UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-13311
CityFed Financial Corp.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2527684
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
PO Box 3126, Nantucket, MA 02584
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(Address of principal executive offices)
(508) 228-2366
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(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of October 31, 1999, the number of
shares of outstanding common stock was 18,715,609.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CITYFED FINANCIAL CORP.
STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
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(UNAUDITED)
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<S> <C> <C>
ASSETS
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CASH $ 61 $ 48
INVESTMENT SECURITIES - At amortized cost
(Market Value September 30, 1999, $9,557;
December 31, 1998, $9,460) 9,567 9,453
OTHER ASSETS 158 154
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TOTAL ASSETS $ 9,786 $ 9,655
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Contingency reserve $ 6,570 $ 6,615
Other liabilities 4,417 4,444
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Total liabilities 10,987 11,059
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 30,000,000 shares authorized:
$2.10 cumulative convertible, Series B, $25 par
value, issued and outstanding: 2,538,850
in 1999 and 1998 63,471 63,471
Series C Junior, cumulative, $.01 par value,
liquidation preference $3.00 per share,
shares issued and outstanding: 8,257,079 82 82
in 1999 and 1998
Common stock, $.01 par value, 100,000,000 shares
authorized, issued: 18,914,609 in 1999 and
1998, outstanding: 18,715,609 in 1999 and 1998 188 188
Additional paid-in capital 108,868 108,868
Accumulated deficit (172,810) (173,013)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
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Total stockholders' deficit (1,201) (1,404)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,786 $ 9,655
======== ========
See notes to financial statements.
</TABLE>
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CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
INCOME:
Interest on investments $ 156 $ 136 $ 383 $ 379
------- ------- ------- ------
Total income 156 136 383 379
------- ------- ------- ------
EXPENSES:
Compensation and employee
benefits 31 30 95 93
Other operating expenses 27 25 85 64
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Total expenses 58 55 180 157
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INCOME FROM CONTINUING OPERATIONS 98 81 203 222
LOSS FROM DISCONTINUED OPERATIONS - - - -
------- ------- ------- ------
NET INCOME $ 98 $ 81 $ 203 $ 222
======= ======= ======= ======
NET LOSS AVAILABLE FOR COMMON
STOCKHOLDERS $(2,061) $(2,078) $(6,273) $(6,254)
BASIC LOSS PER SHARE:
From continuing operations $ (0.11) $ (0.11) $ (0.34) $ (0.33)
From discontinued operations $ - $ - $ - $ -
Net loss $ (0.11) $ (0.11) $ (0.34) $ (0.33)
AVERAGE SHARES OUTSTANDING 18,715,609 18,715,609 18,715,609 18,715,288
DIVIDENDS PER COMMON SHARE - - - -
See notes to financial statements.
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CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 365 $ 358
Operating expenses (256) (265)
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Net cash provided by operating activities 109 93
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment securities (96) (116)
Other - net - (2)
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Net cash used in investing activities (96) (118)
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NET INCREASE (DECREASE) IN CASH 13 (25)
CASH AT BEGINNING OF PERIOD 48 66
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CASH AT END OF PERIOD $ 61 $ 41
======= ======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 203 $ 222
Loss from discontinued operations - -
Contingency reserve payments (56) (70)
Increase in other assets 4 10
Decrease in accrued income and expense, net (34) (69)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 109 $ 93
======= ======
See notes to financial statements.
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
1. Until December 8, 1989, CityFed Financial Corp. (the "Company" or
"CityFed") was a unitary savings and loan holding company that conducted
its business primarily through its ownership of City Federal Savings Bank
("City Federal") and its subsidiaries. On December 7, 1989, the Office of
Thrift Supervision ("OTS") of the United States Department of the Treasury
declared City Federal insolvent, ordered it closed and appointed the
Resolution Trust Corporation ("RTC") as receiver of City Federal. As a
result of the receivership of City Federal, the Company has undergone
material changes in the nature of its business and is no longer operating
as a savings and loan holding company. At September 30, 1999, the
Company's business activities consisted primarily of attempting to resolve
outstanding claims against the Company and the management of investments.
As a result of the receivership of City Federal, the financial statements
of CityFed at December 31, 1989, for the year then ended, and for
subsequent periods, reflect CityFed's interest in City Federal as
discontinued operations. The financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above
and in Note 4, substantially all of the operations of the Company have
been discontinued and the Company is subject to a number of commitments
and contingencies that raise substantial doubt about its ability to
continue as a going concern. Except as indicated in Note 4, the financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. Currently, CityFed is not conducting an
operating business. At the present time, management has invested, and
intends to invest, CityFed's assets on a short-term basis.
2. The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1998 ("1998 Form 10-KSB"). The interim statements
reflect all adjustments of a normal recurring nature that are, in the
opinion of management, necessary for a fair presentation of the results
and financial position for the periods presented.
