<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
_________________
CITADEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3885184
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
600 NORTH BRAND BOULEVARD
GLENDALE, CALIFORNIA 91203
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 551-7450
_________________
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. The number of shares of
Common Stock, par value $.01 per share, and 3% Cumulative Voting Convertible
Preferred Stock of Registrant outstanding as of November 10, 1994 was 6,669,924
shares and 1,329,114 shares, respectively.
<PAGE>
CITADEL HOLDING CORPORATION
INDEX
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as
of September 30, 1994 and December 31, 1993 1
Consolidated Statements of Operations (Unaudited) for the
quarters and nine months ended September 30, 1994 and 1993 3
Consolidated Statements of Cash Flows (Unaudited) for the
quarters and nine months ended September 30 , 1994 and 1993 6
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
a. Exhibits
b. Reports on Form 8-K
</TABLE>
i
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1994 1993
<S> <C> <C>
Cash, federal funds sold and other $ 2,407 $ 145,961
cash equivalents
Investment securities held for sale 92,259
Mortgage-backed securities held for 91,108
sale
Loans held for sale, at lower of cost 367,688
or market
Loans receivable, net of allowances of
$64,277 at December 31, 1993 3,345,695
Interest receivable 23,052
Investment in FHLB stock 52,151
Other real estate owned 153,607
Premises and equipment, net 49,247
Other receivables 3,172
Deferred tax assets 245 1,247
Prepaid expenses 633
Other assets 644 67,504
Investment in Fidelity Federal Bank 20,486
Rental properties, less accumulated 19,921
depreciation
TOTAL $47,508 $4,389,519
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $3,368,643
FHLB advances 326,400
Commercial paper 304,000
Mortgage-backed notes and bonds 100,000
Other borrowings 3,830
Amounts due Fidelity Federal Bank $ 131
Security deposits payable 157
Deferred tax liabilities 14,564
Accounts payable/accrued liabilities 1,613 24,679
Deferred proceeds from bulk sales 4,000
agreement
Subordinated notes 60,000
Short-term line of credit 6,200
Mortgage note payable 13,930
Total liabilities 26,031 4,202,116
</TABLE>
See notes to consolidated financial statements. (Continued)
1
<PAGE>
CITADEL HOLDING CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Serial preferred stock, per value
$.01 per share; authorized,
5,000,000 shares; no shares
outstanding
Common stock, par value $.01 per
share; authorized, 10,000,000
shares; issued and outstanding,
6,595,624 shares at September 30,
1994 and December 31, 1993 $ 66 $ 66
Paid in capital 60,052 60,052
Retained earnings (deficit) (38,641) 127,285
Total stockholders' equity 21,477 187,403
TOTAL $ 47,508 $4,389,519
========= ==========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
2
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
1994 1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C>
REAL ESTATE OPERATIONS:
Rental income $ 811 $ 811
Interest income 1 1
812 812
Real estate operating expenses 451 451
Depreciation and amortization 114 114
Interest expense 284 284
LOSS FROM REAL ESTATE
OPERATIONS (37) (37)
FINANCIAL SERVICES OPERATIONS:
Interest income $69,187 $221,053
Interest expense 43,767 139,912
NET INTEREST INCOME 25,420 81,141
Provisions for estimated loan losses 19,500 41,500
NET INTEREST INCOME AFTER
PROVISION FOR ESTIMATED
LOAN LOSSES 5,920 39,641
NONINTEREST INCOME (EXPENSE):
Loan and other fees 1,432 4,719
Gain (loss) on sales of loans, net (34) 586
Fee income from investment products 590 3,556
Fee income on deposits and other 744 2,422
income
Provision for estimated real estate (4,000) (21,000)
losses
Real estate operations on specific
properties (6,433) (14,128)
Gains on sales of mortgage-backed
securities, net 917 2,460
Gains on sales of investment
securities, net 17 1,963
Total noninterest income (expense) (6,767) (19,422)
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
INCOME (LOSS) FROM FINANCIAL
SERVICES OPERATIONS (847) 20,219
See notes to consolidated financial (Continued)
statements.
</TABLE>
4
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1994 1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C>
ADMINISTRATIVE EXPENSE $ 221 $ 23,489 $ 1,006 $ 67,676
LOSS OF FIDELITY FEDERAL BANK (58,908) (164,883)
LOSS BEFORE INCOME TAXES - (59,166) (24,336) (165,926) (47,457)
INCOME TAX EXPENSE (BENEFIT) (9,611) (17,622)
NET EARNINGS (LOSS) $ (59,166) $ (14,725) $ (165,926) $ (29,835)
NET EARNINGS (LOSS) PER SHARE $ (8.97) $ (2.23) $ (25.16) $(5.38)
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 6,595,624 6,595,624 6,595,624 5,544,673
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
5
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1994 1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings (loss) $(59,166) $ (14,725) $(165,926) $ (29,835)
Reconciliation of net earnings (loss)
to net cash from operations:
Provisions for estimated losses 23,500 62,500
Gains on sales of loans and (896) (5,005)
securities
Capitalized loan origination costs (587) (1,310)
Amortization of deferred loan (219) (876)
items, net
Purchases of investment securities (142,131) (231,960)
held for sale
Maturities of investments 137,619 172,619
securities held for sale
Sales in investment securities held 27,068 55,372
for sale
Purchases of investment securities
held
for trading (85,238) (85,238)
Sales of investment securities held 85,181 85,181
for trading
Purchases of mortgage-backed
securities
held for sale (74,438) (129,795)
Principal repayments of
mortgage-backed
securities held for sale 29,446 36,179
Sales of mortgage-backed securities 107,359 205,588
held for sale
Originations of loans held for sale (41,455) (84,315)
Proceeds from sales of loans held 28,549 72,738
for sale
FHLB stock dividend 510 1,139
Depreciation and amortization 114 2,306 114 6,774
Interest receivable decrease 1,564 4,808
Other receivable increase (3,172) (3,172)
Other assets increase (644) (9,191) (644) (4,889)
Prepaid expense increase (633) (633)
Deferred tax asset increase (245) (245)
Deferred income taxes decrease (3,931) (4,420)
Interest payable increase (decrease) 2,484 731
Amounts due Fidelity increase 131 131
Security deposits payable increase 157 157
Other liabilities and deferred
income increase (decrease) 1,613 (4,609) 1,613 (21,379)
Deferred proceeds from Bulk Sales 4,000 4,000
agreement
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Other, net (374) (805)
Writedown of investment in Fidelity 52,811 52,811
Deconsolidation of Fidelity 5,380 111,959
Operating cash flows, net 346 67,792 165 103,802
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of investment securities (71,287) (96,280)
Maturities of investment securities 56,400 86,400
Principal repayments of mortgage-backed
securities 5,537
Loans receivable, net decrease 65,606 131,060
See notes to consolidated financial
statements.
(Continued)
</TABLE>
7
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1994 1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C>
Real estate investment (additions) $(19,997) $ (369) $ (19,997) $ 2,840
dispositions, net
Sales of real estate 12,921 30,705
Premises and equipment (additions), (1,259) (4,615)
net
Other, net (475) (2,006)
Investing cash flows, net (19,997) 61,537 (19,997) 153,641
CASH FLOWS - FINANCING ACTIVITIES:
Demand deposits and passbook savings,
net increase (decrease) (7,405) (50,930)
Certificate accounts, net increase 85,368 (103,496)
(decrease)
Proceeds from FHLB advances 40,000 200,000
Repayment of FHLB advances (75,000) (425,000)
Short-term borrowings increase 6,200 (52,700) 6,200 309,301
(decrease)
Mortgage note increase 13,930 13,930
Repayments of long-term borrowings (62,000) (162,000)
Loan fee increase (175) (175)
Proceeds from stock rights offering, 31,378
net
Financing cash flows, net 19,955 (71,737) 19,955 (200,747)
Less cash and cash equivalents of
Fidelity at beginning of period (90,747) (143,677)
Net increase (decrease) in
cash and cash equivalents (90,443) 57,592 (143,554) 56,696
Cash and cash equivalents at
beginning of period 92,850 109,366 145,961 110,262
CASH AND CASH EQUIVALENTS AT $ 2,407 $166,958 $ 2,407 $ 166,958
END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the period for:
Interest on deposits, advances and $ 51 $ 39,545 $ 51 $ 133,439
other borrowings
Income taxes 1,139 1,184
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Additions to real estate owned 65,383 123,033
Transfers from investment portfolio to
held-for-sale portfolio:
Loans receivable 4,314
Investment securities 37,486
Mortgage-backed securities 224,688
</TABLE>
See notes to consolidated financial statements.
(Concluded)
8
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On August 4, 1994, Citadel Holding Corporation ("Citadel") completed a
restructuring (together with the other transactions described below, the
"Restructuring") in which, among other things, Citadel's ownership interest
in Fidelity Federal Bank, a Federal Savings Bank ("Fidelity" and the
"Bank"), was reduced from 100% to approximately 16%. The reduction was a
result of Fidelity issuing and selling to investors in a public offering
shares of Class A and Class C common stock ("FFB Class A Common Stock" and
"FFB Class C Common Stock," respectively). Citadel's investment in Fidelity
was reclassified into 4,202,243 shares of Class B common stock of Fidelity
("FFB Class B Common Stock" or, together with FFB Class A Common Stock and
FFB Class C Common Stock, "FFB Common Stock"). As a result (and, for
purposes of the financial statements contained in this report, effective
January 1, 1994), Citadel no longer consolidates Fidelity in its financial
statements; rather it accounts for its investment on the cost basis. In
addition, several other significant events occurred in the Restructuring,
including:
a. Citadel sold to Fidelity all of the stock of Gateway Investment Services,
Inc., previously a wholly-owned subsidiary of Citadel ("Gateway").
b. A newly-formed subsidiary of Citadel, Citadel Realty, Inc. ("CRI";
Citadel and its subsidiaries, including CRI, are referred to herein as
the "Company"), purchased four real properties (the "Citadel Purchase
Assets") from Fidelity for a purchase price of $19.8 million of which
$13.9 million was financed by Fidelity on a secured basis and the balance
of which was financed by Craig Corporation, a significant stockholder of
Citadel ("Craig"), under a short-term line of credit (the "Citadel
Purchase").
c. Citadel received from Fidelity by way of dividend (i) one-year
transferable options (subsequently contributed to CRI) to acquire two
office buildings (the "Office Buildings") used in the operations of
Fidelity (including its headquarters buildings) for an aggregate exercise
price of $9.3 million (the "Office Building Options"), portions of which
buildings would be leased back by Fidelity upon exercise of such options,
and (ii) Fidelity's interest in a lawsuit filed against the former
carrier of Fidelity's directors' and officers' insurance policies,
involving certain coverage and indemnity issues (the "D&O Litigation");
d. Citadel and Fidelity entered into a Stockholders' Agreement (the
"Stockholders' Agreement"), under which, among other things, Citadel must
reimburse the Bank for certain losses that may be incurred by the Bank as
a result of certain environmental and other representations (the
"Recourse Representations") made by the Bank in connection with bulk
sales (the "Bulk Sales") of loans and other assets ("Bulk Sale Assets")
to certain third parties in connection with the Restructuring. Subject
to the $4 million limit, the Stockholders' Agreement requires Citadel to
reimburse the Bank for losses
9
<PAGE>
incurred by the Bank in either repurchasing Bulk Sale Assets in the event
of breached Recourse Representations or curing such breaches (the "Bulk
Sale Indemnity").
