UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-13311
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CITYFED FINANCIAL CORP.
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(Name of small business issuer in its charter)
DELAWARE 22-2527684
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
PO BOX 3126, NANTUCKET, MA 02584
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (508)228-2366
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: (1) Common Stock,
par value $0.01 per share ("Common Stock"), (2) $2.10 Cumulative Convertible
Preferred Stock Series B, par value $25.00 per share ("Series B Stock"), and (3)
Series C, Junior Preferred Stock, par value $0.01 per share ("Series C Stock").
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___
Check if there is disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.(_X_)
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State issuer's revenues for its most recent fiscal year: $517,000 for the
year ended December 31, 1996.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $368,636 at February 28, 1997. The market value of the
registrant's Series C Stock is based on the bid price for such stock on December
29, 1996. The market value of the registrant's Common Stock is based on the bid
price on February 10, 1997 of $0.01. The market value of the registrant's Series
B Stock is based on the March 28, 1991 bid price, the last day on which a price
was available. All prices are as reported by the National Quotation Bureau, Inc.
The number of shares outstanding of the registrant's Common Stock, as of
February 28, 1997, was 18,714,646.
Transactional Small Business Disclosure Format (check one): Yes___; No __X__
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
CityFed Financial Corp. ("CityFed") was incorporated in Delaware in 1984. On
December 7, 1989, the Office of Thrift Supervision ("OTS") appointed the
Resolution Trust Corporation ("RTC") as receiver for City Federal Savings Bank
("City Federal"), the sole subsidiary of CityFed. A new federal mutual savings
bank, City Savings Bank, F.S.B. ("City Savings"), was created that 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 has been 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.
Since the receivership of City Federal, CityFed has been, and currently is, in
the process of determining its liabilities, including its contingent liabilities
described below. 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. See
"Current Activities" below. Since the receivership of City Federal, the
operating expenses of CityFed have consisted of the salaries of the employees of
CityFed (see Item 10., "Executive Compensation - Executive Compensation"),
office expenses (see Item 2., "Description of Property"), 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.
INADVERTENT INVESTMENT COMPANY
Due to the nature of its assets at and subsequent to December 8, 1989, CityFed
may be deemed to fall within the definition of an "investment company" under the
Investment Company Act of 1940, as amended ("1940 Act"), from that date to the
present. To resolve any question regarding its current status under the 1940
Act, CityFed filed an application on October 19, 1990 with the Division of
Investment Management of the Securities and Exchange Commission ("SEC") for an
order exempting it from certain provisions of the 1940 Act and certain rules and
regulations thereunder. This application was amended on September 23, 1993,
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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.
BOESKY SETTLEMENT
In March 1986, CityFed, as a limited partner, invested $5,016,430 in Ivan F.
Boesky & Company, L.P., now known as CX Partners, L.P. ("CX"). The assets of CX
are now being administered by a liquidating trustee. In December 1989, CityFed,
along with other limited partners of CX and others, entered into an agreement
("Master Agreement") concerning the distribution of certain assets of CX. On
January 9, 1990, CityFed received the amount of $5,016,430 from CX. This amount
was CityFed's initial investment in CX. CityFed received further distributions
of $494,008 on December 8, 1991, $198,731 during November, 1993, $46,952 in
December 1994, $44,013 in March 1995 and $37,981 in December 1996. CityFed is
obligated to return all of the $5,016,430, the $494,008, the $198,731, the
$46,952, the $44,013, the $37,981 and future amounts received from CX to the
extent that the claims of creditors of CX cannot be satisfied out of CX's
remaining assets. CityFed is not aware of any threatened claims that would be of
such a magnitude that could not be expected to be satisfied out of CX's
remaining assets. Because of the uncertainty regarding future payments, CityFed
is treating them on a cash basis for financial reporting purposes.
Under the terms of the Master Agreement, most of the limited partners of CX
(including CityFed) share with each other in any recoveries from CX or its
affiliates, Seemala Partners, L.P. and Marabill Partners, L.P., in respect of
those partners' investments in such entities.
CityFed and certain other limited partners of CX entered into an agreement that
became effective September 30, 1991, settling their claims against certain
defendants in litigation then pending in the United States District Court for
the Southern District of New York (87 Civ. 1865 (MP)). In connection with this
settlement, CityFed received $221,401 on October 7, 1991.
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In March 1995, CityFed also received $16,682 representing its interest in the
amount allocated to the CX-related claims in the Milken Global Settlement.
POTENTIAL OBLIGATIONS OF CITYFED
NOTICE OF CHARGES AND HEARING FOR CEASE AND DESIST ORDER TO DIRECT RESTITUTION
AND OTHER APPROPRIATE RELIEF AND NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTIES -
On June 2, 1994, the OTS issued a Notice of Charges and Hearing for Cease and
Desist Order to Direct Restitution and Other Appropriate Relief and Notice of
Assessment of Civil Money Penalties ("Notice of Charges") against CityFed and
against Gordon E. Allen, John W. Atherton, Jr., Edwin M. Halkyard, Alfred J.
Hedden, Peter R. Kellogg, William A. Liffers and Gilbert G. Roessner
("Respondents"), who are current or former directors and, in some cases,
officers of CityFed and of CityFed's former subsidiary, City Federal.
In the Notice of Charges, the OTS alleges that CityFed "engaged in an unsafe or
unsound practice, violated a written agreement entered into with the agency and
violated a condition imposed in writing by the agency" by "failing to cause the
net worth of City Federal to be maintained at the levels required by the
applicable capital requirements." The "written agreement" and the "condition
imposed in writing" alleged by the OTS refer, respectively, to the Stipulation
of CityFed Financial Corp., dated December 4, 1984 ("Stipulation"), that CityFed
provided to the Federal Savings and Loan Insurance Corporation ("FSLIC") in
connection with the approval by the Federal Home Loan Bank Board ("FHLBB") of
CityFed's acquisition of City Federal in December 1984, and to FHLBB Resolution
No. 84-664, dated November 21, 1984, that approved CityFed's acquisition of City
Federal on the condition that, among other things, CityFed provide the
Stipulation to the FSLIC. The Stipulation provided that, as long as CityFed
controlled City Federal, CityFed would cause the net worth of City Federal to be
maintained at a level consistent with that required by regulations and would
infuse sufficient additional equity capital, in a form satisfactory to the
regulators, to effect compliance with the capital requirement. The Notice of
Charges alleges that CityFed "has been and continues to be unjustly enriched in
connection with" the violations alleged by the OTS, and that such violations
"involve a reckless disregard for the law or any applicable regulations or prior
order of either the FHLBB or the OTS." The Notice of Charges requests that an
order be entered by the Director of the OTS requiring CityFed to make
restitution, reimburse, indemnify or guarantee the OTS against loss in an amount
not less than $118.4 million, which the OTS alleges represents the regulatory
capital deficiency reported by City Federal in the fall of 1989.
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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.
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. The case has been
assigned to an administrative law judge who has entered a scheduling order.
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 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
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review by the Acting Director of the OTS of the conclusions in the Prehearing
Order. If the Acting Director were to affirm the conclusions in the Prehearing
Order, CityFed would intend to seek review of that decision in the United States
Court of Appeals and, if necessary, to seek from the Supreme Court of the United
States a review of any adverse decision from the Court of Appeals. However,
following 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.
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.
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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 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.
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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 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
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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 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
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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.
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.
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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 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
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<PAGE>
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.
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.
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In addition to the First and Second RTC Actions, the Notice of Charges, the
Ridder Action and the "Indemnification Claims Relating to Deferred Compensation
Plans" (described below), CityFed is currently aware of several other legal
actions and matters with respect to which current or former officers, directors
or employees of CityFed or its former subsidiaries have requested that CityFed
advance expenses and indemnify them. Except for the indemnification requests
relating to the Notice of Charges (which CityFed's Board of Directors has not
yet considered), CityFed has generally agreed to advance expenses in connection
with these requests, except where certain preconditions to advancement and
indemnification have not been met or where advancement and indemnification may
not be warranted under applicable law.
Because of the Temporary Order and the Escrow Agreement, CityFed is not
continuing to advance expenses in connection with any of the indemnification and
advancement requests referred to above. It is not yet clear whether, as a result
of the Third Circuit's decision in the Ridder Action discussed below, CityFed
will be required, notwithstanding the existence of the Temporary Order and the
Escrow Agreement, to advance expenses to the defendants in the Ridder Action,
and to current or former officers, directors and employees of CityFed who are or
were parties in other actions or proceedings, including the Second RTC Action,
the Injunction Action, the D.C. Appeal, the Supreme 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
15
<PAGE>
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 December 31, 1996, CityFed received but has not paid bills totaling
$4,331,000 in the aggregate for legal services and expenses rendered in
connection with the defense of current and former directors and officers of
CityFed in the Cases. Although CityFed has not paid these bills, it accrues the
amounts billed under the caption "Other Liabilities" on its Statement of
Financial Condition as the bills are received.