3. In July 1989, the Company's Board of Directors suspended the payment
of dividends on all three currently outstanding series of the Company's
stock. These include the Company's common stock, $0.01 par value per share
("Common Stock"), on which the Company had been paying quarterly dividends
of one cent per share; the Series C, Junior Preferred Stock, Cumulative,
$0.01 par value per share ("Series C Stock"), with a quarterly dividend of
ten cents per share; and the $2.10 Cumulative Convertible Preferred Stock,
Series B, $25.00 par value per share ("Series B Stock"), with a quarterly
dividend of $0.525 per share. Dividends on both series of the Company's
preferred stock are cumulative. At September 30, 1999, dividends in
arrears were $54.6 million and $33.9 million on the Company's Series B and
Series C Stock, respectively.
4. COMMITMENTS AND CONTINGENCIES
NOTICE OF CHARGES AND HEARING FOR CEASE AND DESIST ORDER TO DIRECT
RESTITUTION AND OTHER APPROPRIATE RELIEF AND NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTIES - On June 2, 1994, the OTS issued a Notice of Charges and
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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, "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
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District of New Jersey ("N.J. Court"), captioned RESOLUTION TRUST
CORPORATION V. ATHERTON, ET AL., Civil Action No. 93-1811 (GEB)
(consolidated with RESOLUTION TRUST CORPORATION V. SIMMONS, ET AL., Civ.
Action No. 92-5261-B (GEB)) ("Second RTC Action"). CityFed had made such
advancement of litigation expenses in accordance with the agreement
between CityFed and the RTC entered into as of December 14, 1992 ("Expense
Agreement"), in connection with the action the RTC filed against CityFed,
captioned RESOLUTION TRUST CORPORATION V. CITYFED FINANCIAL CORP., ET AL.,
Civil Action No. 92-5261-A (GEB) ("First RTC Action"), in the N.J. Court.
The Notice of Charges requests that an order be entered by the Director of
the OTS requiring the Respondents to make restitution, reimburse,
indemnify or guarantee the OTS against loss in an amount not less than
$400,000, which the OTS alleges represents the amount of legal expenses
CityFed paid on their behalf from April to December 1993 in connection
with the Second RTC Action.
In the Notice of Charges, the OTS also assesses a civil money penalty
against the Respondents on the grounds that the Respondents allegedly
"violated a condition imposed in writing and/or a written agreement." The
amount of civil money penalties assessed against the Respondents is
$51,750 each.
The Notice of Charges states that the civil money penalties assessed
against CityFed and the Respondents must be paid to the United States
Department of the Treasury within 60 days of the issuance of the Notice of
Charges. The Notice of Charges also seeks reimbursement for the OTS from
CityFed and the Respondents for all costs and expenses associated with the
investigation and prosecution of the administrative enforcement action
commenced by the filing of the Notice of Charges. 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 Charges provides that a hearing will be held before an
administrative law judge on the question of whether a final cease and
desist order should be issued against CityFed and the Respondents. CityFed
and the Respondents filed an answer in response to the Notice of Charges
and 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' administrative proceeding against CityFed and the Respondents
issued a Prehearing Order granting the OTS' 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
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retention of dividends and other funds received from its former
subsidiary, City Federal, constitutes "unjust enrichment" within the
meaning of 12 U.S.C. Section 1818(b)(6) and that the Stipulation CityFed
provided to the FSLIC in December 1984 regarding maintenance of the net
worth of City Federal is enforceable by the OTS against CityFed.
On March 27, 1996, CityFed filed a motion for reconsideration of the ALJ's
Prehearing Order. On April 26, 1996, the OTS filed a memorandum in
opposition to CityFed's motion for reconsideration. 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.
On August 20, 1997, OTS Director Nicolas Retsinas issued a Decision and
Order granting CityFed's Motion for Interlocutory Review. Director
Retsinas concluded that the ALJ had erred in recommending summary
disposition on the OTS net worth maintenance claim against CityFed. The
Director held that there were disputed issues of fact on that claim that
precluded summary judgment, and he remanded the case to the ALJ for
further proceedings consistent with his decision. The Director agreed with
the ALJ that the 5-year federal statute of limitations applicable to
"fines, penalties and forfeitures" did not bar OTS' restitution claims.
However, the Director reserved to a later date a decision on whether that
statute would bar OTS' civil money penalty claims. OTS has said it does
not intend to pursue civil money penalty claims against CityFed if it
obtains an award of restitution in excess of CityFed's net worth.
Following the Director's decision, the Administrative Law Judge has lifted
the stay of proceedings, and CityFed and the OTS have begun to engage in
discovery on the net worth maintenance claim.
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
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related papers in the United States District Court for the District of
Columbia ("D.C. Court") in a case captioned CITYFED FINANCIAL CORP. V.
OFFICE OF THRIFT SUPERVISION AND JONATHAN L. FIECHTER, Case No.
1:94CV01273 (HHG) ("Injunction Action"). In the Injunction Action, CityFed
sought a temporary restraining order and an injunction against the
Temporary Order that would set aside, limit or suspend the enforcement,
operation and effectiveness of the Temporary Order.
The D.C. Court held a hearing on motions pending before it on August 15,
1994. On September 8, 1994, the D.C. Court issued an Order denying
CityFed's and the intervening Respondents' motions to set aside, or, in
the alternative, modify the Temporary Order. CityFed and the
intervening Respondents filed notices of appeal from the D.C. Court's
Order to the United States Court of Appeals for the District of Columbia
Circuit ("D.C. Circuit"), and the intervening Respondents filed a motion
in the D.C. Circuit for an expedited appeal and an order enjoining the
enforcement of the Temporary Order during the pendency of the appeal.
