UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-13311
CityFed Financial Corp.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2527684
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
PO Box 3126, Nantucket, MA 02584
(Address of principal executive offices) (Zip Code)
(508) 228-2366
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of October 31, 1996, the number of
shares of outstanding common stock was 18,714,646.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CITYFED FINANCIAL CORP.
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STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and December 31, 1995
(Dollars in Thousands)
September 30, 1996 December 31,
(Unaudited) 1995
ASSETS
<S> <C> <C>
CASH $ 30 $ 14
INVESTMENT SECURITIES - At amortized cost (Market Value: 8,894 8,836
September 30, 1996, $8,865; December 31, 1995, $8,833)
OTHER ASSETS 160 152
--------- ---------
TOTAL ASSETS $ 9,084 $ 9,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Contingency reserve $ 6,822 $ 3,987
Other liabilities 4,306 2,879
--------- -------
Total liabilities 11,128 6,866
--------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, 30,000,000 shares authorized:
$2.10 cumulative convertible, Series B, $25.00 par value,
issued and outstanding: 2,539,400 in 1996 and 1995 63,485 63,485
Series C Junior, cumulative, $.01 par value, liquidation
preference $3.00 per share, shares issued and outstanding:
8,257,079 in 1996 and 1995 82 82
Common stock, $.01 par value, 100,000,000 shares authorized,
issued: 18,913,646 in 1996 and 1995, outstanding:
18,714,646 in 1996 and 1995 188 188
Additional paid-in capital 108,854 108,854
Accumulated deficit (173,653) (169,473)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
--------- ---------
Total stockholders' equity (2,044) 2,136
---------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,084 $ 9,002
========= =========
See notes to financial statements.
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<TABLE>
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CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Nine months ended September 30, 1996 and 1995
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME:
Interest on investments $ 119 $ 131 $ 355 $ 397
Other - - 1 61
-------- -------- -------- --------
Total income 119 131 356 458
-------- -------- -------- --------
EXPENSES:
Compensation and employee benefits 30 30 91 92
Other operating expenses 18 71 95 118
-------- -------- -------- --------
Total expenses 48 101 186 210
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 71 30 170 248
LOSS FROM DISCONTINUED OPERATIONS (200) (500) (4,350) (1,200)
-------- -------- -------- --------
NET LOSS $ (129) $ (470) $ (4,180) $ (952)
======== ======== ======== ========
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS
$(2,288) $ (2,629) $(10,657) $ (7,429)
LOSS PER SHARE:
From continuing operations $ (0.11) $ (0.11) $ (0.34) $ (0.33)
From discontinued operations $ (0.01) $ (0.03) $ (0.23) $ (0.07)
Net loss $ (0.12) $ (0.14) $ (0.57) $ (0.40)
AVERAGE SHARES OUTSTANDING 18,714,646 18,714,646 18,714,646 18,714,646
DIVIDENDS PER COMMON SHARE - - - -
See notes to financial statements.
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<TABLE>
<CAPTION>
CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(Dollars in Thousands)
(Unaudited)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 323 $ 436
Operating expenses (278) (455)
Other income 1 61
------- -------
Net cash provided by operating activities 46 42
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment securities (26) (89)
Other - net (4) -
-------- -------
Net cash used in investing activities (30) (89)
-------- -------
NET INCREASE (DECREASE) IN CASH 16 (47)
CASH AT BEGINNING OF PERIOD 14 52
------- -------
CASH AT END OF PERIOD $ 30 $ 5
======= =======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(4,180) $ (952)
Loss from discontinued operations 4,350 1,200
Contingency reserve payments (98) (131)
Accrued income and expense (26) (75)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 46 $ 42
======= =======
See notes to financial statements.
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1. Until December 8, 1989, CityFed Financial Corp. (the "Company" or
"CityFed") was a unitary savings and loan holding company that
conducted its business primarily through its ownership of City Federal
Savings Bank ("City Federal") and its subsidiaries. On December 7,
1989, the Office of Thrift Supervision (the "OTS") of the United States
Department of the Treasury declared City Federal insolvent, ordered it
closed and appointed the Resolution Trust Corporation ("RTC") as
receiver of City Federal. As a result of the receivership of City
Federal, the Company has undergone material changes in the nature of
its business and is no longer operating as a savings and loan holding
company. At September 30, 1996, the Company's business activities
consisted primarily of attempting to resolve outstanding claims against
the Company and the management of investments.
As a result of the receivership of City Federal, the financial
statements of CityFed at December 31, 1989, for the year then ended,
and for subsequent periods, reflect CityFed's interest in City Federal
as discontinued operations. The financial statements have been prepared
assuming the Company will continue as a going concern. As discussed
above and in Note 4, substantially all of the operations of the Company
have been discontinued and the Company is subject to a number of
commitments and contingencies that raise substantial doubt about its
ability to continue as a going concern. Except as indicated in Note 4,
the financial statements do not include any adjustments that might
result from the outcome of these uncertainties. Currently, CityFed is
not conducting an operating business. At the present time, management
has invested, and intends to invest, CityFed's assets on a short term
basis.
2. The financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended December 31, 1995 ("1995 Form 10-KSB"). The
interim statements reflect all adjustments of a normal recurring nature
that are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented.
3. In July 1989, the Company's Board of Directors suspended the payment of
dividends on all three currently outstanding series of the Company's
stock. These include the Company's common stock, $0.01 par value per
share ("Common Stock"), on which the Company had been paying quarterly
dividends of one cent per share; the Series C Junior Preferred Stock,
Cumulative, $0.01 par value per share ("Series C Stock"), with a
quarterly dividend of ten cents per share; and the $2.10 Cumulative
Convertible Preferred Stock, Series B, $25.00 par value per share
("Series B Stock"), with a quarterly dividend of 52.5 cents per share.
Dividends on both series of the Company's preferred stock are
cumulative. At September 30, 1996, dividends in arrears were $38.7
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million and $23.9 million on the Company's Series B and Series C Stock,
respectively.
4. COMMITMENTS AND CONTINGENCIES
NOTICE OF CHARGES AND HEARING FOR CEASE AND DESIST ORDER TO DIRECT
RESTITUTION AND OTHER APPROPRIATE RELIEF AND NOTICE OF ASSESSMENT OF
CIVIL MONEY PENALTIES - On June 2, 1994, the OTS issued a Notice of
Charges and Hearing for Cease and Desist Order to Direct Restitution
and Other Appropriate Relief and Notice of Assessment of Civil Money
Penalties ("Notice of Charges") against CityFed and against Gordon E.
Allen, John W. Atherton, Jr., Edwin M. Halkyard, Alfred J. Hedden,
Peter R. Kellogg, William A. Liffers and Gilbert G. Roessner
("Respondents"), who are current or former directors and, in some
cases, officers of CityFed and of CityFed's former subsidiary, City
Federal.
In the Notice of Charges, the OTS alleges that CityFed "engaged in an
unsafe or unsound practice, violated a written agreement entered into
with the agency and violated a condition imposed in writing by the
agency" by "failing to cause the net worth of City Federal to be
maintained at the levels required by the applicable capital
requirements." The "written agreement" and the "condition imposed in
writing" alleged by the OTS refer, respectively, to the Stipulation of
CityFed Financial Corp., dated December 4, 1984 ("Stipulation"), that
CityFed provided to the Federal Savings and Loan Insurance Corporation
("FSLIC") in connection with the approval by the Federal Home Loan Bank
Board ("FHLBB") of CityFed's acquisition of City Federal in December
1984, and to FHLBB Resolution No. 84-664, dated November 21, 1984, that
approved CityFed's acquisition of City Federal on the condition that,
among other things, CityFed provide the Stipulation to the FSLIC. The
Stipulation provided that, as long as CityFed controlled City Federal,
CityFed would cause the net worth of City Federal to be maintained at a
level consistent with that required by regulations and would infuse
sufficient additional equity capital, in a form satisfactory to the
regulators, to effect compliance with the capital requirement. The
Notice of Charges alleges that CityFed "has been and continues to be
unjustly enriched in connection with" the violations alleged by the
OTS, and that such violations "involve a reckless disregard for the law
or any applicable regulations or prior order of either the FHLBB or the
OTS." The Notice of Charges requests that an order be entered by the
Director of the OTS requiring CityFed to make restitution, reimburse,
indemnify or guarantee the OTS against loss in an amount not less than
$118.4 million, which the OTS alleges represents the regulatory capital
deficiency reported by City Federal in the fall of 1989.
