COMMERCIAL FEDERAL CORPORATION
(Name of Registrant as Specified In Its Charter)
CAI CORPORATION
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii),
14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of
Schedule 14A.
[ X ] $500 per each party to the controversy pursuant
to Exchange Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act
Rules 14a-6(i)(4) and 0-11.
TITLE OF EACH
CLASS OF PROPOSED
SECURITIES AGGREGATE NUMBER MAXIMUM
TO WHICH OF SECURITIES TO PRICE AGGREGATE AMOUNT
TRANSACTION WHICH TRANSACTION PER VALUE OF OF FILING
APPLIES APPLIES SHARE TRANSACTION FEE
_____________ _________________ _____ ___________ _________
[ X ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$500 Fee Paid on September 14, 1995
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
(3) Filing Party:
Same as above
(4) Date Filed:
September 14, 1995
M E M O R A N D U M
TO: ______________________________
FROM: CAI Corporation
DATE: November 3, 1995
This memorandum outlines the positions of CAI Corporation
concerning the issues raised in the ongoing proxy contest
between CAI and the incumbent Board of Directors and
management of Commercial Federal Corporation.
I. Overview
* CAI Corporation is the largest stockholder of
CFC. It owns 8.75% of the outstanding shares
of Commercial Federal Corporation common stock.
We are long-term investors who first took a
substantial position in CFC in 1989 and have
never sold a share of CFC stock. Our 1,250,100
shares represented as much as 15% of the common
stock prior to the issuance of additional
shares in CFC's 1992 secondary offering and was
9.7% prior to the recent acquisition of
Railroad Savings in October of 1995.
* CAI is currently engaged in a proxy
solicitation seeking to elect its two nominees
to CFC's nine-member Board and to adopt a
stockholder resolution requesting the CFC Board
to promptly take action aimed at soliciting
merger and acquisition proposals. CAI believes
that its interests are identical to those of
its fellow CFC stockholders -- to maximize the
value of all of CFC's shares.
II. Sale or Merger of CFC
CAI wants to maximize the value of all of CFC's shares
through a sale or merger of the Company. We think the
CFC Board and management are not committed to maximizing
shareholder value. As with most incumbent Boards and
managements, they appear to be content with running a
publicly-held company and we believe that any efforts to
maximize value have become secondary to their interest in
remaining independent. If they prevail in this contest,
we expect they will construe the vote as an endorsement
of a "business as usual" policy and it will be years --
if ever -- before they seriously consider a premium sale
or merger. The reasons to pursue a sale or merger now
are compelling:
A. The thrift industry is generally considered a
dying industry, and consolidation into the
banking industry is inevitable. This isn't
just our view -- it's one shared by virtually
all industry analysts. Why?
* Well run thrifts are not as profitable as
well run banks. Due to the historical
regulatory limitations on thrift product
offerings, they cannot generate the same
returns on their customer base that banks
can. Well run banks command a higher PE
multiple and return on assets than do well
run thrifts.
* Changes in technology are expected to
result in thrift retail branch networks
such as that operated by CFC being less
and less valuable.
* There is no longer a justifiable economic
or political reason for a separate thrift
charter. A combination of loan
securitization, non-regulated mortgage
companies and banks entering the mortgage
business reduces the need for a separate
thrift charter and, by increasing
competition, reduces the profitability of
thrifts.
* Thrifts cannot convert their operations to
bank-like operations without a substantial
investment of capital, sizable upfront
costs and significant business risks.
B. Now is a good time generally for healthy banks
and thrifts to be sold.
* An unprecedented wave of consolidation is
currently underway in the bank and thrift
industry.
* Historically high prices are currently
being paid by bank and thrift acquirors.
* The current high valuation of acquirors'
stocks enables them to pay high prices.
* Banks currently are seeking to grow
earnings and revenues through acquisitions
and are still willing to pay significant
premiums for traditional retail networks
in order to achieve growth. The current
intense competition for achieving this
growth through acquisitions has raised the
prices being paid for healthy targets.
* The current interest rate environment has
raised the value of thrifts, because a
substantial portion of their assets are
interest rate sensitive and increase in
value in a low interest rate environment.
* Bottom line -- there is no assurance that
these various factors will continue for
any particular period of time or that the
current high prices for thrifts will
continue to be available.
* We believe an institution should sell when
it can at a premium price, not when it has
to.
C. It is a particularly good time for CFC to sell.
* CFC has recovered from the financial
disaster it experienced under current
management in the late 1980's, and is now
a profitable institution with a clean
balance sheet poised to be sold at a
premium.