The D.C. Circuit denied the intervening Respondents' motion for
injunction on October 21, 1994. The caption of the case in the D.C.
Circuit is CITYFED FINANCIAL CORP., ET AL. V. OFFICE OF THRIFT
SUPERVISION, ET AL., Nos. 94-5254 and 5255 ("D.C. Appeal").
On October 26, 1994, CityFed and the OTS entered into an Escrow Agreement
("Escrow Agreement") with CoreStates Bank, N.A. ("CoreStates") pursuant to
which CityFed transferred substantially all of its assets to CoreStates
for deposit into an escrow account to be maintained by CoreStates.
Pursuant to the Escrow Agreement, CoreStates executes a wire transfer of
$15,000 from the escrow account to CityFed on the first business day of
every month. The Escrow Agreement provides that CityFed may sell and
purchase securities in the escrow account, and that CoreStates will be
paid a fee of $2,500 per year, plus reimbursement for out-of-pocket
expenses, for serving as escrow agent. CityFed's assets in the escrow
account continue to be invested in money market instruments with a
maturity of one year or less and money market mutual funds. Withdrawals or
disbursements from the escrow account are not permitted without the
written authorization of the OTS, other than for (1) the $15,000 monthly
transfer to CityFed, (2) the disbursement of funds on account of purchases
of securities by CityFed and (3) the payment of the escrow fee and
expenses to CoreStates. The Escrow Agreement also provides that CoreStates
will restrict the escrow account in such a manner as to implement the
terms of the Escrow Agreement and to prevent a change in status or
function of the escrow account unless authorized by CityFed and the OTS in
writing. CoreStates provides 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 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
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at the request of the RTC and CityFed, the N.J. Court entered several
successive orders staying the First RTC Action from October 1993 through
June 1994. The Orders staying the First RTC Action did not affect the
Expense Agreement, except that the Orders provided that the Expense
Agreement would terminate upon the effective date of any order issued by
the OTS, or of any consent order or agreement between the OTS and CityFed,
that addressed the subject matter of the Expense Agreement. In light of
the filing by the OTS of the Notice of Charges on June 2, 1994, the RTC
and CityFed agreed to (1) a Consent Order Dismissing Claims Against
Defendant CityFed Financial Corp. Without Prejudice, which provides for
the dismissal without prejudice of the RTC's claim against CityFed in the
First RTC Action, and which was entered as an Order of the N.J. Court on
July 19, 1994; and (2) a Tolling Agreement, effective as of July 11, 1994,
pursuant to which CityFed and the RTC agreed (a) to toll, during the
pendency of the OTS' proceeding against CityFed, the running of the
statute of limitations with respect to the claims the RTC had asserted
against CityFed in the First RTC Action and (b) that, if the OTS'
proceeding against CityFed results in a determination that the Stipulation
was void and/or unenforceable as a matter of law, or that CityFed did not
violate the Stipulation, the RTC would be bound by such determination.
The RTC also sought, in its complaint in the First RTC Action, to recover
damages in excess of $130 million from two former officers of City Federal
resulting from their alleged negligence, gross negligence, breach of
fiduciary duty and other duties and other wrongful and improper conduct
while serving as officers of City Federal in connection with the approval,
funding, management, oversight and workout of two large acquisition,
development and construction loans for two projects located in Florida,
Grand Harbor ("Grand Harbor") and Woodfield Country Club Estates
("Woodfield"). On February 9, 1993, upon motion of CityFed in the First
RTC Action, the N.J. Court entered an order 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.
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
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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, 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 Cprporation ("FDIC"), as
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 have
settled with the RTC or FDIC or have been dismissed from the Second RTC
Action. 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
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Roessner to the RTC or FDIC, and thus the amount of indemnification claim
assigned by them to the RTC or FDIC, are $1,200,000 for Mr. Kean, $400,000
for Mr. Criser, $250,000 for Mr. Hedden and $335,000 for Mr. Roessner. The
RTC agreed to allow a $70,000 credit toward the amount to be paid by Mr.
Roessner as a means of resolving Mr. Roessner's claim against the RTC for
lost earnings on deferred compensation amounts Mr. Roessner claims were
withheld from him by the RTC. In their settlements with the FDIC, Gordon
Allen and Peter Kellogg retained their rights to seek indemnification from
CityFed for settlement payments they made 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.
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 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),
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CityFed had generally agreed to advance expenses in connection with these
requests, except where certain preconditions to advancement and
indemnification have not been met or where advancement and indemnification
may not be warranted under applicable law.
Because of the Temporary Order and the Escrow Agreement, CityFed is not
continuing to advance expenses in connection with any of the
indemnification and advancement requests referred to above. It is not yet
clear whether, as a result of the Third Circuit's decision in the Ridder
Action discussed below, CityFed will be required, notwithstanding the
existence of the Temporary Order and the Escrow Agreement, to advance
expenses to the defendants in the Ridder Action, and to current or former
officers, directors and employees of CityFed who are or were parties in
other actions or proceedings, including the Second RTC Action, the
Injunction Action, the D.C. Appeal, the Supreme Court Case, and
proceedings relating to the Notice of Charges and the Temporary Order. It
is also not yet clear whether CityFed will be required to make payments of
legal fees and expenses to the individuals who have settled with the RTC
or FDIC in the Second RTC Action or to make payments to the RTC or FDIC in
respect of the indemnification claims assigned to the RTC or FDIC by some
of the individuals who have settled with the RTC or FDIC. For more
information regarding these settlements and assignments of indemnification
rights, see "Second RTC Action" above.