In the Notice of Charges, the OTS also assesses a civil money penalty
against CityFed on the grounds that CityFed allegedly "knowingly"
committed the alleged violations described above and allegedly
"knowingly or recklessly caused a substantial loss to City Federal."
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The amount of the civil money penalty assessed against CityFed in the
Notice of Charges is $2,649,600.
With respect to the Respondents, the Notice of Charges alleges that the
Respondents, as directors of CityFed, "had an affirmative obligation to
see that CityFed complied with the net worth maintenance obligation"
and that, "by failing to direct CityFed to cause the net worth of City
Federal to be maintained at the levels required by the applicable
capital requirements, the [Respondents] violated a written agreement
entered into with the agency, violated a condition imposed in writing
by the agency" and "engaged in an unsafe or unsound act." The Notice of
Charges alleges that some of the Respondents (Messrs. Allen, Atherton,
Hedden, Kellogg and Roessner) "have been and continue to be unjustly
enriched in connection with their violations by the payment of their
legal expenses with CityFed assets," an allegation that refers to the
advancement by CityFed, pursuant to its obligations in its Bylaws and
Restated Certificate of Incorporation (see "Indemnification Claims"
below), of litigation expenses to such Respondents in connection with
the action by the RTC against such Respondents and other current and
former directors and/or officers of CityFed and/or City Federal in the
United States District Court for the District of New Jersey ("N.J.
Court"), captioned RESOLUTION TRUST CORPORATION V. ATHERTON, ET AL.,
Civil Action No. 93-1811 (GEB) (consolidated with RESOLUTION TRUST
CORPORATION V. SIMMONS, ET AL., Civ. Action No. 92-5261-B (GEB))
("Second RTC Action"). CityFed had made such advancement of litigation
expenses in accordance with the agreement between CityFed and the RTC
entered into as of December 14, 1992 ("Expense Agreement"), in
connection with the action the RTC filed against CityFed, captioned
RESOLUTION TRUST CORPORATION V. CITYFED FINANCIAL CORP., ET AL., Civil
Action No. 92-5261-A (GEB) ("First RTC Action"), in the N.J. Court. The
Notice of Charges requests that an order be entered by the Director of
the OTS requiring the Respondents to make restitution, reimburse,
indemnify or guarantee the OTS against loss in an amount not less than
$400,000, which the OTS alleges represents the amount of legal expenses
CityFed paid on their behalf from April to December 1993 in connection
with the Second RTC Action.
In the Notice of Charges, the OTS also assesses a civil money penalty
against the Respondents on the grounds that the Respondents allegedly
"violated a condition imposed in writing and/or a written agreement."
The amount of civil money penalties assessed against the Respondents is
$51,750 each.
The Notice of Charges states that the civil money penalties assessed
against CityFed and the Respondents must be paid to the United States
Department of the Treasury within 60 days of the issuance of the Notice
of Charges. The Notice of Charges also seeks reimbursement for the OTS
from CityFed and the Respondents for all costs and expenses associated
with the investigation and prosecution of the administrative
enforcement action commenced by the filing of the Notice of Charges.
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CityFed and the Respondents requested a hearing on the assessment of
civil money penalties against them, and such hearing will be combined
with the hearing on the other matters set forth in the Notice of
Charges. During the pendency of such hearing, the civil money penalty
assessments will not be a final order of the OTS and will not be
enforceable against CityFed or the Respondents.
On November 30, 1995, the OTS issued an Amended Notice of Charges and
Hearing for Cease and Desist Order to Direct Restitution and Other
Appropriate Relief and Notice of Assessment of Civil Money Penalties
("Amended Notice of Charges") that is identical to the Notice of
Charges except that the Amended Notice of Charges includes a reference
to a federal statutory provision not referred to in the Notice of
Charges that the OTS asserts provides an additional basis for the
issuance of a Cease and Desist Order against CityFed and the
Respondents.
On February 1, 1996, the Administrative Law Judge ("ALJ") presiding
over the OTS's administrative proceeding against CityFed and the
Respondents issued a Prehearing Order granting the OTS's Motion for
Partial Summary Disposition with respect to CityFed and denying
CityFed's Motion for Partial Summary Disposition of the OTS's
Assessment of Civil Money Penalties and CityFed's Cross-Motion for
Summary Adjudication. The Prehearing Order also denied the Respondents'
Motion for Partial Summary Disposition. In the Prehearing Order, the
ALJ concluded that CityFed's retention of dividends and other funds
received from its former subsidiary, City Federal, constitutes "unjust
enrichment" within the meaning of 12 U.S.C. * 1818(b)(6) and that the
Stipulation CityFed provided to the FSLIC in December 1984 regarding
maintenance of the net worth of City Federal is enforceable by the OTS
against CityFed.
On March 27, 1996, CityFed filed a motion for reconsideration of the
ALJ's Prehearing Order. On April 26, 1996, the OTS filed a memorandum
in opposition to CityFed's motion for reconsideration. On May 29, 1996,
the ALJ denied CityFed's motion for reconsideration. On June 12, 1996,
CityFed moved for interlocutory review by the Acting Director of the
OTS of the conclusions in the Prehearing Order. If the Acting Director
were to affirm the conclusions in the Prehearing Order, CityFed would
intend to seek review of that decision in the United States Court of
Appeals and, if necessary, to seek from the Supreme Court of the United
States a review of any adverse decision from the Court of Appeals.
However, following the Acting Director's decision, it may be necessary
to have the matter progress to a hearing and a final order before
review by the Court of Appeals is possible. If the conclusions in the
Prehearing Order are not ultimately reversed, CityFed may be required
to turn over to the OTS all or substantially all of CityFed's assets.
For further information regarding the Stipulation, see "First RTC
Action" below.
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TEMPORARY ORDER TO CEASE AND DESIST - Also on June 2, 1994, the OTS
issued a Temporary Order to Cease and Desist ("Temporary Order")
against CityFed. The Temporary Order required CityFed to post, by 12:00
noon on the seventh calendar day following service of the Temporary
Order, $9,000,000 as security for the payment of the amount of
restitution and reimbursement sought by the OTS in its Notice of
Charges. As CityFed's total assets were $9.2 million on September 30,
1994, the amount sought by the OTS represented substantially all of the
assets of CityFed.
The Temporary Order also requires CityFed to "cease and desist from
directly or indirectly causing the use, sale, transfer or encumbrance
of funds or other assets of any nature whatsoever in which CityFed has
a legal or beneficial interest, whether directly or through any other
person or entity, except as provided in" the Temporary Order. However,
CityFed may pay ordinary and reasonable operating expenses of up to
$15,000 per month and may, subject to certain limitations, pay
reasonable and necessary legal fees and expenses in its own defense.
CityFed is also required to furnish certain financial information to
the OTS pursuant to the Temporary Order. The Temporary Order
effectively prohibits CityFed from advancing litigation expenses or
providing indemnification pursuant to its obligations under its Bylaws
and Restated Certificate of Incorporation. See "Indemnification Claims"
below.
On June 9, 1994, CityFed filed a Complaint for Injunctive and
Declaratory Relief, an Application for a Temporary Restraining Order
and Preliminary Injunction and a supporting Memorandum of Points and
Authorities and other related papers in the United States District
Court for the District of Columbia ("D.C. Court") in a case captioned
CITYFED FINANCIAL CORP. V. OFFICE OF THRIFT SUPERVISION AND JONATHAN L.
FIECHTER, Case No. 1:94CV01273 (HHG) ("Injunction Action"). In the
Injunction Action, CityFed sought a temporary restraining order and an
injunction against the Temporary Order that would set aside, limit or
suspend the enforcement, operation and effectiveness of the Temporary
Order.
