECOND
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF INITIAL NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS NOTE'S DATE OF
ORIGINAL ISSUANCE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
A-1
<PAGE>
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM
THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO THE
ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER OR THE
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE (PROVIDED
THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE
PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION
COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE
SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR
(6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT
WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF
THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT
IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2)
AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
[Definitive Securities Legend]
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
A-2
<PAGE>
[FORM OF FACE OF INITIAL NOTE]
No. $
GS ESCROW CORP.
6 3/4% Senior Note due 2001
CUSIP No.
GS Escrow Corp., a Delaware corporation, promises to pay to ,
or registered assigns, the principal sum of Dollars on August 1, 2001.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
A-3
<PAGE>
Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
GS ESCROW CORP.
By: _________________________
Name:
Title:
By: _________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated:_________________ By: ____________________________
Authorized Signatory
A-4
<PAGE>
[FORM OF REVERSE SIDE OF INITIAL NOTE]
GS ESCROW CORP.
6 3/4% Senior Note due 2001
1. Interest
GS Escrow Corp., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Issuer"), promises to pay interest on the principal amount of this
Note at the rate per annum shown above; provided, however, that if (a) by the
75th day following the date of consummation of both the Golden State Acquisition
and the Refinancing Transactions (or if such day is not a Business Day, the
first Business Day thereafter), neither the Shelf Registration Statement nor the
Exchange Offer Registration Statement has been filed with the SEC, the rate per
annum at which interest will accrue on the Notes will increase by 0.5% from and
including such date until but excluding the earlier of (i) the date the Shelf
Registration Statement or the Exchange Offer Registration Statement is filed and
(ii) the 180th day following the date of consummation of both the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a Business
Day, the first Business Day thereafter) and (b) by the 180th day following the
date of consummation of both the Golden State Acquisition and the Refinancing
Transactions (or if such day is not a Business Day, the first Business Day
thereafter), neither (i) the Exchange Offer is consummated nor (ii) the Shelf
Registration Statement with respect to the resale of the Notes is declared
effective, the rate per annum at which interest will accrue on the Notes will
increase by 0.5% from and including such date until but excluding the earlier of
(i) the consummation of the Exchange Offer and (ii) the effective date of the
Shelf Registration Statement. The Issuer will pay interest semiannually in
arrears on February 1 and August 1 of each year, commencing February 1, 1999.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from August 6, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months. The
Issuer shall pay interest on overdue principal at the rate borne by the Notes
plus 1% per annum, and it shall pay interest on overdue installments of interest
at the same rate to the extent lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date;
provided, however, that interest accruing on this Note prior to the consummation
of the Exchange Offer
A-5
<PAGE>
or Private Exchange will be paid to the holder of this Note or the Exchange
Note, as the case may be, on the record date next preceding the Interest Payment
Date following the consummation of the Exchange Offer or Private Exchange.
Defaulted interest will be paid in the manner set forth in the Indenture.
Holders must surrender the Notes to a Paying Agent to collect principal
payments. The Issuer will pay principal and interest in money of the United
States of America that at the time of payment is legal tender for payment of
public and private debts. Payments in respect of the Notes represented by a
Global Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent and Registrar. The Issuer may appoint and change any Paying Agent,
Registrar or co-registrar without notice. The Issuer or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or
co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the Indenture
dated as of August 6, 1998 between the Issuer and the Trustee (the "Indenture"),
to which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes include those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as
in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
A-6
<PAGE>
This Note is one of a series designated pursuant to the Second
Supplemental Indenture dated as of August 6, 1998 as the 6 3/4% Senior Notes Due
2001 (the "Notes"), limited in aggregate principal amount to $350,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to, among other things, (i) incur
Debt, (ii) make certain Restricted Payments, (iii) enter into consensual
restrictions upon the payment of certain dividends and distributions by such
Subsidiaries, (iv) issue or sell shares of capital stock of the Bank, (v) enter
into or permit certain transactions with Affiliates and (vi) create or incur
Liens on assets of Holdings. Certain of these limitations may not be applicable
if the Notes are rated Investment Grade. The Indenture also imposes certain
limitations on the ability of Holdings or the Bank to consolidate or merge with
or into any other Person or convey or transfer all or substantially all of its
assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or
from time to time in part, at an aggregate redemption price equal to the sum of:
(i) the principal amount of the Notes to be redeemed, plus (ii) accrued and
unpaid interest (if any) to the date of redemption (subject to the right of the
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 40 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except
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that, if the Average Life to Stated Maturity of the Notes is less than one year,
the weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15, 1999 or (ii) the Merger Agreement or
the related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
least 30 days but not more than 60 days before any redemption date, and notice
of mandatory redemption pursuant to paragraph 5(b) will be mailed promptly after
the occurrence of the event triggering such redemption, but in no event less
than 10 days prior to the Mandatory Redemption Date, in each case to each Holder
of Notes to be redeemed at his or her address appearing in the Security
Register. Notes in denominations larger than $1,000 may be redeemed in part but
only in whole multiples of $1,000. If money sufficient to pay the redemption
price of all Notes (or portions thereof) to be redeemed on the redemption date
is deposited with the Paying Agent (or if the Issuer or a Subsidiary of the
Issuer acts as the Paying Agent, it segregates the money held by it as Paying
Agent and holds it as a separate trust fund)
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on or before the redemption date and certain other conditions are satisfied,
then on and after such date interest ceases to accrue on such Notes (or such
portions thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorse ments or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
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12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate
some of or all its obligations under the Notes and the Indenture in respect of
the Notes if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
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14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
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<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
A-12
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint ________________________ agent to transfer this Note on
the books of the Issuer. The agent may substitute another to act for him.
_______________________________________________________________________________
Date: ________________ Your Signature: ________________________________________
_______________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act of 1933 after the later of the date of original
issuance of such Notes and the last date, if any, on which such Notes were owned
by the Issuer or any Affiliate of the Issuer, the undersigned confirms that such
Notes are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) / / to the Issuer; or
(2) / / pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) / / inside the United States to a "qualified
institutional buyer" (as defined in Rule 144A under
the Securities Act of 1933) that purchases for its
own account or for the account of a qualified
institutional buyer to whom notice is given that such
transfer is being made in reliance on Rule 144A, in
each case pursuant to
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<PAGE>
and in compliance with Rule 144A under the Securities Act
of 1933; or
(4) / / outside the United States in an offshore
transaction within the meaning of Regulation S under
the Securities Act in compliance with Rule 904 under
the Securities Act of 1933; or
(5) / / to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act of 1933) that has furnished to the
Trustee a signed letter containing certain
representations and agreements (the form of which
letter can be obtained from the Trustee or the
Issuer); or
(6) / / pursuant to another available exemption from
registration provided by Rule 144 under the
Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register
any of the Notes evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however,
that if box (4), (5) or (6) is checked, the Trustee may require, prior
to registering any such transfer of the Notes, such legal opinions,
certifications and other information as the Issuer has reasonably
requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
--------------------------------
Your Signature
Signature Guarantee:
Date: _____________________ ________________________________
Signature must be guaranteed Signature of Signature Guarantee
by a participant in a recognized
signature guaranty medallion
program or other signature
guarantor acceptable to the
Trustee
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<PAGE>
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Issuer as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: __________________ ______________________________
NOTICE: To be executed by an
executive officer
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<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $ . The
following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
<S> <C> <C> <C> <C>
</TABLE>
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount:
$
Date: __________________ Your Signature: _________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee: ___________________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
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<PAGE>
EXHIBIT B TO SECOND
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF EXCHANGE NOTE]
No. $
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
6 3/4% Senior Note due 2001
CUSIP No. ______
[GS Escrow Corp.] [Golden State Holdings Inc.],(1) a Delaware
corporation, promises to pay to _______________, or registered assigns, the
principal sum of ________ Dollars on August 1, 2001.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
- --------
(1) Golden State Holdings Inc. if the Exchange Offer occurs after the Escrow
Corp. Merger.
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<PAGE>
Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
[GS ESCROW CORP.]
[GOLDEN STATE HOLDINGS INC.]
By: ___________________________________________
Name:
Title:
By: ___________________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated:__________________ By: ________________________________
Authorized Signatory
* If the Security is to be issued in global form, add the Global Securities
Legend from Exhibit A to the Applicable Supplemental Indenture and the
attachment from such Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY."
** If the Security is a Private Exchange Note issued in a Private Exchange to
an Initial Purchaser holding an unsold portion of its initial allotment, add the
Restricted Securities Legend from Exhibit A and replace the Assignment Form
included in this Exhibit B with the Assignment Form included in such Exhibit A.
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<PAGE>
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
6 3/4% Senior Note due 2001
1. Interest.
[GS Escrow Corp.] [Golden State Holdings Inc.], a Delaware corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Issuer"), promises to pay
interest on the principal amount of this Note at the rate per annum shown above
(without duplication of the interest that accrued on the Initial Note in
exchange for which this Note was issued). The Issuer will pay interest
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1999; provided, however, that interest accruing on the Initial Note
prior to the consummation of the Exchange Offer or Private Exchange will be paid
to the holder of the Initial Note or the Exchange Note, as the case may be, on
the record date next preceding the Interest Payment Date following the
consummation of the Exchange Offer or Private Exchange. Interest on this Note
will accrue from the most recent date to which interest has been paid on the
Initial Notes or, if no interest has been paid on the Initial Notes, on the
Exchange Notes from August 6, 1998. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Issuer shall pay interest on overdue
principal at the rate borne by the Notes plus 1% per annum, and it shall pay
interest on overdue installments of interest at the same rate to the extent
lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date.
The Issuer will pay interest referred to in paragraph 1 of the Initial Notes
(except defaulted interest) on the Initial Notes in exchange for which the
Exchange Notes were issued to the Persons who, at the close of business on the
January 15 or the July 15 next preceding the applicable interest payment date,
are registered holders of such Initial Notes, if such record date occurs prior
to such exchange, or registered holders of the Exchange Notes, if such record
date occurs on or after the date of such exchange, even if such Initial Notes or
Exchange Notes are canceled after the record date and on or before such interest
payment date. Defaulted interest will be paid in the manner set forth in the
Indenture. Holders must surrender the Notes to a Paying Agent to collect
principal payments. The Issuer will pay principal and interest in money of the
United States of America that at the time of payment is legal tender for payment
of public
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<PAGE>
and private debts. Payments in respect of the Notes represented by a Global
Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent and Registrar. The Issuer may appoint and change any Paying Agent,
Registrar or co-registrar without notice. The Issuer or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or
co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the
Indenture, dated as of August 6, 1998 between the Issuer and the Trustee (the
"Indenture"), to which reference is hereby made for a statement of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee and any agent of the Trustee, any Paying Agent, the Issuer and the
Holders of the Notes and the terms upon which the Notes are issued and are to be
authenticated and delivered. The terms of the Notes also include those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA") and
Securityholders are referred to the TIA for a statement of those terms. Terms
defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture.
This Note is one of a series designated pursuant to the Second
Supplemental Indenture dated as of August 6, 1998 as the 6 3/4% Senior Notes Due
2001 (the "Notes"), limited in aggregate principal amount to $350,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to,
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<PAGE>
among other things, (i) incur Debt, (ii) make certain Restricted Payments, (iii)
enter into consensual restrictions upon the payment of certain dividends and
distributions by such Subsidiaries, (iv) issue or sell shares of capital stock
of the Bank (v) enter into or permit certain transactions with Affiliates and
(vi) create or incur Liens on assets of Holdings. Certain of these limitations
may not be applicable if the Notes are rated Investment Grade. The Indenture
also imposes certain limitations on the ability of Holdings or the Bank to
consolidate or merge with or into any other Person or convey or transfer all or
substantially all of its assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or
from time to time in part, at an aggregate redemption price equal to the sum of:
(i) the principal amount of the Notes to be redeemed, plus (ii) accrued and
unpaid interest (if any) to the date of redemption (subject to the right of the
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 40 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if the Average
Life to Stated Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15 , 1999 or (ii) the Merger Agreement or
the
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<PAGE>
related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
at least 30 days but not more than 60 days before any redemption date, and
notice of mandatory redemption pursuant to paragraph 5(b) will be mailed
promptly after the occurrence of the event triggering such redemption, but in no
event less than 10 days prior to the Mandatory Redemption Date, in each case to
each Holder of Notes to be redeemed at his or her address appearing in the
Security Register. Notes in denominations larger than $1,000 may be redeemed in
part but only in whole multiples of $1,000. If money sufficient to pay the
redemption price of all Notes (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent (or if the Issuer or a
Subsidiary of the Issuer acts as the Paying Agent, it segregates the money held
by it as Paying Agent and holds it as a separate trust fund) on or before the
redemption date and certain other conditions are satisfied, then on and after
such date interest ceases to accrue on such Notes (or such portions thereof)
called for redemption.
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<PAGE>
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorse ments or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
B-7
<PAGE>
12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate
some of or all its obligations under the Notes and the Indenture in respect of
the Notes if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
B-8
<PAGE>
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
B-9
<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
B-10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint ___________________________ agent to transfer this Note
on the books of the Issuer. The agent may substitute another to act for him.
_______________________________________________________________________________
Date: Your Signature:
------------------------ ---------------------------------
_______________________________________________________________________________
Sign exactly as your name appears on the other side of this Note. Signature must
be guaranteed by a participant in a recognized signature guaranty medallion
program or other signature guarantor acceptable to the Trustee.
B-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount: $
Date: _________________ Your Signature: _________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:____________________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
B-12
<PAGE>
================================================================================
GS ESCROW CORP.
to be merged with and into
GOLDEN STATE HOLDINGS INC.
Issuer
and
THE BANK OF NEW YORK
Trustee
-------------------------------------
THIRD SUPPLEMENTAL INDENTURE
Dated as of August 6, 1998
-------------------------------------
7% Senior Notes Due 2003
================================================================================
<PAGE>
1
THIRD SUPPLEMENTAL INDENTURE (this "Third Supplemental Indenture"), dated
as of August 6, 1998, between GS ESCROW CORP., a Delaware corporation (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking corporation, as trustee
(the "Trustee").
WHEREAS the Issuer has executed and delivered to the Trustee an Indenture,
dated as of August 6, 1998, as amended by the First and Second Supplemental
Indentures, each dated August 6, 1998, the "Original Indenture", providing for
the issuance and sale by the Issuer from time to time of its senior debt
securities (the "Securities"), which term shall include any Securities issued
under the Indenture (as defined below) after the date hereof;
WHEREAS Section 9.01(5) of the Indenture permits the Issuer and the
Trustee, at any time and from time to time, to enter into one or more indentures
supplemental to the Indenture for the purpose of establishing any form of
Security and providing for the issuance of any series of Securities, as provided
in Article II of the Indenture, and setting forth the terms thereof, and/or
adding to the rights of the Holders of the Securities of any series;
WHEREAS the Issuer proposes in and by this Third Supplemental Indenture to
supplement and amend the Original Indenture (as so amended, the "Indenture") in
certain respects to establish a series of Securities issued pursuant to the
Indenture designated as the 7% Senior Notes Due 2003 limited in aggregate
principal amount to $600,000,000 (the "Initial Notes") and, if and when issued
pursuant to an Exchange Offer or a Private Exchange (each as defined in Appendix
A hereto) for a like principal amount of the Initial Notes, the Issuer's 7%
Senior Notes due 2003 (the "Exchange Notes") (the Initial Notes and the Exchange
Notes together shall constitute one series of Securities for purposes of the
Indenture and are sometimes referred to herein as the "Notes"); and
WHEREAS the Issuer has requested that the Trustee execute and deliver this
Third Supplemental Indenture and has certified that all requirements necessary
to make this Third Supplemental Indenture a valid instrument in accordance with
its terms have been satisfied, and that the execution and delivery of this Third
Supplemental Indenture has been duly authorized in all respects.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer
and the Trustee hereby covenant and agree for the equal and ratable benefit of
the holders of that series of Securities which consists of Initial Notes and
Exchange Notes as follows:
1. Creation of Series of Securities. Pursuant to Section 2.03 of the
Indenture, there is hereby created a new series of Securities designated as the
"7%
<PAGE>
2
Senior Notes Due 2003" limited in aggregate principal amount to $600,000,000 and
consisting of the Initial Notes and the Exchange Notes. The Initial Notes and
the Exchange Notes together shall constitute one series of Securities for
purposes of the Indenture.
2. Form, Terms, Issuance and Transfer of Securities. Provisions relating to
the Initial Notes and the Exchange Notes are set forth in Appendix A hereto,
which is hereby incorporated in and expressly made a part of this Third
Supplemental Indenture. The Initial Notes shall be substantially in the form
annexed hereto as Exhibit A. The terms and provisions contained in the form of
the Initial Notes annexed hereto as Exhibit A shall constitute, and are hereby
expressly made, a part of this Third Supplemental Indenture. The Exchange Notes
shall be substantially in the form annexed hereto as Exhibit B. The terms and
provisions contained in the form of the Exchange Notes annexed hereto as Exhibit
B shall constitute, and are hereby expressly made, a part of this Third
Supplemental Indenture. To the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this Third Supplemental Indenture, expressly
agree to such terms and provisions and to be bound thereby.
3. Applicability of Defined Terms and Provisions. The definitions of terms
defined in, and the provisions set forth in, this Third Supplemental Indenture
and the Appendix and Exhibits attached hereto, shall apply only to the series of
Securities established pursuant to this Third Supplemental Indenture.
4. This Third Supplemental Indenture. This Third Supplemental Indenture,
together with the Appendix and the Exhibits hereto shall be construed as
supplemental to the Indenture and shall form a part of it. The Indenture is
hereby incorporated by reference herein and, except as expressly amended hereby,
is hereby ratified, approved and confirmed and all terms, conditions and
provisions thereof shall remain in full force and effect.
5. GOVERNING LAW. THIS THIRD SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
6. Counterparts. This Third Supplemental Indenture may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
7. Headings. The headings of this Third Supplemental Indenture are for
reference only and shall not limit or otherwise affect the meaning hereof.
<PAGE>
3
8. Trustee Not Responsible for Recitals. The recitals herein contained are
made by the Issuer, and not by the Trustee, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee shall not be responsible
in any manner whatsoever for or in respect of the validity or sufficiency of
this Third Supplemental Indenture.
9. Separability. In case any one or more of the provisions contained in
this Third Supplemental Indenture or in the series of Securities created hereby
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of the Third Supplemental Indenture or of such series of
Securities, but this Third Supplemental Indenture and such series of the
Securities shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental
Indenture to be duly executed by their respective authorized officers as of the
date first written above.
GS ESCROW CORP.
By ____________________________________
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By ____________________________________
Name:
Title:
<PAGE>
1
APPENDIX A TO THIRD
SUPPLEMENTAL INDENTURE
GS ESCROW CORP.
7% SENIOR NOTES DUE 2003
FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO
RULE 144A, TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN
RELIANCE ON REGULATION S AND, SUBJECT TO THE APPLICABLE
PURCHASE AGREEMENT, TO INSTITUTIONAL ACCREDITED INVESTORS.
PROVISIONS RELATING TO INITIAL NOTES
AND EXCHANGE NOTES
1. Definitions
1.1 Definitions.
(a) Capitalized terms used herein and not defined have the meaning
ascribed to such terms in the Indenture, including the Third Supplemental
Indenture to which this Appendix A is attached (the "Applicable Supplemental
Indenture").
(b) For the purposes of this Appendix A the following terms shall have
the meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Temporary Regulation S Global Note or beneficial
interest therein, the rules and procedures of the Depository, Euroclear and
Cedel for such Global Note, in each case to the extent applicable to such
transaction and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Note or Exchange
Note bearing, if required, the restricted securities legend set forth in Section
2.3(e).
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Exchange Offer" means an offer by the Issuer pursuant to the
Registration Agreement or otherwise, to certain Holders of Initial Notes, to
issue and deliver to such Holders, in exchange for the Initial Notes, a like
aggregate principal amount of Exchange Notes registered under the Securities
Act.
"Exchange Offer Registration Statement" means a registration statement
of the Issuer on an appropriate form under the Securities Act with respect to
the
<PAGE>
2
Exchange Offer, all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"IAI" means an institutional "accredited investor" as described in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Salomon Brothers Inc., Goldman, Sachs &
Co., Bear, Stearns & Co., Inc., Chase Securities Inc., Lehman Brothers Inc. and
NationsBanc Montgomery Securities LLC.
"Private Exchange" means the offer by the Issuer, pursuant to Section
1 of the Registration Agreement, or pursuant to any similar provision of any
other Registration Agreement, to issue and deliver to certain purchasers, in
exchange for the Initial Notes held by such purchasers as part of their initial
distribution, a like aggregate principal amount of Private Exchange Notes.
"Private Exchange Notes" means the 7% Senior Notes Due 2003 to be
issued pursuant to this Indenture in connection with a Private Exchange pursuant
to a Registration Agreement.
"Purchase Agreement" means the Purchase Agreement, dated July 30,
1998, between the Issuer and the Initial Purchasers relating to the Initial
Notes, or any similar agreement relating to any future sale of Initial Notes by
the Issuer.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registration Agreement" means the Registration Agreement dated July
30, 1998 among Escrow Corp., Golden State Holdings and the Initial Purchasers
relating to the Initial Securities.
"Securities Custodian" means the custodian with respect to a
Global Security (as appointed by the Depository), or any successor person
thereto who shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement issued
by the Issuer in connection with the offer and sale of Initial Notes or Exchange
Notes pursuant to the Registration Agreement.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the legend set forth in
Section 2.3(e) hereto.