The foregoing historical information for the three and nine months ended
September 30, 1994 presents the Company's results of operations for the two
months subsequent to the closing of the Restructuring (the "closing")
separate from the results of operations of the Company (including Fidelity
and Gateway) prior to the Restructuring.
For the period prior to the closing of the Restructuring, administrative
expenses have been recorded consistent with previous allocations made to
Citadel by Fidelity. Subsequent to the closing, Citadel's investment in
Fidelity has been accounted for under the cost basis of accounting.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of various normal
accruals) necessary to present fairly its financial position, its results of
operations and its cash flows. The results of operations for the nine month
period ended September 30, 1994 are not indicative of the results of
operations to be expected for the entire year of 1994.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes required to be in conformity with
generally accepted accounting principles. The financial information
provided herein, including the information under the heading, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A"), is written with the presumption that the users of the interim
financial statements have read, or have access to, the most recent Annual
Report on Form 10-K which contains the latest audited financial statements
and notes thereto, together with the MD&A as of December 31, 1993 and for
the year then ended.
2. LOSS OF FIDELITY FEDERAL BANK
Effective August 4, 1994, Citadel is carrying its investment in Fidelity on
the cost basis. Prior to that date, Fidelity was consolidated with Citadel
for financial statement purposes. The loss of Fidelity is reflected as a
single line item in the 1994 statement of operations.
The loss of Fidelity for the periods below consisted of the following:
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
-----------------------------
September 30, 1994
-----------------------------
($ in 1,000)
<S> <C> <C>
Loss from operations through August 4, 1994 $ 6,097 $112,072
Write-down of investment in Fidelity 52,811 52,811
------------ -------------
$58,908 $164,883
============ =============
</TABLE>
10
<PAGE>
The write-down of the investment in Fidelity of $52,811,000 is based on
4,202,243 shares of Class B Common Stock received in the Restructuring at
$4.875 per share, or a total value of $20,486,000. Such amount per share
was deemed to be the fair value giving effect to the Bank's operating
results for the third quarter of 1994 and the current trading range of FFB
Class A Common Stock. Included in the write-down of the investment in
Fidelity is the effect of the proceeds received from the settlement of the
D&O Litigation, the write-down on uncollectible loans, and the deferral of a
portion of the proceeds received from the Bulk Sale Asset agreement relating
to the Bulk Sale Indemnity. Reference is made to Fidelity's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994 for further
information regarding the results of operations of Fidelity for the periods
covered hereby. Such report has been filed as an exhibit to this report.
* * * * * *
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESTRUCTURING AND THE RESTRUCTURED COMPANY
On August 4, 1994, the Company completed a Restructuring described under "Item
1-Financial Statements-Note 1-Basis of Presentation" above. The Restructuring
included a public offering by Fidelity of 21, 577,141 shares of FFB Common
Stock, which resulted in the reduction of Citadel's equity interest in Fidelity
from 100% to approximately 16%. Information contained in this Form 10-Q
regarding the Bank (including information regarding the Bank's policies,
procedures and plans) was provided to Citadel by Bank personnel and is included
herein based upon assurances by the Bank as to the accuracy of such information.
As a result of the Restructuring, Citadel no longer wholly-owns the Bank and is
not in a position to verify the accuracy of such information.
The results of the Restructuring are materially less favorable to the Company
than had been previously anticipated primarily due to limited equity investor
interest associated with the lingering uncertainty of the California economy,
the results of the January 1994 Northridge earthquake, the higher than expected
costs of Restructuring, continued weakness exhibited by Fidelity's loan
portfolio, and the less than anticipated proceeds of the Bulk Sales. Other
contributing factors included the effect of recent interest rate increases and
the costs associated with the redemption by Fidelity of certain subordinated
notes in connection with the Restructuring. Citadel continues to be registered
as a Savings and Loan Holding Company subject to examination and regulation by
the Office of Thrift Supervision ("OTS"). While Citadel does not currently
participate in the management and direction of Fidelity, Citadel intends to
continue its registration as a savings and loan holding company in order to be
in a position to better protect its investment in Fidelity. At the present
time, this investment constitutes approximately 43.1% of the book value of
Citadel's assets and 95.4% of Citadel's book net worth.
Following is additional information regarding the Restructuring and related
transactions. The descriptions below of the documents entered into by the
Company in connection with the Restructuring are necessarily summary in nature
and are qualified in their entirety by the complete terms and conditions of such
documents, which documents have been filed as exhibits to Citadel's Form 10-Q
for the quarter ended June 30, 1994.
Citadel Purchase
The Citadel Purchase Assets included three apartment complexes totaling 388
units located in Southern California, purchased for $13.9 million, and a 178,000
square foot office building in Phoenix, Arizona, purchased for $5.9 million.
Fidelity has financed $13.9 million of the purchase price of three of the four
Citadel Purchase Assets by making three separate loans to CRI secured by the
respective properties. With respect to each of two of the apartment complexes,
Fidelity has extended a 10-year loan, amortizing over 30 years, at an adjustable
rate of interest tied to the one-year Treasury rate plus approximately 3.70% per
annum, with an initial interest rate of 7.25%. The loan secured by the office
building has a seven-year term, amortizing over 25 years, with an adjustable
rate of interest tied to the six-month LIBOR rate plus 4.50% per annum, with an
initial rate of 9.25% per annum. This loan is guaranteed by Citadel. In
addition, CRI borrowed $6.2 million from Craig under an $8.2 million line of
credit (the "Craig Line
12
<PAGE>
of Credit") to finance the balance of the purchase price of the Citadel Purchase
Assets. See "Craig Line of Credit" below.
13
<PAGE>
The table below provides an overview of the Citadel Purchase Assets owned by the
Company at the end of the third quarter of 1994.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LAST APPRAISAL
---------------------------
UNITS/SQUARE % LEASED AT REMAINING APPRAISED APPRAISAL DATE
ADDRESS TYPE FEET 9/30/94 MAJOR TENANTS LEASE TERMS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARBOLEDA Office/ 178,000 99.8 American 1-5 Yrs. /(1)/ June 30, 1994
1661 Camelback Rd., Restaurant Express
Phoenix, Arizona
- ------------------------------------------------------------------------------------------------------------------------------------
None /(2)/ June 16, 1994
VESELICH Apartment 216 91.2 6-12 months
3939 Veselich Ave. 176,000
Los Angeles, California
- ------------------------------------------------------------------------------------------------------------------------------------
PARTHENIA Apartment 27 44 None 6-12 months /(3)/ Nov. 12, 1993
21028 Parthenia 26,000
Canoga Park, California
- ------------------------------------------------------------------------------------------------------------------------------------
WESTERN Apartment 145 99.3 None 6-12 months June 14, 1994
23200 S. Western Ave. 98,000
Harbor City, California
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
APPRAISED $25.635
VALUE: million
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES
- -----
(1) This appraisal was prior to American Express' announcement that they
will leave this facility in February 1997. The appraisal assumed that
American Express exercises an extension option under the lease to
2002.
(2) "As is" value.
(3) Of the 27 units in this complex, 21 were significantly damaged in the
January 1994 Northridge earthquake. The appraisal predates the
earthquake.
14
<PAGE>
Due to the complexity of valuing real estate and changing market conditions,
the values provided by independent appraisers are indicative only and do not
take into account, among other things, changes in market condition, tenancy
renewals and other significant events.
Arboleda, Phoenix
Although this property was 100% leased at September 30, 1994, American
Express Company, which occupies 58% (100,098 sq. ft.) of the property, announced
that it does not intend to renew at the expiration of the current term in
February 1997. While management believes that the leasing market in Phoenix will
continue to strengthen, it is anticipated that significant capital expenditures
would be necessary to relet the American Express space and that the space would
remain vacant for some time. With the uncertainty regarding the American Express
lease and certain planning issues on an adjacent site, management believes it to
be unlikely that proceeds would be maximized by a current disposition.
Veselich, Los Angeles
While the occupancy rate of this property in the last 12 months has ranged
from 80% to 95%, this property has historically experienced considerable
turnover of tenants. This has resulted in high overhead and reduced cash flows.
Management is planning to address this issue by carrying out deferred
maintenance, increasing marketing expenditures and improving diligence on
prospective tenants. It is expected that the property will be stabilized at near
to full occupancy in some time in 1995, but there can be no assurance on this
point.
Parthenia, Canoga Park
Of the 27 units in this complex, 21 were significantly damaged in the
January 1994 Northridge earthquake. The Company has since completed appropriate
repairs. The apartment complex remained 33% occupied during the earthquake
renovation, and occupancy had increased to 44% by September 30, 1994. It is
anticipated that it will take 6 - 12 months to complete the releasing of the
property.
Western, Harbor City
During the last several months, this property has consistently operated at
99% occupancy with low tenant turnover. Nonetheless, this property is held for
sale since it does not meet the Company's criteria for retention.
Craig Line of Credit
In order to acquire the Citadel Purchase Assets, CRI borrowed $13.9 million
from Fidelity (see "Citadel Purchase" above) and $6.2 million from Craig. The
amounts borrowed from Craig were part of the $8.2 million Craig Line of Credit.
The Craig Line of Credit is guaranteed by Citadel, which guarantee is secured by
a pledge of all of the stock of CRI and a negative pledge of all of the assets
of Citadel.
The Craig Line of Credit matures and is due and payable in full on August 5,
1995, subject to CRI's right, if it satisfies certain conditions and pays an
extension fee, to extend the line for an additional six months to February 5,
1996. Borrowings under the Craig Line of Credit bear interest at prime plus
15
<PAGE>
3%, and there is a 0.5% annual fee on the average undrawn balance under the
line. CRI paid a 2.5% commitment fee at origination of the Craig Line of Credit,
and, if CRI were to elect to extend the maturity date of the line, it would be
required to pay a 1% extension fee. The Craig Line of Credit was recently
restructured with $5.25 million of the outstandings being converted into
preferred stock and the availability under the line of credit being reduced to
$950,000, all of which is currently outstanding. See Item 2, below.