The D.C. Court held a hearing on motions pending before it on August
15, 1994. On September 8, 1994, the D.C. Court issued an Order denying
CityFed's and the intervening Respondents' motions to set aside, or, in
the alternative, modify the Temporary Order. CityFed and the
intervening Respondents filed notices of appeal from the D.C. Court's
Order to the United States Court of Appeals for the District of
Columbia Circuit ("D.C. Circuit"), and the intervening Respondents
filed a motion in the D.C. Circuit for an expedited appeal and an order
enjoining the enforcement of the Temporary Order during the pendency of
the appeal. The D.C. Circuit denied the intervening Respondents' motion
for injunction on October 21, 1994. The caption of the case in the D.C.
Circuit is CITYFED FINANCIAL CORP., ET AL. V. OFFICE OF THRIFT
SUPERVISION, ET AL., Nos. 94-5254 and 5255 ("D.C. Appeal").
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On October 26, 1994, CityFed and the OTS entered into an Escrow
Agreement ("Escrow Agreement") with CoreStates Bank, N.A.
("CoreStates") pursuant to which CityFed transferred substantially all
of its assets to CoreStates for deposit into an escrow account to be
maintained by CoreStates. Pursuant to the Escrow Agreement, CoreStates
executes a wire transfer of $15,000 from the escrow account to CityFed
on the first business day of every month. The Escrow Agreement provides
that CityFed may sell and purchase securities in the escrow account,
and that CoreStates will be paid a fee of $2,500 per year, plus
reimbursement for out of pocket expenses, for serving as escrow agent.
CityFed's assets in the escrow account continue to be invested in money
market instruments with a maturity of one year or less and money market
mutual funds. Withdrawals or disbursements from the escrow account are
not permitted without the written authorization of the OTS, other than
for (1) the $15,000 monthly transfer to CityFed, (2) the disbursement
of funds on account of purchases of securities by CityFed and (3) the
payment of the escrow fee and expenses to CoreStates. The Escrow
Agreement also provides that CoreStates will restrict the escrow
account in such a manner as to implement the terms of the Escrow
Agreement and to prevent a change in status or function of the escrow
account unless authorized by CityFed and the OTS in writing. CoreStates
will provide to the OTS a copy of all statements regarding the escrow
account provided to CityFed.
On July 11, 1995, the D.C. Circuit affirmed the denial by the D.C.
Court of the motions by CityFed and the intervening Respondents for a
temporary restraining order and an injunction against the Temporary
Order.
The Crime Control Act of 1990 provides that commitments to maintain the
capital of federally insured depository institutions, such as City
Federal, are afforded a priority over other unsecured claims in a
bankrupt corporation's estate to the extent provided in 11 U.S.C.
Section 507(a). Thus, if CityFed is held liable for the amount of
capital that would have been required to cause City Federal to meet its
regulatory capital requirements, a claim based on such liability would
have priority over other unsecured claims against CityFed's estate in
bankruptcy to the extent provided in such section.
FIRST RTC ACTION - On December 7, 1992, the RTC, in its capacity as
receiver for City Savings, and the RTC, in its corporate capacity,
filed the First RTC Action in the N.J. Court against CityFed and
against two former officers of City Federal. In its complaint in the
First RTC Action, the RTC, in its corporate capacity, sought, inter
alia, to recover damages in excess of $12 million against CityFed
resulting from CityFed's alleged violation of the Stipulation to
maintain the net worth of City Federal.
In connection with the First RTC Action, the RTC filed an Order to Show
Cause with Temporary Restraints Freezing Assets of Defendant CityFed
Financial Corp. ("Order to Show Cause") seeking an order from the N.J.
Court placing all assets of CityFed under the control of the N.J. Court
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and related relief pending a hearing on a preliminary injunction. On
January 5, 1993, CityFed and the RTC entered into the Expense
Agreement, effective as of December 14, 1992, whereby the RTC agreed to
refrain from seeking the relief sought in its Order to Show Cause. In
the Expense Agreement, the RTC further agreed that CityFed could make
payments of ordinary and reasonable business expenses, including
aggregate compensation and employee benefits in amounts not to exceed
those paid in 1991 for John W. Atherton, Jr., as President of CityFed,
and for CityFed's corporate secretary, directors' fees and reasonable
expenses in connection with attendance at meetings of CityFed's Board
of Directors, reasonable and necessary fees for outside auditing
services, taxes, transfer fees, and rent and utilities for CityFed's
offices in Florida and Massachusetts, reasonable corporate legal fees,
and reasonable defense costs, attorneys' fees and/or disbursements in
connection with the First RTC Action and, relating only to the defense
of CityFed, with respect to the action originally filed in the United
States District Court for the Northern District of California captioned
RIDDER, ET AL. V. CITYFED FINANCIAL CORP., C92-4649-BAC, which was
dismissed without prejudice and refiled in the N.J. Court captioned
RIDDER, ET AL. V. CITYFED FINANCIAL CORP., (Case No. 93-1676) (HLS)
("Ridder Action"). Pursuant to the Expense Agreement, CityFed had been
giving a monthly accounting of such expenditures to the RTC, and the
RTC had the right to apply to the N.J. Court in the First RTC Action
for an appropriate Order to prohibit such expenditures.
CityFed agreed in the Expense Agreement to give the RTC written notice
prior to making any payment of extraordinary expenses of more than
$5,000 and of any payment on behalf of CityFed (other than with respect
to the First RTC Action and the Ridder Action) and/or on behalf of any
individual or individuals with respect to whom CityFed is obligated
under its Bylaws to make such payment for defense costs, attorneys'
fees and/or disbursements with respect to any other then-pending or
threatened, or subsequently initiated or threatened, civil or
administrative investigation, action or proceeding. The RTC had the
right to make an application to the N.J. Court to prohibit the payment
of such extraordinary expenses of more than $5,000 and such defense
costs, attorneys' fees and/or disbursements.
By its terms, the Expense Agreement remained in full force and effect
until (a) it was terminated by mutual agreement of CityFed and the RTC
in writing, (b) it was terminated by an order of the N.J. Court or (c)
the N.J. Court entered a final order with respect to the RTC's claim
against CityFed in the First RTC Action regarding the Stipulation.
On September 30, 1993, CityFed was advised by OTS staff that it
intended to recommend that the OTS initiate an administrative
enforcement proceeding against CityFed. The OTS staff reaffirmed its
intention to recommend that the OTS initiate such a proceeding in
meetings between OTS staff and representatives of CityFed in April
1994. In light of this, and at the request of the RTC and CityFed, the
N.J. Court entered several successive orders staying the First RTC
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Action from October 1993 through June 1994. The Orders staying the
First RTC Action did not affect the Expense Agreement, except that the
Orders provided that the Expense Agreement would terminate upon the
effective date of any order issued by the OTS, or of any consent order
or agreement between the OTS and CityFed, that addressed the subject
matter of the Expense Agreement. In light of the filing by the OTS of
the Notice of Charges on June 2, 1994, the RTC and CityFed agreed to
(1) a Consent Order Dismissing Claims Against Defendant CityFed
Financial Corp. Without Prejudice, which provides for the dismissal
without prejudice of the RTC's claim against CityFed in the First RTC
Action, and which was entered as an Order of the N.J. Court on July 19,
1994; and (2) a Tolling Agreement, effective as of July 11, 1994,
pursuant to which CityFed and the RTC agreed (a) to toll, during the
pendency of the OTS' proceeding against CityFed, the running of the
statute of limitations with respect to the claims the RTC had asserted
against CityFed in the First RTC Action and (b) that, if the OTS'
proceeding against CityFed results in a determination that the
Stipulation was void and/or unenforceable as a matter of law, or that
CityFed did not violate the Stipulation, the RTC would be bound by such
determination.
The RTC also sought, in its complaint in the First RTC Action, to
recover damages in excess of $130 million from two former officers of
City Federal resulting from their alleged negligence, gross negligence,
breach of fiduciary duty and other duties and other wrongful and
improper conduct while serving as officers of City Federal in
connection with the approval, funding, management, oversight and
workout of two large acquisition, development and construction loans
for two projects located in Florida, Grand Harbor ("Grand Harbor") and
Woodfield Country Club Estates ("Woodfield"). On February 9, 1993, upon
motion of CityFed in the First RTC Action, the N.J. Court entered an
order severing the RTC's claims against CityFed from the RTC's claims
against the two former officers of City Federal.