<PAGE>
3
1.2 Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section:
---- ----------
<S> <C>
"Agent Members".................................................................................... 2.1(b)
"Global Security".................................................................................. 2.1(a)
"Permanent Regulation S Global Security"........................................................... 2.1(a)
"Regulation S" .................................................................................... 2.1
"Restricted Period"................................................................................ 2.1(a)
"Rule 144A"........................................................................................ 2.1
"Rule 144A Global Security"........................................................................ 2.1(a)
"Temporary Regulation S Global Security"........................................................... 2.1(a)
</TABLE>
2. The Notes
2.1 Form and Dating.
The Initial Notes will be offered and sold by the Issuer, from time to
time, pursuant to one or more Purchase Agreements. The Initial Notes will be
resold, initially only to QIBs in reliance on Rule 144A under the Securities Act
("Rule 144A") and in reliance on Regulation S under the Securities Act
("Regulation S"). Initial Notes may thereafter be transferred to, among others,
QIBs, purchasers in reliance on Regulation S and IAIs under Rule
501(a)(1),(2),(3) or (7) under the Securities Act.
(a) Global Securities. Rule 144A Notes shall be issued initially in
the form of one or more permanent global Notes in definitive, fully registered
form (collectively, the "Rule 144A Global Security") and Regulation S Notes
shall be issued initially in the form of one or more temporary global Notes
(collectively, the "Temporary Regulation S Global Security"), in each case
without interest coupons with the global securities legend and restricted
securities legend set forth in Exhibit A to the Applicable Supplemental
Indenture, which shall be deposited on behalf of the purchasers of the Initial
Notes represented thereby with the Securities Custodian, and registered in the
name of the Depository or a nominee of the Depository, duly executed by the
Issuer and authenticated by the Trustee as provided in the Indenture. Beneficial
ownership interests in the Temporary Regulation S Global Security will not be
exchangeable for interests in the Rule 144A Global Security, a permanent global
security (the "Permanent Regulation S Global Security"), or any other security
without a legend containing restrictions on transfer of such Note prior to the
expiration of the 40-day distribution compliance period as set forth under Rule
9.03(b) (the "Restricted Period") under the Securities Act and then only upon
certification in form reasonably satisfactory to the Trustee that beneficial
ownership interests in such Temporary Regulation S Global Security are owned
either by non-U.S. persons or U.S. persons who purchased such interests in a
transaction that did not require registration under the Securities Act. The Rule
144A Global Securities, Temporary Regulation S Global Security and Permanent
Regulation S Global Security are
<PAGE>
4
collectively referred to herein as "Global Securities." The aggregate principal
amount of the Global Securities may from time to time be increased or decreased
by adjustments made on the records of the Trustee and the Depository or its
nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depository.
The Issuer shall execute and the Trustee shall, in accordance with
this Section 2.1(b) and pursuant to an Issuer Order, authenticate and make
available for delivery initially one or more Global Securities that (a) shall be
registered in the name of the Depository for such Global Security or Global
Securities or the nominee of such Depository and (b) shall be delivered by the
Trustee to such Depository or pursuant to such Depository's instructions or held
by the Trustee as Securities Custodian.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under the Indenture with respect to any Global Security held on
their behalf by the Depository or by the Trustee as Securities Custodian or
under such Global Security, and the Depository may be treated by the Issuer, the
Trustee and any agent of the Issuer or the Trustee as the absolute owner of such
Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer
or the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices of such Depository
governing the exercise of the rights of a holder of a beneficial interest in any
Global Security.
(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of certificated Notes.
2.2 Authentication. The Trustee shall authenticate and make available for
delivery: (1) Initial Notes for original issue in an aggregate principal amount
of $600,000,000 and (2) Exchange Notes for issue from time to time only in an
Exchange Offer or a Private Exchange pursuant to a Registration Agreement, for a
like principal amount of Initial Notes, upon an Issuer Order. Such order shall
specify the amount of the Notes to be authenticated and the date on which the
original issue of Notes is to be authenticated and, if such order is being
delivered other than on the Issue Date, whether the Notes are to be Initial
Notes or Exchange Notes. The aggregate principal amount of Notes Outstanding at
any time may not exceed the amount set forth in the first sentence of this
Section 2.2, except as provided in Section 2.10 of the Indenture.
<PAGE>
5
2.3 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Definitive
Securities are presented to the Registrar or a co-registrar with a request for
transfer or exchange, the Registrar or co-registrar shall register the transfer
or make the exchange as provided in Section 2.09 of the Indenture; provided,
however, that the Definitive Securities surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer and the Registrar or
co-registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(ii) are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act, pursuant to Section 2.3(b)
or pursuant to clause (A), (B) or (C) below, and are accompanied by the
following additional information and documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect (in
the form set forth in the Definitive Security); or
(B) if such Definitive Securities are being transferred to the
Issuer, a certification to that effect (in the form set forth in the
Definitive Security); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act, (i) a certification to that effect and (ii) if the
Issuer so requests, an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in Section 2.3(e)(i).
(b) Restrictions on Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged for a
beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by a written instrument of transfer in
form reasonably satisfactory to the Issuer and the Registrar or co-registrar,
together with:
(i) certification (in the form set forth in the Definitive Security)
that such Definitive Security is being transferred (A) to a QIB in
accordance with Rule 144A, (B) to an IAI that has furnished to the Trustee
a signed letter or (C) outside the United States in an offshore transaction
within the meaning of Regulation S and in compliance with Rule 904 under
the Securities Act; and
<PAGE>
6
(ii) written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an adjustment on its books and records
with respect to such Global Security to reflect an increase in the
aggregate principal amount of the Securities represented by the Global
Security, such instructions to contain information regarding the Depository
account to be credited with such increase;
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depository and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged pursuant to Section 2.4, the Issuer shall issue and the
Trustee shall authenticate, upon written order of the Issuer in the form of an
Officers' Certificate, a new Global Security in the appropriate principal
amount.
(c) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depository, in accordance with the Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depository therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depository's
procedures containing information regarding the participant account of the
Depository to be credited with a beneficial interest in the Global Security and
such account shall be credited in accordance with such instructions with a
beneficial interest in the Global Security and the account of the Person making
the transfer shall be debited by an amount equal to the beneficial interest in
the Global Security being transferred. In the case of a transfer of a beneficial
interest in a Global Security to an IAI, the transferee must furnish a signed
letter to the Trustee containing certain representations and agreements (the
form of which letter can be obtained from the Trustee or the Issuer).
(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Security to a beneficial interest in another Global Security,
the Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security to which such
interest is being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall reflect on its
books and records the date and a corresponding decrease in the principal
amount of Global Security from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix A (other
than the provisions set forth in Section 2.4), a Global Security may not be
<PAGE>
7
transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(iv) In the event that a Global Security is exchanged for Notes in
definitive registered form pursuant to Section 2.4 prior to the
consummation of an Exchange Offer or the effectiveness of a Shelf
Registration Statement with respect to such Notes, such Notes may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the Initial Notes
intended to ensure that such transfers comply with Rule 144A, Regulation S
or such other applicable exemption from registration under the Securities
Act, as the case may be) and such other procedures as may from time to time
be adopted by the Issuer.
(d) Restrictions on Transfer of Temporary Regulation S Global
Securities. During the Restricted Period, beneficial ownership interests in
Temporary Regulation S Global Securities may only be sold, pledged or
transferred through Euroclear or Cedel in accordance with the Applicable
Procedures and only (i) to the Issuer, (ii) so long as such security is eligible
for resale pursuant to Rule 144A, to a person whom the selling holder reasonably
believes is a QIB that purchases for its own account or for the account of a QIB
to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S, (iv) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 (if applicable) under the Securities Act, or
(v) pursuant to an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States. During the Restricted Period, interests in the Temporary
Regulation S Global Security may not be transferred to institutions that are
"Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
(e) Legend.
(i) Except as permitted by the following paragraphs (ii), (iii) and
(iv), each Note certificate evidencing the Global Securities and the
Definitive Securities (and all Notes issued in exchange therefor or in
substitution thereof) shall bear a legend in substantially the following
form:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS
NOTE'S DATE OF ORIGINAL ISSUANCE
<PAGE>
8
OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE
ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO
THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE WHICH MAY
BE OBTAINED FROM THE ISSUER OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE
TO THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN
THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT TO THIS CLAUSE (4) PRIOR
TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION COMPLIANCE PERIOD" (WITHIN
THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE SECURITIES ACT)), (5)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS
NOTE AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES
AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY
TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED
INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES
<PAGE>
9
ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2)
OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT."
Each Definitive Security will also bear the following additional
legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR
AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER
AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE
FOREGOING RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global
Security) pursuant to Rule 144 under the Securities Act:
(A) in the case of any Transfer Restricted Security that is a
Definitive Security, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Security
that does not bear the legends set forth above and rescind any
restriction on the transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security that is
represented by a Global Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legends set forth above and
rescind any restriction on the transfer of such Transfer Restricted
Security,
in either case, if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such certification
to be in the form set forth on the reverse of the Initial Note).
(iii) After a transfer of any Initial Notes during the period of the
effectiveness of a Shelf Registration Statement with respect to such
Initial Notes, all requirements pertaining to legends on such Initial Note
will cease to apply, the requirements requiring that any such Initial Note
be issued in global form will cease to apply, and an Initial Note in
certificated or global form without legends will be available to the
transferee of the Holder of such Initial Notes upon exchange of such
transferring Holder's certificated Initial Note. Upon the occurrence of any
of the circumstances described in this paragraph, the Issuer will deliver
an Officers' Certificate to the Trustee instructing the Trustee to issue
Notes without legends.
<PAGE>
10
(iv) Upon the consummation of an Exchange Offer with respect to the
Initial Notes pursuant to which certain Holders of such Initial Notes are
offered Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes be issued
in global form will cease to apply, and certificated Initial Notes with the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture will be available to Holders of such Initial Notes
that do not exchange their Initial Notes, and Exchange Notes in
certificated or global form will be available to Holders that exchange such
Initial Notes in such Exchange Offer. Upon the occurrence of any of the
circumstances described in this paragraph, the Issuer will deliver an
Officers' Certificate to the Trustee instructing the Trustee to issue
Securities without legends.
(v) Upon the consummation of a Private Exchange with respect to the
Initial Notes pursuant to which Holders of such Initial Notes are offered
Private Exchange Notes in exchange for their Initial Notes, all
requirements pertaining to such Initial Notes that Initial Notes issued to
certain Holders be issued in global form will continue to apply, and
Private Exchange Notes in global form will be available to Holders that
exchange such Initial Notes in such Private Exchange.
(f) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depository to the Trustee for
cancelation or retained and canceled by the Trustee. At any time prior to such
cancelation, if any beneficial interest in a Global Security is exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, the
principal amount of Notes represented by such Global Security shall be reduced
and an adjustment shall be made on the books and records of the Trustee (if it
is then the Securities Custodian for such Global Security) with respect to such
Global Security, by the Trustee or the Securities Custodian, to reflect such
reduction.
(g) Obligations with Respect to Transfers and Exchanges of Securities.
Terms and provisions for registration of transfer or exchange of the Notes shall
be as set forth in Section 2.09 of the Indenture.
(h) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant in the
Depository or any other Person with respect to the accuracy of the records
of the Depository or its nominee or of any participant or member thereof,
with respect to any ownership interest in the Notes or with respect to the
delivery to any participant, member, beneficial owner or other Person
(other than the Depository) of any notice (including any notice of
redemption or repurchase)
<PAGE>
11
or the payment of any amount, under or with respect to such Notes. All
notices and communications to be given to the Holders and all payments to
be made to Holders under the Notes shall be given or made only to the
registered Holders (which shall be the Depository or its nominee in the
case of a Global Security). The rights of beneficial owners in any Global
Security shall be exercised only through the Depository subject to the
applicable rules and procedures of the Depository. The Trustee may rely and
shall be fully protected in relying upon information furnished by the
Depository with respect to its members, participants and any beneficial
owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Note (including any transfers between or
among Depository participants, members or beneficial owners in any Global
Security) other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and
when expressly required by, the terms of the Indenture, and to examine the
same to determine substantial compliance as to form with the express
requirements hereof.
2.4 Certificated Securities.
(a) A Global Security deposited with the Depository or with the
Trustee as Securities Custodian pursuant to Section 2.1 shall be transferred to
the beneficial owners thereof in the form of certificated Notes in an aggregate
principal amount equal to the principal amount of such Global Security, in
exchange for such Global Security, only if such transfer complies with Section
2.3 and (i) the Depository notifies the Issuer that it is unwilling or unable to
continue as a Depository for such Global Security or if at any time the
Depository ceases to be a "clearing agency" registered under the Exchange Act,
and a successor depositary is not appointed by the Issuer within 90 days of such
notice, or (ii) an Event of Default has occurred and is continuing or (iii) the
Issuer, in its sole discretion, notifies the Trustee in writing that it elects
to cause the issuance of certificated Securities under the Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depository to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of certificated Notes of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depository shall direct.
Any certificated Initial Note delivered in exchange for an interest in the
Global Security shall, except as otherwise provided by Section 2.3(e), bear the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture.
<PAGE>
12
(c) Subject to the provisions of Section 2.4(b), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.
(d) In the event of the occurrence of either of the events specified
in Section 2.4(a)(i), (ii) or (iii), the Issuer will promptly make available to
the Trustee a reasonable supply of certificated Securities in definitive, fully
registered form without interest coupons.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental
Indenture to be duly executed by their respective authorized officers as of the
date first written above.
GS ESCROW CORP.
By /s/ Glen P. Dickes
------------------------------------
Name: Glen P. Dickes
Title: Vice President and Secretary
THE BANK OF NEW YORK, as Trustee
By /s/ Robert A. Massimillo
------------------------------------
Name: Robert Massimillo
Title: Assistant Vice President
<PAGE>
EXHIBIT A TO THIRD
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF INITIAL NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO
THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS NOTE'S DATE OF
ORIGINAL ISSUANCE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
A-1
<PAGE>
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM
THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO THE
ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER OR THE
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE (PROVIDED
THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE
PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION
COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE
SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR
(6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT
WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF
THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT
IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2)
AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
[Definitive Securities Legend]
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
A-2
<PAGE>
[FORM OF FACE OF INITIAL NOTE]
No. $
GS ESCROW CORP.
7% Senior Note due 2003
CUSIP No.
GS Escrow Corp., a Delaware corporation, promises to pay to ______________,
or registered assigns, the principal sum of ____________ Dollars on August 1,
2003.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
A-3
<PAGE>
Additional provisions of this Note are set forth on the other side of this
Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
GS ESCROW CORP.
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated:_________________ By:______________________________
Authorized Signatory
A-4
<PAGE>
[FORM OF REVERSE SIDE OF INITIAL NOTE]
GS ESCROW CORP.
7% Senior Note due 2003
1. Interest
GS Escrow Corp., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Issuer"), promises to pay interest on the principal amount of this
Note at the rate per annum shown above; provided, however, that if (a) by the
75th day following the date of consummation of both the Golden State Acquisition
and the Refinancing Transactions (or if such day is not a Business Day, the
first Business Day thereafter), neither the Shelf Registration Statement nor the
Exchange Offer Registration Statement has been filed with the SEC, the rate per
annum at which interest will accrue on the Notes will increase by 0.5% from and
including such date until but excluding the earlier of (i) the date the Shelf
Registration Statement or the Exchange Offer Registration Statement is filed and
(ii) the 180th day following the date of consummation of both the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a Business
Day, the first Business Day thereafter) and (b) by the 180th day following the
date of consummation of both the Golden State Acquisition and the Refinancing
Transactions (or if such day is not a Business Day, the first Business Day
thereafter), neither (i) the Exchange Offer is consummated nor (ii) the Shelf
Registration Statement with respect to the resale of the Notes is declared
effective, the rate per annum at which interest will accrue on the Notes will
increase by 0.5% from and including such date until but excluding the earlier of
(i) the consummation of the Exchange Offer and (ii) the effective date of the
Shelf Registration Statement. The Issuer will pay interest semiannually in
arrears on February 1 and August 1 of each year, commencing February 1, 1999.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from August 6, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months. The
Issuer shall pay interest on overdue principal at the rate borne by the Notes
plus 1% per annum, and it shall pay interest on overdue installments of interest
at the same rate to the extent lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to the
Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date;
provided, however, that interest accruing on this Note prior to the consummation
of the Exchange Offer
A-5
<PAGE>
or Private Exchange will be paid to the holder of this Note or the Exchange
Note, as the case may be, on the record date next preceding the Interest Payment
Date following the consummation of the Exchange Offer or Private Exchange.
Defaulted interest will be paid in the manner set forth in the Indenture.
Holders must surrender the Notes to a Paying Agent to collect principal
payments. The Issuer will pay principal and interest in money of the United
States of America that at the time of payment is legal tender for payment of
public and private debts. Payments in respect of the Notes represented by a
Global Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying Agent
and Registrar. The Issuer may appoint and change any Paying Agent, Registrar or
co-registrar without notice. The Issuer or any of its domestically incorporated
Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures, notes,
bonds or other evidences of indebtedness of the Issuer, of the series herein
specified, all issued or to be issued under and pursuant to the Indenture dated
as of August 6, 1998 between the Issuer and the Trustee (the "Indenture"), to
which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes include those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as
in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
A-6
<PAGE>
This Note is one of a series designated pursuant to the Third Supplemental
Indenture dated as of August 6, 1998 as the 7% Senior Notes Due 2003 (the
"Notes"), limited in aggregate principal amount to $600,000,000, subject to
Section 2.10 of the Indenture. The Notes include the Initial Notes and any
Exchange Notes issued in exchange for Initial Notes. The Initial Notes and the
Exchange Notes are treated as a single series of Securities under the Indenture.
The Indenture imposes certain limitations on the ability of the Issuer, Holdings
or Holdings' Subsidiaries to, among other things, (i) incur Debt, (ii) make
certain Restricted Payments, (iii) enter into consensual restrictions upon the
payment of certain dividends and distributions by such Subsidiaries, (iv) issue
or sell shares of capital stock of the Bank, (v) enter into or permit certain
transactions with Affiliates and (vi) create or incur Liens on assets of
Holdings. Certain of these limitations may not be applicable if the Notes are
rated Investment Grade. The Indenture also imposes certain limitations on the
ability of Holdings or the Bank to consolidate or merge with or into any other
Person or convey or transfer all or substantially all of its assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or from
time to time in part, at an aggregate redemption price equal to the sum of: (i)
the principal amount of the Notes to be redeemed, plus (ii) accrued and unpaid
interest (if any) to the date of redemption (subject to the right of the holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time
of determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except
A-7
<PAGE>
that, if the Average Life to Stated Maturity of the Notes is less than one year,
the weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden State
Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are not
consummated on or prior to January 15, 1999 or (ii) the Merger Agreement or the
related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999, in
the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
least 30 days but not more than 60 days before any redemption date, and notice
of mandatory redemption pursuant to paragraph 5(b) will be mailed promptly after
the occurrence of the event triggering such redemption, but in no event less
than 10 days prior to the Mandatory Redemption Date, in each case to each Holder
of Notes to be redeemed at his or her address appearing in the Security
Register. Notes in denominations larger than $1,000 may be redeemed in part but
only in whole multiples of $1,000. If money sufficient to pay the redemption
price of all Notes (or portions thereof) to be redeemed on the redemption date
is deposited with the Paying Agent (or if the Issuer or a Subsidiary of the
Issuer acts as the Paying Agent, it segregates the money held by it as Paying
Agent and holds it as a separate trust fund)
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<PAGE>
on or before the redemption date and certain other conditions are satisfied,
then on and after such date interest ceases to accrue on such Notes (or such
portions thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right, subject to certain conditions specified in the Indenture, to cause
the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of $1,000
and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorse ments or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it for
all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent shall pay the money back to the Issuer at its
written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
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12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate some of
or all its obligations under the Notes and the Indenture in respect of the Notes
if the Issuer deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities of any series may be amended or one or more supplemental
indentures may be entered into with the written consent of the Holders of at
least a majority in principal amount outstanding of the Securities of each
series affected by such amendment or supplemental indenture and (ii) any default
or noncompliance with any provision in any series may be waived with the written
consent of the Holders of a majority in principal amount outstanding of the
Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
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14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the Notes,
subject to certain limitations, may declare all the Notes to be immediately due
and payable. Certain events of bankruptcy or insolvency are Events of Default
and shall result in the Notes being immediately due and payable upon the
occurrence of such Events of Default without any further act of the Trustee or
any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer shall
not have any liability for any obligations of the Issuer under the Notes or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the Trustee
(or an authenticating agent) manually signs the certificate of authentication on
the other side of this Note.
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<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint ______________________ agent to transfer this Note on
the books of the Issuer. The agent may substitute another to act for him.
_______________________________________________________________________________
Date: ________________ Your Signature: ________________________________________
_______________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act of 1933 after the later of the date of original
issuance of such Notes and the last date, if any, on which such Notes were owned
by the Issuer or any Affiliate of the Issuer, the undersigned confirms that such
Notes are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) / / to the Issuer; or
(2) / / pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) / / inside the United States to a "qualified
institutional buyer" (as defined in Rule 144A under
the Securities Act of 1933) that purchases for its
own account or for the account of a qualified
institutional buyer to whom notice is given that such
transfer is being made in reliance on Rule 144A, in
each case pursuant to
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<PAGE>
and in compliance with Rule 144A under the Securities Act
of 1933; or
(4) / / outside the United States in an offshore
transaction within the meaning of Regulation S under
the Securities Act in compliance with Rule 904 under
the Securities Act of 1933; or
(5) / / to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act of 1933) that has furnished to the
Trustee a signed letter containing certain
representations and agreements (the form of which
letter can be obtained from the Trustee or the
Issuer); or
(6) / / pursuant to another available exemption from
registration provided by Rule 144 under the
Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register
any of the Notes evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however,
that if box (4), (5) or (6) is checked, the Trustee may require, prior
to registering any such transfer of the Notes, such legal opinions,
certifications and other information as the Issuer has reasonably
requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
--------------------------------
Your Signature
Signature Guarantee:
Date: _____________________ ________________________________
Signature must be guaranteed Signature of Signature Guarantee
by a participant in a recognized
signature guaranty medallion
program or other signature
guarantor acceptable to the
Trustee
______________________________________________________________________________
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<PAGE>
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a "qualified institutional buyer"
within the meaning of Rule 144A under the Securities Act of 1933, and is aware
that the sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Issuer as the undersigned has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated: __________________ ______________________________
NOTICE: To be executed by an
executive officer
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<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $_____________.