James J. Cotter, the Chairman of the Board, also is the Chairman of the Board
and a director of Craig. S. Craig Tompkins, the Vice-Chairman of the Board,
Secretary, Treasurer and Principal Accounting Officer of Citadel, is also the
President and a director of Craig. As of September 30, 1994, Craig owned
approximately 9% of the outstanding common stock of Citadel ("Common Stock"),
and made the Craig Line of Credit available to facilitate the Restructuring and
Recapitalization. The Craig Line of Credit was approved by the full Board of
Directors of Citadel as a part of the Restructuring, with Messrs Cotter and
Tompkins abstaining. In the absence of the Craig Line of Credit, Citadel would
not have been able to purchase the Citadel Purchase Assets.
Office Building Options
As part of the Restructuring, Citadel also acquired by way of dividend the
Office Building Options, which were assigned to CRI. The Office Buildings
subject to the Office Building Options are located in Glendale (the "Glendale
Building") and in Sherman Oaks (the "Sherman Oaks Building"), respectively, and
the aggregate exercise price of the Office Building Options is $9.3 million,
which is equal to the aggregate net book value of the Office Buildings as of
June 30, 1994 on the books of Fidelity. At September 30, 1994, the Company
did not have the financial resources available to exercise these options.
16
<PAGE>
The table below provides an overview of the Office Buildings:
<TABLE>
<CAPTION>
UNITS/SQUARE % LEASED AT
ADDRESS TYPE FEET 9/30/94 MAJOR TENANTS LEASE TERM
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GLENDALE Office 89,000 100 Fidelity; Public Storage (1)
BUILDING
600 North Brand Blvd.,
Glendale, California
- -------------------------------------------------------------------------------------------------------------------------------
Office 26,300 100 Fidelity 7 years (2)
SHERMAN OAKS
BUILDING
14455 Ventura Blvd., Sherman Oaks,
California
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
- ------
(1) For Fidelity, 10 years from the exercise of the Office Buildings Option;
for Public Storage, to 1996.
(2) 7 years from the exercise of the Office Buildings Option.
17
<PAGE>
Third-party appraisals on the Office Buildings indicate that the market value
of the Office Buildings could be up to $3 million above the exercise price of
the Office Building Options, before costs the Company would incur in connection
with the exercise, which may be significant.
The following provides certain additional information regarding the Office
Buildings:
Glendale Building
This is the headquarters building of Fidelity. Management continues to
evaluate the property, including ascertaining the likely costs of repairing the
January 1994 Northridge earthquake damage to the car parking structure and
whether the main structure was damaged in that earthquake.
Upon exercise of the Office Building Option with respect to this property,
Citadel and Fidelity would enter into a 10-year, full service gross lease for
four of the six floors of the building the terms of which have been fully
negotiated, except that, if the option were to be exercised after February 4,
1995, the rental rates would be adjusted to market rentals and would be subject
to OTS approval. The rental rate of the first five years of the lease term
would be approximately $26,600 per month including parking for the ground floor
and approximately $75,000 per month including parking for the fourth, fifth and
sixth floors. This lease would provide for annual rental increases at the lower
of the increase in the Consumer Price Index ("CPI") or 3%. After the first five
years of the lease term, the rental rate for the ground floor will be adjusted
to the higher of the then current market rate or the prevailing rental rate in
the fifth year of the lease and the rental rate for the upper floors would be
adjusted to the higher of the then current market rate or $1.50 per square foot
increased by the annual rental rate increase applied during the first five years
of the lease as described in the preceding sentence. Fidelity would have the
option to extend the lease of the ground floor for two consecutive five year
terms at a market rental rate and would have the option to purchase the Glendale
Building at a market rate at the expiration of the lease term, provided that
Citadel then owns the building.
While management believes that the Glendale Building is well situated, the
value of both Office Buildings is tied in significant part to the credit-
worthiness and future prospects of Fidelity. Management has tentatively decided
to pursue the exercise of the option with respect to this building. No
financing commitment has yet been obtained.
Sherman Oaks Building
This property was heavily damaged in the Northridge earthquake. Renovation
work required by the earthquake has been completed and Fidelity is now operating
a branch in the building.
Upon exercise of the Office Building Option with respect to this property,
Fidelity and Citadel would enter into a seven-year, triple net, master lease the
terms of which have been agreed upon, except that, if the option were to be
exercised after February 4, 1995, the rental rates would be adjusted to market
rentals and would be subject to OTS approval. Fidelity would pay approximately
$29,950 per month in rent, including parking. The rental would increase each
year at the lower of the increase in the CPI or 4%. At the expiration of the
master lease term, Fidelity would have the option to enter into a lease of the
ground floor for two consecutive five year terms at a market rental rate.
18
<PAGE>
Management has determined that the property does not meet its criteria for
retention. Consequently, the property has been listed for sale. The Company
has made a preliminary determination to exercise the Office Building Option with
respect to this building and expects to finance the exercise from cash on hand.
D&O Litigation
In connection with the Restructuring, Fidelity also transferred to Citadel its
interest in the D&O Litigation. Fidelity had obtained a substantial monetary
judgment against the defendant insurance carrier, which was reversed and
remanded by the Ninth Circuit Court of Appeals in December 1993. On remand, the
trial court rendered a subsequent judgment in favor of Fidelity of approximately
$2.9 million. In October, 1994, Citadel received $2.5 million cash in final
settlement of this litigation. A receivable for such amount was recorded as of
September 30, 1994.
Bulk Sale Indemnity
Deferred proceeds in the amount of $4 million have been included in the
September 30, 1994 balance sheet, representing the contingent liability of
Citadel under the Bulk Sale Indemnity. As of November 15, 1994, Fidelity had
made claims for approximately $3.9 million under that indemnity. The Company
has not yet determined the extent to which, if any, these claims are
meritorious.
Description of FFB Class B Common Stock
Under the terms of the Amended and Restated Charter S of Fidelity (the "Amended
Charter"), Citadel, as holder of FFB Class B Common Stock, is entitled to
limited voting rights. Holders of FFB Class B Common Stock are permitted to
vote only (i) with respect to any amendment, modification or waiver of the
Amended Charter that would adversely affect the rights of the FFB Class B Common
Stock (including, without limitation, any increase or decrease in the percentage
of shares of FFB Class B Common Stock outstanding required to approve any such
amendment, modification or waiver), in which case any such amendment,
modification or waiver will not be effective without the prior affirmative vote
of the holders of the majority of the FFB Class B Common Stock at the time
outstanding voting as a separate class and (ii) on a merger or consolidation of
the Bank or a sale or exchange of all or substantially all of the assets of the
Bank on which the holders of FFB Class A Common Stock have the right to vote, in
which event the holders of FFB Class A Common Stock and FFB Class B Common Stock
will vote together as one class, (iii) together with the holders of the FFB
Class A Common Stock and the FFB Class C Common Stock, voting as a single class,
on any dissolution of the Bank or (iv) as otherwise required by law.
The holders of FFB Class B Common Stock are entitled to receive dividends pari
passu with the holders of FFB Class A Common Stock and FFB Class C Common Stock,
out of funds legally available therefor, subject to the restrictions of the
Bank's regulators and the payment of preferential amounts of which any class of
stock having preferences over the FFB Common Stock is entitled. Upon
liquidation, dissolution or winding up of the Bank, holders of the FFB Class B
Common Stock are entitled to share ratably and pari passu with holders of FFB
Class A Common Stock and FFB Class C Common Stock in all assets remaining after
the payment of all liabilities of the Bank and of any preferential amounts to
which any class of stock having preferences over the FFB Common Stock is
entitled.
19
<PAGE>
Upon the sale or transfer of any shares of FFB Class B Common Stock by Citadel
to any person that is not an affiliate of Citadel, such transferred shares will
automatically be converted into shares of FFB Class A Common Stock. In
addition, any outstanding shares of FFB Class B Common Stock will automatically
be converted into shares of FFB Class A Common Stock if such outstanding shares
represent less than 10% of the total outstanding FFB Common Stock on a fully-
diluted basis. The conversion rate for the FFB Class B Common Stock will be
one-to-one.
Pursuant to a Registration Rights Agreement entered into with the Bank (the
"Registration Rights Agreement"), Citadel and any person who acquires shares of
FFB Class B Common Stock or FFB Class A Common Stock issuable upon conversion of
the shares of FFB Class B Common Stock (the "Registrable Securities") is
entitled to certain registration rights with respect to such shares, subject to
the terms and conditions of the Registration Rights Agreement. At any time on
or after the end of the first fiscal year ending after the closing of the
Reorganization and before March 31, 1998, the holder or holders of more than 50%
of the Registrable Securities may require the Bank to register all or a portion
of the Registrable Securities under OTS regulations, subject to certain
restrictions, provided that no registration statement filed by the Bank pursuant
to any such demand shall become effective prior to the date of filing by the
Bank of its Annual Report on Form 10-K for the first fiscal year ending after
the date of the Closing (the "Form 10-K Filing Date"). No more than three
demands may be made pursuant to such registration rights. Furthermore, if, at
any time before March 31, 1999, the Bank proposes to register any of its FFB
Common Stock under the OTS regulations for purposes of an offering or sale in a
primary or secondary offering, the Bank may be required to include any or all
shares of Registrable Securities as directed by the holders thereof. Subject to
certain limitations, the Bank is required to bear all registration and selling
expenses in connection with the registration of the Registrable Securities.
The Stockholders' Agreement provides restrictions on the transfers of shares of
FFB Class B Common Stock. Except pursuant to the exercise of its registration
rights described above, no holder of FFB Class B Common Stock may sell publicly
shares of FFB Class B Common Stock representing more than 5% of the total
outstanding Common Stock of the Banks on a fully-diluted basis during any 30-day
period without the prior approval of the Board of Directors of the Bank. In
addition, if shares of FFB Class B Common Stock representing more than 5% of the
total outstanding FFB Common Stock on a fully-diluted basis are proposed to be
sold privately to any person or, if after giving effect to such private sale,
the transfers (including any of the transferee's affiliates or any "group" (as
defined) of which the transferee is a member) would own more than 5% of the
outstanding Common Stock of the Bank on a fully diluted basis, then except in
connection with distributions by Citadel of such shares to its stockholders,
Fidelity will have an assignable right of first refusal with respect to the
shares of FFB Class B Common Stock proposed to be sold. Upon any distribution
of FFB Class B Common Stock by Citadel to its stockholders, by dividend or
otherwise, any Citadel stockholder will be entitled to convert all or portion of
the shares of FFB Class B Common Stock so distributed to the extent that such
shares when added to all other shares of FFB Class B Common Stock owned
immediately prior to the distribution by such stockholder and any shares of FFB
Class B Common Stock owned immediately prior to the distribution by all other
members of any "group" of which such stockholder is a member, do not exceed five
percent of all outstanding shares of FFB Common Stock of the Bank.