CityFed received a letter dated June 21, 1995, from Skadden, Arps, Slate,
Meagher & Flom ("Skadden"), which is counsel for Gordon Allen, Marshall
Criser, Edwin Halkyard, Peter Kellogg, William Liffers and Victor Pelson
("Outside Directors"), who are or were parties to one or more of the
following matters (collectively, the "Cases"): (1) the Second RTC Action;
(2) the Injunction Action and D.C. Appeal; (3) the Supreme Court Case; and
(4) the administrative enforcement proceeding brought by the OTS against
CityFed and the Respondents. In the letter, the Outside Directors demanded
that, pursuant to CityFed's Bylaws and Restated Certificate of
Incorporation, and in light of the Order issued in the Ridder Action
described below, CityFed pay all outstanding invoices from Skadden for
legal services rendered to the Outside Directors in connection with the
Cases. The letter states that, if CityFed refuses to make the payments
demanded, the Outside Directors will consider taking appropriate legal
action to enforce their rights. CityFed received a similar letter from
Venable, Baetjer, Howard & Civiletti, counsel for John Kean, who was a
party to the Second RTC Action, as well as from Alfred J. Hedden, Gilbert
G. Roessner, and Gordon Allen, who were or are parties to the Cases.
CityFed is considering what action to take in response to these letters.
CityFed expects that it may receive other, similar letters demanding
payment from other current or former directors and officers who were or
are parties to one or more of the Cases.
Through September 30, 1999, CityFed received but has not paid bills
totaling $4,356,000 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.
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
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not possible for CityFed to estimate with any accuracy the probable amount
or range of liability relating to current or potential indemnification
claims pursuant to CityFed's Bylaws, although the amount of such claims
could be material.
Certain insurance policies may provide coverage to CityFed for
indemnification payments made by CityFed. These policies, subject to
certain exclusions, limitations and loss participation provisions, provide
coverage to CityFed for amounts that it may be obligated to pay to
indemnify its current and former directors and officers, and in some cases
also provide coverage to the directors and officers of CityFed directly
for covered losses resulting from claims made against CityFed's directors
and officers for certain wrongful acts. Under the insurance policies,
CityFed would be required, prior to any payment by the insurers to it, to
absorb a retention amount equal to the first $4 million of each covered
loss unless it is unable to do so by reason of insolvency.
The insurers have denied coverage with respect to the claims made against
the directors and officers in the First and Second RTC Actions.
Consequently, CityFed may not be reimbursed by the insurers for any
expenses advanced or indemnification payments made to these individuals in
the First and Second RTC Actions.
RIDDER ACTION - On or about April 19, 1993, Willem Ridder, John Hurst,
Lyndon Merkle and Gregory DeVany, former employees of City Collateral and
Financial Services, Inc., a subsidiary of City Federal, commenced the
Ridder Action by filing a complaint against CityFed in the N.J. Court. (A
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
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defense to its current and former officers and directors. In addition, the
petition requested that the Third Circuit require plaintiffs to post
security if an injunction is issued in plaintiffs' favor. On March 22,
1995, the Third Circuit denied CityFed's petition for rehearing. On July
3, 1995, the N.J. Court entered an Order ("Ridder Order") in the Ridder
Action, directing CityFed to remit immediately to the plaintiffs in the
Ridder Action $437,400, which represents legal fees incurred by the
plaintiffs through December 31, 1994 in the Ridder Action and as
defendants in the F&D Action, plus interest in the amount of $13,955.13.
The Ridder Order also provides a procedure for the payment by CityFed of
the legal fees incurred by the Ridder plaintiffs in the Ridder Action and
the F&D Action from January 1, 1995, forward.
Because of the Temporary Order, CityFed is unable unilaterally to make the
payment required by the Ridder Order. On July 13, 1995, CityFed submitted
the Ridder Order to the OTS and requested the permission of the OTS to pay
the amounts CityFed is directed to pay in the Ridder Order, as well as
permission to pay to the Ridder plaintiffs the sum of $601.84 in court
costs, which CityFed had been directed to pay to the plaintiffs in a May
4, 1995 Order of the N.J. Court. On August 18, 1995, the OTS issued a
Decision and Order ("OTS Order") denying this request by CityFed. On
August 2, 1995, CityFed appealed the Ridder Order to the Third Circuit,
arguing that the N.J. Court had abused its discretion by ordering CityFed
to make a payment CityFed could not make because of the Temporary Order.