The following increases or decreases in this Global Security have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
</TABLE>
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant to
Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the Issuer
pursuant to Section 4.06 of the Indenture, state the amount: $
Date: __________________ Your Signature:___________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:__________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
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<PAGE>
EXHIBIT B TO THIRD
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF EXCHANGE NOTE]
No. $
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
7% Senior Note due 2003
CUSIP No. ______
[GS Escrow Corp.] [Golden State Holdings Inc.](1) a Delaware corporation,
promises to pay to _______________, or registered assigns, the principal sum of
Dollars on August 1, 2003.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
- --------
(1) Golden State Holdings Inc. if the Exchange Offer occurs after the Escrow
Corp. Merger.
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<PAGE>
Additional provisions of this Note are set forth on the other side of this
Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
[GS ESCROW CORP.]
[GOLDEN STATE HOLDINGS INC.]
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated:__________________ By:________________________________
Authorized Signatory
______________
* If the Security is to be issued in global form, add the Global Securities
Legend from Exhibit A to the Applicable Supplemental Indenture and the
attachment from such Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY."
** If the Security is a Private Exchange Note issued in a Private Exchange to
an Initial Purchaser holding an unsold portion of its initial allotment, add the
Restricted Securities Legend from Exhibit A and replace the Assignment Form
included in this Exhibit B with the Assignment Form included in such Exhibit A.
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<PAGE>
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
7% Senior Note due 2003
1. Interest.
[GS Escrow Corp.] [Golden State Holdings Inc.], a Delaware corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Issuer"), promises to pay
interest on the principal amount of this Note at the rate per annum shown above
(without duplication of the interest that accrued on the Initial Note in
exchange for which this Note was issued). The Issuer will pay interest
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1999; provided, however, that interest accruing on the Initial Note
prior to the consummation of the Exchange Offer or Private Exchange will be paid
to the holder of the Initial Note or the Exchange Note, as the case may be, on
the record date next preceding the Interest Payment Date following the
consummation of the Exchange Offer or Private Exchange. Interest on this Note
will accrue from the most recent date to which interest has been paid on the
Initial Notes or, if no interest has been paid on the Initial Notes, on the
Exchange Notes from August 6, 1998. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Issuer shall pay interest on overdue
principal at the rate borne by the Notes plus 1% per annum, and it shall pay
interest on overdue installments of interest at the same rate to the extent
lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to the
Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date.
The Issuer will pay interest referred to in paragraph 1 of the Initial Notes
(except defaulted interest) on the Initial Notes in exchange for which the
Exchange Notes were issued to the Persons who, at the close of business on the
January 15 or the July 15 next preceding the applicable interest payment date,
are registered holders of such Initial Notes, if such record date occurs prior
to such exchange, or registered holders of the Exchange Notes, if such record
date occurs on or after the date of such exchange, even if such Initial Notes or
Exchange Notes are canceled after the record date and on or before such interest
payment date. Defaulted interest will be paid in the manner set forth in the
Indenture. Holders must surrender the Notes to a Paying Agent to collect
principal payments. The Issuer will pay principal and interest in money of the
United States of America that at the time of payment is legal tender for payment
of public
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<PAGE>
and private debts. Payments in respect of the Notes represented by a Global
Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying Agent
and Registrar. The Issuer may appoint and change any Paying Agent, Registrar or
co-registrar without notice. The Issuer or any of its domestically incorporated
Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures, notes,
bonds or other evidences of indebtedness of the Issuer, of the series herein
specified, all issued or to be issued under and pursuant to the Indenture, dated
as of August 6, 1998 between the Issuer and the Trustee (the "Indenture"), to
which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes also include those made part of the Indenture
by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb)
as in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
This Note is one of a series designated pursuant to the Third Supplemental
Indenture dated as of August 6, 1998 as the 7% Senior Notes Due 2003 (the
"Notes"), limited in aggregate principal amount to $600,000,000, subject to
Section 2.10 of the Indenture. The Notes include the Initial Notes and any
Exchange Notes issued in exchange for Initial Notes. The Initial Notes and the
Exchange Notes are treated as a single series of Securities under the Indenture.
The Indenture imposes certain limitations on the ability of the Issuer, Holdings
or Holdings' Subsidiaries to,
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<PAGE>
among other things, (i) incur Debt, (ii) make certain Restricted Payments, (iii)
enter into consensual restrictions upon the payment of certain dividends and
distributions by such Subsidiaries, (iv) issue or sell shares of capital stock
of the Bank (v) enter into or permit certain transactions with Affiliates and
(vi) create or incur Liens on assets of Holdings. Certain of these limitations
may not be applicable if the Notes are rated Investment Grade. The Indenture
also imposes certain limitations on the ability of Holdings or the Bank to
consolidate or merge with or into any other Person or convey or transfer all or
substantially all of its assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or from
time to time in part, at an aggregate redemption price equal to the sum of: (i)
the principal amount of the Notes to be redeemed, plus (ii) accrued and unpaid
interest (if any) to the date of redemption (subject to the right of the holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if the Average
Life to Stated Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden State
Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are not
consummated on or prior to January 15 , 1999 or (ii) the Merger Agreement or the
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<PAGE>
related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999, in
the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed at
least 30 days but not more than 60 days before any redemption date, and notice
of mandatory redemption pursuant to paragraph 5(b) will be mailed promptly after
the occurrence of the event triggering such redemption, but in no event less
than 10 days prior to the Mandatory Redemption Date, in each case to each Holder
of Notes to be redeemed at his or her address appearing in the Security
Register. Notes in denominations larger than $1,000 may be redeemed in part but
only in whole multiples of $1,000. If money sufficient to pay the redemption
price of all Notes (or portions thereof) to be redeemed on the redemption date
is deposited with the Paying Agent (or if the Issuer or a Subsidiary of the
Issuer acts as the Paying Agent, it segregates the money held by it as Paying
Agent and holds it as a separate trust fund) on or before the redemption date
and certain other conditions are satisfied, then on and after such date interest
ceases to accrue on such Notes (or such portions thereof) called for redemption.
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<PAGE>
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right, subject to certain conditions specified in the Indenture, to cause
the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of $1,000
and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorse ments or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it for
all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent shall pay the money back to the Issuer at its
written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
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<PAGE>
12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate some of
or all its obligations under the Notes and the Indenture in respect of the Notes
if the Issuer deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities of any series may be amended or one or more supplemental
indentures may be entered into with the written consent of the Holders of at
least a majority in principal amount outstanding of the Securities of each
series affected by such amendment or supplemental indenture and (ii) any default
or noncompliance with any provision in any series may be waived with the written
consent of the Holders of a majority in principal amount outstanding of the
Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
B-8
<PAGE>
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the Notes,
subject to certain limitations, may declare all the Notes to be immediately due
and payable. Certain events of bankruptcy or insolvency are Events of Default
and shall result in the Notes being immediately due and payable upon the
occurrence of such Events of Default without any further act of the Trustee or
any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer shall
not have any liability for any obligations of the Issuer under the Notes or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the Trustee
(or an authenticating agent) manually signs the certificate of authentication on
the other side of this Note.
B-9
<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
B-10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint ___________________________ agent to transfer this Note
on the books of the Issuer. The agent may substitute another to act for him.
_______________________________________________________________________________
Date: ________________ Your Signature:_________________________________________
_______________________________________________________________________________
Sign exactly as your name appears on the other side of this Note. Signature must
be guaranteed by a participant in a recognized signature guaranty medallion
program or other signature guarantor acceptable to the Trustee.
B-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant to
Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the Issuer
pursuant to Section 4.06 of the Indenture, state the amount: $
Date: __________________ Your Signature:___________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:____________________________________________________
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
B-12
<PAGE>
================================================================================
GS ESCROW CORP.
to be merged with and into
GOLDEN STATE HOLDINGS INC.
Issuer
and
THE BANK OF NEW YORK
Trustee
-------------------------------------
FOURTH SUPPLEMENTAL INDENTURE
Dated as of August 6, 1998
-------------------------------------
7 1/8% Senior Notes Due 2005
================================================================================
<PAGE>
1
FOURTH SUPPLEMENTAL INDENTURE (this "Fourth Supplemental Indenture"),
dated as of August 6, 1998, between GS ESCROW CORP., a Delaware corporation (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking corporation, as trustee
(the "Trustee").
WHEREAS the Issuer has executed and delivered to the Trustee an
Indenture, dated as of August 6, 1998, as amended by the First, Second and Third
Supplemental Indentures, each dated August 6, 1998, the "Original Indenture",
providing for the issuance and sale by the Issuer from time to time of its
senior debt securities (the "Securities"), which term shall include any
Securities issued under the Indenture (as defined below) after the date hereof;
WHEREAS Section 9.01(5) of the Indenture permits the Issuer and the
Trustee, at any time and from time to time, to enter into one or more indentures
supplemental to the Indenture for the purpose of establishing any form of
Security and providing for the issuance of any series of Securities, as provided
in Article II of the Indenture, and setting forth the terms thereof, and/or
adding to the rights of the Holders of the Securities of any series;
WHEREAS the Issuer proposes in and by this Fourth Supplemental
Indenture to supplement and amend the Original Indenture (as so amended, the
"Indenture") in certain respects to establish a series of Securities issued
pursuant to the Indenture designated as the 7 1/8% Senior Notes Due 2005 limited
in aggregate principal amount to $800,000,000 (the "Initial Notes") and, if and
when issued pursuant to an Exchange Offer or a Private Exchange (each as defined
in Appendix A hereto) for a like principal amount of the Initial Notes, the
Issuer's 7 1/8% Senior Notes due 2005 (the "Exchange Notes") (the Initial Notes
and the Exchange Notes together shall constitute one series of Securities for
purposes of the Indenture and are sometimes referred to herein as the "Notes");
and
WHEREAS the Issuer has requested that the Trustee execute and deliver
this Fourth Supplemental Indenture and has certified that all requirements
necessary to make this Fourth Supplemental Indenture a valid instrument in
accordance with its terms have been satisfied, and that the execution and
delivery of this Fourth Supplemental Indenture has been duly authorized in all
respects.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer
and the Trustee hereby covenant and agree for the equal and ratable benefit of
the holders of that series of Securities which consists of Initial Notes and
Exchange Notes as follows:
1. Creation of Series of Securities. Pursuant to Section 2.03 of the
Indenture, there is hereby created a new series of Securities designated as the
"7 1/8%
<PAGE>
2
Senior Notes Due 2005" limited in aggregate principal amount to $800,000,000 and
consisting of the Initial Notes and the Exchange Notes. The Initial Notes and
the Exchange Notes together shall constitute one series of Securities for
purposes of the Indenture.
2. Form, Terms, Issuance and Transfer of Securities. Provisions
relating to the Initial Notes and the Exchange Notes are set forth in Appendix A
hereto, which is hereby incorporated in and expressly made a part of this Fourth
Supplemental Indenture. The Initial Notes shall be substantially in the form
annexed hereto as Exhibit A. The terms and provisions contained in the form of
the Initial Notes annexed hereto as Exhibit A shall constitute, and are hereby
expressly made, a part of this Fourth Supplemental Indenture. The Exchange Notes
shall be substantially in the form annexed hereto as Exhibit B. The terms and
provisions contained in the form of the Exchange Notes annexed hereto as Exhibit
B shall constitute, and are hereby expressly made, a part of this Fourth
Supplemental Indenture. To the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this Fourth Supplemental Indenture, expressly
agree to such terms and provisions and to be bound thereby.
3. Applicability of Defined Terms and Provisions. The definitions of
terms defined in, and the provisions set forth in, this Fourth Supplemental
Indenture and the Appendix and Exhibits attached hereto, shall apply only to the
series of Securities established pursuant to this Fourth Supplemental Indenture.
4. This Fourth Supplemental Indenture. This Fourth Supplemental
Indenture, together with the Appendix and the Exhibits hereto shall be construed
as supplemental to the Indenture and shall form a part of it. The Indenture is
hereby incorporated by reference herein and, except as expressly amended hereby,
is hereby ratified, approved and confirmed and all terms, conditions and
provisions thereof shall remain in full force and effect.
5. GOVERNING LAW. THIS FOURTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT
WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT
THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED
THEREBY.
6. Counterparts. This Fourth Supplemental Indenture may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
7. Headings. The headings of this Fourth Supplemental Indenture are for
reference only and shall not limit or otherwise affect the meaning hereof.
<PAGE>
3
8. Trustee Not Responsible for Recitals. The recitals herein contained
are made by the Issuer, and not by the Trustee, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee shall not be responsible
in any manner whatsoever for or in respect of the validity or sufficiency of
this Fourth Supplemental Indenture.
9. Separability. In case any one or more of the provisions contained in
this Fourth Supplemental Indenture or in the series of Securities created hereby
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of the Fourth Supplemental Indenture or of such series of
Securities, but this Fourth Supplemental Indenture and such series of the
Securities shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
GS ESCROW CORP.
By -----------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By -----------------------------
Name:
Title:
<PAGE>
1
APPENDIX A TO FOURTH
SUPPLEMENTAL INDENTURE
GS ESCROW CORP.
7 1/8% SENIOR NOTES DUE 2005
FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO
RULE 144A, TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN
RELIANCE ON REGULATION S AND, SUBJECT TO THE APPLICABLE
PURCHASE AGREEMENT, TO INSTITUTIONAL ACCREDITED
INVESTORS.
PROVISIONS RELATING TO INITIAL NOTES
AND EXCHANGE NOTES
1. Definitions
1.1 Definitions.
(a) Capitalized terms used herein and not defined have the meaning
ascribed to such terms in the Indenture, including the Fourth Supplemental
Indenture to which this Appendix A is attached (the "Applicable Supplemental
Indenture").
(b) For the purposes of this Appendix A the following terms shall have
the meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Temporary Regulation S Global Note or beneficial
interest therein, the rules and procedures of the Depository, Euroclear and
Cedel for such Global Note, in each case to the extent applicable to such
transaction and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Note or Exchange
Note bearing, if required, the restricted securities legend set forth in Section
2.3(e).
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Exchange Offer" means an offer by the Issuer pursuant to the
Registration Agreement or otherwise, to certain Holders of Initial Notes, to
issue and deliver to such Holders, in exchange for the Initial Notes, a like
aggregate principal amount of Exchange Notes registered under the Securities
Act.
"Exchange Offer Registration Statement" means a registration statement
of the Issuer on an appropriate form under the Securities Act with respect to
the
<PAGE>
2
Exchange Offer, all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"IAI" means an institutional "accredited investor" as described in Rule
501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Salomon Brothers Inc., Goldman, Sachs & Co.,
Bear, Stearns & Co., Inc., Chase Securities Inc., Lehman Brothers Inc. and
NationsBanc Montgomery Securities LLC.
"Private Exchange" means the offer by the Issuer, pursuant to Section 1
of the Registration Agreement, or pursuant to any similar provision of any other
Registration Agreement, to issue and deliver to certain purchasers, in exchange
for the Initial Notes held by such purchasers as part of their initial
distribution, a like aggregate principal amount of Private Exchange Notes.
"Private Exchange Notes" means the 71/8% Senior Notes Due 2005 to be
issued pursuant to this Indenture in connection with a Private Exchange pursuant
to a Registration Agreement.
"Purchase Agreement" means the Purchase Agreement, dated July 30, 1998,
between the Issuer and the Initial Purchasers relating to the Initial Notes, or
any similar agreement relating to any future sale of Initial Notes by the
Issuer.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registration Agreement" means the Registration Agreement dated July
30, 1998 among Escrow Corp., Golden State Holdings and the Initial Purchasers
relating to the Initial Securities.
"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depository), or any successor person thereto who
shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement issued by
the Issuer in connection with the offer and sale of Initial Notes or Exchange
Notes pursuant to the Registration Agreement.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the legend set forth in
Section 2.3(e) hereto.
<PAGE>
3
1.2 Other Definitions.
Defined in
Term Section:
---- ----------
"Agent Members".................................................. 2.1(b)
"Global Security"................................................ 2.1(a)
"Permanent Regulation S Global Security"......................... 2.1(a)
"Regulation S" .................................................. 2.1
"Restricted Period".............................................. 2.1(a)
"Rule 144A"...................................................... 2.1
"Rule 144A Global Security"...................................... 2.1(a)
"Temporary Regulation S Global Security"......................... 2.1(a)
2. The Notes
2.1 Form and Dating.
The Initial Notes will be offered and sold by the Issuer, from time to
time, pursuant to one or more Purchase Agreements. The Initial Notes will be
resold, initially only to QIBs in reliance on Rule 144A under the Securities Act
("Rule 144A") and in reliance on Regulation S under the Securities Act
("Regulation S"). Initial Notes may thereafter be transferred to, among others,
QIBs, purchasers in reliance on Regulation S and IAIs under Rule
501(a)(1), (2), (3) or (7) under the Securities Act.
(a) Global Securities. Rule 144A Notes shall be issued initially in the
form of one or more permanent global Notes in definitive, fully registered form
(collectively, the "Rule 144A Global Security") and Regulation S Notes shall be
issued initially in the form of one or more temporary global Notes
(collectively, the "Temporary Regulation S Global Security"), in each case
without interest coupons with the global securities legend and restricted
securities legend set forth in Exhibit A to the Applicable Supplemental
Indenture, which shall be deposited on behalf of the purchasers of the Initial
Notes represented thereby with the Securities Custodian, and registered in the
name of the Depository or a nominee of the Depository, duly executed by the
Issuer and authenticated by the Trustee as provided in the Indenture. Beneficial
ownership interests in the Temporary Regulation S Global Security will not be
exchangeable for interests in the Rule 144A Global Security, a permanent global
security (the "Permanent Regulation S Global Security"), or any other security
without a legend containing restrictions on transfer of such Note prior to the
expiration of the 40-day distribution compliance period as set forth under Rule
9.03(b) (the "Restricted Period") under the Securities Act and then only upon
certification in form reasonably satisfactory to the Trustee that beneficial
ownership interests in such Temporary Regulation S Global Security are owned
either by non-U.S. persons or U.S. persons who purchased such interests in a
transaction that did not require registration under the Securities Act. The Rule
144A Global Securities, Temporary Regulation S Global Security and Permanent
Regulation S Global Security are
<PAGE>
4
collectively referred to herein as "Global Securities." The aggregate principal
amount of the Global Securities may from time to time be increased or decreased
by adjustments made on the records of the Trustee and the Depository or its
nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depository.
The Issuer shall execute and the Trustee shall, in accordance with this
Section 2.1(b) and pursuant to an Issuer Order, authenticate and make available
for delivery initially one or more Global Securities that (a) shall be
registered in the name of the Depository for such Global Security or Global
Securities or the nominee of such Depository and (b) shall be delivered by the
Trustee to such Depository or pursuant to such Depository's instructions or held
by the Trustee as Securities Custodian.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under the Indenture with respect to any Global Security held on
their behalf by the Depository or by the Trustee as Securities Custodian or
under such Global Security, and the Depository may be treated by the Issuer, the
Trustee and any agent of the Issuer or the Trustee as the absolute owner of such
Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer
or the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices of such Depository
governing the exercise of the rights of a holder of a beneficial interest in any
Global Security.
(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of certificated Notes.
2.2 Authentication. The Trustee shall authenticate and make available
for delivery: (1) Initial Notes for original issue in an aggregate principal
amount of $800,000,000 and (2) Exchange Notes for issue from time to time only
in an Exchange Offer or a Private Exchange pursuant to a Registration Agreement,
for a like principal amount of Initial Notes, upon an Issuer Order. Such order
shall specify the amount of the Notes to be authenticated and the date on which
the original issue of Notes is to be authenticated and, if such order is being
delivered other than on the Issue Date, whether the Notes are to be Initial
Notes or Exchange Notes. The aggregate principal amount of Notes Outstanding at
any time may not exceed the amount set forth in the first sentence of this
Section 2.2, except as provided in Section 2.10 of the Indenture.
<PAGE>
5
2.3 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Definitive
Securities are presented to the Registrar or a co-registrar with a request for
transfer or exchange, the Registrar or co-registrar shall register the transfer
or make the exchange as provided in Section 2.09 of the Indenture; provided,
however, that the Definitive Securities surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer and the Registrar or
co-registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(ii) are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act, pursuant to Section 2.3(b)
or pursuant to clause (A), (B) or (C) below, and are accompanied by the
following additional information and documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect (in
the form set forth in the Definitive Security); or
(B) if such Definitive Securities are being transferred to the
Issuer, a certification to that effect (in the form set forth in the
Definitive Security); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act, (i) a certification to that effect and (ii) if the
Issuer so requests, an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in Section 2.3(e)(i).