In addition, for a period commencing six months after the Closing and ending 18
months after the Closing, Fidelity has the right to redeem, subject to the
approval of OTS and the approval of the
20
<PAGE>
stockholders of Citadel, any outstanding shares of FFB Class B Common Stock
owned by Citadel or its affiliates (each a "Citadel Person"), in excess of the
number of shares of FFB Common Stock held by the then largest stockholder of the
Bank (other than Citadel), at a redemption price (the "Redemption Price") equal
to either (a) 110% of the market price of the FFB Class A Common Stock, assuming
it is then listed on a national securities exchange or admitted for quotation on
the National Association of Securities Dealers Automated Quotation System, or
(b) if the FFB Class A Common Stock is not so listed or quoted 100% of the book
value per share of all FFB Common Stock as of the most recent quarterly balance
sheet date; provided that no such redemption shall be made in anticipation of
any merger, consolidation, sale of all or substantially all of Fidelity's
assets, distribution (other than any ordinary cash dividend), or any other
transaction involving the receipt by holders of any class of FFB Common Stock of
any cash or other property. Fidelity will be required to notify each Citadel
Person holding shares of FFB Class B Common Stock of its intention to exercise
such right to redeem shares. After receiving such notice, such Citadel Person
will have the option to distribute any or all of the shares of FFB Class B
Common Stock it owns to its stockholders, in which case Fidelity will redeem
only the shares of FFB Class B Common Stock, if any, not so distributed by such
Citadel Person.
Tax Sharing
The tax sharing agreement between Citadel and Fidelity was terminated prior to
the Closing. At the Closing, Citadel and Fidelity entered into a tax
disaffiliation agreement (the "Tax Disaffiliation Agreement") that sets out each
party's rights and obligations with respect to deficiencies and refunds, if any,
of federal, state, local and foreign taxes for periods before and after the
Closing and related matters such as the filing of tax returns and the conduct of
Internal Revenue Service and other audits. In general, under the Tax
Disaffiliation Agreement, Fidelity will be responsible for (1) all adjustments
to the tax liability of Fidelity and its subsidiaries for period before the
Closing to operations of Fidelity, (ii) any tax liability of Fidelity and its
subsidiaries for the taxable year that begins before and ends after the Closing
in respect of that part of the taxable year through the end of the date of the
Closing, and (iii) any tax liability of Fidelity and its subsidiaries for
periods after the Closing. For this purpose, Gateway is deemed to be a
subsidiary of Fidelity at all relevant times and any liability for taxes for
such period ending on or before the Closing shall be measured by Citadel's
actual liability for taxes for such period, after applying tax benefits
otherwise available to Citadel attributable to such period. With certain
exceptions, Fidelity will be entitled to any refunds of taxes relating to its
tax liabilities.
In general, Citadel will be responsible for all tax liabilities of Citadel and
its subsidiaries (other than Fidelity and its subsidiaries) for all periods
prior to disaffiliation. Citadel will be entitled to any refunds of taxes
relating to its liabilities.
Management
Steve Wesson has been appointed as President and Chief Executive Officer of the
Company. Mr. Wesson was initially retained to develop a plan for the retention
by Citadel of approximately $500 million in gross book value of the assets
ultimately sold to third parties in the Bulk Sales. From 1989 until he joined
the Company in 1993, Mr. Wesson served as CEO of Burton Property Trust Inc., the
U.S. real estate subsidiary of The Burton Group PLC. In this position he was
responsible for the Restructuring and eventual disposal of the company's assets
in the U.S. Mr. Wesson succeeds Richard M. Greenwood, who resigned from his
positions with Citadel and continues as the President and Chief
21
<PAGE>
Executive Officer of Fidelity. All officers of Citadel, other than Heidi Wulfe,
Senior Vice President, Controller and Chief Accounting Officer, resigned their
offices effective as of the Closing. Ms. Wulfe resigned her positions with
Citadel effective August 23, 1994. On September 15, 1995, S. Craig Tompkins
was appointed Secretary, Treasurer and Principal Accounting Officer of Citadel.
Upon the closing of the Restructuring, Directors Donald Boulanger, Mel
Goldsmith, Richard M. Greenwood and Zelbie Trogden resigned as directors of
Citadel and Fidelity and Ralph B. Perry III resigned as a Director of Fidelity.
Directors Peter W. Geiger and Alfred Villasenor, Jr. resigned as directors of
Fidelity but, along with Directors James J. Cotter and S. Craig Tompkins (who
were not directors of Fidelity) will continue as directors of Citadel. Steve
Wesson was also elected as a Citadel Director. Messrs. Goldsmith, Greenwood and
Perry were reelected as directors of Fidelity along with five new directors not
previously associated with the Company, who were elected effective upon the
Closing. Mr. James J. Cotter will continue as the Chairman of the Board of
Citadel, and Norman Barker, Jr., a former Chairman of the Board of Directors of
First Interstate Bank of California, became the Chairman of the Board of
Fidelity.
Citadel Loan to Former Chief Executive Officer
As part of Mr. Greenwood's compensation package when the joined Citadel,
Citadel extended an interest-free loan to Mr. Greenwood in the amount of
$240,000, payable on demand. The loan was made principally to refinance a loan
extended to Mr. Greenwood by his previous employer. At the Closing, this loan
was converted into a 2-year term loan, with 9% interest accrual to commence 6
months after the Closing. Accrued interest is payable monthly in arrears.
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY OF THE COMPANY
In prior periods, Citadel has relied almost exclusively on Fidelity and Gateway
for its liquidity needs. As a result of the Closing of the Restructuring on
August 4, 1994, Fidelity and Gateway have ceased to be subsidiaries of Citadel,
and Citadel and its wholly-owned subsidiary CRI can no longer rely on these
companies for liquidity.
Management of the Company is currently evaluating the assets and opportunities
available to the Company with a view to developing a new business plan.
Management currently anticipates that the Company will (i) seek to dispose of
its FFB Class B Common Stock, (ii) work to maximize the value of its current
real estate holdings and (iii) exercise the options to purchase the Office
Buildings. However, no final conclusions have been reached regarding
any of the foregoing aspects of such business plan.
The Company expects that its sources of funds in the near term will include
cash on hand ($2.4 million on September 30, 1994 and including $2.5 million
collected after that date in settlement of the D&O Litigation), cash flow from
the operations of its real estate properties, if any, and proceeds from asset
sales. Although, the Company has no right to require its FFB Class B Common
Stock to be
22
<PAGE>
registered for sale until the Form 10-K Filing Date (which is not expected to
occur prior to March 31, 1995), management is actively exploring ways in which
to dispose of these securities and reduce its exposure to Fidelity.
Uses of funds are expected to include (i) funding of the exercise price of the
Office Building Options, (ii) capital expenditures with respect to the Company's
real estate assets, (iii) operating expenses, (iv) any amounts that may become
payable under the $4 million Bulk Sale Indemnity and (iv) debt service under the
Craig Line of Credit and the loans obtained from Fidelity to finance the
acquisition of the four Citadel Purchase Assets.
As discussed above, the Craig Line of Credit matures on August 5, 1995, subject
to possible extension. All amounts outstanding thereunder (approximately
$950,000 at November 18, 1994) will become due and payable on the maturity date.
Current sources of funds may or may not be sufficient to make such payment.
Management is currently exploring ways of raising additional cash (among other
things in order to retire the remaining Craig Line of Credit and to exercise the
Office Building Options), including asset sales, refinancings and equity and
debt offerings or a combination of the foregoing. The Company believes that the
above sources of funds will be sufficient to cover its basic operating needs for
at least 12 months; however there can be no assurance that the Company will be
able to raise additional funds sufficient to cover its other cash needs or that
it will be able to do so on favorable terms.
FINANCIAL HIGHLIGHTS
As discussed throughout this report, upon closing of the Restructuring on August
4, 1994, the Company's operations changed from a financial services holding
company to a company whose principal assets consist of shares in Fidelity and
real estate. As a result, textual comparisons between the Company's operating
results for the quarter and nine months ended September 30, 1994 and the
equivalent periods during 1993 are not meaningful and have been omitted.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 7, 1994, Dillon Group commenced an action in the Court of Chancery
of the State of Delaware (the "Delaware Action") against Citadel, its directors
and Craig seeking an order declaring that shares of Citadel issued to Craig on
October 21, 1994 (see Item 2 - "Changes of Securities," below) were not properly
issued and enjoining Craig from voting such shares or counting such shares
towards a quorum at the Annual Meeting scheduled for December 12, 1994,
determining that any shares issued by Citadel after November 4, 1994 shall not
be voted or counted towards a quorum at the Annual Meeting, and preliminarily
and permanently enjoining the directors of Citadel from issuing any shares of
stock of Citadel prior to the Annual Meeting. After a hearing, the Court denied
the application on the ground that Dillon had failed to make an adequate record
justifying the relief sought without prejudice to renewal of an application for
preliminary relief if additional shares of Citadel are issued. The Court has
set January 4, 1995 as the trial date for this action. On November 14, 1994,
the Dillon Group amended its Complaint to include challenges to the issuance to
Craig of certain shares of Preferred Stock on November 11, 1994. See Item 2,
below. Citadel and its directors believe this case is without merit and intend
to vigorously defend themselves. As discussed below, the Board of Directors
believes that the issuances of shares to Craig are in the best interests of
Citadel and its
23
<PAGE>
stockholders. On November 16, 1994, Citadel filed certain counter claims in the
Delaware Action seeking to invalidate any election of Dillon Group's nominees
based upon a consent solicitation initiated by Dillon Group and a bylaw
amendment proposed by Dillon Group. Citadel also filed a lawsuit in the United
States District Court for the Central District of California (the "Federal
Action"), against the Dillon Group and the Dillon nominees seeking injunctive
relief against each defendant pursuant to Section 13(d) of the Securities
Exchange Act of 1934 on the ground that defendants have failed to disclose and
have misrepresented various material facts required to be disclosed in filing
with the SEC under Section 13(d).
ITEM 2. CHANGES IN SECURITIES
Issuance of Common Stock
Commencing shortly after the Restructuring, Citadel began to explore with
Craig the possibility of Craig making an additional equity infusion in Citadel
for working capital purposes. Citadel formed a special committee (the "Special
Committee") of the independent directors of the Board (which included all of the
directors other than Messrs. Cotter and Tompkins) to negotiate the terms of such
an equity infusion. On October 21, 1994, Citadel, after approval by the Special
Committee, issued 74,300 shares of Common Stock, to Craig at a purchase price of
$3.85 per share. The transaction provided capital to Citadel and increased
Craig's equity stake in Citadel to just above 10%. Because Citadel has remained
a registered savings and loan holding company following the Restructuring,
acquisition of more than 10% of Citadel's equity can require the approval of the
OTS. Craig advised Citadel that it previously received such OTS approval, and
that such approval would expire on October 23, 1994 unless Craig's equity
interest increased above 10% prior to its expiration. Once Craig's equity
interest exceeded 10%, however, Craig would be permitted under its OTS approvals
to acquire additional equity in Citadel without obtaining additional OTS
approvals. Accordingly, this transaction both increased Citadel's working
capital and preserved Craig as a potential source of future equity financing
without new OTS approval. On November 17, 1994, Citadel shares closed at $3-
7/16.
