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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 March 31, 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 or (I.R.S. Employer
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 April 30, 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.
STATEMENTS OF FINANCIAL CONDITION
March 31, 1996 and December 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CASH $ 15 $ 14
INVESTMENT SECURITIES - At amortized cost (Market Value:
March 31, 1996, $8,829; December 31, 1995, $8,833) 8,827 8,836
OTHER ASSETS 155 152
---------- ----------
TOTAL ASSETS $ 8,997 $ 9,002
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Contingency reserve $ 6,805 $ 3,987
Other liabilities 3,949 2,879
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Total liabilities 10,754 6,866
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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
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March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Additional paid-in capital 108,854 108,854
Accumulated deficit (173,366) (169,473)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
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Total stockholders' equity (1,757) 2,136
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,997 $ 9,002
========= ==========
See notes to financial statements.
</TABLE>
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CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
1996 1995
INCOME:
Interest on investment $ 119 $ 130
Other - 17
------ -------
Total income 119 147
------ ------
EXPENSES:
Compensation and employee benefits 31 35
Other operating expenses 31 31
------ ------
Total expenses 62 66
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INCOME FROM CONTINUING OPERATIONS 57 81
LOSS FROM DISCONTINUED OPERATIONS 3,950 -
------ ------
NET INCOME (LOSS) $(3,893) $ 81
======== ======
NET LOSS AVAILABLE FOR COMMON $(6,052) $(2,078)
STOCKHOLDERS
LOSS PER SHARE:
From continuing operations $(0.11) $(0.11)
From discontinuing operations $(0.21) -
Net Loss $(0.32) $(0.11)
AVERAGE SHARES OUTSTANDING 18,714,646 18,714,646
DIVIDENDS PER COMMON SHARE - -
See notes to financial statements
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CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(Dollars in Thousands)
(Unaudited)
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<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 68 $ 169
Operating expenses (125) (123)
Other income - 17
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Net cash (used in) provided by operating
activities (57) 63
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investment securities 60 (114)
Other - net (2) -
-------- -------
Net cash provided by (used in) investing
activities 58 (114)
------- -------
NET INCREASE (DECREASE) IN CASH 1 (51)
CASH AT BEGINNING OF PERIOD 14 52
------- -------
CASH AT END OF PERIOD $ 15 $ 1
======= =======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net (loss) income $(3,893) $ 81
Loss from discontinued operations 3,950 -
Contingency reserve payments (26) (22)
Accrued income and expense (88) 4
-------- ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 57 $ 63
======== =======
See notes to financial statements.
</TABLE>
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 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
March 31, 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,
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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 March
31, 1996, dividends in arrears were $36.0 million and $22.3
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
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$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." 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.
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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. 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. Section 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.
If the ALJ denies CityFed's motion for reconsideration, CityFed
will seek an 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. If the conclusions in the
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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.
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
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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").
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
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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 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
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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 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
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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 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
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to review the Third Circuit's decision. On April 15, 1996, the
Supreme Court granted the petition for writ of certiorari. Under
the current schedule, briefs are to be filed with the Supreme
Court in July and August, and the case (the "Supreme Court Case")
is to be heard during the Court's October term.
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 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, which had been set for April 15, 1996, was postponed
in light of a number of settlements in the Second RTC Action.
CityFed is aware that several of the defendants in the Second RTC
Action have settled with the RTC or FDIC. To CityFed's
knowledge, the defendants who have entered into settlement
agreements with the RTC or FDIC to date are Victor Pelson, John
Kean, Marshall Criser, Alfred Hedden, Gilbert Roessner, Gordon
Allen and Peter Kellogg. The settlement agreement for Mr. 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 Messrs. Kean, Criser,
Hedden and 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
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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, Messrs. Allen and
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 that the FDIC has engaged in
discussions with George Mikula, James McTernan, Richard Simmons
and Michael DeFreytas that may lead to a settlement of the Second
RTC Action with respect to each of them.
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 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
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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 parties in other
actions or proceedings, including the Second RTC Action, the
Injunction Action, the D.C. Appeal, 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 in the Second RTC Action or to make payments to the RTC
in respect of the indemnification claims assigned to the RTC by
some of the individuals who have settled with the RTC. 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; and (3) the administrative
enforcement proceeding brought by the OTS against CityFed and the
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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. 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 are parties to one
or more of the Cases.
Through March 31, 1996, CityFed received but has not paid bills
totaling $3,889,000 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 will request payment on the indemnification claims
assigned to it by individuals who have settled with the RTC 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
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.
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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 March 31, 1996, relating to the matters described under
"Commitments and Contingencies."
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 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
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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
decision awarding indemnification to the Ridder plaintiffs. This
petition is currently pending before the Third Circuit.
In 1995, 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
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Capital Resources." In the event that 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 is presently stayed (as are all Court of Federal
Claims supervisory goodwill cases) pending possible Supreme Court
review of the recent decision of the United States Court of
Appeals for the Federal Circuit in another supervisory goodwill
case, WINSTART CORP. V. UNITED STATES, 64 F.3d 1531 (Fed. Cir.