(b) Restrictions on Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged for a
beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by a written instrument of transfer in
form reasonably satisfactory to the Issuer and the Registrar or co-registrar,
together with:
(i) certification (in the form set forth in the Definitive
Security) that such Definitive Security is being transferred (A) to a
QIB in accordance with Rule 144A, (B) to an IAI that has furnished to
the Trustee a signed letter or (C) outside the United States in an
offshore transaction within the meaning of Regulation S and in
compliance with Rule 904 under the Securities Act; and
<PAGE>
6
(ii) written instructions directing the Trustee to make, or to
direct the Securities Custodian to make, an adjustment on its books and
records with respect to such Global Security to reflect an increase in
the aggregate principal amount of the Securities represented by the
Global Security, such instructions to contain information regarding the
Depository account to be credited with such increase;
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depository and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged pursuant to Section 2.4, the Issuer shall issue and the
Trustee shall authenticate, upon written order of the Issuer in the form of an
Officers' Certificate, a new Global Security in the appropriate principal
amount.
(c) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depository, in accordance with the Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depository therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depository's
procedures containing information regarding the participant account of the
Depository to be credited with a beneficial interest in the Global Security and
such account shall be credited in accordance with such instructions with a
beneficial interest in the Global Security and the account of the Person making
the transfer shall be debited by an amount equal to the beneficial interest in
the Global Security being transferred. In the case of a transfer of a beneficial
interest in a Global Security to an IAI, the transferee must furnish a signed
letter to the Trustee containing certain representations and agreements (the
form of which letter can be obtained from the Trustee or the Issuer).
(ii) If the proposed transfer is a transfer of a beneficial
interest in one Global Security to a beneficial interest in another
Global Security, the Registrar shall reflect on its books and records
the date and an increase in the principal amount of the Global
Security to which such interest is being transferred in an amount
equal to the principal amount of the interest to be so transferred,
and the Registrar shall reflect on its books and records the date and
a corresponding decrease in the principal amount of Global Security
from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix A
(other than the provisions set forth in Section 2.4), a Global
Security may not be
<PAGE>
7
transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or
another nominee of the Depository or by the Depository or any such
nominee to a successor Depository or a nominee of such successor
Depository.
(iv) In the event that a Global Security is exchanged for Notes
in definitive registered form pursuant to Section 2.4 prior to the
consummation of an Exchange Offer or the effectiveness of a Shelf
Registration Statement with respect to such Notes, such Notes may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the Initial
Notes intended to ensure that such transfers comply with Rule 144A,
Regulation S or such other applicable exemption from registration
under the Securities Act, as the case may be) and such other
procedures as may from time to time be adopted by the Issuer.
(d) Restrictions on Transfer of Temporary Regulation S Global
Securities. During the Restricted Period, beneficial ownership interests in
Temporary Regulation S Global Securities may only be sold, pledged or
transferred through Euroclear or Cedel in accordance with the Applicable
Procedures and only (i) to the Issuer, (ii) so long as such security is eligible
for resale pursuant to Rule 144A, to a person whom the selling holder reasonably
believes is a QIB that purchases for its own account or for the account of a QIB
to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S, (iv) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 (if applicable) under the Securities Act, or
(v) pursuant to an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States. During the Restricted Period, interests in the Temporary
Regulation S Global Security may not be transferred to institutions that are
"Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
(e) Legend.
(i) Except as permitted by the following paragraphs (ii), (iii)
and (iv), each Note certificate evidencing the Global Securities and
the Definitive Securaities (and all Notes issued in exchange therefor
or in substitution thereof) shall bear a legend in substantially the
following form:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING
THIS NOTE, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT
BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED UNTIL THE SECOND
ANNIVERSARY OF THIS NOTE'S DATE OF ORIGINAL ISSUANCE
<PAGE>
8
OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"),
TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED
BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH
REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED
BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE
ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE
TO THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE
FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE
WHICH MAY BE OBTAINED FROM THE ISSUER OR THE TRUSTEE IS DELIVERED BY
THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN
HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT
TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION
COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE 903(b) OF REGULATION S
UNDER THE SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF
APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE
AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES
AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT
ANY TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING
RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS
AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES
<PAGE>
9
ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT
FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF
PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES
ACT."
Each Definitive Security will also bear the following additional
legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION
AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global
Security) pursuant to Rule 144 under the Securities Act:
(A) in the case of any Transfer Restricted Security that is
a Definitive Security, the Registrar shall permit the Holder
thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legends set forth
above and rescind any restriction on the transfer of such
Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security that is
represented by a Global Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for
a Definitive Security that does not bear the legends set forth
above and rescind any restriction on the transfer of such
Transfer Restricted Security,
in either case, if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such certification
to be in the form set forth on the reverse of the Initial Note).
(iii) After a transfer of any Initial Notes during the period of
the effectiveness of a Shelf Registration Statement with respect to
such Initial Notes, all requirements pertaining to legends on such
Initial Note will cease to apply, the requirements requiring that any
such Initial Note be issued in global form will cease to apply, and an
Initial Note in certificated or global form without legends will be
available to the transferee of the Holder of such Initial Notes upon
exchange of such transferring Holder's certificated Initial Note. Upon
the occurrence of any of the circumstances described in this
paragraph, the Issuer will deliver an Officers' Certificate to the
Trustee instructing the Trustee to issue Notes without legends.
<PAGE>
10
(iv) Upon the consummation of an Exchange Offer with respect to
the Initial Notes pursuant to which certain Holders of such Initial
Notes are offered Exchange Notes in exchange for their Initial Notes,
all requirements pertaining to such Initial Notes that Initial Notes
be issued in global form will cease to apply, and certificated Initial
Notes with the restricted securities legend set forth in Exhibit A to
the Applicable Supplemental Indenture will be available to Holders of
such Initial Notes that do not exchange their Initial Notes, and
Exchange Notes in certificated or global form will be available to
Holders that exchange such Initial Notes in such Exchange Offer. Upon
the occurrence of any of the circumstances described in this
paragraph, the Issuer will deliver an Officers' Certificate to the
Trustee instructing the Trustee to issue Securities without legends.
(v) Upon the consummation of a Private Exchange with respect to
the Initial Notes pursuant to which Holders of such Initial Notes are
offered Private Exchange Notes in exchange for their Initial Notes,
all requirements pertaining to such Initial Notes that Initial Notes
issued to certain Holders be issued in global form will continue to
apply, and Private Exchange Notes in global form will be available to
Holders that exchange such Initial Notes in such Private Exchange.
(f) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depository to the Trustee for
cancelation or retained and canceled by the Trustee. At any time prior to such
cancelation, if any beneficial interest in a Global Security is exchanged for
certificated or Definitive Securities, redeemed, repurchased or canceled, the
principal amount of Notes represented by such Global Security shall be reduced
and an adjustment shall be made on the books and records of the Trustee (if it
is then the Securities Custodian for such Global Security) with respect to such
Global Security, by the Trustee or the Securities Custodian, to reflect such
reduction.
(g) Obligations with Respect to Transfers and Exchanges of Securities.
Terms and provisions for registration of transfer or exchange of the Notes shall
be as set forth in Section 2.09 of the Indenture.
(h) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant
in the Depository or any other Person with respect to the accuracy of
the records of the Depository or its nominee or of any participant or
member thereof, with respect to any ownership interest in the Notes or
with respect to the delivery to any participant, member, beneficial
owner or other Person (other than the Depository) of any notice
(including any notice of redemption or repurchase)
<PAGE>
11
or the payment of any amount, under or with respect to such Notes. All
notices and communications to be given to the Holders and all payments
to be made to Holders under the Notes shall be given or made only to
the registered Holders (which shall be the Depository or its nominee in
the case of a Global Security). The rights of beneficial owners in any
Global Security shall be exercised only through the Depository subject
to the applicable rules and procedures of the Depository. The Trustee
may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its members, participants
and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on
transfer imposed under this Indenture or under applicable law with
respect to any transfer of any interest in any Note (including any
transfers between or among Depository participants, members or
beneficial owners in any Global Security) other than to require
delivery of such certificates and other documentation or evidence as
are expressly required by, and to do so if and when expressly required
by, the terms of the Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements
hereof.
2.4 Certificated Securities.
(a) A Global Security deposited with the Depository or with the Trustee
as Securities Custodian pursuant to Section 2.1 shall be transferred to the
beneficial owners thereof in the form of certificated Notes in an aggregate
principal amount equal to the principal amount of such Global Security, in
exchange for such Global Security, only if such transfer complies with Section
2.3 and (i) the Depository notifies the Issuer that it is unwilling or unable to
continue as a Depository for such Global Security or if at any time the
Depository ceases to be a "clearing agency" registered under the Exchange Act,
and a successor depositary is not appointed by the Issuer within 90 days of such
notice, or (ii) an Event of Default has occurred and is continuing or (iii) the
Issuer, in its sole discretion, notifies the Trustee in writing that it elects
to cause the issuance of certificated Securities under the Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depository to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of certificated Notes of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depository shall direct.
Any certificated Initial Note delivered in exchange for an interest in the
Global Security shall, except as otherwise provided by Section 2.3(e), bear the
restricted securities legend set forth in Exhibit A to the Applicable
Supplemental Indenture.
<PAGE>
12
(c) Subject to the provisions of Section 2.4(b), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.
(d) In the event of the occurrence of either of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Issuer will promptly make available to the
Trustee a reasonable supply of certificated Securities in definitive, fully
registered form without interest coupons.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
GS ESCROW CORP.
By /s/ Glenn Dickes
-------------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
THE BANK OF NEW YORK, as Trustee
By /s/ Robert A. Massimillo
-------------------------------------
Name: Robert Massimillo
Title: Assistant Vice President
<PAGE>
EXHIBIT A TO FOURTH
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF INITIAL NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED UNTIL THE SECOND ANNIVERSARY OF THIS NOTE'S DATE OF
ORIGINAL ISSUANCE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS NOTE IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
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<PAGE>
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM
THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES SPECIFIED IN THE INDENTURE TO THE
ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER OR THE
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE (PROVIDED
THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE
PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY DISTRIBUTION
COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE 903(b) OF REGULATION S UNDER THE
SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR
(6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT
WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF
THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT
IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2)
AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
[Definitive Securities Legend]
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
A-2
<PAGE>
[FORM OF FACE OF INITIAL NOTE]
No. $
GS ESCROW CORP.
7 1/8% Senior Note due 2005
CUSIP No.
GS Escrow Corp., a Delaware corporation, promises to pay to ,
or registered assigns, the principal sum of Dollars on August 1, 2005.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
A-3
<PAGE>
Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
GS ESCROW CORP.
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated: By:
-------------------- -------------------------------------
Authorized Signatory
A-4
<PAGE>
[FORM OF REVERSE SIDE OF INITIAL NOTE]
GS ESCROW CORP.
7 1/8% Senior Note due 2005
1. Interest
GS Escrow Corp., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Issuer"), promises to pay interest on the principal amount of this
Note at the rate per annum shown above; provided, however, that if (a) by the
75th day following the date of consummation of both the Golden State Acquisition
and the Refinancing Transactions (or if such day is not a Business Day, the
first Business Day thereafter), neither the Shelf Registration Statement nor the
Exchange Offer Registration Statement has been filed with the SEC, the rate per
annum at which interest will accrue on the Notes will increase by 0.5% from and
including such date until but excluding the earlier of (i) the date the Shelf
Registration Statement or the Exchange Offer Registration Statement is filed and
(ii) the 180th day following the date of consummation of both the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a Business
Day, the first Business Day thereafter) and (b) by the 180th day following the
date of consummation of both the Golden State Acquisition and the Refinancing
Transactions (or if such day is not a Business Day, the first Business Day
thereafter), neither (i) the Exchange Offer is consummated nor (ii) the Shelf
Registration Statement with respect to the resale of the Notes is declared
effective, the rate per annum at which interest will accrue on the Notes will
increase by 0.5% from and including such date until but excluding the earlier of
(i) the consummation of the Exchange Offer and (ii) the effective date of the
Shelf Registration Statement. The Issuer will pay interest semiannually in
arrears on February 1 and August 1 of each year, commencing February 1, 1999.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from August 6, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months. The
Issuer shall pay interest on overdue principal at the rate borne by the Notes
plus 1% per annum, and it shall pay interest on overdue installments of interest
at the same rate to the extent lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date;
provided, however, that interest accruing on this Note prior to the consummation
of the Exchange Offer
A-5
<PAGE>
or Private Exchange will be paid to the holder of this Note or the Exchange
Note, as the case may be, on the record date next preceding the Interest Payment
Date following the consummation of the Exchange Offer or Private Exchange.
Defaulted interest will be paid in the manner set forth in the Indenture.
Holders must surrender the Notes to a Paying Agent to collect principal
payments. The Issuer will pay principal and interest in money of the United
States of America that at the time of payment is legal tender for payment of
public and private debts. Payments in respect of the Notes represented by a
Global Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent and Registrar. The Issuer may appoint and change any Paying Agent,
Registrar or co-registrar without notice. The Issuer or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or
co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the Indenture
dated as of August 6, 1998 between the Issuer and the Trustee (the "Indenture"),
to which reference is hereby made for a statement of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee and any
agent of the Trustee, any Paying Agent, the Issuer and the Holders of the Notes
and the terms upon which the Notes are issued and are to be authenticated and
delivered. The terms of the Notes include those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as
in effect on the date of the Indenture (the "TIA") and Securityholders are
referred to the TIA for a statement of those terms. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture.
A-6
<PAGE>
This Note is one of a series designated pursuant to the Fourth
Supplemental Indenture dated as of August 6, 1998 as the 7 1/8% Senior Notes Due
2005 (the "Notes"), limited in aggregate principal amount to $800,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to, among other things, (i) incur
Debt, (ii) make certain Restricted Payments, (iii) enter into consensual
restrictions upon the payment of certain dividends and distributions by such
Subsidiaries, (iv) issue or sell shares of capital stock of the Bank, (v) enter
into or permit certain transactions with Affiliates and (vi) create or incur
Liens on assets of Holdings. Certain of these limitations may not be applicable
if the Notes are rated Investment Grade. The Indenture also imposes certain
limitations on the ability of Holdings or the Bank to consolidate or merge with
or into any other Person or convey or transfer all or substantially all of its
assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or
from time to time in part, at an aggregate redemption price equal to the sum of:
(i) the principal amount of the Notes to be redeemed, plus (ii) accrued and
unpaid interest (if any) to the date of redemption (subject to the right of the
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except
A-7
<PAGE>
that, if the Average Life to Stated Maturity of the Notes is less than one year,
the weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15, 1999 or (ii) the Merger Agreement or
the related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
least 30 days but not more than 60 days before any redemption date, and notice
of mandatory redemption pursuant to paragraph 5(b) will be mailed promptly after
the occurrence of the event triggering such redemption, but in no event less
than 10 days prior to the Mandatory Redemption Date, in each case to each Holder
of Notes to be redeemed at his or her address appearing in the Security
Register. Notes in denominations larger than $1,000 may be redeemed in part but
only in whole multiples of $1,000. If money sufficient to pay the redemption
price of all Notes (or portions thereof) to be redeemed on the redemption date
is deposited with the Paying Agent (or if the Issuer or a Subsidiary of the
Issuer acts as the Paying Agent, it segregates the money held by it as Paying
Agent and holds it as a separate trust fund)
A-8
<PAGE>
on or before the redemption date and certain other conditions are satisfied,
then on and after such date interest ceases to accrue on such Notes (or such
portions thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of
Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorse ments or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
A-9
<PAGE>
12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate
some of or all its obligations under the Notes and the Indenture in respect of
the Notes if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
A-10
<PAGE>
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
A-11
<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
A-12
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books
of the Issuer. The agent may substitute another to act for him.
Date: Your Signature:
------------------- -------------------------------------
Sign exactly as your name appears on the other side of this Note.
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act of 1933 after the later of the date of original
issuance of such Notes and the last date, if any, on which such Notes were owned
by the Issuer or any Affiliate of the Issuer, the undersigned confirms that such
Notes are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) / / to the Issuer; or
(2) / / pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) / / inside the United States to a "qualified
institutional buyer" (as defined in Rule 144A under
the Securities Act of 1933) that purchases for its
own account or for the account of a qualified
institutional buyer to whom notice is given that such
transfer is being made in reliance on Rule 144A, in
each case pursuant to
A-13
<PAGE>
and in compliance with Rule 144A under the Securities Act
of 1933; or
(4) / / outside the United States in an offshore
transaction within the meaning of Regulation S under
the Securities Act in compliance with Rule 904 under
the Securities Act of 1933; or
(5) / / to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act of 1933) that has furnished to the
Trustee a signed letter containing certain
representations and agreements (the form of which
letter can be obtained from the Trustee or the
Issuer); or
(6) / / o pursuant to another available exemption from
registration provided by Rule 144 under the
Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register
any of the Notes evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however,
that if box (4), (5) or (6) is checked, the Trustee may require, prior
to registering any such transfer of the Notes, such legal opinions,
certifications and other information as the Issuer has reasonably
requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
--------------------------------
Your Signature
Signature Guarantee:
Date:
---------------------- --------------------------------
Signature must be guaranteed Signature of Signature Guarantee
by a participant in a recognized
signature guaranty medallion
program or other signature
guarantor acceptable to the
Trustee
A-14
<PAGE>
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Issuer as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated:
------------------- ------------------------------------
NOTICE: To be executed by an
executive officer
A-15
<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $ .
The following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
<S> <C> <C> <C> <C>
</TABLE>
A-16
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount: $
Date: Your Signature:
------------------- ------------------------
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:
----------------------------------------------------
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
A-17
<PAGE>
EXHIBIT B TO FOURTH
SUPPLEMENTAL INDENTURE
[FORM OF FACE OF EXCHANGE NOTE]
No. $
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
7 1/8% Senior Note due 2005
CUSIP No. ______
[GS Escrow Corp.] [Golden State Holdings Inc.],(1) a Delaware
corporation, promises to pay to ________________, or registered assigns, the
principal sum of Dollars on August 1, 2005.
Interest Payment Dates: February 1 and August 1, commencing February 1,
1999.
Record Dates: January 15 and July 15.
- ----------------
(1) Golden State Holdings Inc. if the Exchange Offer occurs after the Escrow
Corp. Merger.
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<PAGE>
Additional provisions of this Note are set forth on the other side of
this Note.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
[GS ESCROW CORP.]
[GOLDEN STATE HOLDINGS INC.]
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK, as Trustee
Dated: By:
----------------- ------------------------------------
Authorized Signatory
- ----------------
* If the Security is to be issued in global form, add the Global Securities
Legend from Exhibit A to the Applicable Supplemental Indenture and the
attachment from such Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY."
** If the Security is a Private Exchange Note issued in a Private Exchange to
an Initial Purchaser holding an unsold portion of its initial allotment, add the
Restricted Securities Legend from Exhibit A and replace the Assignment Form
included in this Exhibit B with the Assignment Form included in such Exhibit A.
B-2
<PAGE>
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
[GS ESCROW CORP.] [GOLDEN STATE HOLDINGS INC.]
7 1/8% Senior Note due 2005
1. Interest.
[GS Escrow Corp.] [Golden State Holdings Inc.], a Delaware corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Issuer"), promises to pay
interest on the principal amount of this Note at the rate per annum shown above
(without duplication of the interest that accrued on the Initial Note in
exchange for which this Note was issued). The Issuer will pay interest
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1999; provided, however, that interest accruing on the Initial Note
prior to the consummation of the Exchange Offer or Private Exchange will be paid
to the holder of the Initial Note or the Exchange Note, as the case may be, on
the record date next preceding the Interest Payment Date following the
consummation of the Exchange Offer or Private Exchange. Interest on this Note
will accrue from the most recent date to which interest has been paid on the
Initial Notes or, if no interest has been paid on the Initial Notes, on the
Exchange Notes from August 6, 1998. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Issuer shall pay interest on overdue
principal at the rate borne by the Notes plus 1% per annum, and it shall pay
interest on overdue installments of interest at the same rate to the extent
lawful.
2. Method of Payment
The Issuer will pay interest on the principal amount of the Notes to
the Persons who are registered holders of Notes at the close of business on the
January 15 or July 15 next preceding the Interest Payment Date even if the Notes
are canceled after the record date and on or before the Interest Payment Date.
The Issuer will pay interest referred to in paragraph 1 of the Initial Notes
(except defaulted interest) on the Initial Notes in exchange for which the
Exchange Notes were issued to the Persons who, at the close of business on the
January 15 or the July 15 next preceding the applicable interest payment date,
are registered holders of such Initial Notes, if such record date occurs prior
to such exchange, or registered holders of the Exchange Notes, if such record
date occurs on or after the date of such exchange, even if such Initial Notes or
Exchange Notes are canceled after the record date and on or before such interest
payment date. Defaulted interest will be paid in the manner set forth in the
Indenture. Holders must surrender the Notes to a Paying Agent to collect
principal payments. The Issuer will pay principal and interest in money of the
United States of America that at the time of payment is legal tender for payment
of public
B-3
<PAGE>
and private debts. Payments in respect of the Notes represented by a Global
Security (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Issuer will make all payments in respect of a
certificated Note (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
payments on the Notes will be made, in the case of a Holder of at least
$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the Trustee
or the Paying Agent to such effect designating such account no later than 30
days immediately preceding the relevant due date for payment (or such other date
as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent and Registrar. The Issuer may appoint and change any Paying Agent,
Registrar or co-registrar without notice. The Issuer or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or
co-registrar.
4. Indenture
This Note is one of the duly authorized issues of senior debentures,
notes, bonds or other evidences of indebtedness of the Issuer, of the series
herein specified, all issued or to be issued under and pursuant to the
Indenture, dated as of August 6, 1998 between the Issuer and the Trustee (the
"Indenture"), to which reference is hereby made for a statement of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee and any agent of the Trustee, any Paying Agent, the Issuer and the
Holders of the Notes and the terms upon which the Notes are issued and are to be
authenticated and delivered. The terms of the Notes also include those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA") and
Securityholders are referred to the TIA for a statement of those terms. Terms
defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture.