Issuance of Preferred Stock In Debt Restructuring
On November 10, 1994, Citadel issued 1,329,114 shares (the "Preferred
Shares") of 3% Cumulative Voting Convertible Preferred Stock to Craig at a price
of $3.95 per share (the "Debt Restructuring"). Payment was made in the form of
cancellation of $5,250,000 of indebtedness owed to Craig under the Craig Line of
Credit. In connection with the Debt Restructuring, the Craig Line of Credit was
reduced to $950,000, all of which is currently drawn.
The Debt Restructuring was reviewed and approved by the Special Committee.
The members of the Special Committee determined that, without the issuance of
the Preferred Shares, Citadel would likely be forced to liquidate its assets,
including its shares of Fidelity, under a "distress sale" circumstance to pay
the indebtedness under the Craig Line of Credit, thereby reducing prospects for
maximizing the value of Citadel's assets. The Special Committee was especially
concerned that the lack of a liquid market for Fidelity stock might impede
Citadel's ability to maximize its value in a forced disposition to meet
Citadel's obligations under the Craig Line of Credit. The Special Committee was
also concerned that it might be unable to identify any alternative sources of
equity or receive sufficient proceeds from a sale of the Fidelity shares to pay
the Craig Line of Credit as the maturity date drew nearer, particularly if there
was a further deterioration of Fidelity's financial condition. The conversion of
the debt to equity has improved Citadel's cash flow by converting floating rate
debt bearing an interest rate of prime plus 3% into a fixed cumulative dividend
of 3%
24
<PAGE>
(which is not a liability on Citadel's balance sheet until declared), and has
expanded Citadel's equity base while reducing Citadel's leverage.
The Special Committee received the written opinion of Wedbush Morgan
Securities ("Wedbush"), dated November 10, 1994, that, based upon and subject to
the matters set forth therein, the consideration received by Citadel for the
issuance of the Preferred Shares is fair, from a financial point of view, to the
public stockholders of Citadel. In rendering its opinion Wedbush, among other
things, compared the financial and stock market information for Citadel with
similar information for certain other companies whose securities are publicly
traded and considered the likelihood that Citadel could sell the Preferred
Shares or a similar security to another purchaser on better terms. Wedbush is an
investment banking firm and a member of the New York Stock Exchange and other
principal stock exchanges in the United States, and is regularly engaged as part
of its business in the valuation of businesses and securities for corporate,
estate tax and other purposes in connection with mergers and acquisitions,
private placements and negotiated underwritings. A copy of the Wedbush opinion
has been filed as an exhibit to Citadel's Current Report on Form 8-K (the
"Preferred Stock 8-K") filed with the SEC on November 14, 1994. In retaining
Wedbush, the Special Committee noted, among other things, the absence of any
prior representation by Wedbush of Craig.
Set forth below is a description of certain terms of the issuance of the
Preferred Shares. Such description is summary in nature and is qualified in its
entirety by reference to the Certificate of Designation and the related
stock purchase agreement with Craig, which was filed as exhibits to the
Preferred Stock 8-K. Holders of the Preferred Shares will have the right to
convert such shares into Common Stock at any time at a conversion ratio based
upon the market price of Common Stock, subject to certain limitations. In
addition, the Preferred Shares are subject to automatic conversion into Common
Stock under certain circumstances if Citadel undertakes a rights offering of
Common Stock to its stockholders. Citadel has the option to redeem the Preferred
Shares at any time after November 10, 1997 at a premium. Holders of Preferred
Shares have the right to require Citadel to purchase their shares at a premium
under certain circumstances, including a "Change in Control." A Change in
Control is defined as the occurrence of either of the following events: (i) any
person, entity or "group" (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules thereunder)
other than Craig, and its successors and affiliates, acquires beneficial
ownership of over 35% of the outstanding voting securities of Citadel; or (ii)
the directors of Citadel as of October 10, 1994 (the "Current Directors"), and
any future directors ("Continuing Directors") of Citadel who have been elected
or nominated by a majority of the Current Directors or the Continuing Directors,
cease to constitute a majority of the Board of Directors. The terms of the Craig
Line of Credit also provide Craig with the right to require Citadel to pay the
indebtedness thereunder upon a change in control.
The Preferred Shares vote jointly (not as a separate class) with the Common
Stock on most matters, including the election of directors, with each Preferred
Share entitled to one vote. Holders of the Preferred Shares will have the
opportunity to purchase part of any new issuance of voting securities of Citadel
to preserve their respective percentage voting interests. If a court of
competent jurisdiction issues any ruling, judgment, injunction, decree or order
that prohibits Craig from voting the Preferred Shares at any meeting of Citadel
stockholders or pursuant to any written consent of Citadel stockholders, in
which vote or consent the Preferred Shares would otherwise be entitled to
participate, or invalidates any such vote or consent of such Preferred Shares,
then Craig will have the right to rescind its purchase of the Preferred Shares.
Upon any such rescission, the debt under the Craig Line of Credit would be
reinstated and would bear interest as though it had been outstanding on a
continuous basis. At November 18, 1994, the effective rate of interest on the
Craig Line of Credit was 11.5%. The Certificate of Designations for the
Preferred Shares, establishing the voting powers,
25
<PAGE>
preferences and relative rights of the Preferred Shares, and the definitive
Preferred Stock Purchase Agreement between Citadel and Craig have been included
as exhibits to the Preferred Stock 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
4.1 Certificate of Designation relating to 3% Cumulative Voting
Convertible Preferred Stock*
4.2 Preferred Stock Purchase Agreement dated November 10, 1994
by and between Citadel and Craig*
4.3 Stock Purchase Agreement by and between Citadel and Craig**
10.1 Employment agreement between the Company and Steve Wesson
27 Financial Data Schedule
99 Financial Statements and Related Notes Contained in the
Quarterly Report on Form 10-Q of Fidelity for the Quarter
Ended September 30, 1994.
(b) Reports on Form 8-K -
(i) Current Report on Form 8-K of Citadel filed with the SEC on
August 4, 1994.
(ii) Current Report on Form 8-K of Citadel filed with the SEC on
August 12, 1994.
(iii) Current Report on Form 8-K of Citadel filed with the SEC on
October 25, 1994.
(iv) Current Report on Form 8-K of Citadel filed with the SEC on
November 14, 1994.
- -----------------
* Filed as an exhibit to the Current Report listed under Item 6(b)(iv).
** Filed as an exhibit to the Current Report listed as Item 6(b)(iii).
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITADEL HOLDING CORPORATION
---------------------------
(Registrant)
Date: November 21, 1994 By: /s/ Steve Wesson
--------------------- -------------------------------------
Steve Wesson
President and Chief Executive Officer
Date: November 21, 1994 By: /s/ S. Craig Tompkins
--------------------- --------------------------------------
Principal Accounting Officer
27
<PAGE>
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the dates set forth
below, between CITADEL HOLDING CORPORATION, a Delaware corporation ("Citadel")
and STEVE WESSON ("Executive").
In consideration of the mutual promises contained herein, Citadel and
Executive agree as follows:
1. EFFECTIVE DATE. The effective date (the "Effective Date") of
--------------
this Agreement is August 4, 1994.
2. EMPLOYMENT. As of the Effective Date, Citadel hereby employs
----------
Executive to render the services specified herein upon the terms and conditions
and for the compensation herein provided, and Executive hereby agrees to render
the services as specified.
3. TERM OF EMPLOYMENT. Unless otherwise extended by agreement of
------------------
the parties, Executive's employment hereunder will commence as of the Effective
Date set forth above and will end on the earliest of:
(a) a date two years from the Effective Date (this Agreement
shall be automatically renewed for consecutive one-year periods unless either
party gives notice of non-renewal at least 30 days prior to the end of the
initial two-year term hereof or prior to the end of any annual renewal hereof);
(b) the date of termination of Executive's employment as
defined herein (paragraphs 6 or 7); or
(c) the date of Executive's death.
<PAGE>
4. SERVICES TO BE RENDERED. Subject to the terms and conditions of
-----------------------
this Agreement, Executive will be employed as Chief Executive Officer of Citadel
at its principal office, and he will promote the business affairs and business
interests of Citadel faithfully and diligently. Executive further agrees to
serve in such other executive positions with Citadel, or with the affiliates or
subsidiaries thereof, as Citadel may direct or to which he may be elected from
time to time, provided that such positions are consistent, and not in conflict,
with his position and executive duties on behalf of Citadel. Executive, in the
ordinary course of his duties, shall report to the Chairman of the Board of
Citadel. It is further agreed that the titles, reporting responsibilities and
duties of such other executive positions may be changed or eliminated at any
time. Executive will perform the usual and customary duties of Chief Executive
Officer and of any additional positions he may hold, and he is granted the usual
and customary power and authority associated with each such office, subject to
the respective provisions of the Certificate of Incorporation and By-laws of
Citadel. Citadel will not assign to Executive any duties or responsibilities
that are inconsistent with the position, duties, responsibilities or status of
Chief Executive Officer, change his title as Chief Executive Officer, require
him to relocate his principal office to a location outside Los Angeles County or
materially change his reporting responsibilities or materially diminish his
authority or status.
2
<PAGE>
5. SALARY; REIMBURSEMENT OF EXPENSES; PERQUISITES; BENEFITS;
---------------------------------------------------------
BONUSES; DEFERRED COMPENSATION.
- ------------------------------
(A) SALARY. For services rendered hereunder Executive will be
------
paid an annual base salary of $175,000, payable semi-monthly, or in such other
regular reasonable periodic installments as may be established by Citadel.
(B) EXPENSE REIMBURSEMENT AND PERQUISITES. Citadel will pay or
-------------------------------------
reimburse Executive for all reasonable travel, business entertainment and other
expenses reasonably and necessarily incurred by Executive in the performance of
his obligations under this Agreement. During the term of this Agreement Citadel
will provide Executive with an expense allowance of $1,150 a month for the use
of an automobile. Citadel will reimburse Executive for all initiation fees and
dues associated with membership in those professional and social clubs which are
approved either by the Chairman of the Board of Directors, or by the Board of
Directors, of Citadel. It is agreed that all equity memberships will be the
property of and will be in the name of Citadel if permitted by the club. If not
so permitted, Executive agrees that upon the termination of his employment he
will pay to Citadel the then fair market value of such equity membership should
he decide to retain such membership, or alternatively, he immediately will at
the option of Citadel either (a) seek to sell such membership at fair market
value and pay the proceeds of such sale, if any, to Citadel, or (b) transfer the
membership without charge to Citadel's nominee.