SECOND RTC ACTION - On April 26, 1993, the RTC, in its capacity as
receiver for City Savings, filed the Second RTC Action in the N.J.
Court against John W. Atherton, Jr., Gordon E. Allen, Alfred J. Hedden,
Peter R. Kellogg, John Kean, Gilbert G. Roessner, George E. Mikula and
James P. McTernan, all former directors and/or officers of City
Federal. In its initial complaint in the Second RTC Action, the RTC
sought to recover damages in excess of $130 million for alleged
negligence, gross negligence and breach of fiduciary duties by the
defendants in connection with the Grand Harbor and Woodfield loans.
Although the Second RTC Action was filed separately from the First RTC
Action, the N.J. Court consolidated the two actions for administrative
purposes. As a result of such consolidation, the claims in the First
and Second RTC Actions relating to the Grand Harbor and Woodfield loans
are proceeding and being considered together.
On June 17, 1993, the RTC filed a First Amended Complaint ("First
Amended Complaint") in the Second RTC Action that named as additional
defendants in the Second RTC Action Victor A. Pelson and Marshall M.
Criser, two former directors of City Federal. With the exception of the
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addition of Messrs. Pelson and Criser as defendants, the substance of
the First Amended Complaint is identical to the complaint filed by the
RTC on April 26, 1993.
On November 15, 1993, the N.J. Court granted the motions of several of
the defendants to dismiss the RTC's First Amended Complaint to the
extent it alleged a cause of action for simple negligence. On December
15, 1993, the RTC filed a Second Amended Complaint ("Second Amended
Complaint") in the Second RTC Action, alleging gross negligence and
breach of duty against the defendants named in the Second RTC Action in
connection with the Grand Harbor and Woodfield loans, and also in
connection with the Port Liberte loan ("Port Liberte"), a large real
estate development loan in New Jersey that had not been mentioned in
the First RTC Action or in the initial complaint or the First Amended
Complaint in the Second RTC Action. The Second Amended Complaint, with
the addition of allegations regarding Port Liberte, seeks damages in
excess of $200 million (as compared to $130 million in the First
Amended Complaint).
The RTC filed an interlocutory appeal with the United States Court of
Appeals for the Third Circuit ("Third Circuit") from the N.J. Court's
November 15, 1993 Orders in the Second RTC Action that dismissed the
RTC's First Amended Complaint to the extent it alleged a cause of
action for simple negligence. On June 23, 1995, the Third Circuit
reversed the N.J. Court's November 15, 1993 Orders. On December 12,
1995, several of the defendants in the Second RTC Action filed with the
Supreme Court of the United States a petition for a writ of certiorari
for the Supreme Court to review the Third Circuit's decision. On April
15, 1996, the Supreme Court granted the petition for writ of
certiorari. On November 4, 1996, the Supreme Court heard oral argument
in this case ("Supreme Court Case"). A decision in the Supreme Court
Case is expected in the next few months.
On January 29, 1994, several of the defendants in the Second RTC Action
filed a motion to dismiss the Port Liberte claims ("Port Liberte
Motion") contained in the Second Amended Complaint on the ground that
such claims are barred by the statute of limitations. The N.J. Court
denied the Port Liberte Motion by order entered May 3, 1994.
On June 2, 1994, several of the defendants in the Second RTC Action
filed Answers ("Answers") to the RTC's Second Amended Complaint. The
Answers denied many of the allegations made by the RTC in the Second
Amended Complaint. The Answers also included several affirmative
defenses. On September 9, 1994, the N.J. Court granted the RTC's motion
to strike the affirmative defenses.
On January 2, 1996, the Federal Deposit Insurance Corporation ("FDIC"),
the statutory successor to the RTC, filed a Third Amended Complaint
("Third Amended Complaint") in the Second RTC Action. The Third Amended
Complaint alleges that the defendants in the Second RTC Action are
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liable for negligence as well as gross negligence and breach of
fiduciary duty under federal common law. In all other respects, the
Third Amended Complaint is identical to the Second Amended Complaint.
On February 14, 1996, some of the defendants in the Second RTC Action
filed a motion to dismiss the Third Amended Complaint. The hearing on
that motion that had been set for April 15, 1996, was postponed
indefinitely in light of a number of settlements in the Second RTC
Action.
CityFed is aware that all of the defendants in the Second RTC Action
other than John W. Atherton, Jr. have settled with the RTC or FDIC. The
settlement agreement for Victor Pelson includes a waiver by him of his
indemnification claim against CityFed for legal fees and expenses and
the amount of his settlement payment in the Second RTC Action, but only
if the OTS and CityFed settle the administrative proceeding or final
judgment is entered against CityFed in the proceeding. Mr. Pelson is
paying the RTC $650,000 to settle the Second RTC Action. The settlement
agreements for John Kean, Marshall Criser, Alfred Hedden and Gilbert
Roessner include (1) an assignment by them to the RTC or FDIC of their
respective indemnification claims against CityFed for settlement
payments they make to the RTC or FDIC to settle the Second RTC Action,
and (2) retention by them of their respective indemnification claims
against CityFed for legal fees and expenses incurred in the Second RTC
Action. The settlement payments to be made by Messrs. Kean, Criser,
Hedden and Roessner to the RTC or FDIC, and thus the amount of
indemnification claim assigned by them to the RTC or FDIC, are
$1,200,000 for Mr. Kean, $400,000 for Mr. Criser, $250,000 for Mr.
Hedden and $335,000 for Mr. Roessner. The RTC agreed to allow a $70,000
credit toward the amount to be paid by Mr. Roessner as a means of
resolving Mr. Roessner's claim against the RTC for lost earnings on
deferred compensation amounts Mr. Roessner claims were withheld from
him by the RTC. In their settlements with the FDIC, Gordon Allen and
Peter Kellogg retained their rights to seek indemnification from
CityFed for settlement payments they make to the FDIC as well as for
legal fees and expenses incurred by them in the Second RTC Action. Mr.
Allen agreed to pay $250,000 to settle the Second RTC Action, and Mr.
Kellogg agreed to pay $3,000,000. Because of their settlements with the
RTC or FDIC, Messrs. Criser, Hedden, Roessner, Allen and Kellogg have
withdrawn as petitioners in the Supreme Court Case, leaving Mr.
Atherton as the sole remaining petitioner. CityFed understands also
that the FDIC has settled with George Mikula, James McTernan, Richard
Simmons and Michael DeFreytas for $5,000 each and they each have
retained their rights to seek indemnification from CityFed for their
settlement payments.
For further information regarding indemnification claims against
CityFed, see "Indemnification Claims" below.
INDEMNIFICATION CLAIMS - The Bylaws of CityFed, inter alia, obligate
CityFed to indemnify, to the fullest extent authorized by the Delaware
General Corporation Law, any person who is made or threatened to be
made a party to or becomes involved in an action by reason of the fact
that he or she is or was an employee of CityFed or one of its
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subsidiaries, and to pay on his or her behalf expenses incurred in
defending such an action prior to the final disposition of such action;
provided that expenses incurred by an officer or director may be paid
in advance only if such person delivers an undertaking to CityFed to
repay such amounts if it ultimately is determined that the person is
not entitled to be indemnified under CityFed's Bylaws and the Delaware
General Corporation Law. These undertakings are generally not secured.
Consequently, CityFed may become obligated to indemnify such persons
for their expenses incurred in connection with any such action and to
advance legal expenses incurred by such persons prior to the final
disposition of any such action. In addition to any amounts paid on
behalf of such person for expenses incurred in connection with such an
action, CityFed may also have further indemnification responsibilities
to the extent damages are assessed against such a person.
As described above, CityFed and several former directors and/or
officers of City Federal have been named as defendants or respondents
in the First and Second RTC Actions and in the Notice of Charges. Many
of these former directors and/or officers of City Federal have
requested CityFed to indemnify them and to advance expenses to them in
connection with these matters. A special committee of CityFed's Board
of Directors, comprised of directors who have not been named in the
First or Second RTC Actions, was established to consider this request
for indemnification and advancement of expenses. On the advice of
counsel to the special committee, CityFed has advanced reasonable
defense costs to such former directors and officers.