This Note is one of a series designated pursuant to the Fourth
Supplemental Indenture dated as of August 6, 1998 as the 7 1/8% Senior Notes Due
2005 (the "Notes"), limited in aggregate principal amount to $800,000,000,
subject to Section 2.10 of the Indenture. The Notes include the Initial Notes
and any Exchange Notes issued in exchange for Initial Notes. The Initial Notes
and the Exchange Notes are treated as a single series of Securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Issuer, Holdings or Holdings' Subsidiaries to,
B-4
<PAGE>
among other things, (i) incur Debt, (ii) make certain Restricted Payments, (iii)
enter into consensual restrictions upon the payment of certain dividends and
distributions by such Subsidiaries, (iv) issue or sell shares of capital stock
of the Bank (v) enter into or permit certain transactions with Affiliates and
(vi) create or incur Liens on assets of Holdings. Certain of these limitations
may not be applicable if the Notes are rated Investment Grade. The Indenture
also imposes certain limitations on the ability of Holdings or the Bank to
consolidate or merge with or into any other Person or convey or transfer all or
substantially all of its assets.
5. Redemption
(a) On any Business Day, the Issuer may redeem the Notes in whole, or
from time to time in part, at an aggregate redemption price equal to the sum of:
(i) the principal amount of the Notes to be redeemed, plus (ii) accrued and
unpaid interest (if any) to the date of redemption (subject to the right of the
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any time of
determination, the excess, if any, of (A) the present value at such time of
determination of the remaining required interest and principal payments in
respect of the portion of such Note to be redeemed, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the then
outstanding principal amount of the portion of such Note to be redeemed.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for repayment or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining Average
Life to Stated Maturity of the Notes; provided, however, that, if the Average
Life to Stated Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if the Average
Life to Stated Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
(b) Notwithstanding the foregoing, in the event that (i) the Golden
State Acquisition, the Refinancing Transactions and the Escrow Corp. Merger are
not consummated on or prior to January 15 , 1999 or (ii) the Merger Agreement or
the
B-5
<PAGE>
related Plan of Merger are terminated or the Golden State Acquisition is
abandoned prior to such date, then the Issuer will redeem all of the Notes on
the Mandatory Redemption Date at a redemption price in cash equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the Mandatory Redemption Date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant Interest
Payment Date).
"Mandatory Redemption Date" means the earlier of (a) February 1, 1999,
in the event that the Escrow Corp. Merger, the Golden State Acquisition and the
Refinancing Transactions are not consummated on or prior to January 15, 1999,
and (b) the 15th day (or if such day is not a Business Day, the next following
Business Day) following the termination of either or both of the Merger
Agreement or the Plan of Merger or the abandonment of the Golden State
Acquisition in the event of such termination or abandonment.
"Plan of Merger" means the Agreement and Plan of Merger dated as of
February 4, 1998 among Parent Holdings, Holdings, First Gibraltar Holdings,
Inc., Hunters Glen/Ford Ltd., Golden State and Golden State Financial
Corporation, as amended from time to time.
6. Sinking Fund
The Notes of this series are not subject to any sinking fund.
7. Notice of Redemption
Notice of optional redemption pursuant to paragraph 5(a) will be mailed
at least 30 days but not more than 60 days before any redemption date, and
notice of mandatory redemption pursuant to paragraph 5(b) will be mailed
promptly after the occurrence of the event triggering such redemption, but in no
event less than 10 days prior to the Mandatory Redemption Date, in each case to
each Holder of Notes to be redeemed at his or her address appearing in the
Security Register. Notes in denominations larger than $1,000 may be redeemed in
part but only in whole multiples of $1,000. If money sufficient to pay the
redemption price of all Notes (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent (or if the Issuer or a
Subsidiary of the Issuer acts as the Paying Agent, it segregates the money held
by it as Paying Agent and holds it as a separate trust fund) on or before the
redemption date and certain other conditions are satisfied, then on and after
such date interest ceases to accrue on such Notes (or such portions thereof)
called for redemption.
B-6
<PAGE>
8. Repurchase of Securities at the Option of Holders upon Change of
Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right, subject to certain conditions specified in the Indenture, to
cause the Issuer to repurchase all or any part of the Notes of such Holder at a
purchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant Interest Payment Date) as provided in, and
subject to the terms of, the Indenture; provided, however, that notwithstanding
the occurrence of a Change in Control, the Issuer shall not be obligated to
purchase the Notes in the event that it has exercised its right to redeem all
the Notes pursuant to the provisions under paragraph 5(a) above.
9. Denominations; Transfer; Exchange
The Notes are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorsements or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Issuer shall not be required (i) to issue,
register the transfer of or exchange any Note during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of the Notes selected for redemption and ending at the close of
business on the date of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part.
10. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Issuer at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Issuer and not to the Trustee for payment.
B-7
<PAGE>
12. Discharge and Defeasance
Subject to certain conditions, the Issuer at any time may terminate
some of or all its obligations under the Notes and the Indenture in respect of
the Notes if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be.
13. Amendment; Supplement; Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities of any series may be amended or one or more
supplemental indentures may be entered into with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
of each series affected by such amendment or supplemental indenture and (ii) any
default or noncompliance with any provision in any series may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities of such series. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of the Notes or any other series of
Securities, the Issuer and the Trustee may enter into one or more amendments or
indentures supplemental to the Indenture for, among others, one or more of the
following purposes: (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 or Section 4.10 of the Indenture;
(iii) to provide for uncertificated Securities in addition to or in place of
certificated Securities; (iv) to add Guarantees with respect to the Securities
of any series, or to remove such Guarantees, when permitted by the terms of the
Indenture or to secure (or provide additional security for) the Securities of
any series; (v) to establish any form of Security and provide for the issuance
of Securities in series and to set forth the terms thereof, and/or to add to the
rights of the holders of the Securities of any series; (vi) to add additional
covenants or to surrender rights or powers conferred on the Issuer; (vii) to
evidence and provide for the acceptance of appointment by another corporation as
a successor Trustee under the Indenture with respect to one or more series of
Securities and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee; (viii) to add any additional Events of
Default in respect of Securities of any series; (ix) to provide for the issuance
of Securities in coupon as well as fully registered form; (x) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the TIA or to otherwise comply with the TIA; or (xi) to make any
change that does not adversely affect the rights of any Holder of the Securities
of any series. A consent to any amendment or waiver of any provision in the
Indenture or in the Securities of any series by any Holder given in connection
with a tender of such Holder's Securities shall not be rendered invalid by such
tender.
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<PAGE>
14. Defaults and Remedies
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Notes may direct the Trustee in its exercise of any trust or power under the
Indenture in respect of the Notes. The Holders of a majority in principal amount
of the Notes, by written notice to the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to the
Notes have been cured or waived except nonpayment of principal or interest that
has become due solely because of such acceleration.
15. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with
the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Issuer
shall not have any liability for any obligations of the Issuer under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Securityholder waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Note.
B-9
<PAGE>
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Issuer will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture.
B-10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books
of the Issuer. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
--------------- ---------------------------------------
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Note. Signature must
be guaranteed by a participant in a recognized signature guaranty medallion
program or other signature guarantor acceptable to the Trustee.
B-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.06 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.06 of the Indenture, state the amount: $
Date: Your Signature:
--------------- ------------------------
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:
----------------------------------------------------
Signature must be guaranteed by a participant in a
recognized signature guaranty medallion program or
other signature guarantor acceptable to the Trustee
B-12
<PAGE>
----------------------------
GS ESCROW CORP.
GOLDEN STATE HOLDINGS INC.
Floating Rate Notes Due 2003
6 3/4% Senior Notes Due 2001
7% Senior Notes Due 2003
7 1/8% Senior Notes Due 2005
----------------------------
FIFTH SUPPLEMENTAL INDENTURE
Dated as of September 14, 1998
Supplementing the Indenture, dated
as of August 6, 1998, Between
GS Escrow Corp. and
The Bank of New York, as Trustee
----------------------------
THE BANK OF NEW YORK,
AS TRUSTEE
----------------------------
<PAGE>
FIFTH SUPPLEMENTAL INDENTURE, dated as of September 14, 1998
(the "Fifth Supplemental Indenture"), among GS ESCROW CORP., a Delaware
corporation (the "Company"), GOLDEN STATE HOLDINGS INC. a Delaware
corporation ("Golden State Holdings"), and THE BANK OF NEW YORK (the
"Trustee"), as Trustee under the Indenture referred to herein.
WHEREAS, the Company and the Trustee heretofore executed and
delivered an Indenture, dated as of August 6, 1998, as supplemented (the
"Indenture"), in respect of the Floating Rate Notes Due 2003, the 6 3/4%
Senior Notes Due 2001, the 7% Senior Notes Due 2003 and the 7 1/8% Senior
Notes Due 2005 (collectively, the "Securities"); and
WHEREAS, the Company and Golden State Holdings have entered
into an Agreement and Plan of Merger dated as of August 6, 1998, pursuant to
which the Company will merge with and into Golden State Holdings (the
"Merger") on the date hereof; and
WHEREAS, Section 5.01(c) of the Indenture provides that in
the case of the Merger, Golden State Holdings, as the surviving Person, shall
expressly assume by supplemental indenture all the obligations of the Company
under the Securities and the Indenture; and
WHEREAS, Section 9.01(2) of the Indenture provides that the
Company and the Trustee may amend the Indenture and the Securities without
notice to or consent of any Holders of the Securities in order to comply with
Article V of the Indenture; and
WHEREAS, this Fifth Supplemental Indenture has been duly
authorized by all necessary corporate action on the part of each of the
Company and Golden State Holdings.
NOW, THEREFORE, the Company, the Trustee and Golden State
Holdings agree as follows for the equal and ratable benefit of the Holders of
the Securities:
2
<PAGE>
ARTICLE I
ASSUMPTION BY SUCCESSOR CORPORATION
SECTION 1.1. Assumption of the Securities. Golden State
Holdings, as the surviving Person in the Merger, hereby expressly assumes the
due and punctual payment of the principal of and interest on the Securities
and all obligations of the Company under the Securities and the Indenture and
shall be the successor to the Company under the Indenture.
SECTION 1.2. Trustee's Acceptance. The Trustee hereby
accepts this Fifth Supplemental Indenture and agrees to perform the same under
the terms and conditions set forth in the Indenture.
ARTICLE II
Miscellaneous
SECTION 2.1. Effect of Supplemental Indenture. Upon the
later to occur of (i) the execution and delivery of this Fifth Supplemental
Indenture by the Company, Golden State Holdings and the Trustee and (ii) the
consummation of the Merger, the Indenture shall be supplemented in accordance
herewith, and this Fifth Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Securities heretofore or
hereafter authenticated and delivered under the Indenture shall be bound
thereby.
SECTION 2.2. Indenture Remains in Full Force and Effect.
Except as supplemented hereby, all provisions in the Indenture shall remain in
full force and effect.
SECTION 2.3. Indenture and Supplemental Indenture Construed
Together. This Fifth Supplemental Indenture is an indenture supplemental to
and in implementation of the Indenture, and the Indenture and this Fifth
Supplemental Indenture shall henceforth be read and construed together.
SECTION 2.4. Confirmation and Preservation of Indenture. The
Indenture as supplemented by this Fifth Supplemental Indenture is in all
respects confirmed and preserved.
3
<PAGE>
SECTION 2.5. Conflict with Trust Indenture Act. If any
provision of this Fifth Supplemental Indenture limits, qualifies or conflicts
with any provision of the TIA that is required under the TIA to be part of and
govern any provision of this Fifth Supplemental Indenture, the provision of
the TIA shall control. If any provision of this Fifth Supplemental Indenture
modifies or excludes any provision of the TIA that may be so modified or
excluded, the provision of the TIA shall be deemed to apply to the Indenture
as so modified or to be excluded by this Second Supplemental Indenture, as
the case may be.
SECTION 2.6. Severability. In case any provision in this
Fifth Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 2.7. Terms Defined in the Indenture. All capitalized
terms not otherwise defined herein shall have the meanings ascribed to them in
the Indenture.
SECTION 2.8. Headings. The Article and Section headings of
this Fifth Supplemental Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Fifth Supplemental
Indenture and shall in no way modify or restrict any of the terms or
provisions hereof.
SECTION 2.9. Benefits of Fifth Supplemental Indenture, etc.
Nothing in this Fifth Supplemental Indenture or the Securities, express or
implied, shall give to any Person, other than the parties hereto and thereto
and their successors hereunder and thereunder and the Holders of the
Securities, any benefit of any legal or equitable right, remedy or claim under
the Indenture, this Fifth Supplemental Indenture or the Securities.
SECTION 2.10. Successors. All agreements of Golden State
Holdings in this Fifth Supplemental Indenture shall bind its successors. All
agreements of the Trustee in this Fifth Supplemental Indenture shall bind its
successors.
SECTION 2.11. Trustee Not Responsible for Recitals. The
recitals contained herein shall be taken as the statements of the Company and
of Golden State Holdings, and the Trustee assumes no responsibility for their
correctness.
4
<PAGE>
SECTION 2.12. Certain Duties and Responsibilities of the
Trustee. In entering into this Fifth Supplemental Indenture, the Trustee shall
be entitled to the benefit of every provision of the Indenture relating to the
conduct or affecting the liability or affording protection to the Trustee,
whether or not elsewhere herein so provided.
SECTION 2.13. Governing Law. This Fifth Supplemental
Indenture shall be governed by, and construed in accordance with, the laws of
the State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 2.14. Counterpart Originals. The parties may sign
any number of copies of this Fifth Supplemental Indenture. Each signed copy
shall be an original, but all of them together represent the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Fifth
Supplemental Indenture to be duly executed as of the date first written
above.
GS ESCROW CORP.
By: /s/ Glenn P. Dickes
------------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
GOLDEN STATE HOLDINGS INC.
By: /s/ Richard H. Terzian
------------------------------------
Name: Richard H. Terzian
Title: Chief Financial Officer
THE BANK OF NEW YORK, as Trustee
By: /s/ Thomas C. Knight
------------------------------------
Name: Thomas C. Knight
Title: Assistant Vice President
6
<PAGE>
GS ESCROW CORP.
$2,000,000,000
$250,000,000 Floating Rate Notes Due 2003
$350,000,000 6 3/4% Senior Notes Due 2001
$600,000,000 7% Senior Notes Due 2003
$800,000,000 7 1/8% Senior Notes Due 2005
To Be Assumed by Merger into
GOLDEN STATE HOLDINGS INC.
REGISTRATION AGREEMENT
New York, New York
July 30, 1998
To: SALOMON BROTHERS INC
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
CHASE SECURITIES INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
In care of:
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
GS ESCROW CORP., a Delaware corporation (the "Company"), proposes to
issue and sell to Salomon Brothers Inc, Goldman, Sachs & Co., Bear, Stearns &
Co. Inc., Lehman Brothers Inc., Chase Securities Inc. and NationsBanc
Montgomery Securities LLC (the "Initial Purchasers"), upon the terms set forth
in a purchase agreement dated July 30, 1998, among the Company, Trans Network
Insurance Services Inc. ("TNIS") and the Initial Purchasers (the "Purchase
Agreement"), $250,000,000 aggregate principal amount of its Floating Rate
Notes Due 2003 (the "Floating Rate Notes"), $350,000,000 aggregate principal
amount of its 6 3/4% Senior Notes Due 2001 (the "2001 Notes"), $600,000,000
aggregate principal amount of its 7% Senior Notes Due 2003 (the "2003 Notes")
and $800,000,000 aggregate principal amount of its 7 1/8% Senior Notes Due 2005
(the "2005 Notes" and, together with the Floating Rate Notes, the 2001 Notes
and the 2003 Notes, the "Securities"). As used herein, the "Issuer" shall
refer to the Company prior to the Escrow Corp. Merger and to New First
Nationwide Holdings Inc. (to be renamed Golden State Holdings Inc.
("Holdings") and any successor thereto following the Escrow Corp. Merger.
Capitalized terms used but not specifically defined herein are defined in the
Purchase Agreement. As an inducement to the Initial Purchasers to enter into
the Purchase Agreement and in satisfaction of a condition to your obligations
thereunder, each of the Company and Holdings agrees with you, for the benefit
of the holders of the Securities (including the Initial Purchasers) (the
"Holders"), as follows:
1. Registered Exchange Offer. The Issuer shall prepare and, not later
than 75 days following the consummation of both the Golden State Acquisition
and the Refinancing
<PAGE>
2
Transactions (or if the 75th day is not a business day, the first business day
thereafter), shall file with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Exchange Offer Registration
Statement") on an appropriate form under the Securities Act of 1933, as
amended (the "1933 Act") with respect to a proposed offer (the "Registered
Exchange Offer") to the Holders to issue and deliver to such Holders, in
exchange for the Securities, a like principal amount of debt securities of the
Issuer (the "Exchange Notes") identical in all material respects to the
Securities (except that the interest rate increase provisions and the transfer
restrictions will be modified or eliminated, as appropriate), shall use its
best efforts to cause the Exchange Offer Registration Statement to become
effective under the 1933 Act within 150 days following the consummation of
both the Golden State Acquisition and the Refinancing Transactions (or if the
150th day is not a business day, the first business day thereafter) and shall
use its best efforts to keep the Exchange Offer Registration Statement
effective under the 1933 Act until the close of business on the 180th day
following the expiration of the Registered Exchange Offer (such period being
called the "Exchange Offer Registration Period") for use by Exchanging Dealers
(as defined below) as contemplated in Section 3(g) below. The Issuer shall be
deemed not to have used its best efforts to keep the Exchange Offer
Registration Statement effective during the Exchange Offer Registration Period
if it voluntarily takes any action that would result in Exchanging Dealers not
being able to use such Registration Statement as contemplated in such Section
3(g), unless (i) such action is required by applicable law, or (ii) such
action is taken by the Issuer in good faith and for valid business reasons
(not including avoidance of the Issuer's obligations hereunder), including the
acquisition or divestiture of assets, so long as the Issuer promptly
thereafter complies with the requirements of Section 3(j) hereof, if
applicable. The Exchange Notes will be issued under the Indenture or an
indenture (the "Exchange Notes Indenture") between the Issuer and the Trustee
or such other bank or trust company reasonably satisfactory to you, as trustee
(the "Exchange Notes Trustee"), such indenture to be identical in all material
respects with the Indenture except for the interest rate increase provisions
and the transfer restrictions relating to the Securities (as described above).
Upon the effectiveness of the Exchange Offer Registration Statement,
the Issuer shall promptly commence the Registered Exchange Offer, it being the
objective of such Registered Exchange Offer to enable each Holder electing to
exchange Securities for Exchange Notes (assuming that such Holder is not an
affiliate of the Issuer within the meaning of the 1933 Act, acquires the
Exchange Notes in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the
Exchange Notes) to trade such Exchange Notes from and after their receipt
without any limitations or restrictions under the 1933 Act and without
material restrictions under the securities laws of a substantial proportion of
the several states of the United States. Notwithstanding the foregoing, the
Initial Purchasers, the Issuer and the Company acknowledge that, pursuant to
current interpretations by the Commission's staff of Section 5 of the 1933
Act, and in the absence of an applicable exemption therefrom, (i) each Holder
(including any Initial Purchaser) which is a broker-dealer electing to
exchange Securities, acquired for its own account as a result of market making
activities or other trading activities, for Exchange Notes (an "Exchanging
Dealer"), is required to deliver a prospectus containing the information set
forth in Annex A hereto on the cover, in Annex B hereto in "The Exchange
Offer" section, and in Annex C hereto in the "Plan of Distribution" section of
such prospectus in connection with a sale of any such Exchange Notes received
by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii)
each Initial Purchaser which elects to sell Exchange Notes acquired in
exchange for Securities constituting any portion of an unsold allotment is
required to deliver a prospectus, containing the information required by Items
507 and/or 508 of Regulation S-K under the 1933 Act, as applicable, in
connection with such a sale.
In connection with the Registered Exchange Offer, the Issuer shall:
(a) mail to each Holder a copy of the prospectus forming
part of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
<PAGE>
3
(b) keep the Registered Exchange Offer open for not less
than 30 days after the date notice thereof is mailed to the Holders
(or longer if required by applicable law);
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City
of New York;
(d) permit Holders to withdraw tendered Securities at any
time prior to the close of business, New York time, on the last
business day on which the Registered Exchange Offer shall remain
open; and
(e) otherwise comply in all respects with all applicable
laws.
As soon as practicable after the close of the Registered
Exchange Offer, the Issuer shall:
(a) accept for exchange all Securities tendered and not
validly withdrawn pursuant to the Registered Exchange Offer;
(b) deliver to the Trustee for cancelation all Securities so
accepted for exchange; and
(c) cause the Trustee or the Exchange Notes Trustee, as the
case may be, promptly to authenticate and deliver to each Holder of
Securities Exchange Notes equal in principal amount to the Securities
of such Holder so accepted for exchange.
Interest on each Exchange Note will accrue from the last interest
payment date on which interest was paid on the Securities surrendered in
exchange therefor or, if no interest has been paid on the Securities, from the
date interest began to accrue on the Securities.
