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, 1997
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.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2527684
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
PO Box 3126, Nantucket, MA 02584
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(Address of principal executive offices) (Zip Code)
(508) 228-2366
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(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 [ ]
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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, 1997, 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.
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
March 31, 1997 and December 31, 1996
(Dollars in Thousands)
March 31, 1997 December 31,
(Unaudited) 1996
----------- ----
<S> <C> <C>
ASSETS
CASH $ 12 $ 85
INVESTMENT SECURITIES - At amortized cost (Market Value: 9,024 8,911
March 31, 1997, $9,014; December 31, 1996, $8,911)
OTHER ASSETS 159 160
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TOTAL ASSETS $ 9,195 $ 9,156
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Contingency reserve $ 6,730 $ 6,734
Other liabilities 4,380 4,407
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Total liabilities 11,110 11,141
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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 1997 and 1996 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 1997 and 1996 82 82
Common stock, $.01 par value, 100,000,000 shares authorized,
issued: 18,913,646 in 1997 and 1996, outstanding:
18,714,646 in 1997 and 1996 188 188
Additional paid-in capital 108,854 108,854
Accumulated deficit (173,524) (173,594)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
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Total stockholders' deficit (1,915) (1,985)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,195 $ 9,156
========= =========
</TABLE>
See notes to financial statements.
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CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
March 31,
-----------------------------
1997 1996
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INCOME:
Interest on investments $ 123 $ 119
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Total income 123 119
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EXPENSES:
Compensation and employee benefits 34 31
Other operating expenses 19 31
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Total expenses 53 62
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INCOME FROM CONTINUING OPERATIONS 70 57
LOSS FROM DISCONTINUED OPERATIONS -- 3,950
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NET INCOME (LOSS) $ 70 $ (3,893)
============ ============
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS
$ (2,089) $ (6,052)
LOSS PER SHARE:
From continuing operations $ (0.11) $ (0.11)
From discontinued operations $ -- $ (0.21)
Net loss $ (0.11) $ (0.32)
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.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(Dollars in Thousands)
(Unaudited)
March 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 77 $ 68
Operating expenses (83) (125)
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Net cash used in operating activities (6) (57)
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CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investment securities (67) 60
Other - net -- (2)
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Net cash (used in) provided by investing activities (67) 58
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NET (DECREASE) INCREASE IN CASH (73) 1
CASH AT BEGINNING OF PERIOD 85 14
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CASH AT END OF PERIOD $ 12 $ 15
======= =======
RECONCILIATION OF NET INCOME TO NET CASH USED
IN OPERATING ACTIVITIES:
Net income (loss) $ 70 $(3,893)
Loss from discontinued operations -- 3,950
Contingency reserve payments (3) (26)
Accrued income and expense (73) (88)
------- -------
NET CASH USED IN OPERATING ACTIVITIES $ (6) $ (57)
======= =======
</TABLE>
See notes to financial statements.
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (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 ("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, 1997, 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 receivorship 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, 1996 ("1996 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
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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 March 31, 1997, dividends in arrears
were $41.3 million and $25.6 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
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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." 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.
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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. 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.
The Notice of Changes provides that a hearing will be held before an
administrative law judge on the question of whether a final cease and
desist order should be issued against CityFed and the Respondents. CityFed
and the Respondents filed an answer in response to the Notice of Charges
and have filed motions for summary disposition of the OTS' claims.
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. ss. 1818(b)(6) and that the Stipulation CityFed provided to the
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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 OTS 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 any 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.
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
$9.1 million on June 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. 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. Although
CityFed attempted to have the Temporary Order set aside in court, it was
unsuccessful.
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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").
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
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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 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
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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 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
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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 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.
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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 January 14, 1997, in the case
captioned ATHERTON V. FEDERAL DEPOSIT INSURANCE CORPORATION, 519 U.S.
______, 117 S. Ct. 666 (1997) ("Supreme Court Case"), the Supreme Court of
the United States vacated the Third Circuit's judgment and remanded the
case.
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
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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 agreed to pay 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
agreed 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
("Roessner Credit") 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. 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. On
February 21, 1997, in the wake of the decision in the Supreme Court Case,
the N.J. Court held a status conference at which a possible settlement
between the FDIC and Mr. Atherton was discussed.
For further information regarding indemnification claims against CityFed,
see "Indemnification Claims" below.
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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 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 with respect to the First and Second RTC Actions. On the advice of
counsel to the special committee, CityFed has advanced reasonable defense
costs to such former directors and officers in such Actions.
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 had 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.
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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 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 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 March 31, 1997, CityFed received but has not paid bills totaling
$4,334,000 in the aggregate for legal services and expenses rendered in
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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 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.
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
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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 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
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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. 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. On March 31, 1997, CityFed
included approximately $838,000 in its contingency reserve relating to the
Ridder Action.
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
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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 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 been granted leave to intervene as a plaintiff in supervisory
goodwill cases involving closed institutions where there is claimed to be a
deficit in the receivership estate, including 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 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
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of November 1, 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 full Board of Directors
received the report of special counsel to the Compensation Committee.