In addition to the First and Second RTC Actions, the Notice of Charges,
the Ridder Action and the "Indemnification Claims Relating to Deferred
Compensation Plans" (described below), CityFed is currently aware of
several other legal actions and matters with respect to which current
or former officers, directors or employees of CityFed or its former
subsidiaries have requested that CityFed advance expenses and indemnify
them. Except for the indemnification requests relating to the Notice of
Charges (which CityFed's Board of Directors has not yet considered),
CityFed has generally agreed to advance expenses in connection with
these requests, except where certain preconditions to advancement and
indemnification have not been met or where advancement and
indemnification may not be warranted under applicable law.
Because of the Temporary Order and the Escrow Agreement, CityFed is not
continuing to advance expenses in connection with any of the
indemnification and advancement requests referred to above. It is not
yet clear whether, as a result of the Third Circuit's decision in the
Ridder Action discussed below, CityFed will be required,
notwithstanding the existence of the Temporary Order and the Escrow
Agreement, to advance expenses to the defendants in the Ridder Action,
and to current or former officers, directors and employees of CityFed
who are or were parties in other actions or proceedings, including the
Second RTC Action, the Injunction Action, the D.C. Appeal, the Supreme
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Court Case, and proceedings relating to the Notice of Charges and the
Temporary Order. It is also not yet clear whether CityFed will be
required to make payments of legal fees and expenses to the individuals
who have settled with the RTC or FDIC in the Second RTC Action or to
make payments to the RTC or FDIC in respect of the indemnification
claims assigned to the RTC or FDIC by some of the individuals who have
settled with the RTC or FDIC. For more information regarding these
settlements and assignments of indemnification rights, see "Second RTC
Action" above.
CityFed received a letter dated June 21, 1995, from Skadden, Arps,
Slate, Meagher & Flom ("Skadden"), which is counsel for Gordon Allen,
Marshall Criser, Edwin Halkyard, Peter Kellogg, William Liffers and
Victor Pelson ("Outside Directors"), who are or were parties to one or
more of the following matters (collectively, the "Cases"): (1) the
Second RTC Action; (2) the Injunction Action and D.C. Appeal; (3) the
Supreme Court Case: and (4) the administrative enforcement proceeding
brought by the OTS against CityFed and the Respondents. In the letter,
the Outside Directors demanded that, pursuant to CityFed's Bylaws and
Restated Certificate of Incorporation, and in light of the Order issued
in the Ridder Action described below, CityFed pay all outstanding
invoices from Skadden for legal services rendered to the Outside
Directors in connection with the Cases. The letter states that, if
CityFed refuses to make the payments demanded, the Outside Directors
will consider taking appropriate legal action to enforce their rights.
CityFed received a similar letter from Venable, Baetjer, Howard &
Civiletti, counsel for John Kean, who was a party to the Second RTC
Action, as well as from Alfred J. Hedden, Gilbert G. Roessner, and
Gordon Allen, who were or are parties to the Cases. CityFed is
currently considering what action to take in response to these letters.
CityFed expects that it may receive other, similar letters demanding
payment from other current or former directors and officers who were or
are parties to one or more of the Cases.
Through September 30, 1996, CityFed received but has not paid bills
totaling $4,242,000 in the aggregate for legal services and expenses
rendered in connection with the defense of current and former directors
and officers of CityFed in the Cases. Although CityFed has not paid
these bills, it accrues the amounts billed under the caption "Other
Liabilities" on its Statement of Financial Condition as the bills are
received.
CityFed does not know whether all current or former officers, directors
or employees of CityFed or its former subsidiaries who are or were
involved in actions or proceedings will request advancement or payment
of legal expenses and indemnification or, if requested, whether they
will be entitled to advancement of expenses or indemnification. CityFed
also does not know whether the RTC or FDIC will request payment on the
indemnification claims assigned to it by individuals who have settled
with the RTC or FDIC in the Second RTC Action, as described above.
Thus, it is not possible for CityFed to estimate with any accuracy the
probable amount or range of liability relating to current or potential
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indemnification claims pursuant to CityFed's Bylaws, although the
amount of such claims could be material.
Certain insurance policies may provide coverage to CityFed for
indemnification payments made by CityFed. These policies, subject to
certain exclusions, limitations and loss participation provisions,
provide coverage to CityFed for amounts that it may be obligated to pay
to indemnify its current and former directors and officers, and in some
cases also provide coverage to the directors and officers of CityFed
directly for covered losses resulting from claims made against
CityFed's directors and officers for certain wrongful acts. Under the
insurance policies, CityFed would be required, prior to any payment by
the insurers to it, to absorb a retention amount equal to the first $4
million of each covered loss unless it is unable to do so by reason of
insolvency.
The insurers have denied coverage with respect to the claims made
against the directors and officers in the First and Second RTC Actions.
Consequently, CityFed may not be reimbursed by the insurers for any
expenses advanced or indemnification payments made to these individuals
in the First and Second RTC Actions.
See Item 2., "Management's Discussion and Analysis or Plan of
Operation" for a description of the contingency reserves, and the
charges and additional reserves posted in the three month period ended
September 30, 1996, relating to the matters described in this Note 4.
RIDDER ACTION - On or about April 19, 1993, Willem Ridder, John Hurst,
Lyndon Merkle and Gregory DeVany, former employees of City Collateral
and Financial Services, Inc., a subsidiary of City Federal, commenced
the Ridder Action by filing a complaint against CityFed in the N.J.
Court. (A substantially similar complaint was previously filed in the
United States District Court for the Northern District of California.
CityFed challenged jurisdiction and the plaintiffs voluntarily
dismissed that action. The complaint was thereafter refiled in New
Jersey.) The plaintiffs seek advancement and indemnification of their
legal costs and expenses incurred in conjunction with an action brought
against them by the RTC in the N.J. Court, RESOLUTION TRUST CORPORATION
V. FIDELITY AND DEPOSIT COMPANY, ET AL., Civil Action No. 92-1003
(D.N.J.) ("F&D Action"), plus damages in an unspecified amount for
physical and emotional distress, oppression, fraud and malice. The
complaint in the Ridder Action does not include a request for a sum
certain. On June 7, 1993, CityFed filed its answer to the complaint,
denying that plaintiffs are entitled to any recovery. Although certain
of the parties have exchanged documents, formal discovery has not yet
commenced in the Ridder Action. However, plaintiffs filed a motion for
summary judgment or, in the alternative, for a preliminary injunction
as to their claims for advancement of expenses and indemnification.
The N.J. Court denied the motion; however, on appeal the Third Circuit
overturned the decision of the N.J. Court. Pursuant to its order and
judgment, which were entered February 9, 1995, the Third Circuit held
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that the plaintiffs were entitled to receive advances of their costs of
defense under CityFed's Bylaws as a matter of law. The Third Circuit
directed the N.J. Court to issue an injunction requiring CityFed to
advance plaintiffs' defense costs incurred in connection with the F&D
Action in an amount to be agreed upon by the parties or, if the parties
are unable to reach agreement, in an amount determined to be reasonable
by the N.J. Court upon additional proceedings. On February 23, 1995,
CityFed filed a petition requesting that the Third Circuit grant
rehearing on issues relating to the relief granted. In particular, the
petition requested that the Third Circuit reconsider the grant of
injunctive relief on the basis that the Temporary Order effectively
precludes CityFed from paying the costs of defense to its current and
former officers and directors. In addition, the petition requested that
the Third Circuit require plaintiffs to post security if an injunction
is issued in plaintiffs' favor. On March 22, 1995, the Third Circuit
denied CityFed's petition for rehearing. On July 3, 1995, the N.J.
Court entered an Order ("Ridder Order") in the Ridder Action, directing
CityFed to remit immediately to the plaintiffs in the Ridder Action
$437,400, which represents legal fees incurred by the plaintiffs
through December 31, 1994 in the Ridder Action and as defendants in the
F&D Action, plus interest in the amount of $13,955.13. The Ridder Order
also provides a procedure for the payment by CityFed of the legal fees
incurred by the Ridder plaintiffs in the Ridder Action and the F&D
Action from January 1, 1995, forward.