CityFed does not know whether all current or former officers, directors or
employees of CityFed or its former subsidiaries who are or were involved in
actions or proceedings will request advancement or payment of legal expenses and
indemnification or, if requested, whether they will be entitled to advancement
of expenses or indemnification. CityFed also does not know whether the RTC or
FDIC will request payment on the indemnification claims assigned to it by
individuals who have settled with the RTC or FDIC in the Second RTC Action, as
described above. Thus, it is not possible for CityFed to estimate with any
accuracy the probable amount or range of liability relating to current or
potential 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
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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
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
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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. The Third
Circuit denied the Petition for Rehearing on May 20, 1996. Although the matter
is remanded to the N.J. Court for further action, the N.J. Court has yet to take
any action. In 1996, CityFed included 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 without access to the records of City Federal, CityFed is
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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
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for this amount (approximately $1.1 million as 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 an agreement dated as of December 15, 1993 ("Funds Agreement"),
among Mr. Roessner, the RTC as receiver for City Federal, and Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"), the RTC in January 1994 transferred
$933,623.44 to an investment account at DLJ in Mr. Roessner's name. CityFed
believes such funds, which represent a percentage of Mr. Roessner's deferred
compensation claim against City Federal, serve to reduce the amount of Mr.
Roessner's claim against CityFed. CityFed believes that the amount of such claim
may also have been reduced by the amount of the Roessner Credit discussed under
"Second RTC Action" above.
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.
Several defendants have requested that CityFed reimburse them for the settlement
payments made by them under the settlement agreement. CityFed has not responded
to the request. It is likely that CityFed will receive similar requests from the
other parties to the settlement. CityFed's liability to the individuals remains
to be determined.
TAX LIABILITIES - CityFed's liability for federal income taxes for tax years
through 1990 was calculated on the basis of CityFed's inclusion in a
consolidated group that includes City Federal and the successor institutions
created by the OTS to acquire the assets and liabilities of City Federal. Under
the applicable provisions of the Internal Revenue Code of 1986, as amended
("Code"), and the regulations thereunder, all members of the consolidated group,
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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.
CURRENT 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.
Since the receivership of City Federal, CityFed has invested and will continue
to invest its funds in money market instruments with a maturity of one year or
less. These consist of United States government or agency securities, commercial
paper, bank certificates of deposit, one or more 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. Investment in any one of the money market funds is
limited to 5% of CityFed's assets. Investment in the corporate debt securities
of any one issuer is limited to $2,500,000. Under the terms of the Escrow
Agreement, 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.
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ITEM 2. DESCRIPTION OF PROPERTY.
CityFed rents, on a month to month basis, space at 35 Old South Road, Nantucket,
MA 02584 at a cost of $800 per month.
See Item 1., "Description of Business - Current Activities" for a description of
CityFed's current investment policies.
ITEM 3. LEGAL PROCEEDINGS.
See Item 1., "Description of Business - Potential Obligations of CityFed" for
information regarding the Notice of Charges, the Temporary Order, the First RTC
Action, the Second RTC Action and the Ridder Action, which information is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
For the period January 1 through May 29, 1990, the high and low sales prices of
CityFed's Common Stock and Series B Stock on the Nasdaq National Market System
are listed below. The prices represent actual transactions between dealers. On
May 29, 1990, CityFed's Common Stock and Series B Stock were delisted from
Nasdaq at the request of CityFed. The Series C Stock was delisted from Nasdaq at
the end of 1989. CityFed also requested that the London Stock Exchange delist
CityFed's Common Stock and such stock was delisted. Thus, at present, there is
no public trading market for the Common Stock, the Series C Stock or the Series
B Stock. Consequently, set forth below (except as otherwise noted) are the high
and low bid prices of such securities during the reported periods as reported by
the National Quotation Bureau. Such prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
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<TABLE>
<CAPTION>
1990 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Common Stock 1/8 - 1/32 1/8 - 1/32 (1) .01 (1) (1)
Series B Stock 3/8 - 1/4 7/16 - 1/4 (2) (2) .05 -.05 (3)
Series C Stock(3) 1/32 - 1/16 (5) .02 - .02 .02 - .005 .01 -.01
1991 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) (1)
Series B Stock .05-.05 (3)(4) (2) (2) (2)
Series C Stock 1/10 (5) 1/10 (5) 1/10 (5) 1/10 (5)
1992 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) (1)
Series B Stock (2) (2) (2) (2)
Series C Stock 1/10 (5) 1/10 (5) 1/10 (5) (7)
1993 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) (1)
Series B Stock (2) (2) (2) (2)
Series C Stock (7) .11 (5)(7) .11 (5) .11 (5)
1994 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) (1)
Series B Stock (2) (2) (2) (2)
Series C Stock .11 (5) .11 (5) .11 (5) .11 (5)
1995 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) (1)
Series B Stock (2) (2) (2) (2)
Series C Stock .11 (5) .11 (5) .11 (5) .01 -.01
1996 First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Common Stock (1) (1) (1) .50-.50 (9)
Series B Stock (2) (2) (2) (2)
Series C Stock .51-.51 (5) .01-.01 .01-.01 .01-.01
</TABLE>
_________________________
(1) No sales prices or bid or asked quotations are available after May 30,
1990, except for the bid price of $0.01 on August 13, 1990.
(2) No sales prices are available after May 29, 1990. No bid or asked
quotations are available between May 31, 1990 and September 28, 1990 or
after March 28, 1991.
(3) The high and low bid prices reported were supplied by the National
Quotation Bureau.
(4) The last available bid price was on March 18, 1991.
(5) Asked price only supplied by National Quotation Bureau.
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(6) No bid or asked prices are available between February 6 and
March 30, 1990.
(7) No bid or asked prices are available between October 1, 1992 and June 21,
1993.
(8) Excludes January 8, 1996.
(9) Although the bid prices shown are as reported by the National Quotation
Bureau, they appear to be in error.
The approximate number of holders of record of Common Stock as of February 28,
1997 was 9,800.
The 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. The 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 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 December 31, 1996,
the aggregate deficiency on the Series B Stock was $39,995,550 and the aggregate
deficiency on the Series C Stock was $24,771,237.
CityFed does not anticipate being able to pay any dividends on its Series B
Stock, its Series C Stock or its Common Stock for the foreseeable future.
CityFed has not paid any dividends on its Common Stock since the second quarter
of 1989.
CityFed has not sold any securities without registering such sales under the
Securities Act of 1933 during 1994, 1995 or 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, CityFed had $9,156,000 in assets, $11,141,000 in total
liabilities and ($1,985,000) in stockholders' equity compared to $9,002,000 in
assets, $6,866,000 in total liabilities and $2,136,000 in stockholders' equity
at December 31, 1995. However, as discussed in Note 8 to CityFed's financial
statements and under Item 1., "Description of Business - Potential Obligations
24
<PAGE>
of CityFed," 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. See Item 1., "Description of Business -
Current Activities."
While CityFed's liquidity is expected to be sufficient to meet expected
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 CityFed's activities. See Item 1., "Description of Business -
Potential Obligations of CityFed." However, as a result of additions to the
contingency reserve, CityFed currently has a negative net worth and it is
unlikely that CityFed will be able to achieve a positive net worth in the
foreseeable future.
During 1990, 1991, 1992, 1994 1995 and 1996, CityFed maintained reserves for
CityFed's pending litigation expenses that, at December 31, 1996, were
$6,734,000. The provision for the reserves is included in the loss from
discontinued operations in the financial statements. $4,350,000 was added to the
reserves for the twelve months ended December 31, 1996 and charges in the amount
of $1,603,000 were made against the reserves during this same period.
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 against 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 settlement in the
Second RTC Action) or adverse judgments, except that the contingency reserve now
also includes amounts relating to the Ridder Action. See Item 1., "Description
of Business - Potential Obligations of CityFed - Ridder Action" and " - Second
RTC Action." See also Item 1., "Description of Business - Potential Obligations
of CityFed" for a description of the other 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.
25
<PAGE>
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.
CityFed's interest in City Federal is reflected as discontinued operations in
the financial statements. See Item 1., "Description of Business - General."
CURRENT OPERATIONS
CityFed is not presently conducting an operating business. At the present time,
management has invested, and intends in the future to invest, CityFed's assets
on a short term basis.