Notwithstanding any other provisions hereof, the Issuer will ensure
that (i) any Exchange Offer Registration Statement and any amendment thereto
and any prospectus forming part thereof and any supplement thereto complies in
all material respects with the 1933 Act and the rules and regulations
thereunder, (ii) any Exchange Offer Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (iii) any
prospectus forming part of any Exchange Offer Registration Statement, and any
supplement to such prospectus, does not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they were made, not
misleading.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Issuer that at the time of the consummation of
the Registered Exchange Offer (i) any Exchange Notes received by such Holder
will be acquired in the ordinary course of business, (ii) such Holder will
have no arrangements or understanding with any person to participate in the
distribution of the Notes or the Exchange Notes within the meaning of the 1933
Act, (iii) such Holder is not an "affiliate," as defined in Rule 405 of the
1933 Act, of the Issuer or if it is an affiliate, such Holder acknowledges
that it must comply with the registration and prospectus delivery requirements
of the 1933 Act to the extent applicable, (iv) if such Holder is not a
broker-dealer, that it is not engaged in, and does not intend to engage in a
distribution of the Exchange Notes and (v) if such Holder is a broker-dealer,
that it will receive Exchange Notes in exchange for Notes that were acquired
as a result of market-making activities or other trading activities and that
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
In the event that any Initial Purchaser determines upon advice of its
outside counsel that it is not eligible to participate in the Registered
Exchange Offer with respect to the exchange of Securities constituting any
portion of an unsold allotment, as soon as practicable
<PAGE>
4
upon receipt by the Issuer of an opinion of outside counsel for such Initial
Purchaser, reasonably satisfactory in form and substance to outside counsel of
the Issuer, to the effect that such exchange does not require compliance with
the registration requirements under the 1933 Act, the Issuer shall issue and
deliver to such Initial Purchaser, in exchange for such Securities, a like
principal amount of Exchange Notes.
2. Shelf Registration. If, because of any change in law or applicable
interpretations thereof by the Commission's staff, the Issuer determines that
it is not permitted to effect the Registered Exchange Offer as contemplated by
Section 1 hereof, or if for any other reason the Registered Exchange Offer is
not consummated within 180 days after the consummation of the Golden State
Acquisition and the Refinancing Transactions (or if such day is not a business
day, the first business day thereafter), or if any Initial Purchaser so
requests with respect to Securities held by it following consummation of the
Registered Exchange Offer, or if any Holder (other than an Initial Purchaser)
is not eligible to participate in the Registered Exchange Offer or, in the
case of any Initial Purchaser that participates in the Registered Exchange
Offer or acquires Exchange Notes pursuant to the last paragraph of Section 1
hereof, such Initial Purchaser does not receive freely tradeable Exchange
Notes in exchange for exchanged Securities constituting any portion of an
unsold allotment (it being understood that the requirement that an Initial
Purchaser deliver a prospectus in connection with sales of Exchange Notes
acquired in the Registered Exchange Offer in exchange for Securities acquired
as a result of market-making activities or other trading activities, shall not
result in such Exchange Notes not being "freely tradeable" for purposes of
this Section 2) or if the Issuer so elects, the following provisions shall
apply:
(a) The Issuer shall as promptly as practicable file with
the Commission and thereafter shall use its best efforts to cause to
be declared effective a registration statement on an appropriate form
under the 1933 Act relating to the offer and sale of the Securities
by the Holders or the Exchange Notes by the Initial Purchasers, as
applicable, from time to time in accordance with the methods of
distribution elected by such Holders or the Initial Purchasers, as
applicable, and set forth in such registration statement (hereafter,
a "Shelf Registration Statement" and, together with any Exchange
Offer Registration Statement, a "Registration Statement").
(b) The Issuer shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
prospectus forming part thereof to be usable by Holders or the
Initial Purchasers, as applicable, for a period of two years from the
date the Shelf Registration Statement is declared effective by the
Commission (or, if the Issuer has consummated the Registered Exchange
Offer, for a period only until August [ ], 2000) or such shorter
period that will terminate when all the Securities or Exchange Notes,
as applicable, covered by the Shelf Registration Statement have been
sold pursuant to the Registration Statement or when, in the opinion
of outside counsel to the Issuer, which is reasonably satisfactory in
form and substance to counsel for the Initial Purchasers, all such
Securities may be sold without registration under the 1933 Act and
unlegended certificates representing the Securities may be given to
the holders thereof (in any such case, such period being called the
"Shelf Registration Period"). The Issuer shall be deemed not to have
used its best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any
action that would result in Holders of securities covered thereby not
being able to offer and sell such securities during that period,
unless (i) such action is required by applicable law, or (ii) such
action is taken by the Issuer in good faith and for valid business
reasons (not including avoidance of the Issuer's obligations
hereunder), including the acquisition or divestiture of assets, so
long as the Issuer promptly thereafter complies with the requirements
of Section 3(j) hereof, if applicable.
(c) Notwithstanding any other provisions hereof, the Issuer
will ensure that (i) any Shelf Registration Statement and any
amendment thereto and any prospectus forming part thereof and any
supplement thereto complies in all material respects with the
<PAGE>
5
1933 Act and the rules and regulations thereunder, (ii) any Shelf
Registration Statement and any amendment thereto does not, when it
becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any
prospectus forming part of any Shelf Registration Statement, and any
supplement to such prospectus, does not include an untrue statement
of in a material fact or omit to state a material fact necessary in
order to make the statements, in the light of the circumstances under
which they were made, not misleading.
3. Registration Procedures. In connection with any Shelf Registration
Statement and, to the extent applicable, any Exchange Offer Registration
Statement, the following provisions shall apply:
(a) The Issuer shall (i) furnish to the Initial Purchasers,
prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each
supplement, if any, to the prospectus included therein and shall use
its best efforts to reflect in each such document, when so filed with
the Commission, such comments as the Initial Purchasers reasonably
may propose, (ii) include the information set forth in Annex A hereto
on the cover, in Annex B hereto in "The Exchange Offer" section, and
in Annex C hereto in the "Plan of Distribution" section of the
prospectus forming a part of the Exchange Offer Registration
Statement, and include the information set forth in Annex D hereto in
the Letter of Transmittal delivered pursuant to the Registered
Exchange Offer, and (iii) if requested by the Initial Purchasers,
include the information required by Items 507 and/or 508 of
Regulation S-K under the 1933 Act, as applicable, in the prospectus
forming a part of the Registration Statement; and (iv) in the case of
a Shelf Registration Statement, include the names of the Holders who
propose to sell Securities pursuant to the Shelf Registration
Statement, as selling security holders.
(b) (1) The Issuer shall advise you and, in the case of a
Shelf Registration Statement, the Holders of securities included
therein, and, if requested by you or any such Holder, confirm such
advice in writing:
(i) when the Registration Statement and any
amendment thereto has been filed with the Commission and
when the Registration Statement or any post-effective
amendment thereto has become effective; and
(ii) of any request by the Commission for
amendments or supplements to the Registration Statement or
the prospectus included therein or for additional
information.
(2) The Issuer shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities included therein,
and, in the case of an Exchange Offer Registration Statement, any
Exchanging Dealer which has provided in writing to the Issuer a
telephone or facsimile number or address for notices, and, if
requested by you or any such Holder or Exchanging Dealer, confirm
such advice in writing:
(i) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that
purpose;
(ii) of the receipt by the Issuer of any
notification with respect to the suspension of the
qualification of the securities included therein for sale in
any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and
(iii) of the happening of any event that requires
the making of any changes in the Registration Statement or
the prospectus so that as of such date,
<PAGE>
6
the statements therein are not misleading and do not omit to
state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
prospectus, in light of the circumstances under which they
were made) not misleading (which advice shall be accompanied
by an instruction to suspend the use of the prospectus until
the requisite changes have been made).
(c) The Issuer will make every reasonable effort to obtain
the withdrawal of any order suspending the effectiveness of any
Registration Statement at the earliest possible time.
(d) The Issuer will furnish to each Holder of securities
included within the coverage of any Shelf Registration Statement
without charge, at least one copy of such Shelf Registration
Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in
writing, all exhibits (including those incorporated by reference).
(e) The Issuer will, during the Shelf Registration Period,
deliver to each Holder of securities included within the coverage of
any Shelf Registration Statement, without charge, as many copies of
the prospectus (including each preliminary prospectus) included in
such Shelf Registration Statement and any amendment or supplement
thereto as such Holder may reasonably request; and the Issuer
consents to the use of the prospectus or any amendment or supplement
thereto by each of the selling Holders of securities in connection
with the offering and sale of the securities covered by the
prospectus or any amendment or supplement thereto.
(f) The Issuer will furnish to each Exchanging Dealer or
Initial Purchaser, as applicable, which so requests, without charge,
at least one copy of the Exchange Offer Registration Statement and
any post-effective amendment thereto, including financial statements
and schedules, and, if the Exchanging Dealer or Initial Purchaser, as
applicable, so requests in writing, all exhibits (including those
incorporated by reference).
(g) The Issuer will, during the Exchange Offer Registration
Period, promptly deliver to each Exchanging Dealer, without charge,
as many copies of the prospectus included in such Exchange Offer
Registration Statement and any amendment or supplement thereto as
such Exchanging Dealer may reasonably request for delivery by such
Exchanging Dealer in connection with a sale of Exchange Notes
received by it pursuant to the Registered Exchange Offer, and the
Issuer consents to the use of the prospectus or any amendment or
supplement thereto by any such Exchanging Dealer, as aforesaid.
(h) Prior to any public offering of securities pursuant to
any Shelf Registration Statement, the Issuer will register or qualify
or cooperate with the Holders of securities included therein and
their respective counsel in connection with the registration or
qualification of such securities for offer and sale under the
securities or blue sky laws of such jurisdictions as any such Holder
reasonably requests in writing and do any and all other acts or
things necessary or advisable to enable the offer and sale in such
jurisdictions of the securities covered by such Shelf Registration
Statement; provided, however, that the Issuer will not be required to
qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action which would subject it to
general service of process or to taxation in any such jurisdiction
where it is not then so subject.
(i) The Issuer will cooperate with the Holders of securities
to facilitate the timely preparation and delivery of certificates
representing securities to be sold pursuant to any Shelf Registration
Statement free of any restrictive legends and in such denominations
and registered in such names as Holders may request prior to sales of
securities pursuant to such Shelf Registration Statement.
<PAGE>
7
(j) Upon the occurrence of any event contemplated by
paragraph (b)(2)(iii) above, the Issuer will promptly prepare in a
post-effective amendment to the Registration Statement or in a
supplement to the related prospectus or file any other wired document
so that, as thereafter delivered to purchasers of the securities
included therein, the prospectus will not include an untrue statement
of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(k) Not later than the effective date of the applicable
Registration Statement, the Issuer will provide a CUSIP number for
the Securities or Exchange Notes, as the case may be, and provide the
applicable trustee with certificates for the Securities or Exchange
Notes, as the case may be, in a form eligible for deposit with The
Depository Trust Company.
(l) The Issuer will comply with all applicable rules and
regulations of the Commission and will make generally available to
its security holders as soon as practicable after the effective date
of the applicable Registration Statement an earnings statement
satisfying the provisions of Section 11(a) of the 1933 Act.
(m) The Issuer will cause the Indenture or the Exchange
Notes Indenture, as the case may be, to be qualified under the Trust
Indenture Act of 1939, as amended, in a timely manner.
(n) The Issuer may require each Holder of the securities to
be sold pursuant to any Shelf Registration Statement to furnish to
the Issuer such information regarding the holder and the distribution
of such securities as the Issuer may from time to time reasonably
require for inclusion in such Registration Statement, and the Issuer
may exclude from such Registration Statement the Securities of any
Holder that fails to furnish such information within a reasonable
time after receiving such request.
(o) The Issuer shall enter into such customary agreements
(including if requested an underwriting agreement in customary form)
and take all such other action, if any, as any Holder shall
reasonably request in order to facilitate the disposition of the
securities pursuant to any Shelf Registration Statement.
(p) In the case of any Shelf Registration Statement, the
Issuer shall (i) make reasonably available for inspection by the
Holders, and any underwriter participating in any disposition
pursuant to a Registration Statement, and any attorney, accountant or
other agent retained by the Holders or any such underwriter all
relevant financial and other records, pertinent corporate documents
and properties of the Issuer and (ii) cause the Issuer's officers,
directors and employees to supply all relevant information reasonably
requested by the Holders or any such underwriter, attorney,
accountant or agent in connection with any such Registration
Statement.
(q) In the case of any Exchange Offer Registration Statement
the Issuer shall (i) make reasonably available for inspection by the
Initial Purchasers, but in each case only in such firm's capacity as
an Exchanging Dealer and with the express understanding that each
such firm shall be acting solely for itself and not on behalf of any
other party, including, without limitation, any other Exchanging
Dealer, all relevant financial and other records, pertinent corporate
documents and properties of the Issuer and (ii) cause the Issuer's
officers, directors and employees to supply all information
reasonably requested by any of them.
(r) In the case of any Shelf Registration Statement, the
Issuer, if requested by any Holders, shall cause (x) its counsel to
deliver an opinion relating to the securities included within the
coverage of such Shelf Registration Statement in customary form, (y)
its officers to execute and deliver all customary documents and
certificates requested by
<PAGE>
8
any underwriters of the securities and (z) its independent public
accountants to provide to the selling Holders and any underwriter
therefor a comfort letter in customary form.
(s) In the case of any Exchange Offer Registration
Statement, the Issuer, if requested by the Initial Purchasers, but in
each case only in such firm's capacity as an Exchanging Dealer and
with the express understanding that each such firm shall be acting
solely for itself and not on behalf of any other party, including,
without limitation, any other Exchanging Dealer, in connection with
any prospectus delivery as contemplated in paragraph (g) above, shall
use its best efforts to cause, on and as of the effective date of the
Exchange Offer Registration Statement, (x) its counsel to deliver an
opinion relating to the Exchange Offer Registration Statement and the
Exchange Notes in customary form, (y) its officers to execute and
deliver all customary documents and certificates requested and (z)
its independent public accountants to provide a comfort letter in
customary form, subject to receipt of appropriate documentation
(including the delivery of a customary representation letter), as
contemplated by Statement on Auditing Standards No. 72.
4. Registration Expenses. The Issuer will bear all expenses incurred
in connection with the performance of its obligations under Sections 1, 2 and
3 hereof and, in the event of any Shelf Registration Statement, will reimburse
the Holders for the reasonable fees and disbursements of one firm or counsel
designated by the Holders of a majority in principal amount of the securities
to be registered thereunder to act as counsel for the Holders in connection
therewith, and, in the case of any Exchange Offer Registration Statement, will
reimburse the Initial Purchasers, as applicable, for the reasonable fees and
disbursements of counsel in connection therewith.
5. Indemnification.
(a) In the event of a Shelf Registration or in connection
with any prospectus delivery pursuant to a Registered Exchange Offer
by an Exchanging Dealer as contemplated in Section 3(g) above, the
Issuer shall indemnify and hold harmless each Holder and each person,
if any, who controls such Holder, within the meaning of Section 15 of
the 1933 Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "1934 Act") against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may
become subject under the Securities Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
any such Registration Statement or any prospectus forming part
thereof or in any amendments thereof or supplements thereto, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, and agrees to reimburse each
such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action;
provided, however, that the Issuer will not be liable in any such
case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Issuer by or on behalf of any such Holder specifically for
inclusion therein. The foregoing indemnity with respect to any untrue
statement contained in or omission from a preliminary prospectus
shall not inure to the benefit of any Holder (or any person
controlling such Holder) on account of any such loss, claim, damage
or liability arising from the sale of the Securities by such Holder
to any person if a copy of the final prospectus (or the final
prospectus as amended or supplemented) shall not have been delivered
or sent to such person at or prior to the written confirmation of the
initial resale of such Securities to such person and the untrue
statement contained in or omission from such preliminary prospectus
was corrected in the final prospectus (or the final prospectus
<PAGE>
9
as amended or supplemented), provided that the Company has delivered
the final prospectus to the Holders in requisite quantity on a timely
basis to permit such delivery or sending. This indemnity agreement
will be in addition to any liability that the Issuer may otherwise
have.
(b) In the event of a Shelf Registration Statement, each
Holder shall indemnify and hold harmless the Issuer, its directors
and officers and each person, if any, who controls the Issuer within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
Act to the same extent as the foregoing indemnity from the Issuer to
the Holders, but only with reference to written information relating
to such Holder furnished to the Issuer by or on behalf of such Holder
specifically for inclusion in the documents referred to in the
foregoing indemnity; provided, however, that no such Holder shall be
liable for any indemnity claims hereunder in excess of the amount of
net proceeds received by such Holder from the sale of securities
pursuant to the Registration Statement. This indemnity agreement will
be in addition to any liability that the Holders may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 5 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 5, notify the
indemnifying party in writing of the commencement thereof; but the
failure so to notify the indemnifying party (i) will not relieve it
from liability under paragraph (a) or (b) above unless and to the
extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party
other than the indemnification obligation provided in paragraph (a)
or (b) above. The indemnifying party shall be entitled to appoint
counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for
which indemnification is sought (in which case the indemnifying party
shall not thereafter be responsible for the fees and expenses of any
separate counsel retained by the indemnified party or parties except
as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall have the
right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses
of such separate counsel, if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present
such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties that are
different from or additional to those available to the indemnifying
party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of
such action or (iv) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense of the
indemnifying party. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable
fees, costs and expenses of more than one separate firm of attorneys
(in addition to any local counsel) at any one time for all such
indemnified party or parties. Each indemnified party, as a condition
of the indemnity agreements contained in Sections 5(a) and 5(b),
shall use all reasonable efforts to cooperate with the indemnifying
party in the defense of any such action or claim. No indemnifying
party shall be liable for any settlement of any such action effected
without its written consent, which consent shall not be unreasonably
withheld or delayed. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to
any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual
<PAGE>
10
or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim,
action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 5 is unavailable to or insufficient to
hold harmless an indemnified party for any reason, the Issuer and the
applicable Holder or Holders (severally and not jointly) agree to
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which the Issuer and such
Holder or Holders may be subject in such proportions that the Issuer
is responsible for that portion represented by the percentage that
the aggregate consideration received by the Issuer from the sale by
it of the Securities sold by such Holder bears to the aggregate
principal amount of Securities sold by such Holder and such Holder is
responsible for the balance; provided, however, that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 5, each person who controls a Holder within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act and each director, officer, employee and agent of a
Holder shall have the same rights to contribution as such Holder, and
each person who controls the Issuer within the meaning of either the
Securities Act or the Exchange Act and each officer, director
employee and agent of the Issuer shall have the same rights to
contribution as the Issuer, subject in each case to the applicable
terms and conditions of this paragraph (d).
6. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement
may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, unless the
Issuer has obtained the written consent of Holders of a majority in
aggregate principal amount of the Securities.
(b) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail telex, telecopier, or air courier guaranteeing
overnight delivery:
(1) if to a Holder, at the most current address
given by such Holder to the Issuer in accordance with the
provisions of this Section 6(b), which address initially is,
with respect to each Holder, the address of such Holder
maintained by the Registrar under the Indenture, with a copy
in like manner to the Initial Purchasers;
(2) if to the Initial Purchasers, initially at the
respective addresses set forth in the Purchase Agreement
with copies to the parties specified therein; and
(3) if to the Company or Holdings, initially at its
respective address set forth in the Purchase Agreement with
copies to the parties specified therein.
All such notices and communications shall be deemed to have been duly
given when received.
The Initial Purchasers, Holdings or the Company by notice to the
other may designate additional or different addresses for subsequent notices
or communications.
(c) Successors and Assigns. This Agreement shall be binding
upon the Company, Holdings and their successors and assigns.
<PAGE>
11
(d) Counterparts. This agreement may be executed in any
number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the
same agreement.
(e) Headings. The headings in this agreement are for
convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
(f) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW
YORK. Specified times of day refer to New York City time.
<PAGE>
12
Please confirm that the foregoing correctly sets forth the agreement
among the Company, Holdings and you.
Very truly yours,
GS ESCROW CORP.
By: /s/ Glenn P. Dickes
------------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
NEW FIRST NATIONWIDE
HOLDINGS INC. (to be renamed
GOLDEN STATE HOLDINGS INC.)
By: /s/ Glenn P. Dickes
------------------------------------
Name: Glenn P. Dickes
Title: Vice President and Secretary
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
SALOMON BROTHERS INC
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
CHASE SECURITIES INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
by SALOMON BROTHERS INC
by /s/ Jeffrey S. Poorman
--------------------------
Name: Jeffrey S. Poorman
Title: Director
<PAGE>
ANNEX A TO
REGISTRATION AGREEMENT
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the 1933 Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Issuer has agreed that, for a period of 180 days
after the expiration of the Registered Exchange Offer (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
<PAGE>
ANNEX B TO
REGISTRATION AGREEMENT
Each broker-dealer that receives Exchange Notes for its own
account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
<PAGE>
ANNEX C TO
REGISTRATION AGREEMENT
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Existing Notes where such Existing Notes were acquired as a
result of market-making activities or other trading activities. The Issuer has
agreed that for a period of 180 days after the expiration of the Registered
Exchange Offer, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until __________, 199_, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.1
The Issuer will not receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the 1933 Act and
any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the 1933 Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the 1933 Act.
For a period of 180 days after the expiration of the
Registered Exchange Offer, the Issuer will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Issuer has agreed to pay all expenses incident to the Exchange Offer other
than commissions or concessions of any brokers or dealers and will indemnify
the holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the 1933 Act.
- ---------------------
1 The legend required by Item 502(e) of Regulation S-K must appear on the
back page of the Exchange Offer Prospectus.
<PAGE>
ANNEX D TO
REGISTRATION AGREEMENT
Rider A
|_| CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
Address:
Rider B
If the undersigned is not a broker-dealer, the undersigned represents that it
is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Existing Notes, it
represents that the Existing Notes to be exchanged for Exchange Notes were
acquired by it as a result of market-making or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the 1933 Act.