Because of the Temporary Order, CityFed is unable unilaterally to make
the payment required by the Ridder Order. On July 13, 1995, CityFed
submitted the Ridder Order to the OTS and requested the permission of
the OTS to pay the amounts CityFed is directed to pay in the Ridder
Order, as well as permission to pay to the Ridder plaintiffs the sum of
$601.84 in court costs, which CityFed had been directed to pay to the
plaintiffs in a May 4, 1995 Order of the N.J. Court. On August 18,
1995, the OTS issued a Decision and Order ("OTS Order") denying this
request by CityFed. On August 2, 1995, CityFed appealed the Ridder
Order to the Third Circuit, arguing that the N.J. Court had abused its
discretion by ordering CityFed to make a payment CityFed could not make
because of the Temporary Order. On August 29, 1995, CityFed asked the
Third Circuit to stay the Ridder Order pending the appeal from the
Ridder Order, but the Third Circuit denied the request. The appeal was
then fully briefed by the parties and argued to a panel of the Third
Circuit on March 22, 1996. On April 18, 1996, the Third Circuit ruled
in CityFed's favor, vacating the Ridder Order and directing that the
matter be returned to the N.J. Court for further proceedings. Among the
options available to the N.J. Court, noted the Third Circuit, were the
possibility of staying any payment order pending completion of the OTS
administrative proceedings or conditioning any payment obligation on
CityFed's ability to obtain OTS approval. The Third Circuit also said
the N.J. Court might consider reducing the payment obligation to
judgment and permitting OTS to intervene in the proceedings. On May 1,
1996, the Ridder plaintiffs petitioned the Third Circuit for rehearing
en banc, claiming that the Third Circuit panel's April 18, 1996,
decision conflicts with the February 9, 1995, Third Circuit panel
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decision awarding indemnification to the Ridder plaintiffs. The Third
Circuit denied the Petition for Rehearing on May 20, 1996. Although the
matter is remanded to the N.J. Court for further action, the N.J. Court
has yet to take any action.
In 1996, CityFed included $853,000 in its contingency reserve relating
to the Ridder Action. See Item 2., "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources." In
the event that CityFed advances such amounts to the plaintiffs and it
is ultimately determined that plaintiffs are not entitled to
indemnification, CityFed may be required to look solely to plaintiffs'
unsecured undertakings for repayment of any advances.
"SUPERVISORY GOODWILL" ACTION - On August 7, 1995, CityFed, acting in
its own right and as shareholder of City Federal, filed a civil action
in the United States Court of Federal Claims seeking damages for loss
of "supervisory goodwill." The action is captioned CITYFED FINANCIAL
CORP., IN ITS OWN RIGHT AND IN ITS CAPACITY AS SHAREHOLDER OF CITY
FEDERAL SAVING BANK, BEDMINSTER, NEW JERSEY V. UNITED STATES OF
AMERICA, No. 95-508C. CityFed filed this action under the rule of the
Court of Federal Claims that permits the filing of a "Preliminary
Complaint" when a plaintiff lacks access to information necessary to
fully state its claim. CityFed believes that, as of December 7, 1989,
City Federal had substantial amounts of supervisory goodwill on its
books as a result of various acquisitions by City Federal of troubled
depository institutions before that date, but without access to the
records of City Federal, CityFed is unable to state in detail the
nature or amount of its goodwill claim. CityFed's goodwill suit was
stayed (as were all Court of Federal Claims supervisory goodwill cases)
pending the United States Supreme Court's review of the decision of the
United States Court of Appeals for the Federal Circuit in another
supervisory goodwill case, WINSTAR CORP. V. UNITED STATES, 64 F.3d 1531
(Fed. Cir. 1995) ("Winstar"). On July 1, 1996, the United States
Supreme Court affirmed the decision of the Federal Circuit in the
Winstar case, holding that the loss of supervisory goodwill and capital
credits as a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 constituted breaches of contract with the three
institutions involved in that consolidated appeal. The United States
Supreme Court remanded those cases to the United States Court of
Federal Claims for a determination of damages.
CityFed's case is one of 122 supervisory goodwill cases currently
pending in the Court of Federal Claims. The Court has adopted case
management procedures to expedite the handling of these cases in the
wake of the Supreme Court's ruling, and CityFed's counsel is
participating with other plaintiffs' counsel in coordinated prosecution
of these cases. The Government has indicated that it may challenge the
existence of a contract in cases other than those involved in the
Winstar appeal, and it has said it will interpose other defenses and
counterclaims, such as statute of limitations, standing, lack of
proximate causation, fraudulent inducement, and failure to maintain net
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worth. The Chief Judge of the Court of Federal Claims has now
re-assigned all of these cases to himself and is delegating to other
judges on the court responsibility for various issues.
The FDIC has moved to substitute itself as plaintiff in supervisory
goodwill cases involving closed institutions where there is claimed to
be a deficit in the receivership estate. It has filed such a motion in
CityFed's case. The FDIC claims that, as successor receiver (to the
RTC) for these institutions, it is the proper party to assert these
claims, since its claim as insurer of accounts likely exceeds any
potential recovery. CityFed's counsel and counsel for other goodwill
plaintiffs are currently preparing a joint brief in opposition to the
FDIC's motion.
CityFed has now received from the Government "core documents" for each
of the transactions thought to have generated supervisory goodwill.
CityFed's counsel is presently analyzing these documents to determine
whether it now has sufficient documentation to file its Amended
Complaint.
CLAIM OF A FORMER DIRECTOR AND OFFICER - As a result of the
receivership of City Federal, City Federal failed to pay Gilbert G.
Roessner, a former director and officer of CityFed, the amounts owed to
him under various deferred compensation arrangements City Federal had
with him. He claims that CityFed is responsible for this amount
(approximately $1.1 million as of November 1989). On April 30, 1991,
special counsel to the Compensation Committee of CityFed's Board of
Directors recommended to the full Board that no payments be made to Mr.
Roessner currently, but that the Board keep Mr. Roessner's claim under
advisement, to be reconsidered in light of then existing circumstances
and any additional evidence provided by Mr. Roessner in support of his
claim. The Board of Directors received the report of special counsel to
the Compensation Committee.
Pursuant to an agreement dated as of December 15, 1993 ("Funds
Agreement"), among Mr. Roessner, the RTC as receiver for City Federal,
and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), the
RTC in January 1994 transferred $933,623.44 to an investment account at
DLJ in Mr. Roessner's name. CityFed believes such funds, which
represent a percentage of Mr. Roessner's deferred compensation claim
against City Federal, serve to reduce the amount of Mr. Roessner's
claim against CityFed.
INDEMNIFICATION CLAIMS RELATING TO DEFERRED COMPENSATION PLANS - In
September 1990, the RTC, as receiver for City Federal (and the new
Federal mutual savings bank created to acquire all of the deposits and
substantially all of the assets and indebtedness of City Federal),
caused an action to be filed in the N.J. Court seeking the return of
approximately $3.1 million (since reduced to $1.9 million) in deferred
compensation paid by City Federal to certain officers, directors and
employees of City Federal, some of whom are or were also officers,
directors or employees of CityFed. Pursuant to the Delaware General
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Corporation Law and the Bylaws of CityFed, CityFed agreed to pay the
defendants' legal fees in connection with their defense of the
litigation.
A settlement agreement, under which the defendants were to pay
$790,000, was entered into by the parties in June 1993 (of which
$114,000 was in the form of promissory notes from two defendants
payable over four years). This settlement agreement concluded the case.
Several defendants have requested that CityFed reimburse them for the
settlement payments made by them under the settlement agreement.
CityFed has not responded to the request. It is likely that CityFed
will receive similar requests from the other parties to the settlement.
CityFed's liability to the individuals remains to be determined.
TAX LIABILITIES - CityFed's liability for federal income taxes for tax
years through 1990 was calculated on the basis of CityFed's inclusion
in a consolidated group that includes City Federal and the successor
institutions created by the OTS to acquire the assets and liabilities
of City Federal. Under the applicable provisions of the Internal
Revenue Code of 1986, as amended ("Code"), and the regulations
thereunder, all members of the consolidated group, including CityFed,
are jointly and severally liable for any income taxes owed by the
group. CityFed has not included City Federal and the successor
institutions in the Federal income tax returns CityFed filed for its
1991, 1992, 1993, 1994 and 1995 tax years. CityFed's position is not
free from challenge, although CityFed believes that its position is
reasonable under the current tax law.