CityFed currently derives its income by investing its assets in money market
instruments with a maturity of one year or less. See Item 1., "Description of
Business - Current Activities" for a description of CityFed's current investment
policy. At December 31, 1996, CityFed had invested $8,911,000.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995
CityFed recorded income of $229,000 from continuing operations for the year
ended December 31, 1996 compared to a net income from continuing operations of
$277,000 for the year ended December 31, 1995. CityFed lost $4,350,000 from
discontinued operations in 1996 compared to a loss of $3,900,000 from
discontinued operations in 1995.
26
<PAGE>
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 Item 1., "Description of Business Potential Obligations
of CityFed - Ridder Action." CityFed's 1996 and 1995 results of operations
reflect additional provisions of $4,350,000 and $3,900,000, respectively, in the
loss from discontinued operations. The contingency reserve rose from $3,987,000
at December 31, 1995 to $6,734,000 at December 31, 1996.
Interest on investments was $478,000 for the year ended December 31, 1996
compared to $528,000 for the year ended December 31, 1995 due to the lower level
of interest rates during 1996. In 1995 and 1996, CityFed received further
distributions of $44,000 and $38,000 from CX, respectively. See Item 1.,
"Description of Business - Boesky Settlement."
Operating expenses of $288,000 for the year ended December 31, 1996 were less
than the $313,000 level for the year ended December 31, 1995. This occurred
primarily as a result of the lower levels of professional services expenses, and
state taxes included in other operating expenses, which decreased from $157,000
for the year ended December 31, 1995 to $133,000 for the year ended December 31,
1996.
Loss per share from continuing operations of $0.45 and $0.45 for the years ended
December 31, 1996 and 1995, respectively, is after the deduction of unpaid
preferred dividends of $8,636,000 in each year. 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. The loss per share from
discontinued operations for the years ended December 31, 1996 and 1995 were
$0.23 and $0.21, respectively, bringing the total loss per share for those
periods to $0.68 and $0.66, respectively.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER
31, 1994
CityFed recorded income of $277,000 from continuing operations for the year
ended December 31, 1995 compared to a net income from continuing operations of
$188,000 for the year ended December 31, 1994. CityFed lost $3,900,000 from
discontinued operations in 1995 compared to a loss of $2,175,000 from
discontinued operations in 1994.
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 at December 31, 1995 included $853,000
relating to the Ridder Action. See Item 1., "Description of Business - Potential
27
<PAGE>
Obligations of CityFed - Ridder Action." CityFed's 1995 and 1994 results of
operations reflect additional provisions of $3,900,000 and $2,175,000,
respectively, in the loss from discontinued operations. The contingency reserve
rose from $2,169,000 at December 31, 1994 to $3,987,000 at December 31, 1995.
Interest on investments was $528,000 for the year ended December 31, 1995
compared to $376,000 for the year ended December 31, 1994 due to the higher
level of interest rates during 1995. In 1994 and 1995, CityFed received further
distributions of $47,000 and $44,000 from CX, respectively. See Item 1.,
"Description of Business - Boesky Settlement."
Operating expenses of $313,000 for the year ended December 31, 1995 were higher
than the $241,000 level for the year ended December 31, 1994. This occurred
primarily as a result of the higher levels of professional services expenses,
and state taxes included in other operating expenses, which increased from
$86,000 for the year ended December 31, 1994 to $157,000 for the year ended
December 31, 1995.
Loss per share from continuing operations of $0.45 and $0.45 for the years ended
December 31, 1995 and 1994, respectively, is after the deduction of unpaid
preferred dividends of $8,636,000 in each year. 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. The loss per share from
discontinued operations for the years ended December 31, 1995 and 1994 were
$0.21 and $0.12, respectively, bringing the total loss per share for those
periods to $0.66 and $0.57, respectively.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
DELOITTE &
TOUCHE LLP
- ---------------- -------------------------------------------------
Two Hilton Court Telephone: (201) 683-7000
P.O. Box 319 Facsimile: (201) 683-7459
Parsippany, New Jersey 07054-0319
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
CityFed Financial Corp.:
We have audited the accompanying statements of financial condition of CityFed
Financial Corp. (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express (or disclaim) an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our report.
The Office of Thrift Supervision ("OTS") of the United States Department of the
Treasury declared City Federal Savings Bank ("City Federal"), a wholly-owned
subsidiary of the Company, insolvent and ordered it closed on December 7, 1989.
The Resolution Trust Corporation was appointed Receiver to handle all matters
related to City Federal. Operations of City Federal, which accounted for
substantially all of the Company's operations, have been reflected as
discontinued operations in the accompanying financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 8,
substantially all of the operations of the Company have been discontinued and
the Company is subject to a number of commitments and contingencies which raise
substantial doubt about its ability to continue as a going concern. Except as
indicated in Note 8, the financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Because of the possible material effects of the uncertainties referred to in the
preceding paragraph, we are unable to express, and we do not express, an opinion
on the financial statements.
March 28, 1997 /s/ Deloitte & Touche LLP
Parsippany, New Jersey
- ----------------
Deloitte Touche
Tohmatsu
International
- ----------------
29
<PAGE>
CITYFED FINANCIAL CORP.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1995
-------- ---------
ASSETS
- ------
CASH $ 85 $ 14
INVESTMENT SECURITIES AT AMORTIZED COST
(Market Value $8,911 in 1996 and $8,834 in 1995)
(Note 3) 8,911 8,836
OTHER ASSETS 160 152
------- ---------
TOTAL ASSETS $ 9,156 $ 9,002
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Contingency reserve (Notes 2 and 8) $ 6,734 $ 3,987
Other liabilities 4,407 2,879
-------- ---------
Total liabilities 11,141 6,866
-------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 5 and 6):
Preferred stock, 30,000,000 shares authorized:
$2.10 cumulative convertible, Series B,
$25 par value, issued and outstanding:
2,539,400 in 1996 and 1995 63,485 63,485
Series C Junior, cumulative, $.01 par
value, liquidation preference $3.00 per share,
shares issued and outstanding:
8,257,079 in 1996 and 1995 82 82
Common stock, $.01 par value, 100,000,000 shares
authorized, issued: 18,913,646 in 1996 and 1995,
outstanding: 18,714,646 in 1996 and 1995 188 188
Additional paid-in capital 108,854 108,854
Accumulated deficit (173,594) (169,473)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
-------- ---------
Total stockholders' equity (deficit) (1,985) 2,136
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,156 $ 9,002
======== =========
See notes to financial statements.
30
<PAGE>
CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
----------- ----------- -----------
INCOME:
Interest on investments $ 478 $ 528 $ 376
Other (Note 3) 39 62 53
----------- ----------- -----------
Total income 517 590 429
----------- ----------- -----------
EXPENSES:
Compensation and employee benefits 155 156 155
Other operating expenses 133 157 86
----------- ----------- -----------
Total expenses 288 313 241
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 229 277 188
LOSS FROM DISCONTINUED
OPERATIONS (Note 2) (4,350) (3,900) (2,175)
----------- ----------- -----------
NET LOSS $ (4,121) $ (3,623) $ (1,987)
=========== =========== ===========
NET LOSS AVAILABLE FOR
COMMON STOCKHOLDERS $ (12,757) $ (12,259) $ (10,623)
LOSS PER SHARE:
From continuing operations $ (0.45) $ (0.45) $ (0.45)
From discontinued operations $ (0.23) $ (0.21) $ (0.12)
Net loss $ (0.68) $ (0.66) $ (0.57)
AVERAGE SHARES OUTSTANDING 18,714,646 18,714,646 $ 18,714,646
DIVIDENDS PER COMMON SHARE - - -
See notes to financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
CITYFED FINANCIAL CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY
STOCK STOCK CAPITAL DEFICIT STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1993 $63,567 $188 $108,854 $(163,863) $(1,000) $ 7,746
Net loss - - - (1,987) - (1,987)
------- ---- -------- --------- ------- -------
BALANCE
DECEMBER 31, 1994 63,567 188 108,854 (165,850) (1,000) 5,759
Net loss - - - (3,623) - (3,623)
------- ---- -------- --------- ------- -------
BALANCE
DECEMBER 31, 1995 63,567 188 108,854 (169,473) (1,000) 2,136
Net loss - - - (4,121) - (4,121)
------- ---- -------- --------- ------- -------
BALANCE
DECEMBER 31, 1996 $63,567 $188 $108,854 $(173,594) $(1,000) $(1,985)
======= ==== ======== ========= ======= =======
</TABLE>
See notes to financial statements.