Pursuant to Mr. Roessner's settlement with the RTC as discussed under
"Second RTC Action" above, CityFed believes Mr. Roessner's current deferred
compensation claim is in the amount of $169,365.60 plus accrued interest
thereon, if any.
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 paid 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
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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.
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, 1997, the Company has a $6.7
million contingency reserve representing the current minimum expenses
relating to pending litigation estimated to be incurred and provision for
negotiated settlement amounts relating to these contingencies. 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 and negotiated settlement
amounts. The reserve, however, does not include provisions for
trial-related expenses or any other potential settlements or adverse
judgments (other than amounts relating to the Ridder Action) as the Company
is unable to make a reasonable estimate of the amount or range of potential
loss. The following is an analysis of the Company's contingency reserve:
Balance - December 31, 1996 $6,734,000
Charges 4,000
Provision -
----------
Balance - March 31, 1997 $6,730,000
==========
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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 1996 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, 1997. 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 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
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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 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, on February 21, 1996, an Order was issued extending the requested
exemption until February 21, 1997 and, on February 12, 1997, an Order was
issued extending the requested exemption until February 12, 1999.
Liquidity and Capital Resources
At March 31, 1997, CityFed had $9,195,000 in assets, $11,110,000 in total
liabilities and $1,915,000 in negative stockholders' equity. At December
31, 1996, CityFed had $9,156,000 in assets, $11,141,000 in total
liabilities and $1,985,000 in negative stockholders' equity. However, as
discussed in Note 4 to CityFed's financial statements for the three months
ended March 31, 1997 and under Item 1., "Business Potential Obligations of
CityFed" in CityFed's 1996 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. As a result of
additions to the contingency reserve, CityFed currently has a negative net
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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 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
27
<PAGE>
for CityFed's pending litigation expenses, which, at March 31, 1997, were
$6,730,000 and, at December 31, 1996, were $6,734,000.
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 the
settlements in the Second RTC Action) 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 1996 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 other potential settlements or adverse judgments other than those
relating to the Ridder Action and the Second RTC 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
28
<PAGE>
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, 1997 of $70,000. This compares to net income from
continuing operations in the amount of $57,000 for the three months ended
March 31, 1996.
Interest on investments was $123,000 for the three months ended March 31,
1997 compared to $119,000 for the three months ended March 31, 1996 due
primarily to the higher level of interest rates. Total expenses of $53,000
for the three months ended March 31, 1997 were less than the $62,000 for
the same period in 1996 due primarily to a lower level of excise taxes.
CityFed recorded a net income for the three months ended March 31, 1997 of
$70,000. This compares to a net loss in the amount of $3,893,000 for the
three months ended March 31, 1996. 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, 1997.
CityFed's contingency reserve was established in 1989 and is intended to
include reserves for CityFed's pending litigation expenses and legal
expenses advanced to third parties. The contingency reserve now also
includes $853,000 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 1996 Form 10-KSB for a
description of the major claims that may give rise to expected future
costs. CityFed's loss for the three months ended March 31, 1996 reflects
additional provisions of $3,950,000 to the loss from discontinued
operations. The contingency reserve was reduced by charges of $4,000 from
$6,734,000 at December 31, 1996 to $6,730,000 at March 31, 1997.
The net loss per share of $0.11 for the three months ended March 31, 1997,
compares to $0.32 for the three months ended March 31, 1996. 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.
29
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to CityFed's financial statements for the three months ended
March 31, 1997 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 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, 1997, the
aggregate deficiency on the Series B Stock was approximately $41.3 million
and the aggregate deficiency on the Series C Stock was approximately $25.6
million.
30
<PAGE>
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) None
31
<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 13, 1997
32
Exhibit 11
<TABLE>
<CAPTION>
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
Three Months Ended
March 31,
------------------------------
1997 1996
---- ----
Computation of Loss Per Share:
<S> <C> <C>
Weighted average number of shares outstanding 18,714,646 18,714,646
Loss applicable to common stock:(1)
From continuing operations $ (2,089,000) $ (2,102,000)
================== ==============
From discontinued operations $ -- $ (3,950,000)
================== ==============
Net loss $ (2,089,000) $ (6,052,000)
================== ==============
Loss per share:
From continuing operations $ (0.11) $ (0.11)
================== ==============
From discontinued operations $ -- $ (0.21)
================== ==============
Net loss $ (0.11) $ (0.32)
================== ==============
</TABLE>
(1) Losses applicable to Common Stock are net of preferred stock dividends for
the three months ended March 31, 1997 and 1996 in the amount of $2,159,000 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-QSB FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12
<SECURITIES> 9,024
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 26
<DEPRECIATION> 24
<TOTAL-ASSETS> 9,195
<CURRENT-LIABILITIES> 0
<BONDS> 0
(65,482)
0
<COMMON> 63,567
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,195
<SALES> 0
<TOTAL-REVENUES> 123
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 70
<INCOME-TAX> 0
<INCOME-CONTINUING> 70
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