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CONTINGENCY RESERVE - As noted above, the Company is subject to a
number of loss contingencies for which it is currently unable to
reasonably assess the probability or range of loss. At September 30,
1996, the Company had a $6,822,000 contingency reserve representing the
current estimate of the minimum expenses relating to pending
litigation. These costs are difficult to project and will be affected
by whether these matters are settled or whether the actions proceed to
trial. The reserve reflects expected costs to defend against the
claims. The reserve, however, does not include provisions for
trial-related expenses (other than with respect to the OTS
administrative proceeding relating to the Notice of Charges and the
Temporary Order), settlements (other than negotiated settlements,
including settlements in the Second RTC Action) or adverse judgments
(other than amounts relating to the Ridder Action) as CityFed is unable
to make a reasonable estimate of the amount or range of potential loss.
The following is an analysis of CityFed's contingency reserve:
Balance - December 31, 1995 $3,987,000
Charges 1,515,000
Provision 4,350,000
----------
Balance - September 30, 1996 $6,822,000
==========
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Item 2. Management's Discussion and Analysis or Plan of Operation.
General
On December 7, 1989, the Office of Thrift Supervision appointed the
Resolution Trust Corporation ("RTC") as receiver for City Federal
Savings Bank ("City Federal"), the sole subsidiary of CityFed Financial
Corp. ("CityFed" or the "Company"). A new federal mutual savings bank,
City Savings Bank, F.S.B. ("City Savings"), was created, which acquired
all deposits and substantially all of the assets and liabilities of
City Federal. CityFed no longer controls City Federal and has no
control over City Savings.
As a result of this action, the financial statements of CityFed at
December 31, 1989, for the year then ended, and for subsequent periods
reflect CityFed's interest in City Federal as discontinued operations.
Because City Federal was placed in receivership, CityFed's current
interest in City Federal is a claim against the receivership estate for
the proceeds, if any, of the receivership estate of City Federal that
remain after all creditors, including the RTC, have been paid. Receipt
of any payment for such claim is remote. For a fuller description of
the receivership, see Item 1., "Business" in CityFed's 1995 Form
10-KSB.
Since the receivership of City Federal, CityFed has been, and currently
is, in the process of determining its liabilities, including its
contingent liabilities described in Note 4 to CityFed's financial
statements for the nine months ended September 30, 1996. To maintain
the principal value of its existing assets while this process is
ongoing, CityFed has invested substantially all of its funds in high
grade money market instruments with a maturity of one year or less and
money market mutual funds. Since the receivership of City Federal, the
operating expenses of CityFed have consisted of the salaries of the
employees of CityFed, the expenses of the two small offices maintained
by CityFed and the related office operating expenses, expenses relating
to the audit of its financial statements by its independent auditors,
and expenses of its outside legal counsel. Currently, CityFed only has
one full-time employee and one small office.
Due to the nature of its assets at and subsequent to December 8, 1989,
CityFed may be deemed to fall within the definition of an "investment
company" under the Investment Company Act of 1940, as amended ("1940
Act"), from that date to the present. To resolve any question regarding
its current status under the 1940 Act, CityFed filed an application on
October 19, 1990 with the Division of Investment Management of the
Securities and Exchange Commission ("SEC") for an order exempting it
from certain provisions of the 1940 Act and certain rules and
regulations thereunder. This application was amended on September 23,
1993, January 18, 1994 and March 1, 1994. The application was granted
under Sections 6(c) and (e) of the 1940 Act on March 15, 1994. Under
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the order granting the application ("1940 Act Order"), CityFed was not
required to register as an investment company. However, CityFed and
other persons in their transactions and relations with CityFed are,
under the terms of the 1940 Act Order, subject to Sections 9, 17(a),
17(d), 17(e), 17(f), 36 through 45 and 47 through 51 of the 1940 Act,
and the rules thereunder, as if CityFed were a registered investment
company, except insofar as permitted by the 1940 Act Order. The 1940
Act Order exempted CityFed from having to register as an investment
company until the earlier of March 15, 1995 or such time as CityFed
would no longer be required to register as an investment company. On
February 28, 1995, an Order was issued extending the requested
exemption until February 28, 1996 and, on February 21, 1996, an Order
was issued extending the requested exemption until February 21, 1997.
Liquidity and Capital Resources
At September 30, 1996, CityFed had $9,084,000 in assets, $11,128,000 in
total liabilities and $2,044,000 in negative stockholders' equity. At
December 31, 1995, CityFed had $9,002,000 in assets, $6,866,000 in
total liabilities and $2,136,000 in stockholders' equity. However, as
discussed in Note 4 to CityFed's financial statements for the nine
months ended September 30, 1996 and under Item 1., "Business -
Potential Obligations of CityFed" in CityFed's 1995 Form 10-KSB, a
number of claims have been asserted against CityFed. If the claimants
under some or all of these claims are successful, their claims against
CityFed could greatly exceed CityFed's assets. Consequently, CityFed's
assets are currently being invested short term, and expenses have been
reduced to a level that management believes is commensurate with
CityFed's current activities pending resolution of these claims.
While CityFed's liquidity is expected to be sufficient to meet
litigation and administrative expenses over the next twelve months, any
substantial indemnification expense, settlement or judgment (including,
without limitation, any obligation to currently advance legal expenses
in the Cases or the Ridder Action) could reduce liquidity to a level
that would jeopardize the continuation of the Company's activities.
However, as a result of additions to the contingency reserve, CityFed
currently has a negative net worth and it is unlikely that CityFed will
be able to achieve a positive net worth in the foreseeable future.
As discussed above, since the receivership of City Federal, CityFed
initially marshaled its assets and has been, and currently is, in the
process of determining its liabilities. To maintain the value of
CityFed's existing assets while this process is ongoing, CityFed has
invested in income producing instruments. Funds are invested so that
they are convertible into cash in a reasonably short time with minimal,
if any, loss of principal.
Since the receivership of City Federal, CityFed has invested and will
continue to invest substantially all its funds in securities with a
maturity of one year or less. These consist of U.S. government or
- 24 -
<PAGE>
agency securities, commercial paper, bank certificates of deposit,
money market mutual funds and corporate debt obligations. Repurchase
agreements may only be entered into using U.S. government securities as
collateral. Non-governmental or agency investments are purchased only
if they are rated in one of the two highest categories by an
established rating agency. Investments in the corporate debt securities
of any one issuer are limited to $2,500,000. Under the terms of the
Escrow Agreement (defined below), changes in these investment policies
require the approval of the Board of Directors of CityFed and the OTS.
Under the terms of the 1940 Act Order, CityFed may not purchase or
otherwise acquire any additional securities other than securities that
are rated investment grade or higher by a nationally recognized
statistical rating organization or, if unrated, deemed to be of
comparable quality under guidelines approved by CityFed's Board of
Directors, subject to two exceptions:
(a) CityFed may make an equity investment in issuers
that are not investment companies as defined in Section 3(a)
of the 1940 Act (including issuers that are not investment
companies because they are covered by a specific exclusion
from the definition of investment company under Section 3(c)
of the 1940 Act other than Section 3(c)(1)) in connection with
the possible acquisition of an operating business as evidenced
by a resolution approved by CityFed's Board of Directors; and
(b) CityFed may invest in one or more money market
mutual funds that limit their investments to "Eligible
Securities" within the meaning of Rule 2a-7(a)(5) promulgated
under the 1940 Act.
The financial statements of CityFed at December 31, 1989, for the year
then ended, and for subsequent periods reflect that CityFed maintains
reserves for CityFed's pending litigation expenses, which, at September
30, 1996, were $6,822,000 and, at December 31, 1995, were $3,987,000.