32
<PAGE>
CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 439 $ 567 $ 423
Operating expenses (367) (622) (1,021)
Other income 39 62 53
------- ------- -------
Net cash provided by (used in)
operating activities 111 7 (545)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investment securities (36) (45) 536
Other - net (4) - (2)
------- ------- -------
Net cash (used in) provided by
investing activities (40) (45) 534
------- ------ ------
NET INCREASE (DECREASE) IN CASH 71 (38) (11)
CASH AT BEGINNING OF PERIOD 14 52 63
------- ------ ------
CASH AT END OF PERIOD $ 85 $ 14 $ 52
======= ======= ======
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATIONAL ACTIVITIES:
Net loss $(4,121) $(3,623) $(1,987)
Loss from discontinued operations 4,350 3,900 2,175
Contingency reserve payments (102) (226) (673)
Accrued income and expense (16) (44) (60)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 111 $ 7 $ (545)
======= ======= =======
See notes to financial statements.
33
<PAGE>
CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION AND BASIS OF PRESENTATION - 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. Operations of City Federal, which
accounted for substantially all of the Company's operations, have been
reflected as discontinued operations in the accompanying financial
statements. 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 December 31, 1996, the
Company's business activities consisted primarily of attempting to resolve
outstanding claims against the Company and the management of investments.
The financial statements have been prepared assuming the Company will
continue as a going concern. As discussed above and in Note 8, 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 8, 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements. Actual
results could differ from these estimates.
CASH - Cash includes cash on hand and in banks, excluding certificates of
deposit and money market accounts.
INVESTMENT SECURITIES - In accordance with Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," management classifies debt and equity securities, at
34
<PAGE>
acquisition, into one of three categories: held to maturity, available for
sale, or trading. Held to maturity securities are those debt securities that
CityFed has the intent and ability to hold to maturity and are reported at
amortized cost. Due to the short term nature of CityFed's investment
securities, all investment securities, both in 1995 and 1996, are classified
as held to maturity and, therefore, all investment securities are stated at
cost and adjusted for premiums and discounts, which are amortized using the
straight-line method, which does not differ materially from the interest
method.
LOSS PER SHARE - Loss per common share is computed by dividing earnings
after consideration of payment of preferred dividends by the weighted
average number of common shares and common share equivalents outstanding
during each period. Common share equivalents include dilutive stock options.
2. DISCONTINUED OPERATIONS
On December 7, 1989, the OTS declared City Federal insolvent and ordered it
closed. The RTC was appointed receiver to handle all matters related to City
Federal. Operations of City Federal, which accounted for substantially all
of the Company's operations, have been reflected as discontinued operations.
The Company has recognized losses from discontinued operations of City
Federal only to the extent of its investment in and advances to the former
subsidiary savings and loan (determined on a basis consistent with generally
accepted accounting principles). At December 31, 1996 and 1995, the
Company's statement of financial condition does not include any assets or
liabilities of City Federal. However, as discussed in Note 8, there exists a
claim asserting that the Company should assume certain liabilities of City
Federal relating to deferred compensation arrangements with the Company's
former Chairman.
The loss from discontinued operations for 1996, 1995 and 1994 of $4,350,000,
$3,900,000, and $2,175,000, respectively, results from an increase in the
contingency reserve (see Note 8).
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1996 and 1995, which are
all due within one year, is as follows (dollars in thousands):
35
<PAGE>
1996
-----------------------------------------------------
PRINCIPAL CARRYING MARKET
AMOUNT COST VALUE VALUE
Corporate securities:
BankAmerica $ 700 $ 705 $ 702 $ 703
Golden West 500 513 508 508
Merrill Lynch 300 303 302 302
GECC 250 252 251 251
EI DuPont 500 499 499 499
Marsh & McLennan 700 675 682 682
Norwest 400 407 406 406
Merrill Lynch 1,000 960 968 968
Lucent Technologies 700 683 689 688
Merrill Lynch 1,000 974 981 981
Southwest Bell 750 743 746 746
AIG Funding 1,000 994 998 998
Met Life Funding 1,000 990 993 993
CoreStates Bank, N.A.
Money Market Funds 147 147 147 147
Accrued Interest -- -- 39 39
------ ------ ------ ------
Total $8,947 $8,845 $8,911 $8,911
====== ====== ====== ======
1995
----------------------------------------------------
PRINCIPAL CARRYING MARKET
AMOUNT COST VALUE VALUE
Corporate securities:
Atlantic Richfield Co. $1,000 $ 985 $ 1,000 $ 999
Ameritech Corp. 1,300 1,277 1,297 1,296
PacifiCorp. 2,000 1,967 1,994 1,994
Hewlett Packard Company 2,000 1,973 1,992 1,991
AT&T Corp. 1,000 987 996 996
Merrill Lynch, Inc. 1,500 1,478 1,490 1,490
CoreStates Bank, N.A.
Money Market Funds 67 67 67 67
------ ------ ------ ------
Total $8,867 $8,734 $8,836 $8,833
====== ====== ====== ======
In 1994, CityFed transferred substantially all of its investment securities
to CoreStates Bank, N.A. ("CoreStates") for deposit into an escrow account
to be maintained by CoreStates. Certain restrictions exist under the related
escrow agreement (see Note 8 - "Temporary Order to Cease and Desist").
36
<PAGE>
During 1986, CityFed invested, as a limited partner, in the limited
partnership of CX Partners, L.P., formerly known as Ivan F. Boesky &
Company, L.P. ("CX"), the assets of which are now being administered by a
liquidating trustee. This limited partnership investment was carried at its
net realizable value during 1989. In December 1989, CityFed, along with
other limited partners of the limited partnership and others, entered into
an agreement concerning the distribution of certain assets of the limited
partnership. In January 1990, CityFed received an amount from the limited
partnership equal to its initial investment in the limited partnership
($5,017,000). CityFed received further distributions of $38,000, $44,000 and
$47,000 in 1996, 1995, and 1994, respectively, which are included in other
income. In March 1995, CityFed also received $16,682 representing its
interest in the amount allocated to the CX-related claims in the Milken
Global Settlement. Because of the uncertainty regarding the payments,
CityFed is treating the expected payments on a cash basis for financial
reporting purposes. CityFed is obligated to return all amounts received from
the limited partnership to the extent that claims of creditors of the
limited partnership cannot be satisfied out of the limited partnership's
remaining assets. Based upon consultation with counsel to the limited
partnership, CityFed is not aware of any pending or threatened claims that
could not be expected to be satisfied out of the limited partnership's
remaining assets.
4. INCOME TAXES
The Company was the parent company of an affiliated group of corporations
that filed consolidated income tax returns. On December 7, 1989, the OTS
appointed the RTC as receiver for City Federal. A new federal mutual savings
bank, City Savings Bank, F.S.B. ("City Savings"), was created by the OTS.
City Savings acquired all deposits and substantially all of the assets and
liabilities of City Federal. CityFed's liability for Federal income taxes
for the tax years through 1990 were calculated on the basis of CityFed's
inclusion in a consolidated group that includes City Federal and the
successor institution created by the OTS to acquire the assets and
liabilities of City Federal. For its tax years 1991 through 1995, CityFed
has filed its Federal income tax returns on a separate Company basis, which
excludes City Federal and the successor institution. (See Note 8).
On August 13, 1990, the Company entered into an agreement with the RTC, as
receiver for City Federal, concerning certain refunds of Federal, Florida
and New Jersey taxes. Both the Company and the receiver had claimed such
37
<PAGE>
refunds for themselves. The agreement provided that the refunds were to be
held in an interest-bearing escrow account, until such time as the Company
and the receiver resolved their respective claims to the refund moneys or a
court of competent jurisdiction resolved such claims for them. The amount
held in such escrow account was approximately $1.6 million. This dispute has
been resolved and, in 1992, the Company received the refunds from the State
of New Jersey (approximately $43,000) while the RTC, as receiver for City
Federal, retained the Federal and State of Florida tax refunds.
At December 31, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $21,459,000 that expire in
various years through 2010. Operating loss carryforwards for New Jersey,
Massachusetts and Florida state tax purposes, which expire in various years
through 2009, were approximately $24,453,000, $2,454,000 and $993,000,
respectively, at December 31, 1996.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and
operating loss carryforwards. The tax effect of significant items comprising
the Company's net deferred tax asset as of December 31, 1996 and 1995 are as
follows:
38
<PAGE>
1996 1995
Deferred tax assets:
Operating loss carryforwards $ 10,233,768 $ 10,326,251
Contingency reserve 4,464,364 2,755,964
------------ ------------
Total deferred tax assets 14,698,132 13,082,215
------------ ------------
Deferred tax liabilities:
Fixed asset depreciation -- 1,571
------------- ------------
Total deferred tax liabilities -- 1,571
------------- ------------
Net deferred tax asset before
valuation allowance 14,698,132 13,083,786
Valuation allowance 14,698,132 13,083,786
------------- ------------
Net deferred tax asset $ -- $ --
============= ============
There was a $1,614,000 and $1,822,000 increase in the valuation allowance
for the years ended December 31, 1996 and 1995, respectively.