3
<PAGE>
(C) HEALTH AND MEDICAL INSURANCE. Executive shall be entitled to
----------------------------
participate in all medical, dental, life insurance, and disability plans, if
any, which may be established by Citadel. The intention is to establish at
least minimum reasonable employee benefits, including medical insurance, and
vacation accrual, as well as the benefits described in subparagraph (b) above.
Executive acknowledges that, at the current time, Citadel has no such plans. It
is contemplated that, until such time as it has a health and medical plan,
Citadel will provide health and medical insurance benefits covering Executive,
his spouse and children, through the purchase of an individual policy of
health/medical insurance. Such insurance will be subject to reasonable terms
and conditions pertaining to coverage, and will not be required to cover pre-
existing conditions. Until such time as such insurance policy has been
obtained, Citadel will reimburse Executive for payments made by Executive under
any COBRA coverage available to him.
(D) OTHER FRINGE BENEFITS. Executive shall be entitled to
---------------------
participate in all retirement, profit sharing, savings, and stock options plans,
if any, which may be established by Citadel. Executive acknowledges that, at the
current time, Citadel has no such plans. It is contemplated, however, that
Citadel will adopt a stock option plan and that Executive will be granted under
that plan a ten year option to acquire 33,000 shares of Citadel Common Stock,
which options will vest 11,000 immediately upon date of grant, 11,000 on August
4, 1995, and the remaining 11,000 on
4
<PAGE>
August 4, 1996. The exercise price will be fixed at the average closing price
for Citadel common stock during the thirty day period following the date of the
public release of Citadel's results for the quarter ended September 30, 1994.
(E) ANNUAL BONUS. Citadel shall pay Executive a minimum annual
------------
bonus of $50,000, paid in two equal installments on the 31st day of December and
July, the first payment due on December 31, 1994. In addition to the minimum
annual bonus, Executive will be eligible each year for a discretionary bonus,
the amount of which will be determined each year by the Board of Directors in
the exercise of its sole and absolute discretion.
6. TERMINATION OF EMPLOYMENT BY CITADEL. Citadel may terminate
------------------------------------
Executive's employment under this Agreement for any reason, with or without
cause, as defined below. Upon termination of Executive's employment by Citadel
without cause he shall receive those benefits to which he is entitled under then
existing plan provisions and applicable law; he shall receive, without
limitation, all salary, expense, bonus, and other payments and property, if any,
owed to him by Citadel as of the date of termination; finally, Executive shall
be entitled to severance as set forth in paragraph 8 below. Upon termination of
Executive's employment by Citadel for cause, all of Executive's rights to
salary, fringe benefits and all other payments and perquisites from Citadel will
terminate prospectively to the maximum extent permitted by applicable law and
plan provisions. Any such termination by Citadel will be effective upon 15
days' written notice, which
5
<PAGE>
notice will state that the termination is for cause and briefly will describe
the factual basis for such cause. Citadel may suspend Executive from all duties
during this 15-day period. If such ground for cause can be cured, and Executive
is able to cure within the 15-day notice period, then such termination shall not
become effective. In the event of termination for cause, Executive shall be
entitled to accrued salary, and expenses to the date of such written notice but
Executive shall not be entitled to any severance or other payments pursuant to
paragraphs 6, 7 or 8. As used herein, "cause" means dishonesty, misconduct,
incompetence, fraud, breach of fiduciary duty, a material failure or refusal to
perform stated or assigned duties, a knowing violation of any material law, rule
or regulation (other than traffic violations or similar offenses) or of any
cease-and-desist order, or material breach of any provision of this Agreement.
7. TERMINATION OF EMPLOYMENT BY EXECUTIVE. Executive may terminate
--------------------------------------
his employment under this Agreement, with or without cause as defined below, at
any time upon 90 days' prior written notice to Citadel. Citadel may suspend
Executive from all duties during such 90-day period. Upon any such termination
by Executive of this Agreement without cause, all of Executive's rights to
salary, fringe benefits, and all other payments and perquisites will terminate
prospectively to the maximum extent permitted by applicable law and plan
provisions. Upon any such termination by Executive with cause, Executive will
receive payments and benefits as if his employment had been terminated by
Citadel without cause
6
<PAGE>
as defined in paragraph 6. As used in this paragraph only, "cause" means only a
material breach by Citadel of any provision of this Agreement. Nothing in this
Section will vitiate any of Citadel's obligations or Executive's rights with
respect to any termination by Citadel of Executive's employment.
8. SEVERANCE PAYMENTS DUE UPON CERTAIN TERMINATIONS. In the event
------------------------------------------------
of termination of Executive's employment prior to the end of the employment term
defined in paragraph 3(a) above and other than a termination for "cause"
pursuant to paragraph 6, or a termination by Executive without "cause" pursuant
to paragraph 7, or upon Executive's death, Executive will receive those benefits
to which he is entitled under plan provisions and applicable law. He will also
receive all salary, expense and other payments and property, if any, owed to him
by Citadel as of the date of termination. If any such event of termination
occurs during the initial two-year term of this Agreement, Citadel agrees to pay
Executive severance compensation in the amount of $18,750 (one-twelfth of
$225,000) for each month (or portion thereof for each partial month) then
remaining of the term of this Agreement but with a minimum severance of
$225,000. If any such event of termination occurs during any annual renewal of
this Agreement, Citadel agrees to pay Executive severance of $225,000. Any such
amounts are payable in a lump sum within 30 days or in 12 equal monthly
installments, at the sole discretion of Citadel. Citadel acknowledges and
agrees that Executive will be entitled to receive all payments provided for
herein regardless of any income which
7
<PAGE>
Executive may receive from other sources after any such termination. Any
severance payments due to Executive, in the event of his death, may be payable
to Executive's estate or such beneficiaries as he may have designated in
writing.
9. FULL-TIME EMPLOYMENT; CONFIDENTIALITY.
-------------------------------------
(A) FULL-TIME EMPLOYMENT. Executive will devote his full time,
--------------------
energies and attention to perform all of his duties to Citadel under this
Agreement. In addition, Executive will not engage in any business, civic or
other activities that would interfere with the performance of his duties
hereunder. Executive further agrees that he will not perform services, whether
or not for compensation, for any person or entity which competes directly or
indirectly with Citadel without the prior consent of the Board of Directors of
Citadel.
(B) CONFIDENTIALITY. Except as may be required in the ordinary
---------------
course of performing his duties hereunder, Executive shall not at any time,
whether during or after the termination of his employment (other than to promote
and advance the business of Citadel (for purposes of subparagraphs 9(b) (c) and
(d) "Citadel" shall also include Fidelity Federal Bank, FSB, and any related
entities and any subsidiaries or portfolio companies of Citadel), knowingly
reveal to any person or entity any trade secrets or confidential business
information concerning Citadel, including but not limited to its research
results and activities, marketing plans and strategies, pricing and costing
policies, customer lists and accounts, business or financial information of
Citadel which have
8
<PAGE>
come to Executive's knowledge as a result of his employment with Citadel.
(C) RETURN OF ALL CORPORATE PROPERTY AND DOCUMENTS. Upon the
----------------------------------------------
termination of his employment, Executive immediately will return to Citadel all
property of Citadel, including without limitation, all documents and
information, however maintained (including computer files, tapes and
recordings), concerning Citadel or acquired by Executive in the course and scope
of his employment, company-owned automobile(s), keys, credit cards and the like.
(D) RIGHT TO EQUITABLE RELIEF. If Executive commits a breach,
-------------------------
or threatens to commit a breach, of any of the provisions of this paragraph,
Citadel shall have the right to have such provisions specifically enforced by
any court having competent equity jurisdiction, and nothing in Section 11 shall
be interpreted to the contrary.
10. REGULATORY JURISDICTION. It is presently contemplated that this
-----------------------
Agreement and Citadel's obligations hereunder will not be subject to the
regulatory jurisdiction of the Office of Thrift Supervision ("OTS"), Federal
Deposit Insurance Corporation ("FDIC"), Office of the Controller of the Currency
("OCC"), or any other similar regulatory agency with jurisdiction over banks or
thrift institutions (the OTS, FDIC, OCC, and other regulatory agencies are
hereafter referred to collectively as "Regulatory Agencies"). However, should
any of the Regulatory Agencies assert jurisdiction over Citadel, then unless,
and until, Citadel is
9
<PAGE>
successful in establishing that no such jurisdiction is lawful, Citadel shall
have no obligation under this Agreement (and thus shall have no liability under
this Agreement for any failure) to make all or any part of any payment required
by any provision of this Agreement or to satisfy any obligation under any
provision of this Agreement provided Citadel is prohibited from making such
payment or satisfying such obligation in whole or in part by: (a) any
applicable law, statute, rule or regulation administered by such Regulatory
Agencies; or (b) any order (whether temporary or final), directive or
instruction issued by, or any agreement or commitment imposed upon Citadel (and
related entities) by such Regulatory Agencies, or any of them. Citadel agrees
to use its best efforts to establish that no such jurisdiction is lawful or to
remove, clarify or amend any such order so that Citadel can perform all of its
payment or other obligations set forth in this Agreement.
11. ARBITRATION. Any controversy, dispute or claim arising out of,
-----------
relating to or concerning this Agreement, the breach of this Agreement, the
employment of Executive, or the termination of Executive's employment will be
resolved pursuant to this paragraph.
(a) Any controversy, dispute or claim arising out of, relating
to or concerning this Agreement, the breach of this Agreement, the employment of
Executive, or the termination of Executive's employment shall be settled by
arbitration in Los Angeles, California in accordance with the Labor Arbitration
10
<PAGE>
Rules of the American Arbitration Association (the "AAA") then existing.
(Should the AAA publish rules designed to accomplish the arbitration of
employment disputes between employees not represented by a union and their
employers or recommend the use of other rules, then those rules will be utilized
in lieu of the Labor Arbitration Rules.) This agreement to arbitrate will be
specifically enforceable. Judgment upon any award rendered by an arbitrator may
be entered in any court having jurisdiction.
(b) Subject to subparagraph (a) above, any demand for
arbitration shall be filed with the AAA and served on the other party at any
time within the period covered by the applicable statute of limitations.