* Conversion of the stockholders' investment
in CFC into an investment in a well-run
diversified bank would allow stockholders
to:
* realize an immediate premium and sell
their shares for cash in the open
market if they choose, or
* realize an immediate premium and own
stock of better diversified company
with greater capacity to increase EPS
and less risk.
* These factors have led us to conclude that
a significant premium for CFC should be
available today. Keefe, Bruyette & Co., a
nationally known investment banking firm
specializing in financial institutions,
has analyzed for us the premiums to book
value, tangible book value and LTM EPS
paid by acquirors of thrifts in recent
comparable transactions (14 deals with
values over $200mm announced since March
1994). This analysis indicates that a
buyer should be prepared to pay a
substantial premium over CFC's current
market price. And it's important to
recall that while CFC currently is trading
at about $33, it traded as low as $18 7/8
in the last 12 months and in the range of
$27 to $28 as recently as June 30, 1995 --
before CAI publicly stated its intention
to actively pursue a sale or merger of
CFC. If CAI does not succeed in this
proxy contest, and the CFC Board continues
unchallenged with a "business as usual"
policy, we are concerned that CFC stock
may retreat to lower levels.
* Other independent analysts also have
publicly stated their opinion that CFC
shareholders would receive a premium price
if a merger or sale was pursued now.
* Keefe, Bruyette & Woods has also analyzed
six likely acquirors of CFC and the effect
that a stock-for-stock acquisition of CFC
would have on the earnings per share and
capital of these acquirors at various
prices. This analysis shows that all of
the likely acquirors could consummate an
acquisition of CFC at a substantial premium
without suffering any earnings dilution as
long as cost-savings were within the range
of those which could reasonably be expected.
* CFC claims that an annual EPS growth of
15% is sustainable. We believe that annual
earnings growth of 5-8% is far more
likely.
D. There are significant risks in waiting.
* It appears to us that CFC's Board of
Directors mistakenly believes that they
can always sell the Company in the future
at the same premium over book value as
they can today and that therefore, as long
as CFC is profitable, there is nothing to
be lost by not pursuing a sale or merger
now. We disagree.
* Any one or more of the following macro
economic and microeconomic factors could
reduce the value of CFC in the future:
* Current wave of consolidation may
end.
* A significant and/or prolonged
increase in interest rates.
* Bank stock prices may decline in
general due to increased interest
rates, declining credit quality or
decreasing loan demand resulting in
declining earnings growth. A lower
valuation for acquirors' stocks would
make it likely that they would
decrease the premiums offered to target
institutions.
* CFC's credit quality could deterio
rate, either through future acquired
assets or existing assets.
* Technological changes in the banking
sector could accelerate and make
historical branch distribution
systems become less attractive to
acquirors. Once this happens the
premiums over book value for branch
networks may decrease substantially.
* The number of potential acquirors has
already decreased and may continue to
do so, resulting in less competition
for the CFC franchise. Buyers today
may be acquired themselves and larger
companies may change acquisition
priorities to different geographic
regions, particularly if they have
already consummated acquisitions of
other institutions in CFC's markets.
Deposit market caps imposed by state
law could eliminate potential
acquirors, like First Bank Systems.
* The mortgage banking business becomes
less profitable due to regulatory and
competitive changes. Cut throat
pricing and competition could limit
profitable growth opportunities.
III. Lack of Responsiveness to Stockholders
CFC's Board of Directors is not responsive to
stockholders. It is important to send the strongest
possible message to the Board of Directors that
stockholders desire a sale or merger now. This will only
be done by electing CAI's two nominees, adopting CAI's
sell or merge resolution and rejecting the CFC Board's
resolution. The Board's resolution doesn't really do
anything -- it's just the Board's way of saying "leave us
alone so we can continue to do whatever it is we've been
doing." A clear, unambiguous message is needed because
the Board has historically been, and continues to be,
non-responsive to stockholder interests. Indications of
this behavior include:
* CFC has adopted anti-takeover provisions
triggered by the acquisition of more than 15%
of the common shares by anyone the Board does
not approve of.
* The Board states in its own proxy statement
(p.17) that it intends to utterly ignore the
views of stockholders if CAI's resolution
calling for a sale or merger is adopted.
* The Board states in its own proxy statement
(p.4) that it may resist putting CAI's
nominees, if elected, on the Board of CFC's
principal bank subsidiary even though every
current CFC director also serves as a bank
director and this practice is standard in the
industry.
* The Board states in its own proxy statement
(p.15) that even though CAI proposed its
nominees almost two months ago in accordance
with CFC's advance notice by-laws, the Board
may still determine to challenge CAI's right to
nominate Board candidates and try to deny CFC's
stockholders the opportunity to elect CAI's
nominees.