On August 29, 1995, CityFed asked the Third Circuit to stay the Ridder
Order pending the appeal from the Ridder Order, but the Third Circuit
denied the request. The appeal was then fully briefed by the parties and
argued to a panel of the Third Circuit on March 22, 1996. On April 18,
1996, the Third Circuit ruled in CityFed's favor, vacating the Ridder
Order and directing that the matter be returned to the N.J. Court for
further proceedings. Among the options available to the N.J. Court, noted
the Third Circuit, were the possibility of staying any payment order
pending completion of the OTS administrative proceedings or conditioning
any payment obligation on CityFed's ability to obtain OTS approval. The
Third Circuit also said the N.J. Court might consider reducing the payment
obligation to judgment and permitting OTS to intervene in the proceedings.
On May 1, 1996, the Ridder plaintiffs petitioned the Third Circuit for
rehearing en banc, claiming that the Third Circuit panel's April 18, 1996,
decision conflicts with the February 9, 1995, Third Circuit panel decision
awarding indemnification to the Ridder plaintiffs. The petition for
rehearing en banc was denied.
On May 14, 1998, the Ridder Plaintiffs filed a motion asking the N.J.
Court to issue a writ of execution. They apparently intended to use the
writ of execution to try to levy on the CityFed assets being held in
escrow. CityFed opposed this motion, and filed a cross-motion to stay any
further proceeding in the N.J. Court pending a resolution of the
administrative proceedings, a lifting of the Temporary Order, or approval
by the OTS to make the payments. The OTS also sought leave of the N.J.
Court to file a brief as amicus curiae in opposition to the Ridder
Plaintiffs' motion. At a hearing on June 29, 1998, the N.J. Court denied
the OTS motion for leave to file as amicus curiae. On July 28, 1998, the
N.J. Court denied the Ridder Plaintiffs' motion for a writ of execution
but said they could refile the motion upon completion of the
administrative proceeding by the OTS against CityFed, or upon decision by
the U.S. Court of Appeals for the District of Columbia in an action
brought by the Ridder Plaintiffs directly against OTS seeking to force OTS
to permit the payments. The U.S. District Court for the District of
Columbia had ruled against the Ridder Plaintiffs in that case, stating
that it lacked jurisdiction to grant the relief sought, and the Ridder
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Plaintiffs had appealed that ruling. On July 17, 1998, the U.S. Court of
Appeals for the District of Columbia affirmed the District Court's holding
that it lacked jurisdiction to grant the relief sought (a petition to the
U.S. Supreme Court for a writ of certiorari was denied). Following this
decision by the DC Circuit, the N.J. Court denied the Ridder Plaintiffs'
motion for a writ of execution, holding that it too lacked jurisdiction to
grant relief that would interfere with the operation of the Temporary
Order. The N.J. Court stayed any further proceedings in the case pending
conclusion of the OTS administrative action or a lifting of the Temporary
Order. The Ridder Plaintiffs have appealed this decision of the N.J. Court
to the U.S. Court of Appeals for the Third Circuit.
The Ridder Plaintiffs have settled the F&D Action with the FDIC. In the
settlement, the Ridder Plaintiffs paid the FDIC $65,000, and the F&D
Action has been dismissed. As a result, there is no longer any prospect
that the Ridder Plaintiffs will suffer irreparable harm because of the
alleged inability to pay for their legal defense in the F&D Action.
Consequently, there would appear to be no further basis on which a court
could enter an injunction requiring CityFed to advance counsel fees and
expenses to the Ridder Plaintiffs. Should the Ridder Plaintiffs request
indemnification for the amount they paid to the FDIC or for legal fees and
expenses incurred in the defense of the F&D Action, the merits of their
request will be evaluated under CityFed's indemnification policy and under
applicable law. The Ridder Plaintiffs filed with the District Court in New
Jersey a motion for leave to file a "Supplemental Complaint" in which they
purport to state a cause of action for indemnification. CityFed opposed
the motion. The motion was denied without prejudice because of the stay
order entered by the District Court and the pending Third Circuit appeal
of that order.
"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 over 100 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
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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.
Chief Judge Loren Smith of the Court of Federal Claims has established a
procedure for deciding "common issues" which cut across multiple
supervisory goodwill cases. One such issue deals with the right of
investors and holding companies to assert claims as a result of
supervisory goodwill on the books of depository institutions in which they
have an ownership interest. Judge Smith's decision on this issue may
affect the Company's right to assert a claim for the loss of supervisory
goodwill on the books of City Federal.
CLAIM OF A FORMER DIRECTOR AND OFFICER - As a result of the receivership
of City Federal, City Federal failed to pay Gilbert G. Roessner, a former
director and officer of CityFed, the amounts owed to him under various
deferred compensation arrangements City Federal had with him. He claims
that CityFed is responsible for this amount (approximately $1.1 million as
of November 1989). On April 30, 1991, special counsel to the Compensation
Committee of CityFed's Board of Directors recommended to the full Board
that no payments be made to Mr. Roessner currently, but that the Board
keep Mr. Roessner's claim under advisement, to be reconsidered in light of
then existing circumstances and any additional evidence provided by Mr.
Roessner in support of his claim. The full Board of Directors received the
report of special counsel to the Compensation Committee.
Pursuant to Mr. Roessner's settlement with the RTC as discussed under
"Second RTC Action" above, CityFed believes Mr. Roessner's current
deferred compensation claim is in the amount of $169,365.60 plus accrued
interest thereon, if any.