(c) One arbitrator will be appointed by both parties in the
following manner: the AAA will furnish the parties with a list of potential
arbitrators. All such arbitrators must be attorneys. If either party objects to
all of the names on the list, the AAA will provide the parties with an
alternative list of potential arbitrators. In no event may a party reject more
than one list. Notice of rejection must be given to the AAA within seven (7)
business days of receipt of the list. Once a particular list has been accepted
by both parties, the parties alternatively will eliminate the names of the
arbitrators until only one name remains. That remaining person will be appointed
the arbitrator. The parties will draw lots to decide which party will eliminate
the first name from the list. Either party may have the proceedings recorded by
a reporter at that party's expense. If both parties
11
<PAGE>
request a transcript, the cost of the reporter will be shared equally by the
parties. The cost of the arbitrator will be shared equally by the parties.
(d) The arbitrator will have no authority to extend, modify or
suspend any of the terms of this Agreement. The arbitrator will make his award
in writing and shall accompany it with an opinion discussing the evidence and
setting forth the reasons for his award.
(e) The arbitrator shall have the power to make all factual
determinations and rule on all issues of law. The arbitrator shall have the
power to award all reasonable compensatory damages, but not exemplary damages.
Any award rendered by the arbitrator shall be final and binding upon each party
to the arbitration and unreviewable for error of law or legal reasoning of any
kind and any such award may be confirmed, and judgment on such award may be
entered, in any court of competent jurisdiction.
(f) If the rules of the AAA differ from those of this paragraph,
the provisions of this Agreement will control.
12. GENERAL PROVISIONS.
------------------
(A) NOTICES. Any notice required or permitted to be given
-------
under this Agreement will be deemed given only when it is in fact received by
the addressee. The addressee shall advise the party sending notice of the date
of receipt if so requested.
(B) ENTIRE AGREEMENT. Any previous written or oral employment
----------------
agreement(s) between Executive and Citadel or any affiliate or subsidiary
thereof, is hereby cancelled. This
12
<PAGE>
Agreement constitutes the entire understanding between the parties with respect
to the subject matter hereof, superseding all prior or contemporaneous
negotiations, discussions, or preliminary or final agreements, written or oral.
(C) GOVERNING LAW. This Agreement will be governed by and
-------------
construed in accordance with the laws of the State of California.
(D) NO ASSIGNMENT. This Agreement is personal to Citadel and to
-------------
Executive and may not be assigned or delegated by any party without the written
consent of the other party.
(E) NO WAIVER. No party's failure to enforce any provision or
---------
provisions of this Agreement will be construed in any way as a waiver of any
such provision or provisions, or prevent that party thereafter from enforcing
each and every other provision of this Agreement.
(F) WITHHOLDING TAXES. Executive agrees and understands that
-----------------
payroll taxes will be withheld from the amounts payable hereunder in accordance
with applicable law as determined by Citadel.
(G) PARTIAL INVALIDITY. The invalidity or unenforceability of
------------------
any provision or portion of this Agreement will not affect the validity or
enforceability of the other provisions or portions of this Agreement.
(H) AMENDMENTS. No modification, amendment or waiver of any
----------
provision hereof will be binding or valid unless in writing and executed by both
parties.
13
<PAGE>
(I) INTERPRETATION. Both parties have been represented by
--------------
counsel who have participated in the preparation of this Agreement. Accordingly,
no interpretation or construction of any provision will be influenced by the
identity of the draftsperson thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year set forth below.
CITADEL HOLDING CORPORATION
A DELAWARE CORPORATION
Date: October __, 1994 By /S. Craig Tompkins/
____________________________
S. Craig Tompkins
Vice Chairman of the Board
EXECUTIVE
Date: October __, 1994 /Steve Wesson/
______________________________
Steve Wesson
14
<PAGE>
CONSENT OF SPOUSE
-----------------
Steve Wesson and I have been married for over 4 years. I have read
the foregoing Executive Employment Agreement (the "Agreement"). I understand
that the Agreement can be read or interpreted as directly or indirectly
affecting my community property rights or entitlements or my power to dispose of
such rights to which I might have some interest by virtue of laws governing
community property or otherwise. I approve and consent to the foregoing
Agreement and any affect on my rights or entitlements set forth therein; I
acknowledge the receipt of valuable consideration by Steve Wesson pursuant to
the Agreement.
DATED: October ___, 1994.
/ Caroline Wesson /
__________________________________
Caroline Wesson
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 2,407
<SECURITIES> 0
<RECEIVABLES> 3,172
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,457
<PP&E> 19,997
<DEPRECIATION> 76
<TOTAL-ASSETS> 47,508
<CURRENT-LIABILITIES> 8,101
<BONDS> 13,930
<COMMON> 66
0
0
<OTHER-SE> 21,411
<TOTAL-LIABILITY-AND-EQUITY> 47,508
<SALES> 811
<TOTAL-REVENUES> 812
<CGS> 0
<TOTAL-COSTS> 565
<OTHER-EXPENSES> 165,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284
<INCOME-PRETAX> (165,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (165,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165,926)
<EPS-PRIMARY> (25.16)
<EPS-DILUTED> (25.16)
</TABLE>
<PAGE>
EXHIBIT 99
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 1994
and December 31, 1993.................................................................. 1
Consolidated Statements of Operations (Unaudited) for the quarters and the nine months
ended September 30, 1994 and 1993...................................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the quarters and the nine months
ended Steptember 30, 1994 and 1993..................................................... 3
Notes to Consolidated Financial Statements............................................. 5
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ -----------
(Unaudited)
<S> <C> <C>
Assets:
Cash federal funds sold................................................................. $ 70,780 $ 142,853
Investment securities available for sale (September 30, 1994 at fair value; December 31,
1993 at amortized cost, fair value $92,512)............................................. 69,573 $ 92,259
Investment securities held to maturity................................................... 25,000 --
Mortgage-backed securities available for sale (September 30, 1994 at fair value; December
31, 1993 at amortized cost, fair value $91,298)......................................... 41,111 91,108
Loans and real estate held for bulk sale ................................................ 36,721 --
Loans held for sale, at lower of cost of market.......................................... 295,398 367,688
Loans receivable, net of allowances of $51,551 and $83,832 at September 30, 1994 and
December 31, 1993, respectively......................................................... 3,012,427 3,344,363
Interest receivable...................................................................... 7,841 23,049
Investment in FHLB and FRB stock......................................................... 46,385 52,151
Owned real estate, net................................................................... 15,095 153,307
Premises and equipment, net.............................................................. 50,768 49,226
Intangible assets, net................................................................... 809 2,098
Other assets............................................................................. 28,540 65,877
----------- -----------
$ 3,700,448 $ 4,383,979
----------- -----------
Liabilities and Stockholders' Equity:
Liabilities:
Deposits.............................................................................. $ 2,653,414 $ 3,368,664
FHLB Advances......................................................................... 342,700 326,400
Commercial paper...................................................................... 400,000 304,000
Mortgage-backed notes................................................................. 100,000 100,000
Other borrowings...................................................................... -- 3,830
Deferred tax liabilities.............................................................. -- 14,789
Other liabilities..................................................................... 29,542 24,012
Subordinated notes.................................................................... -- 60,000
------------ -----------
$ 3,525,656 $ 4,201,695
------------ -----------
Stockholders' equity:
Serial preferred stock, par value $.01 per share; authorized, 5,000,000 shares; no
shares outstanding --
Common Stock:Class A Common stock, par value $.01 per share; 73,000,000 shares
authorized; 19,860,474 shares outstanding at September 30, 1994 and no shares
outstanding at December 31, 1993....................................................... 199
Class B Common stock, par value $.01 per share; 14,000,000 shares authorized; 4,202,243
shares outstanding at September 30, 1994 and 4,202,243 (as reclassified) shares
outstanding at December 31, 1993....................................................... 42
Class C Common stock, par value $.01 per share;
3,000,000 shares authorized; 1,907,143 shares outstanding at September 30, 1994
and no shares outstanding at December 31, 1993......................................... 19
Paid-in capital......................................................................... 179,431 70,647
Unrealized loss on securities available for sale........................................ (2,885)
Retained (deficit) earnings ............................................................ (2,014) 111,595
----------- -----------
$ 174,792 $ 182,284
----------- -----------
$ 3,700,448 $ 4,383,979
=========== ===========
See notes to consolidated financial statements.