5. STOCKHOLDERS' EQUITY
Each share of $2.10 Cumulative Convertible Preferred Stock, Series B is
entitled to a cumulative dividend of $2.10 per annum when and as declared by
the Board of Directors and will have priority over dividends on the common
stock and Series C Junior Preferred Stock. Each share is convertible to
1.752 shares of common stock. The Series B Preferred Stock is entitled to a
liquidation preference of $25.00 per share.
Each share of Series C Junior Preferred Stock is entitled to a cumulative
dividend of $.40 per annum when and as declared by the Board of Directors
and will have priority over dividends on the common stock. The Series C
Junior Preferred is entitled to a liquidation preference of $3.00 per share
plus all accrued and unpaid dividends and will rank junior to the Company's
outstanding $2.10 Cumulative Convertible Preferred Stock, Series B with
respect to dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Company. At the option of the Company, the
Series C Junior Preferred Stock may be redeemed at any time for $3.00 per
share plus all accrued and unpaid dividends.
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The Company suspended dividend payments in July of 1989. At December 31,
1996, cumulative unpaid dividends totaled $40.0 million ($15.75 per share)
and $24.8 million ($3.00 per share) for the Series B and C preferred stock,
respectively.
6. STOCK OPTION AND DEFERRED COMPENSATION PLANS
The Company had a stock option plan (the "Plan"), which was terminated in
1990, that called for 1,910,000 shares of common stock to be reserved for
issuance pursuant to options that may be granted under the Plan. Under the
terms of the Plan, options were granted at not less than the fair market
value of the shares at the date of grant, and could not have a maximum term
of more than ten years. Options were exercisable to such extent and at such
time during the term thereof as determined by the Board of Directors at the
date of the grant. As of December 31, 1996, nonqualified stock options for
10,500 shares were outstanding under the Plan with exercise prices ranging
from $6.375 to $12.75.
City Federal maintained a Deferral Agreement Deferred Compensation Plan
pursuant to which it administered a deferral agreement with the Company's
former Chairman, Gilbert G. Roessner. Under this plan, Mr. Roessner could
convert deferred compensation into stock units, each stock unit representing
one hypothetical share of the Company's common stock. The conversion price
was based on the fair market value of the common stock. Unless otherwise
elected, the stock units were payable in monthly installments after
termination of service. Distributions were in the form of shares of common
stock or, in certain circumstances, cash. Each stock unit outstanding at
August 5, 1985 represented one hypothetical share of common stock and 0.592
shares of Series C Junior Preferred Stock. As a result of the receivership
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of City Federal, the Company no longer receives funds from City Federal in
connection with the distribution to Mr. Roessner of common stock under the
plan. Accordingly, the Company has not included the stock units that may be
issued under this plan in its 1996, 1995 and 1994 net loss per share
calculations. See Note 8 for claim of Mr. Roessner against the Company
relating to this plan and other deferred compensation arrangements for which
the Company has not recorded a liability in the accompanying financial
statements.
The Company maintained an Amended Directors' Deferred Compensation Plan
under which it entered into deferral agreements with certain officers and
directors which also provided for the conversion of deferred compensation
into stock units. In December 1989, all participating officers and directors
received complete distributions of their interests in this plan. As
discussed in Note 8, the RTC, as receiver for City Federal, caused an action
to be filed seeking the return of such distributions, which action has been
settled.
The Company has reserved 948,000 shares of common stock to fund the
obligations under both the Amended Directors' Deferred Compensation Plan and
the Deferral Agreement Deferred Compensation Plan. Information with respect
to compensation converted to stock units under these plans is as follows:
DEFERRED
STOCK PER COMPENSATION
UNITS SHARE BALANCE
(000')
Balance, December 31, 1996,
1995 and 1994 $ 159,869 $4,472 $715
========= ====== ====
7. PENSION PLANS
The Company, through City Federal, had an ESOP (a defined contribution plan)
with a Minimum Benefit Retirement Plan (the "Floor Plan") and a Thrift and
Profit Sharing Plan (a qualified plan under Section 401(k) of the Internal
Revenue Code). On December 7, 1989, City Federal was declared insolvent by
the OTS and ordered closed. The RTC has been appointed receiver to handle
all matters related to City Federal including these plans. The Company does
not provide any retirement benefits for its employee.
8. 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
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Hearing for Cease and Desist Order to Direct Restitution and Other
Appropriate Relief and Notice of Assessment of Civil Money Penalties
("Notice of Charges") against CityFed and against Gordon E. Allen, John W.
Atherton, Jr., Edwin M. Halkyard, Alfred J. Hedden, Peter R. Kellogg,
William A. Liffers and Gilbert G. Roessner ("Respondents"), who are current
or former directors and, in some cases, officers of CityFed and of CityFed's
former subsidiary, City Federal.
In the Notice of Charges, the OTS alleges that CityFed "engaged in an unsafe
or unsound practice, violated a written agreement entered into with the
agency and violated a condition imposed in writing by the agency" by
"failing to cause the net worth of City Federal to be maintained at the
levels required by the applicable capital requirements." The "written
agreement" and the "condition imposed in writing" alleged by the OTS refer,
respectively, to the Stipulation of CityFed Financial Corp., dated December
4, 1984 ("Stipulation"), that CityFed provided to the Federal Savings and
Loan Insurance Corporation ("FSLIC") in connection with the approval by the
Federal Home Loan Bank Board ("FHLBB") of CityFed's acquisition of City
Federal in December 1984, and to FHLBB Resolution No. 84-664, dated November
21, 1984, that approved CityFed's acquisition of City Federal on the
condition that, among other things, CityFed provide the Stipulation to the
FSLIC. The Stipulation provided that, as long as CityFed controlled City
Federal, CityFed would cause the net worth of City Federal to be maintained
at a level consistent with that required by regulations and would infuse
sufficient additional equity capital, in a form satisfactory to the
regulators, to effect compliance with the capital requirement. The Notice of
Charges alleges that CityFed "has been and continues to be unjustly enriched
in connection with" the violations alleged by the OTS, and that such
violations "involve a reckless disregard for the law or any applicable
regulations or prior order of either the FHLBB or the OTS." The Notice of
Charges requests that an order be entered by the Director of the OTS
requiring CityFed to make restitution, reimburse, indemnify or guarantee the
OTS against loss in an amount not less than $118.4 million, which the OTS
alleges represents the regulatory capital deficiency reported by City
Federal in the fall of 1989.
In the Notice of Charges, the OTS also assesses a civil money penalty
against CityFed on the grounds that CityFed allegedly "knowingly" committed
the alleged violations described above and allegedly "knowingly or
recklessly caused a substantial loss to City Federal." 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,
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"by failing to direct CityFed to cause the net worth of City Federal to be
maintained at the levels required by the applicable capital requirements,
the [Respondents] violated a written agreement entered into with the agency,
violated a condition imposed in writing by the agency" and "engaged in an
unsafe or unsound act." The Notice of Charges alleges that some of the
Respondents (Messrs. Allen, Atherton, Hedden, Kellogg and Roessner) "have
been and continue to be unjustly enriched in connection with their
violations by the payment of their legal expenses with CityFed assets," an
allegation that refers to the advancement by CityFed, pursuant to its
obligations in its Bylaws and Restated Certificate of Incorporation (see
"Indemnification Claims" below), of litigation expenses to such Respondents
in connection with the action by the RTC against such Respondents and other
current and former directors and/or officers of CityFed and/or City Federal
in the United States District Court for the District of New Jersey ("N.J.
Court"), captioned RESOLUTION TRUST CORPORATION V. ATHERTON, ET AL., Civil
Action No. 93-1811 (GEB) (consolidated with RESOLUTION TRUST CORPORATION V.
SIMMONS, ET AL., Civ. Action No. 92-5261-B (GEB)) ("Second RTC Action").
CityFed had made such advancement of litigation expenses in accordance with
the agreement between CityFed and the RTC entered into as of December 14,
1992 ("Expense Agreement"), in connection with the action the RTC filed
against CityFed, captioned RESOLUTION TRUST CORPORATION V. CITYFED FINANCIAL
CORP., ET AL., Civil Action No. 92-5261-A (GEB) ("First RTC Action"), in the
N.J. Court. The Notice of Charges requests that an order be entered by the
Director of the OTS requiring the Respondents to make restitution,
reimburse, indemnify or guarantee the OTS against loss in an amount not less
than $400,000, which the OTS alleges represents the amount of legal expenses
CityFed paid on their behalf from April to December 1993 in connection with
the Second RTC Action.