1995). The Winstar appeal was argued before the Supreme Court on
April 24, 1996. The United States has moved in the Court of
Federal Claims to have the Court adopt case management procedures
for all of the pending goodwill cases. CityFed has opposed that
motion in its goodwill case as inconsistent with the stay in that
case and as premature in light of the pending decision by the
Supreme Court.
CLAIM OF A FORMER DIRECTOR AND OFFICER - As a result of the
receivership of City Federal, City Federal has 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
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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 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.
In July 1993, one of the defendants requested that CityFed
reimburse him for the settlement payments made by him 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 - As required by Internal Revenue Service ("IRS")
Notice 89-102, 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. The Federal
income taxes for City Federal and the successor institutions for
the 1991 and 1992 tax years substantially exceed the assets of
CityFed. Due to the uncertainty under the federal income tax
laws regarding CityFed's federal income tax liability, CityFed,
after consulting with its tax accountants, has not included City
Federal and the successor institutions in the Federal income tax
returns CityFed filed for its 1991, 1992, 1993 and 1994 tax
years. While CityFed's position is not free from doubt,
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regulations under Section 597 of the Code provide for an election
for CityFed not to file a consolidated return. CityFed
anticipates taking all appropriate action to support its
position.
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 March 31,
1996, the Company had a $6,805,000 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) 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 1,132,000
Provision 3,950,000
----------
Balance - March 31, 1996 $6,805,000
==========
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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 three months ended March
31, 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
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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 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 March 31, 1996, CityFed had $8,997,000 in assets, $10,754,000
in total liabilities and $1,757,000 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 three months ended March 31, 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, indemnification and administrative expenses over the
next twelve months, any substantial indemnification expense,
settlement or judgment could reduce liquidity to a level that
would jeopardize the continuation of the Company's activities.
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.
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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 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 March 31, 1996, were $6,805,000 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) or adverse
judgments, except that the contingency reserve now also includes
- 26 -
<PAGE>
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 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 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 net income from continuing operations for the
three months ended March 31, 1996 of $57,000. This compares to
net income from continuing operations in the amount of $81,000
for the three months ended March 31, 1995.
Interest on investments was $119,000 for the three months ended
March 31, 1996 compared to $130,000 for the three months ended
March 31, 1995 due primarily to the lower level of interest
rates. Total expenses of $62,000 for the three months ended
- 27 -
<PAGE>
March 31, 1996 were less than the $66,000 for the same period in
1995 due primarily to a lower level of employee benefit expenses.
CityFed recorded a net loss for the three months ended March 31,
1996 of $3,893,000. This compares to a net income in the amount
of $81,000 for the three months ended March 31, 1995. The loss
for the three months ended March 31, 1996 is primarily the result
of the addition of $3,950,000 to the contingency reserve. No
addition to the contingency reserve was made during the three
months ended March 31, 1995.
The net loss per share of $0.32 for the three months ended March
31, 1996, compares to $0.11 for the three months ended March 31,
1995. In both periods the net loss per share is after the
deduction of unpaid preferred dividends of $2,159,000. 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 three months
ended March 31, 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 Stock, Cumulative, 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 quarterly dividends on the Series B
- 28 -
<PAGE>
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 March 31, 1996, the aggregate
deficiency on the Series B Stock was approximately $36.0 million
and the aggregate deficiency on the Series C Stock was
approximately $22.3 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.
(b) Reports on Form 8-K
A Report on Form 8-K, dated January 22, 1996, was filed on
March 4, 1996, reporting, under Item 5, that on February 1, 1996,
the 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. Section
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.
- 29 -
<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: May 15, 1996
- 30 -
<PAGE>
<PAGE>
Exhibit 11
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Computation of Loss Per Share
Weighted average number of shares outstanding 18,714,646 19,714,646
Loss applicable to common stock:1
From continuing operations $(2,102,000) $(2,078,000)
============ ============
From discontinued operations $(3,950,000) $ -
============ ============
Net Loss $(6,052,000) $(2,078,000)
============ ============
Loss per share:
From continuing operations $(0.11) $(0.11)
======== ========
From discontinued operations $(0.21) $ -
======== ========
Net Loss $(0.32) $(0.11)
======== ========
</TABLE>
1 Losses applicable to Common Stock are net of preferred stock
dividends for the three months ended March 31, 1996 and 1995 in the amount
of $2,159,000 in each period.
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM
10-QSB FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 15
<SECURITIES> 8,827
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 24
<DEPRECIATION> 22
<TOTAL-ASSETS> 8,997
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
63,567
<COMMON> (65,324)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,997
<SALES> 0
<TOTAL-REVENUES> 119
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 62
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57
<INCOME-TAX> 0
<INCOME-CONTINUING> 57
<DISCONTINUED> (3,950)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,893)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
<PAGE>
</TABLE>