</TABLE>
1
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans............................................................... $ 53,911 $ 64,915 $ 171,473 $ 206,916
Mortgage-backed securities.......................................... 537 2,337 2,315 8,511
Investment securities and other..................................... 2,952 1,846 8,296 5,449
------------ ------------- ------------ ------------
Total interest income............................................. 57,400 69,098 182,084 220,876
------------ ------------- ------------ ------------
Interest Expense:
Deposits............................................................ 27,038 30,821 81,520 95,393
FHLB Advances....................................................... 5,144 3,771 12,564 13,729
Other borrowings.................................................... 6,365 7,347 17,572 25,356
Subordinated notes.................................................. 643 1,843 4,329 5,529
------------ ------------- ------------ ------------
Total interest expense............................................ 39,190 43,782 115,985 140,007
------------ ------------- ------------ ------------
Net Interest Income.................................................. 18,210 25,316 66,099 80,869
Provision for estimated loan losses................................. 3,000 19,500 43,612 41,500
------------ ------------- ------------ ------------
Net Interest Income after Provision for Estimated Loan Losses........ 15,210 5,816 22,487 39,369
------------ ------------- ------------ ------------
Noninterest Income (Expense):
Loan fee income...................................................... 1,235 1,400 3,128 4,381
Gains (losses) on loans held for sale, net........................... 566 (34) (3,766) 586
Fee income from investment products.................................. 1,110 -- 2,551 --
Fee income on deposits and other income.............................. 970 777 3,204 2,760
------------ ------------- ------------ ------------
3,881 2,143 5,117 7,727
------------ ------------- ------------ ------------
Provision for estimated real estate losses........................... (1,459) (4,000) (7,826) (21,000)
Direct costs of real estate operations, net.......................... (3,007) (6,433) (8,191) (14,128)
------------ ------------- ------------ ------------
(4,466) (10,433) (16,017) (35,128)
Gains (losses) on sales of securities, net........................... (681) 934 (933) 4,423
------------ ------------- ------------ ------------
Gain on sale of branches............................................. 5,048 -- 5,048 --
------------ ------------- ------------ ------------
Provision for estimated loss on assets held for bulk sale............ (2,500) -- (59,018) --
------------ ------------- ------------ ------------
Total noninterest income (expense)................................ 1,282 (7,356) (65,803) (22,978)
------------ ------------- ------------ ------------
Operating Expense:
Personnel and benefits............................................... 11,257 11,053 35,527 31,993
Occupancy............................................................ 3,461 3,297 10,656 9,376
FDIC insurance....................................................... 2,297 2,428 7,261 6,201
Professional services................................................ 2,664 2,229 8,090 5,908
Office-related expenses.............................................. 1,782 1,689 5,061 4,379
Marketing............................................................ 232 772 1,822 2,068
General insurance.................................................... 435 339 1,231 994
Bank clearing charges................................................ 531 452 1,661 1,402
Restructuring and Recapitalization charges and expenses.............. 1,296 -- 14,146 --
Other general and administrative..................................... 769 (140) 895 80
------------ ------------- ------------ ------------
Total operating expense......................................... 24,724 22,119 86,350 62,401
------------ ------------- ------------ ------------
Loss Before Income Taxes.............................................. (8,232) (23,659) (129,666) (46,010)
Income tax benefit................................................... -- (9,302) (16,057) (17,125)
------------ ------------- ------------ ------------
Net Loss.............................................................. $ (8,232) $ (14,357) $ (113,609) $ (28,885)
============ ============= ============ ============
Net Loss Per Common Share............................................. $ 0.46 $ (3.42) $ (12.87) $ (6.87)
============ ============ ============ ============
Weighted Average Common Shares Outstanding............................ 17,925,306 4,202,243 8,826,865 4,202,243
============ ============ =========== ============
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1994 1993 1994 1993
-------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,232) $ (14,357) $ (113,609) $ (28,885)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Provisions for estimated loan and real estate losses..... 4,459 23,500 51,438 62,500
Provision for loss on assets held for bulk sale.......... 2,500 -- 59,018 --
Gain on sale of branches................................. (5,048) -- (5,048) --
Losses (gains) on sale of loans and securities........... 115 (896) 4,713 (5,005)
Capitalized loan origination costs....................... 149 (587) (259) (1,310)
Amortization of deferred loan items, net................ 274 (219) (191) (876)
Purchases of securities held for trading................. -- (85,238) -- (85,238)
Proceeds from sales of securities held for trading....... -- 85,181 -- 85,181
Originations of loans held for sale...................... (65,375) (41,455) (105,867) (84,315)
Purchases of loans held for sale......................... (78,705) -- (91,534) --
Proceeds from sales of loans held for sale.............. 56,362 45,914 278,409 72,738
FHLB stock dividend...................................... (623) 510 (1,973) 1,139
Depreciation and amortization............................ 1,631 2,305 5,055 6,769
Decrease in interest receivable, net..................... 16,528 1,562 15,209 4,810
Decrease (increase) in other assets, net................. 5,269 (8,662) 46,506 (5,720)
Decrease in deferred income tax benefit.................. -- (3,841) (13,699) (4,316)
Increase in interest payable............................. 3,876 2,484 679 731
Increase (decrease) in other liabilities, net........... 3,569 (2,912) 1,624 (18,830)
Other items.............................................. 500 (287) 946 (628)
----------- ---------- --------- ---------
Net cash (used in) provided by operating activities.... (62,751) 3,002 131,417 (1,255)
----------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale....... (18,958) (120,537) (24,032) (196,959)
Maturities of investment securities available for sale..... -- 115,619 -- 150,619
Proceeds from sales of investment securities
available for sale........................................ 18,988 24,969 18,988 51,877
Purchases of investment securities held to maturity........ -- (71,287) -- (96,280)
Maturities of investment securities held to maturity....... -- 56,400 -- 86,400
Purchases of mortgage-backed securities ("MBS")
available for sale........................................ -- (74,438) (54,812) (129,795)
Principal repayments of MBS................................. 2,597 29,446 10,229 36,179
Proceeds from sales of MBS available for sale............... 43,550 107,359 137,102 205,588
Purchases of MBS held to maturity........................... -- -- -- 5,537
Proceeds from sales of assets held for bulk sales........... 337,901 -- 337,901 --
(Increase) decrease in loans receivable, net................ (74,598) 48,241 (153,147) 131,060
Net dispositions (additions) of real estate investments..... 11,682 (369) 11,161 2,840
Proceeds from sales of real estate owned.................... 61,689 12,921 73,783 30,705
Purchase of Gateway Investment Services , net............... 523 -- 523 --
Net additions of premises and equipment..................... (372) (1,259) (2,606) (4,611)
Other items................................................. 200 (475) 200 (2,006)
------------ ---------- --------- ---------
Net cash provided by investing activities.............. 383,202 126,590 355,290 271,154
------------ ---------- --------- ---------
</TABLE>
(Continued on following page)
3
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------
1994 1993 1994 1993
------------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits............................. $ (7,293) $ 76,206 $ (75,231) $ (55,907)
Deposits sold in branch sale................................ (340,019) -- (340,019) --
Proceeds from FHLB Advances................................. 255,000 40,000 405,000 200,000
Repayments of FHLB Advances................................. (335,000) (75,000) (388,700) (425,000)
Increase (decrease) in short-term borrowings................ 38,900 (52,700) 92,170 309,301
Net proceeds from issuance of common stock.................. 108,000 -- 108,000 --
Repayments of long-term borrowings.......................... (60,000) (62,000) (60,000) (162,000)
Capital contribution from shareholder....................... -- -- -- 18,000
----------- ----------- ---------- ----------
Net cash used in financing activities..................... (340,412) (73,494) (558,780) (215,606)
----------- ----------- ---------- ----------
Net (decrease) increase in cash and cash equivalents.... (19,961) 56,098 (72,073) 54,293
Cash and cash equivalents the beginning of the period..... 90,741 108,250 142,853 110,055
----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 70,780 $ 164,348 $ 70,780 $ 164,348
=========== =========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest expense.......................................... $ 36,346 $ 39,545 $ 116,400 $ 133,359
Income taxes.............................................. -- 1,124 (40,949) 1,124
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Additions to real estate acquired through foreclosure....... $ 14,080 $ 17,809 $ 95,277 $ 140,842
Loans originated to finance sale of real estate acquired
through foreclosure....................................... 17,024 4,926 25,721 11,243
Investment securities transferred from available for sale
to held to maturity....................................... 25,000 -- 25,000 --
Transfers from loan and investment portfolio to
held-for-sale:
Loans receivable........................................ 64,123 -- 80,636 4,314
Investment securities................................... -- -- -- 37,486
Mortgage-backed securities.............................. -- -- -- 224,688
Mortgage loans exchanged for MBS.............................. 44,453 -- 44,453 --
Issuance of stock to bondholders.............................. 1,000 -- 1,000 --
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On August 4, 1994, Fidelity Federal Bank, A Federal Savings Bank,
("Fidelity"), and its former sole stockholder, Citadel Holding Corporation
(''Citadel''), completed major aspects of a plan of restructuring and
recapitalization (the ''Restructuring and Recapitalization''), pursuant to which
Fidelity raised approximately $109 million in net new equity and Citadel's
ownership interest in Fidelity was reduced to 16.2% of the outstanding common
stock. Citadel's ownership interest was reclassified into 4,202,243 shares of
Class B Common Stock, which class has limited voting rights. All share and per
share amounts have been restated to retroactively reflect the reclassification.
Unless the context otherwise requires, Fidelity and its subsidiaries are
referred to in this Quarterly Report on Form 10-Q (the "Form 10-Q") on a
consolidated basis as the "Bank." All references to the "Bank" with respect to
the period after August 4, 1994 include Gateway Investment Services, Inc.
("Gateway"), which was a wholly-owned subsidiary of Citadel during a portion of
the periods covered hereby and on August 3, 1994 became a wholly-owned
subsidiary of Fidelity. For more detailed information regarding the
Restructuring and Recapitalization and the various transactions incidental
thereto, see Item 2--''Management's Discussion and Analysis of Financial
Condition and Results of Operations--Restructuring and Recapitalization."
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of various normal
accruals) necessary to present fairly its financial position, its results of
operations and its cash flows. Certain reclassifications have been made to prior
years' consolidated financial statements and other financial information to
conform to the 1994 presentation. The results of operations for the quarter or
the nine-month period ended September 30, 1994 are not necessarily indicative of
the results of operations to be expected for the entire year of 1994.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
The financial information provided herein, including the information under the
heading Item 2--''Management's Discussion and Analysis of Financial Condition
and Results of Operations'' (''MD&A''), is written with the presumption that the
users of the interim financial statements have read, or have access to, the
Bank's Offering Circular on Form OC dated July 12, 1994, as supplemented by the
Supplement to Offering Circular dated August 1, 1994 (as so supplemented, the
"Offering Circular"), which contains the latest available audited financial
statements, as of December 31, 1993 and notes thereto, together with the MD&A as
of such date.
Supplementary Loss per Share Data
Net loss per share would have been $0.32 and $0.55 for the quarters ended
September 30, 1994 and 1993, respectively, and $4.37 and $1.11 for the nine
months ended September 30, 1994 and 1993, respectively, assuming (a) 21,767,617
shares of Class A and Class C common stock were issued at the beginning of each
respective period and (b) Citadel's previously existing share of common stock
was reclassified into 4,202,243 shares of Class B Common Stock at the beginning
of each respective period.
5
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1994
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The following table summarizes the Bank's securities at September 30, 1994:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
--------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and agency securities...................... $ 72,872 $ -- $ (3,299) $ 69,573
Mortgage-backed securities ("MBS")....................... 41,976 -- (865) 41,111
-------- ------ --------- ---------
114,848 -- (4,164) 110,684
Held to Maturity:
U.S. agency securities.................................. 25,000 -- -- 25,000
-------- ------ --------- ---------
$139,848 $ -- (4,164) $ 135,684
======== ====== ========= =========
Available for Sale:
Net unrealized losses, investment securities............ $ (4,164)
Net unrealized gains, hedging activities................ 808
Deferred income tax benefit............................. 471
---------
Net unrealized losses reported in stockholders' equity (2,885)
=========
</TABLE>
As a part of its asset/liability management activities, during the quarter
ended September 30, 1994, the Bank purchased and sold $20.0 million of available
for sale U.S. Treasury securities and recognized a loss on sale of $15,000. To
reduce the effects of declines in the value of its available for sale investment
securities portfolio, the Bank manages a hedging program related to such
securities. Unrealized gains from such hedging activities associated with a
portion of the portfolio totaled $0.3 million before income taxes for the
quarter ending September 30, 1994 and $0.8 million for the nine months ended
September 30, 1994.
There were no investments in securities held for trading outstanding at
September 30, 1994. During the quarter ended September 30, 1994, the Bank
transferred $25.0 million of U.S. agency securities from the available for sale
portfolio to the held to maturity portfolio.
The following table presents the Bank's securities at September 30, 1994 by
contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------------
WITHIN OVER 1 YEAR OVER 5 YEARS OVER 10
1 YEAR TO 5 YEARS TO 10 YEARS YEARS TOTAL
--------- ----------- ----------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities:
Available for sale..................................... $ 6,548 $ 62,715 $ 310 $ -- $ 69,573
Held to maturity....................................... -- 25,000 -- -- 25,000
MBS available for sale.................................... -- 5,333 -- 35,778 41,111
-------- --------- ------ ------- --------
$ 6,548 $ 93,048 $ 310 $35,778 $135,684
======== ========= ====== ======= ========
</TABLE>
6