INDEMNIFICATION CLAIMS RELATING TO DEFERRED COMPENSATION PLANS - In
September 1990, the RTC, as receiver for City Federal (and the new Federal
mutual savings bank created to acquire all of the deposits and
substantially all of the assets and indebtedness of City Federal), caused
an action to be filed in the N.J. Court seeking the return of
approximately $3.1 million (since reduced to $1.9 million) in deferred
compensation paid by City Federal to certain officers, directors and
employees of City Federal, some of whom are or were also officers,
directors or employees of CityFed. Pursuant to the Delaware General
Corporation Law and the Bylaws of CityFed, CityFed paid the defendants'
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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 tax years 1991 through 1998. CityFed's
position is not free from challenge, although CityFed believes that its
position is reasonable under the current tax law.
CONTINGENCY RESERVE - As noted above, the Company is subject to a number
of loss contingencies for which it is currently unable to reasonably
assess the probability or range of loss. At September 30, 1999, the
Company has a $6.6 million contingency reserve representing the current
minimum expenses relating to pending litigation estimated to be incurred
and provision for negotiated settlement amounts relating to these
contingencies. These costs are difficult to project and will be affected
by whether these matters are settled or whether the actions proceed to
trial. The reserve reflects expected costs to defend against the claims
and negotiated settlement amounts. The reserve, however, does not include
provisions for trial-related expenses or any other potential settlements
or adverse judgments (other than amounts relating to the Ridder Action) as
the Company is unable to make a reasonable estimate of the amount or range
of potential loss. The following is an analysis of the Company's
contingency reserve:
Balance - December 31, 1998 $6,615,000
Charges 45,000
Provision
-
----------
Balance - September 30, 1999 $6,570,000
==========
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
On December 7, 1989, the Office of Thrift Supervision appointed the
Resolution Trust Corporation ("RTC") as receiver for City Federal Savings
Bank ("City Federal"), the sole subsidiary of CityFed Financial Corp.
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("CityFed" or the "Company"). A new federal mutual savings bank, City
Savings Bank, F.S.B. ("City Savings"), was created, which acquired all
deposits and substantially all of the assets and liabilities of City
Federal. CityFed no longer controls City Federal and has no control over
City Savings.
As a result of this action, the financial statements of CityFed at
December 31, 1989, for the year then ended, and for subsequent periods
reflect CityFed's interest in City Federal as discontinued operations.
Because City Federal was placed in receivership, CityFed's current
interest in City Federal is a claim against the receivership estate for
the proceeds, if any, of the receivership estate of City Federal that
remain after all creditors, including the RTC, have been paid. Receipt of
any payment for such claim is remote. For a fuller description of the
receivership, see Item 1., "Business" in CityFed's 1998 Form 10-KSB.
Since the receivership of City Federal, CityFed has been, and currently
is, in the process of determining its liabilities, including its
contingent liabilities described in Note 4 to CityFed's financial
statements for the nine months ended September 30, 1999. To maintain the
principal value of its existing assets while this process is ongoing,
CityFed has invested substantially all of its funds in high grade money
market instruments with a maturity of one year or less and money market
mutual funds. Since the receivership of City Federal, the operating
expenses of CityFed have consisted of the salaries of the employees of
CityFed, the expenses of the two small offices maintained by CityFed and
the related office operating expenses, expenses relating to the audit of
its financial statements by its independent auditors, and expenses of its
outside legal counsel. Currently, CityFed has one full-time employee and
one small office.
Due to the nature of its assets at and subsequent to December 8, 1989,
CityFed may be deemed to fall within the definition of an "investment
company" under the Investment Company Act of 1940, as amended ("1940
Act"), from that date to the present. To resolve any question regarding
its current status under the 1940 Act, CityFed filed an application on
October 19, 1990 with the Division of Investment Management of the
Securities and Exchange Commission ("SEC") for an order exempting it from
certain provisions of the 1940 Act and certain rules and regulations
thereunder. This application was amended on September 23, 1993, January
18, 1994 and March 1, 1994. The application was granted under Sections
6(c) and (e) of the 1940 Act on March 15, 1994. Under the order granting
the application ("1940 Act Order"), CityFed was not required to register
as an investment company. However, CityFed and other persons in their
transactions and relations with CityFed are, under the terms of the 1940
Act Order, subject to Sections 9, 17(a), 17(d), 17(e), 17(f), 36 through
45 and 47 through 51 of the 1940 Act, and the rules thereunder, as if
CityFed were a registered investment company, except insofar as permitted
by the 1940 Act Order. The 1940 Act Order exempted CityFed from having to
register as an investment company until the earlier of March 15, 1995 or
such time as CityFed would no longer be required to register as an
investment company. On February 28, 1995, an Order was issued extending
the requested exemption until February 28, 1996, on February 21, 1996, an
order was issued extending the requested exemption until February 21,
1997, on February 12, 1997, an Order was issued extending the requested
exemption until February 12, 1999 and, on February 12, 1999, an Order was
issued extending the requested exemption until February 12, 2000.