<PAGE>
AMENDMENT NO.1 TO TAX SHARING AGREEMENT
AMENDMENT NO. 1, dated as of September 11, 1998, by and
among Mafco Holdings Inc., a Delaware corporation ("Parent"), Golden State
Bancorp Inc., a Delaware corporation ("Golden State"), First Nationwide
Holdings Inc., a Delaware corporation ("FNH"), California Federal Bank, A
Federal Savings Bank, a federally chartered stock savings bank ("CFB"), and
New First Nationwide Holdings Inc., a Delaware corporation to be renamed
"Golden State Holdings Inc." ("New FNH," and together with Parent, Golden
State, FNH and CFB, the "Parties"), to the Tax Sharing Agreement entered into
as of January 1, 1994, by and among Parent, FNH and CFB, as successor to First
Madison Bank, FSB (the "Tax Sharing Agreement").
WHEREAS, pursuant to Section 6.14 of the Agreement and Plan
of Reorganization, dated as of February 4, 1998, as amended (the "Agreement"),
by and among Golden State, FNH, Golden State Financial Corporation, a Delaware
corpora tion, First Nationwide (Parent) Holdings Inc., a Delaware corporation,
First Gibraltar Holdings Inc., a Delaware corporation, and Hunter's Glen/Ford,
Ltd., a Texas limited partnership, the Parties desire to amend the Tax Sharing
Agreement as set forth herein (capitalized terms used and not otherwise
defined herein have the meanings assigned to them in the Agreement);
NOW THEREFORE, in consideration of the foregoing, and
intend ing to be legally bound hereby, the Parties hereby agree as follows:
1. For any taxable period commencing on or after the
Effective Time, (i) Golden State shall, as of the Effective Time, replace
Parent under the Tax Sharing Agreement and will assume all of the rights and
obligations of Parent under the Tax Sharing Agreement with respect to such
taxable periods; (ii) New FNH shall, as of the Effective Time, replace FNH
under the Tax Sharing Agreement and will assume all of the rights and
obligations of FNH under the Tax Sharing Agreement with respect to such
taxable periods; and (iii) CFB shall continue to be bound by the Tax Sharing
Agreement with respect to such taxable periods.
2. For any taxable period ending on or before the Effective
Time, (i) New FNH shall, as of the Effective Time, be the successor to FNH
under the Tax Sharing Agreement, and will assume all of the rights and
obligations of FNH under the Tax Sharing Agreement with respect to any such
taxable period, and (ii) CFB and
<PAGE>
Parent shall continue to be bound by the Tax Sharing Agreement with respect to
any such taxable period.
3. All references to "this Agreement" in the Tax Sharing
Agree ment shall be deemed to refer to the Tax Sharing Agreement as amended
hereby.
4. Except as expressly amended by this Amendment, the Tax
Sharing Agreement is hereby ratified and confirmed in all respects.
5. This Amendment may be executed in two or more counter
parts, each of which shall be deemed an original and all of which shall be
considered one and the same agreement, and shall become effective when
counterparts have been signed by each of the Parties and delivered to the
other Parties, it being under stood that all Parties need not sign the same
counterpart.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment
to be executed by their respective officers thereunto duly authorized as of
the date first above written.
MAFCO HOLDINGS INC.
By: /s/ Glenn P. Dickes
---------------------------------------------
Name: Glenn P. Dickes
Title: Senior Vice President and Secretary
GOLDEN STATE BANCORP INC.
By: /s/ James R. Eller
---------------------------------------------
Name: James R. Eller
Title: Secretary
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Joram C. Salig
---------------------------------------------
Name: Joram C. Salig
Title: Vice President and Assistant Secretary
NEW FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Joram C. Salig
---------------------------------------------
Name: Joram C. Salig
Title: Vice President and Assistant Secretary
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
By: /s/ Eric K. Kawamura
---------------------------------------------
Name: Eric K. Kawamura
Title: Senior Vice President
<PAGE>
FIRST NATIONWIDE HOLDINGS, INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES,
MINORITY INTEREST AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years ended December 31,
------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges (excluding interest on deposits):
- -----------------------------------------------
Interest on borrowings $397,394 $331,269 $ 693,819 $ 388,626 $287,456 $98,888 $ 16,700
Total fixed charges (including interest on deposits) 397,394 331,269 693,819 388,626 287,456 98,888 16,700
Rent interest factor 4,027 4,098 7,857 5,044 6,628 1,746 361
Income before income taxes, extraordinary item
and minority interest 187,403 131,444 297,861 549,208 122,450 31,928 146,618
Earnings 588,824 466,811 999,537 942,878 416,534 132,562 163,679
Fixed charges (excluding interest on deposits) 401,421 335,367 701,676 393,670 294,084 100,634 17,061
Minority interest and preferred stock dividends 46,192 51,236 102,135 48,045 34,584 0 0
Combined fixed charges excluding interest on
deposits, minority interest and preferred
stock dividends 447,613 386,603 803,811 441,715 328,668 100,634 17,061
Ratio of earnings to combined fixed charges,
(excluding interest on deposits), minority
interest and preferred stock dividends 1.32x 1.21x 1.24x 2.13x 1.27x 1.32x 9.59x
Fixed charges (including interest on deposits):
- -----------------------------------------------
Interest on deposits $355,202 $374,787 $ 746,985 $ 419,174 $447,359 $100,957 $55,410
Interest on borrowings 397,394 331,269 693,819 388,626 287,456 98,888 16,700
Total fixed charges (including interest on deposits) 752,596 706,056 1,440,804 807,800 734,815 199,845 72,110
Rent interest factor 4,027 4,098 7,857 5,044 6,628 1,746 361
Income before income taxes, extraordinary item
and minority interest 187,403 131,444 297,861 549,208 122,450 31,928 146,618
Earnings 944,026 841,598 1,746,522 1,362,052 863,893 233,519 219,089
Fixed charges (including interest on deposits) 756,623 710,154 1,448,661 812,844 741,443 201,591 72,471
Minority interest and preferred stock dividends 46,192 51,236 102,135 48,045 34,584 0 0
Combined fixed charges excluding interest on
deposits, minority interest and preferred
stock dividends 802,815 761,390 1,550,796 860,889 776,027 201,591 72,471
Ratio of earnings to combined fixed charges
(including interest on deposits), minority
interest and preferred stock dividends 1.18x 1.11x 1.13x 1.58x 1.11x 1.16x 3.02x
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation
- ---- -----------------------------
California Federal Bank, A Federal Savings Bank United States of America
First Nationwide Mortgage Corporation Delaware
California Federal Preferred Capital Corporation Maryland
Cal Fed Investments* California
- ----------
* also does business under the name "Cal Fed Financial and Insurance Services"
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Golden State Holdings Inc.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
San Francisco, California
September 24, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura, Renee Nichols Tucei and Vanessa L. Washington
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the Golden State Holdings
Inc. (the "Corporation") Registration Statement on Form S-1 or Form S-4, as
applicable (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), including, without limiting the generality of
the foregoing, to sign the Registration Statement in the name and on behalf of
the Corporation or on behalf of the undersigned as a director or officer of the
Corporation, to sign any amendments and supplements relating thereto (including
post-effective amendments) under the Securities Act and to sign any instrument,
contract, document or other writing of or in connection with the Registration
Statement and any amendments and supplements thereto (including post-effective
amendments) and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Ronald O. Perelman
----------------------
Ronald O. Perelman
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura, Renee Nichols Tucei and Vanessa L. Washington
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the Golden State Holdings
Inc. (the "Corporation") Registration Statement on Form S-1 or Form S-4, as
applicable (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), including, without limiting the generality of
the foregoing, to sign the Registration Statement in the name and on behalf of
the Corporation or on behalf of the undersigned as a director or officer of the
Corporation, to sign any amendments and supplements relating thereto (including
post-effective amendments) under the Securities Act and to sign any instrument,
contract, document or other writing of or in connection with the Registration
Statement and any amendments and supplements thereto (including post-effective
amendments) and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Gerald J. Ford
------------------
Gerald J. Ford
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura, Renee Nichols Tucei and Vanessa L. Washington
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the Golden State Holdings
Inc. (the "Corporation") Registration Statement on Form S-1 or Form S-4, as
applicable (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), including, without limiting the generality of
the foregoing, to sign the Registration Statement in the name and on behalf of
the Corporation or on behalf of the undersigned as a director or officer of the
Corporation, to sign any amendments and supplements relating thereto (including
post-effective amendments) under the Securities Act and to sign any instrument,
contract, document or other writing of or in connection with the Registration
Statement and any amendments and supplements thereto (including post-effective
amendments) and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Howard Gittis
-----------------
Howard Gittis
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura, Renee Nichols Tucei and Vanessa L. Washington
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the Golden State Holdings
Inc. (the "Corporation") Registration Statement on Form S-1 or Form S-4, as
applicable (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), including, without limiting the generality of
the foregoing, to sign the Registration Statement in the name and on behalf of
the Corporation or on behalf of the undersigned as a director or officer of the
Corporation, to sign any amendments and supplements relating thereto (including
post-effective amendments) under the Securities Act and to sign any instrument,
contract, document or other writing of or in connection with the Registration
Statement and any amendments and supplements thereto (including post-effective
amendments) and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Richard H. Terzian
----------------------
Richard H. Terzian
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura, Renee Nichols Tucei and Vanessa L. Washington
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the Golden State Holdings
Inc. (the "Corporation") Registration Statement on Form S-1 or Form S-4, as
applicable (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), including, without limiting the generality of
the foregoing, to sign the Registration Statement in the name and on behalf of
the Corporation or on behalf of the undersigned as a director or officer of the
Corporation, to sign any amendments and supplements relating thereto (including
post-effective amendments) under the Securities Act and to sign any instrument,
contract, document or other writing of or in connection with the Registration
Statement and any amendments and supplements thereto (including post-effective
amendments) and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Carl B. Webb
----------------
Carl B. Webb
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Eric K. Kawamura and Vanessa L. Washing ton or any of them,
each acting alone, his true and lawful attorney-in-fact and agent, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, in connection with the Golden State Holdings Inc. (the
"Corporation") Registration Statement on Form S-1 or Form S-4, as applicable
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), including, without limiting the generality of the foregoing,
to sign the Registration Statement in the name and on behalf of the Corporation
or on behalf of the undersigned as a director or officer of the Corporation, to
sign any amendments and supplements relating thereto (including post-effective
amendments) under the Securities Act and to sign any instrument, contract,
document or other writing of or in connection with the Registration Statement
and any amendments and supplements thereto (including post-effective amendments)
and to file the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the Securities and
Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 25th day
of September, 1998.
/s/ Renee Nichols Tucei
-----------------------
Renee Nichols Tucei
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
GOLDEN STATE HOLDINGS INC.
(Exact name of obligor as specified in its charter)
Delaware 13-3990512
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
135 Main Street
San Francisco, California 94105
(Address of principal executive offices) (Zip code)
----------------------
Floating Rate Notes Due 2003
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the
Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- ---------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 21st day of September, 1998.
THE BANK OF NEW YORK
By: /s/ MARY JANE SCHMALZEL
---------------------------
Name: MARY JANE SCHMALZEL
Title: VICE PRESIDENT
-4-
<PAGE>
Exhibit 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 6,397,993
Interest-bearing balances .......... 1,138,362
Securities:
Held-to-maturity securities ........ 1,062,074
Available-for-sale securities ...... 4,167,240
Federal funds sold and Securities pur-
chased under agreements to resell... 391,650
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................36,538,242
LESS: Allowance for loan and
lease losses ..............631,725
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 35,906,517
Assets held in trading accounts ...... 2,145,149
Premises and fixed assets (including
capitalized leases) ................ 663,928
Other real estate owned .............. 10,895
Investments in unconsolidated
subsidiaries and associated
companies .......................... 237,991
Customers' liability to this bank on
acceptances outstanding ............ 992,747
Intangible assets .................... 1,072,517
Other assets ......................... 1,643,173
-----------
Total assets ......................... $55,830,236
===========
LIABILITIES
Deposits:
In domestic offices ................ $24,849,054
Noninterest-bearing ......10,011,422
Interest-bearing .........14,837,632
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,319,002
Noninterest-bearing .........707,820
Interest-bearing .........14,611,182
Federal funds purchased and Securities
sold under agreements to repurchase. 1,906,066
Demand notes issued to the U.S.
Treasury ........................... 215,985
Trading liabilities .................. 1,591,288
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,991,119
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,574
Bank's liability on acceptances exe-
cuted and outstanding .............. 998,145
Subordinated notes and debentures .... 1,314,000
Other liabilities .................... 2,421,281
-----------
Total liabilities .................... 50,631,514
-----------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,328,050
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 40,198
Cumulative foreign currency transla-
tion adjustments ................... ( 36,129)
------------
Total equity capital ................. 5,198,722
------------
Total liabilities and equity
capital ............................ $55,830,236
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi
Alan R. Griffith Directors
J. Carter Bacot
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
GOLDEN STATE HOLDINGS INC.
(Exact name of obligor as specified in its charter)
Delaware 13-3990512
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
135 Main Street
San Francisco, California 94105
(Address of principal executive offices) (Zip code)
----------------------
6-3/4% Senior Notes Due 2001
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- ----------------------------------------------------------------------------
Name Address
- ----------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 21st day of September, 1998.
THE BANK OF NEW YORK
By: /s/ MARY JANE SCHMALZEL
-----------------------------
Name: MARY JANE SCHMALZEL
Title: VICE PRESIDENT
-4-
<PAGE>
Exhibit 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 6,397,993
Interest-bearing balances .......... 1,138,362
Securities:
Held-to-maturity securities ........ 1,062,074
Available-for-sale securities ...... 4,167,240
Federal funds sold and Securities pur-
chased under agreements to resell... 391,650
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................36,538,242
LESS: Allowance for loan and
lease losses ..............631,725
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 35,906,517
Assets held in trading accounts ...... 2,145,149
Premises and fixed assets (including
capitalized leases) ................ 663,928
Other real estate owned .............. 10,895
Investments in unconsolidated
subsidiaries and associated
companies .......................... 237,991
Customers' liability to this bank on
acceptances outstanding ............ 992,747
Intangible assets .................... 1,072,517
Other assets ......................... 1,643,173
-----------
Total assets ......................... $55,830,236
===========
LIABILITIES
Deposits:
In domestic offices ................ $24,849,054
Noninterest-bearing ......10,011,422
Interest-bearing .........14,837,632
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,319,002
Noninterest-bearing .........707,820
Interest-bearing .........14,611,182
Federal funds purchased and Securities
sold under agreements to repurchase. 1,906,066
Demand notes issued to the U.S.
Treasury ........................... 215,985
Trading liabilities .................. 1,591,288
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,991,119
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,574
Bank's liability on acceptances exe-
cuted and outstanding .............. 998,145
Subordinated notes and debentures .... 1,314,000
Other liabilities .................... 2,421,281
-----------
Total liabilities .................... 50,631,514
-----------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,328,050
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 40,198
Cumulative foreign currency transla-
tion adjustments ................... (36,129)
------------
Total equity capital ................. 5,198,722
------------
Total liabilities and equity
capital ............................ $55,830,236
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi |
Alan R. Griffith | Directors
J. Carter Bacot |
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
GOLDEN STATE HOLDINGS INC.
(Exact name of obligor as specified in its charter)
Delaware 13-3990512
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
135 Main Street
San Francisco, California 94105
(Address of principal executive offices) (Zip code)
----------------------
7% Senior Notes Due 2003
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- ----------------------------------------------------------------------------
Name Address
- ----------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 21st day of September, 1998.
THE BANK OF NEW YORK
By: /s/ MARY JANE SCHMALZEL
---------------------------
Name: MARY JANE SCHMALZEL
Title: VICE PRESIDENT
-4-
<PAGE>
Exhibit 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 6,397,993
Interest-bearing balances .......... 1,138,362
Securities:
Held-to-maturity securities ........ 1,062,074
Available-for-sale securities ...... 4,167,240
Federal funds sold and Securities pur-
chased under agreements to resell... 391,650
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................36,538,242
LESS: Allowance for loan and
lease losses ..............631,725
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 35,906,517
Assets held in trading accounts ...... 2,145,149
Premises and fixed assets (including
capitalized leases) ................ 663,928
Other real estate owned .............. 10,895
Investments in unconsolidated
subsidiaries and associated
companies .......................... 237,991
Customers' liability to this bank on
acceptances outstanding ............ 992,747
Intangible assets .................... 1,072,517
Other assets ......................... 1,643,173
-----------
Total assets ......................... $55,830,236
===========
LIABILITIES
Deposits:
In domestic offices ................ $24,849,054
Noninterest-bearing ......10,011,422
Interest-bearing .........14,837,632
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,319,002
Noninterest-bearing .........707,820
Interest-bearing .........14,611,182
Federal funds purchased and Securities
sold under agreements to repurchase. 1,906,066
Demand notes issued to the U.S.
Treasury ........................... 215,985
Trading liabilities .................. 1,591,288
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,991,119
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,574
Bank's liability on acceptances exe-
cuted and outstanding .............. 998,145
Subordinated notes and debentures .... 1,314,000
Other liabilities .................... 2,421,281
-----------
Total liabilities .................... 50,631,514
-----------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,328,050
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 40,198
Cumulative foreign currency transla-
tion adjustments ................... (36,129)
------------
Total equity capital ................. 5,198,722
------------
Total liabilities and equity
capital ............................ $55,830,236
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi |
Alan R. Griffith | Directors
J. Carter Bacot |
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
GOLDEN STATE HOLDINGS INC.
(Exact name of obligor as specified in its charter)
Delaware 13-3990512
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
135 Main Street
San Francisco, California 94105
(Address of principal executive offices) (Zip code)
----------------------
7-1/8% Senior Notes Due 2005
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- ---------------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 21st day of September, 1998.
THE BANK OF NEW YORK
By: /s/ MARY JANE SCHMALZEL
---------------------------
Name: MARY JANE SCHMALZEL
Title: VICE PRESIDENT
-4-
<PAGE>
Exhibit 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 6,397,993
Interest-bearing balances .......... 1,138,362
Securities:
Held-to-maturity securities ........ 1,062,074
Available-for-sale securities ...... 4,167,240
Federal funds sold and Securities pur-
chased under agreements to resell... 391,650
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................36,538,242
LESS: Allowance for loan and
lease losses ..............631,725
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 35,906,517
Assets held in trading accounts ...... 2,145,149
Premises and fixed assets (including
capitalized leases) ................ 663,928
Other real estate owned .............. 10,895
Investments in unconsolidated
subsidiaries and associated
companies .......................... 237,991
Customers' liability to this bank on
acceptances outstanding ............ 992,747
Intangible assets .................... 1,072,517
Other assets ......................... 1,643,173
-----------
Total assets ......................... $55,830,236
===========
LIABILITIES
Deposits:
In domestic offices ................ $24,849,054
Noninterest-bearing ......10,011,422
Interest-bearing .........14,837,632
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,319,002
Noninterest-bearing .........707,820
Interest-bearing .........14,611,182
Federal funds purchased and Securities
sold under agreements to repurchase. 1,906,066
Demand notes issued to the U.S.
Treasury ........................... 215,985
Trading liabilities .................. 1,591,288
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,991,119
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,574
Bank's liability on acceptances exe-
cuted and outstanding .............. 998,145
Subordinated notes and debentures .... 1,314,000
Other liabilities .................... 2,421,281
-----------
Total liabilities .................... 50,631,514
-----------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,328,050
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 40,198
Cumulative foreign currency transla-
tion adjustments ................... (36,129)
------------
Total equity capital ................. 5,198,722
------------
Total liabilities and equity
capital ............................ $55,830,236
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi |
Alan R. Griffith | Directors
J. Carter Bacot |
<PAGE>
LETTER OF TRANSMITTAL
GOLDEN STATE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
FLOATING RATE NOTES DUE 2003
IN EXCHANGE FOR
FLOATING RATE EXCHANGE NOTES DUE 2003,
6 3/4% SENIOR NOTES DUE 2001
IN EXCHANGE FOR
6 3/4% SENIOR EXCHANGE NOTES DUE 2001,
7% SENIOR NOTES DUE 2003
IN EXCHANGE FOR
7% SENIOR EXCHANGE NOTES DUE 2003 AND
7 1/8% SENIOR NOTES DUE 2005
IN EXCHANGE FOR
7 1/8% SENIOR EXCHANGE NOTES DUE 2005
PURSUANT TO THE PROSPECTUS, DATED , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered or Certified Mail:
The Bank of New York (Eligible Institutions Only) The Bank of New York
101 Barclay Street (212) 815-6339 101 Barclay Street, Floor 7E
Corporate Trust Services Window, New York, New York 10286
Ground Floor To Confirm by Telephone Attn: Reorganization Section
New York, New York 10286 or for Information call:
Attn: Reorganization Section (212) 815-5789
Attn:
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1998 (the "Prospectus"), of Golden State Holdings
Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal
(the "Letter"), which together constitute the Company's offer (the "Exchange
Offer") to exchange (i) an aggregate principal amount of up to $250,000,000 of
its Floating Rate Notes Due 2003 (the "New Floating Rate Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), for a like principal amount of its issued and outstanding Floating Rate
Notes Due 2003 (the "Old Floating Rate Notes" and, together with the New
Floating Rate Notes, the "Floating Rate Notes") from the holders thereof,
(ii) an aggregate principal amount of up to $350,000,000 of its 6 3/4% Senior
Notes Due 2001 (the "New 2001 Notes"), which have been registered under the
Securities Act, for a like principal amount of its issued and outstanding 6 3/4%
Senior Notes Due 2001 (the "Old 2001 Notes" and, together with the New 2001
Notes, the "2001 Notes") from the holders thereof, (iii) an aggregate principal
amount of up to $600,000,000 of its 7% Senior Notes Due 2003 (the "New 2003
Notes"), which have been registered under the Securities Act, for a like
principal amount of its issued and outstanding 7% Senior Notes Due 2003 (the
"Old 2003 Notes" and, together with the New 2003 Notes, the "2003 Notes") from
the holders thereof and (iv) an aggregate principal amount of up to $800,000,000
of its 7 1/8% Senior Notes Due 2005 (the "New 2005 Notes" and, together with the
New 2001 Notes and the New 2003 Notes, the "New Fixed Rate Notes" and, together
with the New Floating Rate Notes, the "New Notes"), which have been registered
under the Securities Act, for a like principal amount of its issued and
outstanding 7 1/8% Senior Notes Due 2005 (the "Old 2005 Notes" and, together
with the New 2005 Notes, the "2005 Notes") from the holders thereof.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If the Exchange Offer is not consummated by , 1998, the
interest rate on the Old Notes from and including such date until but excluding
the date of consummation of the Exchange Offer will increase by 0.5%. Holders of
Old Notes accepted for exchange will be deemed to have waived the right to
receive any other payments or accrued interest on the Old Notes. The Company
reserves the right, at any time or from time to time, to extend the Exchange
<PAGE>
Offer at its discretion, in which event the term "Expiration Date" shall mean
the latest time and date to which the Exchange Offer is extended. The Company
shall notify the holders of the Old Notes of any extension by oral or written
notice prior to 9:00 A.M., New York City time, on the next business day after
the previously scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer -- Book-Entry Transfer" section of the Prospectus and an Agent's
Message (as defined herein) is not delivered. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates or confirmation of the book-entry tender of their Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry
Confirmation") and all other documents required by this Letter to the Exchange
Agent on or prior to the Expiration Date, must tender their Old Notes according
to the guaranteed delivery procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
<PAGE>
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Old Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES 1 2 3
AGGREGATE
NAME(S) AND ADDRESS(ES) OF PRINCIPAL PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
TOTAL
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to
have tendered ALL of the Old Notes represented by the Old Notes
indicated in column 2. See Instruction 2. Old Notes tendered must be
in denominations of principal amount at maturity of $1,000 and any
integral multiple thereof. See Instruction 1.