The litigation costs included in the reserves are difficult to project
and will be affected by whether these matters are settled or whether
the actions will proceed to trial. The reserves reflect expected costs
to defend the claims up to, but not including, the costs of any
trial-related expenses (except as described below). The reserves also
do not include the costs of any settlements (other than negotiated
settlements, including settlements in the Second RTC Action described
in Note 4 to CityFed's financial statements for the nine months ended
September 30, 1996) or adverse judgments, except that the contingency
reserve now also includes amounts relating to the Ridder Action. See
Note 4 to the Notes to Financial Statements in this Form 10-QSB, and
Item 1., "Business - Potential Obligations of CityFed" in CityFed's
1995 Form 10-KSB for a description of the major claims that may give
rise to expected future costs. Although management believes that
CityFed's current level of reserves are sufficient to cover the costs
- 25 -
<PAGE>
of pending litigation matters (but not any trial-related expenses or
the costs of any potential settlements or adverse judgments other than
those relating to the Second RTC Action and the Ridder Action), no
assurances can be given that the reserves established will be adequate,
that any ultimate resolution of the claims will not result in
substantial amounts being incurred or that further claims will not be
asserted.
On October 26, 1994, CityFed and the OTS entered into an Escrow
Agreement ("Escrow Agreement") with CoreStates Bank, N.A.
("CoreStates") pursuant to which CityFed transferred substantially all
of its assets to CoreStates for deposit into an escrow account to be
maintained by CoreStates. Pursuant to the Escrow Agreement, CoreStates
executes a wire transfer of $15,000 from the escrow account to CityFed
on the first business day of every month. The Escrow Agreement provides
that CityFed may sell and purchase securities in the escrow account,
and that CoreStates will be paid a fee of $2,500 per year, plus
reimbursement for out of pocket expenses, for serving as escrow agent.
CityFed's assets in the escrow account continue to be invested in money
market instruments with a maturity of one year or less and money market
mutual funds. Withdrawals or disbursements from the escrow account are
not permitted without the written authorization of the OTS, other than
for (1) the $15,000 monthly transfer to CityFed, (2) the disbursement
of funds on account of purchases of securities by CityFed and (3) the
payment of the escrow fee and expenses to CoreStates. The Escrow
Agreement also provides that CoreStates will restrict the escrow
account in such a manner as to implement the terms of the Escrow
Agreement and to prevent a change in status or function of the escrow
account unless authorized by CityFed and the OTS in writing. CoreStates
will provide to the OTS a copy of all statements regarding the escrow
account provided to CityFed.
Results of Operations
CityFed recorded a net loss for the three months ended September 30,
1996 of $129,000. The loss for the three months ended September 30,
1996 was after the addition of $200,000 to the contingency reserve.
This compares to a net loss in the amount of $470,000 for the three
months ended September 30, 1995. The loss for the three months ended
September 30, 1995 was after the addition of $500,000 to the
contingency reserve.
CityFed recorded income from continuing operations for the three months
ended September 30, 1996 of $71,000. This compares to income from
continuing operations in the amount of $30,000 for the three months
ended September 30, 1995.
Interest on investments was $119,000 for the three months ended
September 30, 1996 compared to $131,000 for the three months ended
September 30, 1995 due primarily to the lower level of interest rates.
Total operating expenses of $48,000 for the three months ended
September 30, 1996 were less than the $101,000 for the same period in
1995 due primarily to a lower level of professional service fees.
- 26 -
<PAGE>
CityFed recorded a net loss for the nine months ended September 30,
1996 of $4,180,000. This compares to a net loss in the amount of
$952,000 for the nine months ended September 30, 1995. The loss for the
nine months ended September 30, 1996 is primarily the result of the
addition of $4,350,000 to the contingency reserve, largely for
indemnification claims arising from negotiated settlements by certain
defendants in the Second RTC Action (see Note 4). The loss for the nine
months ended September 30, 1995 was after the addition of $1,200,000 to
the contingency reserve. Interest on investments was $355,000 for the
nine months ended September 30, 1996 compared to $397,000 for the nine
months ended September 30, 1995 due to the lower level of interest
rates.
The net loss per share of $0.12 and $0.57 for the three and nine months
ended September 30, 1996, respectively, compares to $0.14 and $0.40 for
the three and nine months ended September 30, 1995. In all periods, the
net loss per share is after the deduction of unpaid preferred
dividends. No preferred or common dividends have been paid since the
second quarter of 1989 and none are expected to be paid until CityFed's
situation changes significantly.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to CityFed's financial statements for the nine months ended
September 30, 1996 for a description of currently pending litigation.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
(a) None.
(b) CityFed's $2.10 Cumulative Convertible Preferred Stock, Series B,
par value $25.00 per share ("Series B Stock"), is required to pay
quarterly dividends at a rate of $.525 per share on March 1, June 1,
September 1 and December 1 of each year. CityFed's Series C Junior
Preferred, cumulative, Stock, par value $0.01 per share ("Series C
Stock"), is required to pay quarterly dividends at a rate of $0.10 per
share on March 15, June 15, September 15 and December 15 of each year.
The dividends on both the Series B and the Series C Stock are
cumulative. The Series C Stock is junior to the Series B Stock in the
payment of dividends.
Beginning with the payment due on September 1, 1989, CityFed has not
paid any quarterly dividends on the Series B Stock. Beginning on
September 15, 1989, CityFed also has not paid any quarterly dividends
on the Series C Stock. Because CityFed has failed to pay at least six
- 27 -
<PAGE>
quarterly dividends on the Series B Stock, the holders of such stock
have the exclusive right, voting separately as a class, to elect, and
have elected, two directors of CityFed. Until the aggregate deficiency
is declared and fully paid on the Series B Stock and the Series C
Stock, CityFed may not declare any dividends or make any other
distributions on or redeem the Common Stock. Until the aggregate
deficiency is declared and fully paid on the Series B Stock, CityFed
may not declare any dividends or make any other distributions on or
redeem the Series C Stock. As of September 30, 1996, the aggregate
deficiency on the Series B Stock was approximately $38.7 million and
the aggregate deficiency on the Series C Stock was approximately $23.9
million.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Statement Regarding the Computation of Per Share Loss.
27 Financial Data Schedule, September 30, 1996
(b) Reports on Form 8-K
None
- 28 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITYFED FINANCIAL CORP.
By: /s/ John W. Atherton, Jr.
------------------------------------
John W. Atherton, Jr.
President, Chief Executive Officer
and Treasurer (Principal Executive
and Financial Officer)
Date: November 13, 1996
- 29 -
<PAGE>
Exhibit Index
Exhibit
11 Statement Regarding the Computation of Per Share Loss
27 Financial Data Schedule, September 30, 1996
<TABLE>
<CAPTION>
Exhibit 11
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
Three Months Ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Computation of Loss Per Share:
Weighted average number of shares
outstanding 18,714,646 18,714,646 18,714,646 18,714,646
Loss applicable to common stock:1
From continuing operations
$(2,088,000) $(2,129,000) $ (6,307,000) $(6,229,000)
=========== =========== ============ ===========
From discontinued operations
$ (200,000) $ (500,000) $ (4,350,000) $(1,200,000)
=========== =========== ============ ===========
Net Loss $(2,288,000) $(2,629,000) $(10,657,000) $(7,429,000)
=========== =========== ============ ===========
Loss per share:
From continuing operations
$(0.11) $(0.11) $(0.34) $(0.33)
======= ======= ======= =======
From discontinued operations
$(0.01) $(0.03) $(0.23) $(0.07)
======= ======= ======= =======
Net Loss $(0.12) $(0.14) $(0.57) $(0.40)
======= ======= ======= =======
</TABLE>
- --------
1 Losses applicable to Common Stock are net of preferred stock dividends for the
three months ended September 30, 1996 and 1995 in the amount of $2,159,000 in
each period. Losses applicable to Common Stock are net of preferred stock
dividends for the nine months ended September 30, 1996 and 1995 in the amount of
$6,477,000 in each period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 30
<SECURITIES> 8,894
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 26
<DEPRECIATION> 23
<TOTAL-ASSETS> 9,084
<CURRENT-LIABILITIES> 11,128
<BONDS> 0
0
63,567
<COMMON> (65,611)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,084
<SALES> 0
<TOTAL-REVENUES> 356
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 170
<INCOME-TAX> 0
<INCOME-CONTINUING> 170
<DISCONTINUED> (4,350)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,180)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