20
<PAGE>
Liquidity and Capital Resources
At September 30, 1999, CityFed had approximately $9,786,000 in assets,
$10,987,000 in total liabilities and $1,201,000 in negative stockholders'
equity. At December 31, 1998, CityFed had approximately $9,655,000 in
assets, $11,059,000 in total liabilities and $1,404,000 in negative
stockholders' equity. However, as discussed in Note 4 to CityFed's
financial statements for the nine months ended September 30, 1999 and
under Item 1., "Business - Potential Obligations of CityFed" in CityFed's
1998 Form 10-KSB, a number of claims have been asserted against CityFed.
If the claimants under some or all of these claims are successful, their
claims against CityFed could greatly exceed CityFed's assets.
Consequently, CityFed's assets are currently being invested short term,
and expenses have been reduced to a level that management believes is
commensurate with CityFed's current activities pending resolution of these
claims.
While CityFed's liquidity is expected to be sufficient to meet litigation
and administrative expenses over the next twelve months, any substantial
indemnification expense, settlement or judgment (including, without
limitation, any obligation to currently advance legal expenses in the
Cases or the Ridder Action) could reduce liquidity to a level that would
jeopardize the continuation of the Company's activities. As a result of
additions to the contingency reserve, CityFed currently has a negative net
worth and it is unlikely that CityFed will be able to achieve a positive
net worth in the foreseeable future.
As discussed above, since the receivership of City Federal, CityFed
initially marshaled its assets and has been, and currently is, in the
process of determining its liabilities. To maintain the value of CityFed's
existing assets while this process is ongoing, CityFed has invested in
income producing instruments. Funds are invested so that they are
convertible into cash in a reasonably short time with minimal, if any,
loss of principal.
Since the receivership of City Federal, CityFed has invested and will
continue to invest substantially all its funds in securities with a
maturity of one year or less. These consist of U.S. government or agency
securities, commercial paper, bank certificates of deposit, money market
mutual funds and corporate debt obligations. Repurchase agreements may
only be entered into using U.S. government securities as collateral.
Non-governmental or agency investments are purchased only if they are
rated in one of the two highest categories by an established rating
agency. Investments in the corporate debt securities of any one issuer are
limited to $2,500,000. Under the terms of the Escrow Agreement (defined
below), changes in these investment policies require the approval of the
Board of Directors of CityFed and the OTS.
Under the terms of the 1940 Act Order, CityFed may not purchase or
otherwise acquire any additional securities other than securities that are
rated investment grade or higher by a nationally recognized statistical
rating organization or, if unrated, deemed to be of comparable quality
under guidelines approved by CityFed's Board of Directors, subject to two
exceptions:
(a) CityFed may make an equity investment in issuers that are
not investment companies as defined in Section 3(a) of the 1940 Act
(including issuers that are not investment companies because they are
covered by a specific exclusion from the definition of investment
21
<PAGE>
company under Section 3(c) of the 1940 Act other than Sections
3(c)(1) and 3(c)(7)) 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)(10) promulgated under the 1940 Act.
The financial statements of CityFed at December 31, 1989, for the year
then ended, and for subsequent periods reflect that CityFed maintains
reserves for CityFed's pending litigation expenses, which, at September
30, 1999, were $6,570,000 and, at December 31, 1998, were $6,615,000.
The litigation costs included in the reserves are difficult to project and
will be affected by whether these matters are settled or whether the
actions will proceed to trial. The reserves reflect expected costs to
defend the claims up to, but not including, the costs of any trial-related
expenses (except as described below). The reserves also do not include the
costs of any settlements (other than negotiated settlements, including the
settlements in the Second RTC Action) or adverse judgments, except that
the contingency reserve now also includes amounts relating to the Ridder
Action. See Note 4 to the Notes to Financial Statements in this Form
10-QSB, and Item 1., "Business - Potential Obligations of CityFed" in
CityFed's 1998 Form 10-KSB for a description of the major claims that may
give rise to expected future costs. Although management believes that
CityFed's current level of reserves are sufficient to cover the costs of
pending litigation matters (but not any trial-related expenses or the
costs of any other potential settlements or adverse judgments other than
those relating to the Ridder Action and the Second RTC Action), no
assurances can be given that the reserves established will be adequate,
that any ultimate resolution of the claims will not result in substantial
amounts being incurred or that further claims will not be asserted.
On October 26, 1994, CityFed and the OTS entered into an Escrow Agreement
("Escrow Agreement") with CoreStates Bank, N.A. ("CoreStates") pursuant to
which CityFed transferred substantially all of its assets to CoreStates
for deposit into an escrow account to be maintained by CoreStates.
Pursuant to the Escrow Agreement, CoreStates executes a wire transfer of
$15,000 from the escrow account to CityFed on the first business day of
every month. The Escrow Agreement provides that CityFed may sell and
purchase securities in the escrow account, and that CoreStates will be
paid a fee of $2,500 per year, plus reimbursement for out of pocket
expenses, for serving as escrow agent. CityFed's assets in the escrow
account continue to be invested in money market instruments with a
maturity of one year or less and money market mutual funds. Withdrawals or
disbursements from the escrow account are not permitted without the
written authorization of the OTS, other than for (1) the $15,000 monthly
transfer to CityFed, (2) the disbursement of funds on account of purchases
of securities by CityFed and (3) the payment of the escrow fee and
expenses to CoreStates. The Escrow Agreement also provides that CoreStates
will restrict the escrow account in such a manner as to implement the
terms of the Escrow Agreement and to prevent a change in status or
function of the escrow account unless authorized by CityFed and the OTS in
writing. CoreStates will provide to the OTS a copy of all statements
regarding the escrow account provided to CityFed.