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ____________________________________________
Account Number __________________ Transaction Code Number _________
By crediting Old Notes to the Exchange Agent's Account at the Book-Entry
Transfer Facility in accordance with the Book-Entry Transfer Facility's
Automated Tender Offer Program ("ATOP") and by complying with applicable
ATOP procedures with respect to the Exchange Offer, including transmitting
an Agent's Message to the Exchange Agent in which the holder of Old Notes
acknowledges and agrees to be bound by the terms of this Letter, the
participant in ATOP confirms on behalf of itself and the beneficial owners
as if it had completed the information required herein and executed and
transmitted this Letter to the Exchange Agent.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s) __________________________________________
Window Ticket Number (if any) ____________________________________________
Date of Execution of Notice of Guaranteed Delivery _______________________
Name of Institution which guaranteed delivery ____________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number __________________ Transaction Code Number ___________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name: ____________________________________________________________________
Address: _________________________________________________________________
__________________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, it represents that the Old Notes to be
exchanged for New Notes were acquired by it as a result of market-making or
other trading activities and acknowledges that it will deliver a prospectus
meeting the requirements of the Securities Act of 1933, as amended, in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act of 1933, as
amended.
2
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the New Notes issued in exchange for the Old Notes pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement with any person
to participate in the distribution of such New Notes. However, the Company does
not intend to request the SEC to consider, and the SEC has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer as in other circumstances. If the undersigned is
not a broker-dealer, the undersigned represents that it is not engaged in, and
does not intend to engage in, a distribution of New Notes and has no arrangement
or understanding to participate in a distribution of New Notes. If any holder is
an affiliate of the Company or is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the SEC and (ii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive New Notes for its own account in exchange for Old Notes, it
represents that the Old Notes to be exchanged for the New Notes were acquired by
it as a result of market-making or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal Rights"
section of the Prospectus.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated in the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of the Old Notes."
3
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or New
Notes are to be issued in the name of and sent to someone other than the person
or persons whose signature(s) appear(s) on this Letter above, or if Old Notes
delivered by book-entry transfer which are not accepted for exchange are to be
returned by credit to an account maintained at the Book-Entry Transfer Facility
other than the account indicated above.
Issue: New Notes and/or Old Notes to:
Name(s) ________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
_______________________________________________________________________
(ZIP CODE)
(COMPLETE SUBSTITUTE FORM W-9)
/ / Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
________________________________________________________________________________
(BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or New
Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such person or persons at an
address other than shown in the box entitled "Description of Old Notes" on this
Letter above.
Mail: New Notes and/or Old Notes to:
Name ___________________________________________________________________________
(PLEASE TYPE OR PRINT)
__________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address_________________________________________________________________________
________________________________________________________________________
(ZIP CODE)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE IN LIEU
HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY
CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED
DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
4
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
Dated: ................................................................. , 1998
x ........................................................... , 1998
x ........................................................... , 1998
Signature(s) of Owner(s) Date
Area Code and Telephone Number ....................................
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s): ..............................................................
.......................................................................
(Please Type or Print)
Capacity: .............................................................
Address: ..............................................................
.......................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution: ..............................................
(Authorized Signature)
.......................................................................
(Title)
.......................................................................
(Name and Firm)
Date: .......................................................... , 1998
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER FOR THE
FLOATING RATE NOTES DUE 2003 IN EXCHANGE FOR THE
FLOATING RATE EXCHANGE NOTES DUE 2003, OFFER FOR THE
6 3/4% SENIOR NOTES DUE 2001 IN EXCHANGE FOR THE
6 3/4% SENIOR EXCHANGE NOTES DUE 2001, OFFER FOR THE
7% SENIOR NOTES DUE 2003 IN EXCHANGE FOR THE
7% SENIOR EXCHANGE NOTES DUE 2003, AND OFFER FOR THE
7 1/8% SENIOR NOTES DUE 2005 IN EXCHANGE FOR THE
7 1/8% SENIOR EXCHANGE NOTES DUE 2005 OF GOLDEN STATE HOLDINGS INC.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES.
This letter is to be completed by noteholders either if certificates are to
be forwarded herewith or if tenders are to be made pursuant to the procedures
for delivery by book-entry transfer set forth in "The Exchange Offer--Book-Entry
Transfer" section of the Prospectus and an Agent's Message is not delivered.
Certificates for all physically tendered Old Notes, or Book-Entry Confirmation,
as the case may be, as well as a properly completed and duly executed Letter (or
manually signed facsimile hereof) and any other documents required by this
Letter, must be received by the Exchange Agent at the address set forth herein
on or prior to the Expiration Date, or the tendering holder must comply with the
guaranteed delivery procedures set forth below. Old Notes tendered hereby must
be in denominations of principal amount at maturity of $1,000 and any integral
multiple thereof. The term "Agent's Message" means a message, transmitted to the
Book-Entry Transfer Facility and received by the Exchange Agent and forming a
part of the Book-Entry Confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgement from the tendering Participant
that such Participant has received and agrees to be bound by this Letter and
that the Company may enforce this Letter against such Participant.
Noteholders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Old Notes
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to
such procedures, (i) such tender must be made through an Eligible Institution,
(ii) prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a properly completed and duly executed Letter (or a
facsimile thereof or an Agent's Message in lieu thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, or a Book-Entry Confirmation, and any other
documents required by the Letter will be deposited by the Eligible Institution
with the Exchange Agent, and (iii) the certificates for all physically tendered
Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case
may be, and all other documents required by this Letter, are received by the
Exchange Agent within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount at maturity of Old Notes to be tendered in the box above entitled
"Description of Old Notes--Principal Amount Tendered." A reissued certificate
representing the balance of nontendered Old Notes will be sent to such tendering
holder, unless otherwise provided in the appropriate box on this Letter,
promptly after the Expiration Date. ALL OF THE OLD NOTES DELIVERED TO THE
EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
6
<PAGE>
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered bolder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all of such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder or holders of the Old
Notes specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder or
holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF
OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A
SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT COMPLETED
THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY
INSTRUCTIONS" ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different form the name or address of the person signing this Letter.
In the case of issuance in a different name, the employer identification or
social security number of the person named must also be indicated. Holders
tendering Old Notes by book-entry transfer may request that Old Notes not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such noteholder may designate hereon. If no such instructions are
given, such Old Notes not exchanged will be returned to the name or address of
the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery to
such tendering holder of New Notes may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
7
<PAGE>
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the Substitute Form W-9 set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to backup withholding as a result of a failure to report all interest or
dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
Checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
11. INCORPORATION OF LETTER OF TRANSMITTAL.
This Letter shall be deemed to be incorporated in and acknowledged and
accepted by any tender through the Book-Entry Transfer Facility's ATOP
procedures by any Participant on behalf of itself and the beneficial owners of
any Old Notes so tendered.
8
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN TIN:
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY Social security number or
SIGNING AND DATING BELOW Employer Identification Number
</TABLE>
<TABLE>
<S> <C>
DEPARTMENT OF THE PART 2--TIN Applied For / /
TREASURY INTERNAL
REVENUE SERVICE CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a
PAYOR'S REQUEST number to be issued to me).
FOR (2) I am not subject to backup withholding either because: (a) I am exempt from backup withholding,
TAXPAYER or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to
IDENTIFICATION backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS
NUMBER ("TIN") has notified me that I am no longer subject to backup withholding, and
AND CERTIFICATION (3) any other information provided on this form is true and correct.
SIGNATURE _______________________________ DATE___________________________________
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that
you are no longer subject to backup withholding.
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF
SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
of all reportable payments made to me thereafter will be withheld until I
provide a number.
_____________________________________________ _______________________________
Signature Date
9
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
GOLDEN STATE HOLDINGS INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Golden State Holdings Inc. (the "Company") made pursuant to
the Prospectus, dated , 1998 (the "Prospectus"), if certificates for
the outstanding Floating Rate Notes due 2003 (the "Old Floating Rate Notes"),
the outstanding 6 3/4% Senior Notes due 2001 (the "Old 2001 Notes"), the
outstanding 7% Senior Notes due 2003 (the "Old 2003 Notes") and the outstanding
7 1/8% Senior Notes due 2005 (the "Old 2005 Notes") of the Company (together,
the "Old Notes") are not immediately available or if the procedure for
book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach the Company prior to 5:00 p.m., New York
City time, on the Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by telegram, telex, facsimile transmission, mail or
hand delivery to The Bank of New York (the "Exchange Agent") as set forth below.
In addition, in order to utilize the guaranteed delivery procedure to tender Old
Floating Rate Notes, Old 2001 Notes, Old 2003 Notes or Old 2005 Notes pursuant
to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered or Certified Mail:
The Bank of New York (Eligible Institutions Only) The Bank of New York
101 Barclay Street (212) 815-6339 101 Barclay Street, Floor 7E
Corporate Trust Services Window, New York, New York 10286
Ground Floor To Confirm by Telephone Attn: Reorganization Section
New York, New York 10286 or for Information call:
Attn: Reorganization Section (212) 815-5789
Attn:
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Floating Rate Notes, Old 2001 Notes, Old
2003 Notes or Old 2005 Notes set forth below, pursuant to the guaranteed
delivery procedure described in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Floating Rate Notes
Tendered:*
$_________________________________________________ If Old Floating Rate Notes will be delivered by
Certificate Nos. (if available): book-entry transfer to The Depository Trust
Company, provide account number.
___________________________________________________ Account Number___________________________________
Total Principal Amount Represented by Old
Floating Rate Notes Certificate(s):
___________________________________________________
Principal Amount of Old 2001 Notes Tendered:*
___________________________________________________
$ If Old 2001 Notes will be delivered by book-entry
Certificate Nos. (if available) transfer to The Depository Trust Company, provide
account number.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
________________________________________________ Account Number______________________________________
Total Principal Amount Represented by Old
2001 Notes Certificate(s):
$_______________________________________________
Principal Amount of Old 2003 Notes Tendered:*
$_______________________________________________ If Old 2003 Notes will be delivered by book-entry
Certificate Nos. (if available): transfer to The Depository Trust Company, provide
account number.
________________________________________________ Account Number______________________________________
Total Principal Amount Represented by Old
2003 Notes Certificate(s):
$_______________________________________________
Principal Amount of Old 2005 Notes Tendered:*
$________________________________________________ If Old 2005 Notes will be delivered by book-entry
Certificate Nos. (if available): transfer to The Depository Trust Company, provide
account number.
_________________________________________________ Account Number____________________________________
Total Principal Amount Represented by Old
2005 Notes Certificate(s):
$________________________________________________
</TABLE>
* Must be in denominations of principal amount at maturity of $1,000 and any
integral multiple thereof.
<PAGE>
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES,
SUCCESSORS AND ASSIGNS OF THE UNDERSIGNED.
PLEASE SIGN HERE
<TABLE>
<S> <C>
X
---------------------------------- ----------------------
X
---------------------------------- ----------------------
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:
------------------------
</TABLE>
Must be signed by the holder(s) of Old Floating Rate Notes, Old 2001 Notes,
Old 2003 Notes or Old 2005 Notes as their name(s) appear(s) on certificates for
Old Floating Rate Notes, Old 2001 Notes, Old 2003 Notes or Old 2005 Notes or on
a security position listing, or by person(s) authorized to become registered
holder(s) by endorsement and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): ___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Capacity: __________________________________________________________________
Address(es): __________________________________________________________________
__________________________________________________________________
__________________________________________________________________
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Old Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus, together with a properly completed and duly executed Letter of
Transmittal (or a manually signed facsimile thereof) with any required signature
guarantee and any other documents required by the Letter of Transmittal, will be
received by the Exchange Agent at the address set forth above, no later than
three New York Stock Exchange trading days after the date of execution hereof.
<TABLE>
<S> <C>
Name of Firm:__________________________________ _____________________________________________
(Authorized Signature)
Address:_______________________________________ Name:________________________________________
(Zip Code) (Please Type or Print)
Area Code and Title:_______________________________________
Telephone No.:_________________________________ Dated:___________________________________, 1998
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR
LETTER OF TRANSMITTAL.
<PAGE>
GOLDEN STATE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
FLOATING RATE NOTES DUE 2003
IN EXCHANGE FOR
FLOATING RATE EXCHANGE NOTES DUE 2003,
6 3/4% SENIOR NOTES DUE 2001
IN EXCHANGE FOR
6 3/4% SENIOR EXCHANGE NOTES DUE 2001,
7% SENIOR NOTES DUE 2003
IN EXCHANGE FOR
7% SENIOR EXCHANGE NOTES DUE 2003 AND
7 1/8% SENIOR NOTES DUE 2005
IN EXCHANGE FOR
7 1/8% SENIOR EXCHANGE NOTES DUE 2005
To: BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
Golden State Holdings Inc. (the "Company") is offering, upon and subject to
the terms and conditions set forth in the Prospectus, dated , 1998
(the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), to exchange (the "Exchange Offer") its Floating Rate Exchange
Notes due 2003, its 6 3/4% Senior Exchange Notes due 2001, its 7% Senior
Exchange Notes due 2003 and its 7 1/8% Senior Exchange Notes due 2005, which
have been registered under the Securities Act of 1933, as amended, for its
outstanding Floating Rate Notes due 2003, its outstanding 6 3/4% Senior Notes
due 2001, its outstanding 7% Senior Notes due 2003 and its outstanding 7 1/8%
Senior Notes due 2005 (together, the "Old Notes"). The Exchange Offer is being
made in order to satisfy certain obligations of the Company contained in the
Registration Agreement dated July 30, 1998, by and among the Company, GS Escrow
Corp. and the initial purchasers referred to therein.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated , 1998;
2. The Letter of Transmittal for your use and for the information of your
clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if certificates for Old Notes are not immediately available or time will not
permit all required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for book-entry transfer
cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose account you
hold Old Notes registered in your name or the name of your nominee, with space
provided for obtaining such clients' instructions with regard to the Exchange
Offer; and
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED BY THE
COMPANY (THE "EXPIRATION DATE"). OLD NOTES TENDERED PURSUANT TO THE EXCHANGE
OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing the Old Notes should be delivered
to the Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
<PAGE>
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the Exchange
Offer or to comply with the book-entry transfer procedures on a timely basis, a
tender may be effected by following the guaranteed delivery procedures described
in the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to The Bank
of New York, the Exchange Agent for the Old Notes, at its address and telephone
number set forth on the front of the Letter of Transmittal.
Very truly yours,
GOLDEN STATE HOLDINGS INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF
THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN
THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE>
GOLDEN STATE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
FLOATING RATE NOTES DUE 2003
IN EXCHANGE FOR
FLOATING RATE EXCHANGE NOTES DUE 2003,
6 3/4% SENIOR NOTES DUE 2001
IN EXCHANGE FOR
6 3/4% SENIOR EXCHANGE NOTES DUE 2001,
7% SENIOR NOTES DUE 2003
IN EXCHANGE FOR
7% SENIOR EXCHANGE NOTES DUE 2003 AND
7 1/8% SENIOR NOTES DUE 2005
IN EXCHANGE FOR
7 1/8% SENIOR EXCHANGE NOTES DUE 2005
To Our Clients:
Enclosed for your consideration is a Prospectus, dated , 1998
(the "Prospectus"), and the related Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of Golden State
Holdings Inc. (the "Company") to exchange its Floating Rate Exchange Notes due
2003, its 6 3/4% Senior Exchange Notes due 2001, its 7% Senior Exchange Notes
due 2003 and its 7 1/8% Senior Exchange Notes due 2005, which have been
registered under the Securities Act of 1933, as amended, for its outstanding
Floating Rate Notes due 2003 (the "Old Floating Rate Notes"), its outstanding
6 3/4% Senior Notes due 2001 (the "Old 2001 Notes"), its outstanding 7% Senior
Notes due 2003 (the "Old 2003 Notes") and its outstanding 7 1/8% Senior Notes
due 2005 (the "Old 2005 Notes" and, together with the Old Floating Rate Notes,
the Old 2001 Notes and the Old 2003 Notes, the "Old Notes"), upon the terms and
subject to the conditions described in the Prospectus and the Letter of
Transmittal. The Exchange Offer is being made in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated
, 1998, by and among the Company, GS Escrow Corp. and the initial
purchasers referred to therein.
This material is being forwarded to you as the beneficial owner of the Old
Floating Rate Notes, Old 2001 Notes, Old 2003 Notes or Old 2005 Notes carried by
us in your account but not registered in your name. A TENDER OF SUCH OLD
FLOATING RATE NOTES, OLD 2001 NOTES, OLD 2003 NOTES OR OLD 2005 NOTES MAY ONLY
BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Floating Rate Notes, Old 2001 Notes, Old 2003 Notes or Old
2005 Notes held by us for your account, pursuant to the terms and conditions set
forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Floating Rate Notes, Old 2001 Notes, Old
2003 Notes or Old 2005 Notes on your behalf in accordance with the provisions of
the Exchange Offer. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1998, unless extended by the Company. Any Old Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time before the
Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Certain Conditions to
the Exchange Offer."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise provided
in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on
, 1998, unless extended by the Company.
If you wish to have us tender your Old Floating Rate Notes, Old 2001 Notes,
Old 2003 Notes or Old 2005 Notes, please so instruct us by completing, executing
and returning to us the instruction form on the back of this letter. THE LETTER
OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED
DIRECTLY BY YOU TO TENDER OLD FLOATING RATE NOTES, OLD 2001 NOTES, OLD 2003
NOTES OR OLD 2005 NOTES.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Golden State
Holdings Inc. with respect to its Old Notes.
This will instruct you to tender the Old Floating Rate Notes, Old 2001
Notes, Old 2003 Notes or Old 2005 Notes held by you for the account of the
undersigned, upon and subject to the terms and conditions set forth in the
Prospectus and the related Letter of Transmittal.
Please tender the Old Floating Rate Notes, Old 2001 Notes, Old 2003 Notes
or Old 2005 Notes held by you for my account as indicated below:
<TABLE>
<S> <C>
AGGREGATE PRINCIPAL AMOUNT OF OLD FLOATING RATE NOTES
Floating Rate Notes due 2003............................
/ / Please do not tender any Old Floating
Rate Notes held by you for my account.
AGGREGATE PRINCIPAL AMOUNT OF OLD 2001 NOTES
6 3/4% Senior Notes due 2001............................
/ / Please do not tender any Old 2001 Notes
held by you for my account.
AGGREGATE PRINCIPAL AMOUNT OF OLD 2003 NOTES
7% Senior Notes due 2003................................
/ / Please do not tender any Old 2003 Notes
held by you for my account.
AGGREGATE PRINCIPAL AMOUNT OF OLD 2005 NOTES
7 1/8% Senior Notes due 2005............................
/ / Please do not tender any Old 2005 Notes
held by you for my account.
Dated: , 1998
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Signature(s)
---------------------------------------------
---------------------------------------------
---------------------------------------------
Please print name(s) here
---------------------------------------------
---------------------------------------------
Address(es)
---------------------------------------------
Area Code and Telephone Number
---------------------------------------------
Tax Identification or Social Security No(s).
</TABLE>
None of the Old Floating Rate Notes, Old 2001 Notes, Old 2003 Notes or Old
2005 Notes held by us for your account will be tendered unless we receive
written instructions from you to do so. Unless a specific contrary instruction
is given in the space provided, your signature(s) hereon shall constitute an
instruction to us to tender all the Old Floating Rate Notes, Old 2001 Notes, Old
2003 Notes or Old 2005 Notes held by us for your account.