* CFC has consistently delayed furnishing CAI
with information concerning the holders of
CFC's stock so that CAI has not had the same
opportunity as CFC's Board and management to
communicate with and solicit proxies from CFC
stockholders.
* The Fitzgerald family has controlled CFC for
100 years. Bill Fitzgerald dominates the
Board. Given the long-time family ties to CFC,
we very much doubt he would willingly support a
sale or merger.
* The Board has not been entirely candid with CFC
stockholders concerning the performance of CFC
under Mr. Fitzgerald and a majority of the
current directors. Comparing current
performance and current stock prices to 1990
is somewhat disingenuous. CFC suffered
substantial losses and severe financial
setbacks in the late 1980's and anything looks
good in comparison to 1990. If you look back a
few more years -- to the beginning of fiscal
1987 -- the picture is very different:
* On June 30, 1986, the price of a CFC share
was $19.38. By August 31, 1990, the price
had plunged to $1.63 -- a loss in value
per share of more than 90%.
* Over the nine-year period from June 30,
1986 to June 30, 1995, the average
compound annual rate of return on CFC
shares was only 3.86% -- less than the
average yield on a federally-guaranteed
one-year treasury bill during the same
period.
* During the same nine-year period, the
average annual return on the S&P 500 index
was 12.51%.
* In fiscal 1987, CFC's earnings per share
were $2.99. In the eight subsequent
fiscal years, earnings per share averaged
less than $.75. (Earnings per share is
calculated before extraordinary items and
before cumulative effects of changes in
accounting principles.)
* Over the two year period from June 30,
1993 to June 30, 1995 the CFC stock price
has only increased $1 or 3.81%!
* In CAI's 1993 agreement with CFC, CAI was granted
the right to participate in the Board's annual
planning session. CAI has participated in the last
two annual planning meetings of CFC's Board as well
as numerous other meetings with the Board. In its
numerous meetings with the Board, CAI has never
observed the Board exploring any alternative other
than continued independence.
IV. CAI's Qualified Nominees
CAI's nominees are well qualified to serve on the CFC
Board and stockholders interests will be well served by
their election. CFC knows us well and knows our
backgrounds. If they were being forthright with
stockholders, they would not be questioning our
qualifications.
* Robin Glackin, age 50, is President and Chief
Executive Officer and one-third owner of CAI
Corporation. After receiving his MBA from
Columbia University, he joined Citibank in New
York in 1975 where, within four years, he was
responsible for all of the operations and
marketing for fifty commercial bank branches.
In 1981, he became President and Chief
Operating Officer of a large troubled Texas
thrift subsidiary of a New York Stock Exchange
listed company. The thrift soon returned to
profitability and became known to its
competitors as a technological and marketing
leader. In 1986, he left the thrift to open a
consulting practice with his wife, a marketing
executive, to advise businesses on improving
their operations and profitability. His
clients included companies in the financial
services, communications and real estate
industries. In 1987, he became Chief
Administrative Officer for a national real
estate development firm with $13 billion in
assets, while his wife continued the consulting
practice. He also co-founded Mortgage
Innovations and published a monthly mortgage
trade magazine, The Servicing Transfer Update.
Mr. Glackin is a director of a community
national bank which is unaffiliated with CFC.
* Steven Ellis, age 37, is Senior Vice President
and Treasurer and one-third owner of CAI
Corporation. After he received his degree in
business and accounting from Abilene Christian
University in 1980, he joined the international
accounting firm of Arthur Andersen & Co. where,
as a certified public accountant, his duties
included supervising annual audits and due
diligence reviews of banks and thrifts and
teaching other CPAs bank auditing courses. He
then joined Ferguson and Company, a nationally
known financial services consulting firm, in
1985, where he supervised the senior consulting
staff responsible for all business planning,
regulatory consulting and merger and
acquisition projects. In 1989, Mr. Ellis was a
founding partner of Lax, Boston & Ellis, an
investment banking firm which advised banks and
thrifts in capital planning, balance sheet
restructuring and a number of other areas. He
also co-founded Mortgage Innovations, where he
directed a consulting practice advising banks,
thrifts and mortgage banking companies in the
mortgage acquisition and servicing business and
provided expert witness testimony on mortgage
related matters. Mr. Ellis is currently a
director of a community national bank which is
unaffiliated with CFC.
* Contrast Messrs. Glackin's and Ellis'
significant experience in the bank and thrift-
industry to the two outside directors nominated
by CFC--an orthopedic surgeon (Michael O'Neil)
and a local real estate agent (Sharon Marvin).