In the Notice of Charges, the OTS also assesses a civil money penalty
against the Respondents on the grounds that the Respondents allegedly
"violated a condition imposed in writing and/or a written agreement." The
amount of civil money penalties assessed against the Respondents is $51,750
each.
The Notice of Charges states that the civil money penalties assessed against
CityFed and the Respondents must be paid to the United States Department of
the Treasury within 60 days of the issuance of the Notice of Charges. The
Notice of Charges also seeks reimbursement for the OTS from CityFed and the
Respondents for all costs and expenses associated with the investigation and
prosecution of the administrative enforcement action commenced by the filing
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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. The case has
been assigned to an administrative law judge who has entered a scheduling
order. 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. (beta) 1818(b)(6) and that the
Stipulation CityFed provided to the FSLIC in December 1984 regarding
maintenance of the net worth of City Federal is enforceable by the OTS
against CityFed.
On March 27, 1996, CityFed filed a motion for reconsideration of the ALJ's
Prehearing Order. On April 26, 1996, the OTS filed a memorandum in
opposition to CityFed's motion for reconsideration. On May 29, 1996, the ALJ
denied CityFed's motion for reconsideration. On June 12, 1996, CityFed moved
for interlocutory review by the Acting Director of the OTS of the
conclusions in the Prehearing Order. If the Acting Director were to affirm
the conclusions in the Prehearing Order, CityFed would intend to seek review
of that decision in the United States Court of Appeals and, if necessary, to
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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.
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.
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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 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).
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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
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
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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 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
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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.
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).
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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
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
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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.
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
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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 has generally agreed to
advance expenses in connection with these requests, except where certain
preconditions to advancement and indemnification have not been met or where
advancement and indemnification may not be warranted under applicable law.
Because of the Temporary Order and the Escrow Agreement, CityFed is not
continuing to advance expenses in connection with any of the indemnification
and advancement requests referred to above. It is not yet clear whether, as
a result of the Third Circuit's decision in the Ridder Action discussed
below, CityFed will be required, notwithstanding the existence of the
Temporary Order and the Escrow Agreement, to advance expenses to the
defendants in the Ridder Action, and to current or former officers,
directors and employees of CityFed who are or were parties in other actions
or proceedings, including the Second RTC Action, the Injunction Action, the
D.C. Appeal, the Supreme 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.
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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 December 31, 1996, CityFed received but has not paid bills totaling
$4,331,000 in the aggregate for legal services and expenses rendered in
connection with the defense of current and former directors and officers of
CityFed in the Cases. Although CityFed has not paid these bills, it accrues
the amounts billed under the caption "Other Liabilities" on its Statement of
Financial Condition as the bills are received.
CityFed does not know whether all current or former officers, directors or
employees of CityFed or its former subsidiaries who are or were involved in
actions or proceedings will request advancement or payment of legal expenses
and indemnification or, if requested, whether they will be entitled to
advancement of expenses or indemnification. CityFed also does not know
whether the RTC or FDIC will request payment on the indemnification claims
assigned to it by individuals who have settled with the RTC or FDIC in the
Second RTC Action, as described above. Thus, it is not possible for CityFed
to estimate with any accuracy the probable amount or range of liability
relating to current or potential indemnification claims pursuant to
CityFed's Bylaws, although the amount of such claims could be material.
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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
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
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N.J. Court to issue an injunction requiring CityFed to advance plaintiffs'
defense costs incurred in connection with the F&D Action in an amount to be
agreed upon by the parties or, if the parties are unable to reach agreement,
in an amount determined to be reasonable by the N.J. Court upon additional
proceedings. On February 23, 1995, CityFed filed a petition requesting that
the Third Circuit grant rehearing on issues relating to the relief granted.
In particular, the petition requested that the Third Circuit reconsider the
grant of injunctive relief on the basis that the Temporary Order effectively
precludes CityFed from paying the costs of defense to its current and former
officers and directors. In addition, the petition requested that the Third
Circuit require plaintiffs to post security if an injunction is issued in
plaintiffs' favor. On March 22, 1995, the Third Circuit denied CityFed's
petition for rehearing. On July 3, 1995, the N.J. Court entered an Order
("Ridder Order") in the Ridder Action, directing CityFed to remit
immediately to the plaintiffs in the Ridder Action $437,400, which
represents legal fees incurred by the plaintiffs through December 31, 1994
in the Ridder Action and as defendants in the F&D Action, plus interest in
the amount of $13,955.13. The Ridder Order also provides a procedure for the
payment by CityFed of the legal fees incurred by the Ridder plaintiffs in
the Ridder Action and the F&D Action from January 1, 1995, forward.
Because of the Temporary Order, CityFed is unable unilaterally to make the
payment required by the Ridder Order. On July 13, 1995, CityFed submitted
the Ridder Order to the OTS and requested the permission of the OTS to pay
the amounts CityFed is directed to pay in the Ridder Order, as well as
permission to pay to the Ridder plaintiffs the sum of $601.84 in court
costs, which CityFed had been directed to pay to the plaintiffs in a May 4,
1995 Order of the N.J. Court. On August 18, 1995, the OTS issued a Decision
and Order ("OTS Order") denying this request by CityFed. On August 2, 1995,
CityFed appealed the Ridder Order to the Third Circuit, arguing that the
N.J. Court had abused its discretion by ordering CityFed to make a payment
CityFed could not make because of the Temporary Order. On August 29, 1995,
CityFed asked the Third Circuit to stay the Ridder Order pending the appeal
from the Ridder Order, but the Third Circuit denied the request. The appeal
was then fully briefed by the parties and argued to a panel of the Third
Circuit on March 22, 1996. On April 18, 1996, the Third Circuit ruled in
CityFed's favor, vacating the Ridder Order and directing that the matter be
returned to the N.J. Court for further proceedings. Among the options
available to the N.J. Court, noted the Third Circuit, were the possibility
of staying any payment order pending completion of the OTS administrative
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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. In 1996, 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
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
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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 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 an agreement dated as of December 15, 1993 ("Funds Agreement"),
among Mr. Roessner, the RTC as receiver for City Federal, and Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), the RTC in January 1994
transferred $933,623.44 to an investment account at DLJ in Mr. Roessner's
name. CityFed believes such funds, which represent a percentage of Mr.
Roessner's deferred compensation claim against City Federal, serve to reduce
the amount of Mr. Roessner's claim against CityFed. CityFed believes that
the amount of such claim may also have been reduced by the amount of the
Roessner Credit discussed under "Second RTC Action" above.
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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.
Several defendants have requested that CityFed reimburse them for the
settlement payments made by them under the settlement agreement. CityFed has
not responded to the request. It is likely that CityFed will receive similar
requests from the other parties to the settlement. CityFed's liability to
the individuals remains to be determined.
TAX LIABILITIES - CityFed's liability for federal income taxes for tax years
through 1990 was calculated on the basis of CityFed's inclusion in a
consolidated group that includes City Federal and the successor institutions
created by the OTS to acquire the assets and liabilities of City Federal.
Under the applicable provisions of the Internal Revenue Code of 1986, as
amended ("Code"), and the regulations thereunder, all members of the
consolidated group, including CityFed, are jointly and severally liable for
any income taxes owed by the group. CityFed has not included City Federal
and the successor institutions in the Federal income tax returns CityFed
filed for its 1991, 1992, 1993, 1994 and 1995 tax years. CityFed's position
is not free from challenge, although CityFed believes that its position is
reasonable under the current tax law.
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CONTINGENCY RESERVE - As noted above, the Company is subject to a number of
loss contingencies for which it is currently unable to reasonably assess the
probability or range of loss. At December 31, 1996, the Company has a $6.7
million contingency reserve (see Note 2) 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, 1993 $ 1,543,000
--------------
Charges (1,549,000)
Provision 2,175,000
--------------
Balance - December 31, 1994 2,169,000
--------------
Charges (2,082,000)
Provision 3,900,000
--------------
Balance - December 31, 1995 3,987,000
--------------
Charges (1,603,000)
Provision 4,350,000
--------------
Balance - December 31, 1996 $ 6,734,000
==============
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
The current directors of CityFed are as follows:
POSITIONS HELD DIRECTOR
NAME WITH CITYFED AGE (1) SINCE (2)
---- -------------- ------- ---------
Class I-Term Expired 1994
Gordon E. Allen Director 70 1984
John W. Atherton, Jr. Director, Chairman, 54 1987
President, Chief
Executive Officer and
Treasurer
Class II-Term Expired 1992
Peter R. Kellogg Director 54 1984
Class III-Term Expired 1993
Edwin M. Halkyard Director 62 1988
Directors Elected by the Holders of Series B Stock
Richard N. Morash Director 54 1991
Stephen L. Ranzini Director 31 1991
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______________________________
(1) At January 31, 1997.