We have no objection to having people with
diverse backgrounds serving on bank boards--in
fact, it can be quite helpful. We do object to
having our qualifications challenged by the CFC
Board. CAI's nominees have spent virtually
their entire business careers focused on
financial services, banks and thrifts.
* CAI is only seeking 2 of 9 seats, is not
seeking control and is not seeking to oust Mr.
Fitzgerald. One of the Board's 3 nominees is
guaranteed election, and because cumulative
voting applies in the election, the Board can
guarantee that Mr. Fitzgerald is the Board
candidate elected.
* The interests of CAI and other stockholders are
absolutely aligned because:
* CAI is CFC's largest stockholder.
* CAI has held an interest in CFC since
1989, and is very familiar with CFC's
business and operations.
* CAI has never sold a share of CFC stock
since taking its position in 1989.
* CAI's only interest is to maximize the
value of all of CFC's shares.
* CAI is not seeking to buy CFC.
* CAI is not seeking to control the Board.
* CAI is not working on behalf of any
potential acquiror.
* CAI has no special reason to desire a sale
or merger now which is not shared by other
stockholders.
* CAI is not in favor of a sale at any
price. CAI only favors a sale or merger
if efforts to solicit offers results in an
offer which makes sense. As recently as
last February, CAI presented a written
report to the CFC Board in which we stated
that it was not then a good time to seek
to sell. There are times when it makes
sense to sell and there are times when it
doesn't. This is a time to sell.
* CAI has already proven its willingness to
take action which benefits all
shareholders. CAI's exchange in 1990 with
CFC of the $60 million of Preferred Stock
held by CAI for a note and warrants
increased CFC's tangible capital to a
positive amount and reduced CFC's future
interest cost by $6 million a year.
* There is no downside to stockholders if CAI's
nominees are elected to the Board. If changing
conditions show that CFC cannot be sold at this
time at a price that yields significant value,
the high economic stake of the CAI nominees,
together with their backgrounds and
qualifications, will serve to strengthen the
Board of CFC in dealing with any issue which
might be brought before it.
* Shareholders would benefit from the Board
as a whole having a higher percentage
ownership in the Company since a higher
ownership stake on the part of the Board
should strengthen the oversight process
and tighten the "risk-reward" analysis as
the Board examines strategic alternatives
from time to time. The current Board and
management own less than 3% of the
outstanding shares of stock.
* The two CAI nominees each offer a unique
background of indepth experience to the
Board of CFC -- one from a banking and
thrift management standpoint, the other
from a strategic planning and mergers and
acquisitions standpoint.
* The two CAI nominees will bring a
shareholder perspective to the Board that
is free from any prejudice that might
result from either historical or personal
ties to CFC.
* Having a keen understanding of the
dynamics of the consolidation process
going on in the banking and thrift
industry, the CAI nominees possess a
benchmark to bring to the Board of CFC
against which all other alternatives can
be measured.
* As professional thrift and banking
investors CAI's nominees continually
update their skills and knowledge of the
industry through reading of industry
research, discussions with financial
institution executives and investors, and
attending bank investor conferences.
* CAI has initiated discussion on many
significant issues with the Board and
management of CFC over the five years it
has had an investment in the company.
V. Summary
To summarize our views, CAI wants to maximize the
value of all of CFC's shares and believes that the best
way to achieve this goal is to actively pursue a sale or
merger of the company now. It is evident to us that the
CFC Board and management are not committed to this goal,
and instead merely wish to continue with "business as
usual". A multiple of factors relating to both the
thrift and bank industries generally and CFC
specifically, clearly demonstrate to us that now is the
time to achieve the highest values in a sale or merger.
These factors also show the substantial risks to CFC
stockholders raised if CFC continues to follow a course
of continued independence. The current directors, by
their words and actions, have demonstrated to us that
they have no interest in listening to views concerning
the Company's strategic direction which are contrary to
their own. None of the written communications that
CFC's Board has disseminated to CFC's stockholders, from
the Proxy Statement to the subsequent letters, have
contained any reasons why a sale or merger of CFC should
not be pursued. Instead, the CFC Board's materials have
merely focused on CAI's qualifications and motives, have
presented what we believe to be a distorted view of the
performance of CFC under Mr. Fitzgerald's leadership, and
have utterly failed to focus on the economic advantages
and disadvantages to stockholders of a sale or merger
versus remaining independent. Finally, CAI's nominees
are entirely qualified to serve on the CFC Board and,
because the interests of CAI and its fellow stockholders
are perfectly aligned, we see no valid reason not to vote
for CAI's nominees.