(2) All directors serve until their successors have been elected and qualify.
The following is certain biographical information regarding the current
directors:
Mr. Allen was, until his retirement in 1986, President, Chief Operating Officer
and a director of Cluett, Peabody & Co., Inc., New York, New York, an apparel
manufacturing, sales and distribution company.
Mr. Atherton was elected Vice President of CityFed upon its formation in 1984,
Vice Chairman in April 1986 and President and Chief Executive Officer on
February 1, 1989. On April 18, 1990, Mr. Atherton was also elected Treasurer of
CityFed and, on July 16, 1991, was elected Chairman. He was President of City
Federal from January 1986 until December 8, 1989 and its Chairman and Chief
Executive Officer from February 1, 1989 until December 8, 1989. From November
1987 through February 1, 1989, he was Deputy Chief Executive Officer of City
Federal and, from March 1984 through November 1987, he was Chief Operating
Officer of City Federal. From March 1984 through December 1985, he was Vice
Chairman of City Federal. Prior to that time, he was an Executive Vice President
of City Federal.
Mr. Halkyard was Senior Vice President-Human Resources and a member of the
Management Committee of Allied-Signal, Inc., Morris Township, New Jersey, an
advanced technology company, from 1979 until his retirement in 1990. He is
currently a Distinguished Lecturer in Management in the College of Business
Administration, University of South Carolina. Mr. Halkyard is also a director of
Bally Manufacturing Corporation.
Mr. Kellogg is Senior Managing Director and Chief Executive Officer of Spear,
Leeds & Kellogg, New York, New York, a specialist firm on the New York Stock
Exchange. Mr. Kellogg is a member of the New York Stock Exchange and the
American Stock Exchange. He is President of IAT Reinsurance Syndicate, Ltd., a
Bermuda insurance company, and, until its liquidation in 1986, President and a
director of Interstate Air Taxi, Inc., New York, New York, a commuter airline
service. Mr. Kellogg is a director of First Options of Chicago, Inc., an options
clearing firm, Interstate/Johnson Lane, Inc., a publicly-traded regional
brokerage firm, and The Ziegler Companies, Inc., a publicly-traded regional
brokerage firm.
Mr. Morash has been a private investor in the real estate and securities markets
since October 1987. From December 1984 through October 1987, he was President,
Chief Executive Officer and Director of Yankee Bank for Finance & Savings,
F.S.B. in Boston, Massachusetts. This bank was put into receivership and was
liquidated in October 1987. From February 1983 through December 1984, he was
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Director of Corporate Finance/Banking for Mosley, Hallgarten, Estabrook &
Weeden, Inc., a broker-dealer located in New York, New York, where he was
responsible for the origination and sale of investment banking products to banks
and thrifts. He also managed new equity and debt financings for commercial banks
and thrifts, including mutual to stock conversions. From 1978 through 1983, he
served in various positions with First National Bank of New Jersey, Totowa, New
Jersey. His last position at that bank was Executive Vice President, where he
was responsible for all commercial, mortgage and consumer lending functions and
all activities of a 38 branch network for this $1.5 billion commercial bank.
Mr. Ranzini has been President and Chief Executive Officer of University Bancorp
Inc. (formerly known as Newberry Bancorp Inc.) since July 1988, the holding
company for University Bank ("Bank"), formerly known as The Newberry State Bank,
in Newberry, Michigan. Mr. Ranzini is also a director of University Bancorp,
Inc. In November, 1994, he became the President of the Bank, in December 1995,
he became Senior Vice President - Mortgage Banking of the Bank and, in January
1994, became a director of the Bank. Mr. Ranzini is also Director and Treasurer
of Michigan BIDCO, a community development lending organization (May 1993 to
present).
EXECUTIVE OFFICERS
CityFed has no current executive officers, other than John W. Atherton, Jr. All
executive officers are appointed annually by the Board and serve for one-year
terms.
See Item 1., "Description of Business" concerning the receivership of City
Federal.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
To the best of CityFed's knowledge, all directors, officers and more than 10%
beneficial owners of CityFed have filed all reports on Forms 3, 4 and 5 required
to be filed by them for the year ended December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Mr. Atherton received an annual salary of $100,000 during 1996 and continues to
be paid at the same rate in 1997. The Board approved an additional payment to
him of $35,000 in December 1996.
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CityFed does not have employment agreements with any of its officers.
The following table sets forth information concerning the compensation paid or
accrued by CityFed for CityFed's one officer whose aggregate compensation
exceeded $100,000 in 1996.
ANNUAL COMPENSATION
-------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY($) BONUS($) COMPENSATION ($)
-------- ---- --------- -------- ----------------
John W. Atherton, Jr. 1996 100,000 35,000 16,012 (1)
Chairman, Director, 1995 100,000 35,000 17,035 (1)
President, Chief 1994 100,000 35,000 13,859 (1)
Executive Officer and Treasurer
- -------------------------------
(1) Represents amounts paid for Mr. Atherton's health insurance and for life
insurance for which Mr. Atherton may designate the beneficiary.
DIRECTORS' COMPENSATION
Directors of CityFed receive a meeting fee of $1,000 for each meeting attended.
The Board held four meetings during 1996. No remuneration is paid for telephone
meetings. Directors of CityFed who are compensated as officers of CityFed do not
receive separate compensation for service on the Board of Directors of CityFed.
STOCK OPTION PLAN AND 1987 LONG-TERM PERFORMANCE INCENTIVE PLAN
On September 18, 1990, the Board of Directors of CityFed terminated CityFed's
Stock Option Plan and 1987 Long-Term Performance Incentive Plan ("1987 Plan").
Consequently, CityFed cannot grant any further options under either plan.
As of March 1, 1997, options to purchase 3,000 shares of Common Stock remain
outstanding. These options were issued to former employees of City Federal,
other than Mr. Atherton. All of these outstanding options were issued under
CityFed's Stock Option Plan. No options remain outstanding under the 1987 Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to those persons known
to CityFed to own, or who may be deemed to own, beneficially more than five
percent of any class of voting stock of CityFed (Common Stock, Series B Stock or
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Series C Stock) as of February 28, 1997. Except as otherwise noted, each
beneficial owner listed has sole investment and voting power with respect to the
stock indicated. Information contained in the table is based on reports filed
with or information otherwise supplied to CityFed by the listed beneficial
owners.
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
------------------- ---------------- ---------------
Lehigh Financial Corp. 1,365,000(1) 7.29 percent of the
950 Stuyvesant Avenue Common Stock
Union, New Jersey 07083
Glenn F. Woo 1,776,435(2) 7.25 percent of the
10 Exchange Place Common Stock and 5.09
Jersey City, New Jersey 07302 percent of the Series C
Stock
Joseph L. Ranzini 445,800(3) 17.56 percent of the
209 East Portage Avenue Series B Stock
Sault Ste. Marie, Michigan 49783
and
Stephen L. Ranzini
959 Maiden Lane
Ann Arbor, Michigan 48105
James R. Connacher 452,550 1.59 percent of the
514 St. Clair Avenue East Common Stock and 6.12
Toronto, Ontario, Canada M4 percent of the Series B
Stock
Frank A. Constantini 452,550 1.59 percent of the
41 Glen Road Common Stock and 6.12
Toronto, Ontario, Canada M4 percent of the Series B
Stock
Peter T. Hyland 450,050 1.59 percent of the
129 Oarfield Avenue Common Stock and 6.12
Toronto, Ontario, Canada M4 percent of the Series B
Stock
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NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
------------------- ---------------- ---------------
Philadelphia Bourse, Inc. 1,756,292 21.27 percent of the
Suite 120 Series C Stock
4601 Forbes Boulevard
Lanham, Maryland 20706-4313
- -------------------------------
(1) Represents shares of Common Stock. This information is based on the most
recent Schedule 13D filed by Lehigh Financial Corp. dated January 23,
1989.
(2) Includes 1,356,323 shares of Common Stock and 420,112 shares of Series C
Stock purchased by Mr. Woo on November 20, 1990. This information is based
on the Schedule 13D filed by Mr. Woo on February 25, 1991.
(3) 126,970 of such shares of Series B Stock are held by Joseph L. Ranzini and
318,830 of such shares of Series B Stock are held by Stephen L. Ranzini,
the son of Joseph L. Ranzini. Mr. Joseph L. Ranzini has the sole power to
vote and direct the voting of, and the sole power to dispose and direct
the disposition of, the shares held by him. Mr. Stephen L. Ranzini has the
sole power to vote and direct the voting of, and the sole power to dispose
and direct the disposition of, the shares held by him. This information is
based on an amended Schedule 13D filed by Messrs. Ranzini on February 28,
1995.
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the shares of Common
Stock, Series C Stock and Series B Stock beneficially owned by each director of
CityFed, and by all officers and directors as a group, as of February 28, 1997.
Except as otherwise noted, each beneficial owner listed has sole investment and
voting powers with respect to the stock indicated.
COMMON STOCK
- ------------
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
---- ------------------ --------
Gordon E. Allen 2,243 (1)
John W. Atherton, Jr. 31,105(2) (1)
Edwin M. Halkyard 2,500(3) (1)
Peter R. Kellogg 8,824(4) (1)
Richard N. Morash 97,502 (1)
Stephen L. Ranzini 0 0
All Directors and 142,174(2) (1)
Officers as a Group
(6 Persons)
- ----------------------------
(1) Less than 1.0%.
65
<PAGE>
(2) Includes 19,169 shares held by Mr. Atherton's wife and 7,168 shares held in
custodial accounts for Mr. Atherton's children with respect to which Mrs.
Atherton is custodian.
(3) Held jointly with Mr. Halkyard's wife.
(4) Held by a trust of which Mr. Kellogg is trustee.
SERIES C STOCK
- --------------
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
---- ------------------ --------
Gordon E. Allen 119 (1)
John W. Atherton, Jr. 4,402(2) (1)
Edwin M. Halkyard 0 0
Peter R. Kellogg 379,888(3) 4.60
Richard N. Morash 49,511 (1)
Stephen L. Ranzini 0 0
All Directors and 433,920 5.26
Officers as a Group
(6 Persons)
- ----------------------------
(1) Less than 1.0%.
(2) Includes 4,402 shares held in custodial accounts for Mr. Atherton's
children with respect to which Mr. Atherton's wife is custodian.
(3) Includes 379,888 shares held by two trusts of which Mr. Kellogg is a
trustee. This information is based on the Schedule 13D filed by Mr.
Kellogg on February 14, 1991.
SERIES B STOCK
- --------------
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
---- ------------------ --------
Gordon E. Allen 0 0
John W. Atherton, Jr. 0 0
Edwin M. Halkyard 0 0
Peter R. Kellogg 0 0
Richard N. Morash 0 0
Stephen L. Ranzini 445,800(1) 17.56
All Directors and 445,800 17.56
Officers as a Group
(6 Persons)
66
<PAGE>
- ----------------------------
(1) 126,970 of such shares of Series B Stock are held by Joseph L. Ranzini,
the father of Stephen L. Ranzini. This information is based on an amended
Schedule 13D filed by Messrs. Ranzini dated February 28, 1995.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The bylaws of CityFed obligate CityFed to indemnify, to the fullest extent
authorized by the Delaware General Corporation law, its directors and officers
and to advance expenses to such persons in certain circumstances. See Item 1.,
"Description of Business - Potential Obligations of CityFed - Indemnification
Claims."
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(3) Articles of Incorporation and Bylaws.
3.1 Restated Certificate of Incorporation, as amended. Incorporated
herein by reference to Exhibit 3.1 of CityFed's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
3.2 Bylaws, as amended. Incorporated herein by reference to Exhibit 3.2
of CityFed's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
(10) Material Contracts.
10.1 Stipulation of CityFed Financial Corp. dated December 4, 1984.
Incorporated herein by reference to Exhibit 10.1 of CityFed's Annual
Report on Form 10-KSB for the year ended December 31, 1995.
10.2 Settlement Agreement dated as of the 14th day of December 1992
between CityFed Financial Corp. and the Resolution Trust
Corporation. Incorporated herein by reference to Exhibit 10.5 of
CityFed's Annual Report on Form 10-K for the year ended December 31,
1992.
10.3 Agreement dated as of December 14, 1992 between CityFed Financial
Corp. and the Resolution Trust Corporation. Incorporated herein by
reference to Exhibit 10.3 of CityFed's Annual Report on Form 10-KSB
for the year ended December 31, 1994.
10.4 Escrow Agreement dated October 26, 1995 among CoreStates Bank, N.A.,
CityFed Financial Corp. and the Office of Thrift Supervision.
Incorporated herein by reference to Exhibit 10.4 of CityFed's Annual
Report on Form 10-KSB for the year ended December 31, 1994.
67
<PAGE>
(11) Statement regarding computation of per share earnings (loss).
(23) Consent of Independent Auditors.
(27) Financial data schedule.
(b) Reports on Form 8-K.
None.
68
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITYFED FINANCIAL CORP.
Date: March 28, 1997 By:/s/ John W. Atherton, Jr.
----------------------------
John W. Atherton, Jr.
President, Chief Executive
Officer and Treasurer (Principal
Executive and Financial Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Gordon E. Allen March 28, 1997
- --------------------------
Gordon E. Allen
Director
/s/ John W. Atherton, Jr. March 28, 1997
- ---------------------------
John W. Atherton, Jr.
Chairman, President, Chief Executive
Officer, Treasurer and
Director (Principal Executive,
Financial and Accounting Officer)
/s/ Edwin M. Halkyard March 20, 1997
- --------------------------
Edwin M. Halkyard
Director
/s/ Peter R. Kellogg March 20, 1997
- --------------------------
Peter R. Kellogg
Director
/s/ Richard N. Morash March 28, 1997
- --------------------------
Richard N. Morash
Director
/s/ Stephen L. Ranzini March 28, 1997
- --------------------------
Stephen L. Ranzini
Director
69
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
- -------
3.1 Restated Certificate of Incorporation, as amended. Incorporated herein
by reference to Exhibit 3.1 of CityFed's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
3.2 Bylaws, as amended. Incorporated herein by reference to Exhibit 3.2 of
CityFed's Annual Report on Form 10-KSB for the year ended December 31,
1995.
10.1 Stipulation of CityFed Financial Corp. dated December 4, 1984.
Incorporated herein by reference to Exhibit 10.1 of CityFed's Annual
Report on Form 10-KSB for the year ended December 31, 1995.
10.2 Settlement Agreement dated as of the 14th day of December 1992 between
CityFed Financial Corp. and the Resolution Trust Corporation.
Incorporated herein by reference to Exhibit 10.5 of CityFed's Annual
Report on Form 10-K for the year ended December 31, 1992.
10.3 Agreement dated as of December 14, 1992 between CityFed Financial
Corp. and the Resolution Trust Corporation. Incorporated herein by
reference to Exhibit 10.3 of CityFed's Annual Report on Form 10-KSB
for the year ended December 31, 1994.
10.4 Escrow Agreement dated October 26, 1995 among CoreStates Bank, N.A.,
CityFed Financial Corp. and the Office of Thrift Supervision.
Incorporated herein by reference to Exhibit 10.4 of CityFed's Annual
Report on Form 10-KSB for the year ended December 31, 1994.
11 Statement regarding computation of per share earnings (loss).
23 Consent of Independent Auditors.
27 Financial data schedule.
70
Exhibit 11
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
For the Years Ended December 31, 1996, 1995, and 1994
Year Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
Computation of Loss Per Share:
Weighted average number
of shares outstanding 18,714,646 18,714,646 18,714,646
============ ============ ============
Loss applicable to common
stock:(1)
From Continuing Operations $ (8,407,000) $ (8,359,000) $ (8,448,000)
============ ============ ============
Net Loss $(12,757,000) $(12,259,000) $(10,623,000)
============ ============ ============
Loss per share:
From Continuing Operations $ (0.45) $ (0.45) $ (0.45)
============ ============ ============
Net Loss $ (0.68) $ (0.66) $ (0.57)
============ ============ ============
_____________________
(1) Losses applicable to common stock are net of preferred stock dividends for
the years ended December 31, 1996, 1995, and 1994 in the amount of $8,636,000,
$8,636,000, and $8,636,000, respectively.
71
DELOITTE &
TOUCHE LLP
- ---------------- -------------------------------------------------
Two Hilton Court Telephone: (201) 683-7000
P.O. Box 319 Facsimile: (201) 683-7459
Parsippany, New Jersey 07054-0319
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-98135 and 33-01013 on Form S-8 of CityFed Financial Corp. of our report dated
March 28, 1997 (which disclaims an opinion on the Company's financial statements
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996) appearing in this Annual Report on Form 10-KSB of
CityFed Financial Corp. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 28, 1997
- ---------------
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
- -------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE TWELVE MONTHS ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 85
<SECURITIES> 8,894
<RECEIVABLES> 0
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<PP&E> 27
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<TOTAL-ASSETS> 9,156
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(65,552)
0
<COMMON> 63,567
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