22
<PAGE>
Results of Operations
CityFed recorded income from continuing operations for the nine months
ended September 30, 1999 of $203,000. This compares to income from
continuing operations in the amount of $222,000 for the nine months ended
September 30, 1998. No addition to the contingency reserve was made during
the nine months ended September 30, 1999 or 1998.
CityFed recorded income from continuing operations for the three months
ended September 30, 1999 of $98,000. This compares to a income from
continuing operations in the amount of $81,000 for the three months ended
September 30, 1998.
Interest on investments was $383,000 for the nine months ended September
30, 1999 compared to $379,000 for the nine months ended September 30, 1998
due primarily to the slightly larger amount of funds invested. Total
expenses of $180,000 for the nine months ended September 30, 1999 were
higher than the $157,000 for the same period in 1998 due primarily to a
higher level of professional service and escrow fees.
Interest on investments was $156,000 for the three months ended September
30, 1999, compared to $136,000 for the three months ended September 30,
1998 due primarily to the slightly larger amount of funds invested. Total
operating expenses of $58,000 for the three months ended September 30,
1999 were slightly more than the $55,000 for the same period in 1998.
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. See Note 4 to the Notes to Financial
Statements in this Form 10-QSB, and Item 1., "Business Potential
Obligations of CityFed" in CityFed's 1998 Form 10-KSB for a description of
the major claims that may give rise to expected future costs. No
additional provisions to the loss from discontinued operations were made
during the nine months ended September 30, 1999. The contingency reserve
was reduced by charges of $45,000 from $6,615,000 at December 31, 1998 to
$6,570,000 at September 30, 1999.
The basic net loss per share of $0.11 and $0.34 for the three and nine
months ended September 30, 1999, respectively, compares to $0.11 and $0.33
for the three and nine months ended September 30, 1998. In all periods,
the basic net loss per share is after the deduction of unpaid preferred
dividends. No preferred or common dividends have been paid since the
second quarter of 1989 and none are expected to be paid until CityFed's
situation changes significantly.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to CityFed's financial statements for the nine months ended
September 30, 1999 for a description of currently pending litigation.
23
<PAGE>
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
(a) None.
(b) CityFed's $2.10 Cumulative Convertible Preferred Stock, Series B, par
value $25.00 per share ("Series B Stock"), is required to pay quarterly
dividends at a rate of $0.525 per share on March 1, June 1, September 1
and December 1 of each year. CityFed's Series C, Junior Preferred Stock,
Cumulative, par value $0.01 per share ("Series C Stock"), is required to
pay quarterly dividends at a rate of $0.10 per share on March 15, June 15,
September 15 and December 15 of each year. The dividends on both the
Series B and the Series C Stock are cumulative. The Series C Stock is
junior to the Series B Stock in the payment of dividends.
Beginning with the payment due on September 1, 1989, CityFed has not paid
any quarterly dividends on the Series B Stock. Beginning on September 15,
1989, CityFed also has not paid any quarterly dividends on the Series C
Stock. Because CityFed has failed to pay at least six quarterly dividends
on the Series B Stock, the holders of such stock have the exclusive right,
voting separately as a class, to elect, and have elected, two directors of
CityFed. Until the aggregate deficiency is declared and fully paid on the
Series B Stock and the Series C Stock, CityFed may not declare any
dividends or make any other distributions on or redeem the Common Stock.
Until the aggregate deficiency is declared and fully paid on the Series B
Stock, CityFed may not declare any dividends or make any other
distributions on or redeem the Series C Stock. As of September 30, 1999,
the aggregate deficiency on the Series B Stock was approximately $54.6
million and the aggregate deficiency on the Series C Stock was
approximately $33.9 million.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Statement Regarding the Computation of Per Share Loss.
27. Financial Data Schedule
(b) None
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITYFED FINANCIAL CORP.
By:/s/ John W. Atherton, Jr.
--------------------------
John W. Atherton, Jr.
President, Chief Executive Officer
and Treasurer (Principal Executive
and Financial Officer)
Date: November 12, 1999
Exhibit 11
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of Loss Per Share:
Weighted average number of
shares outstanding 18,715,609 18,715,609 18,715,609 18,715,368
Loss applicable to common
stock:1
From continuing operations $(2,061,000) $(2,078,000) $(6,273,000) $(6,254,000)
============ ============ ============ ============
From discontinued operations $ _ $ _ $ _ $ _
============ ============ ============ ============
Net loss $(2,061,000) $(2,078,000) $(6,273,000) $(6,254,000)
============ ============ ============ ============
Basic loss per share:
From continuing operations $(0.11) $(0.11) $(0.34) $(0.33)
======= ======= ======= =======
From discontinued operations $ - $ - $ - $ -
======= ======= ======= =======
Net loss $(0.11) $(0.11) $(0.34) $(0.33)
======= ======= ======= =======
</TABLE>
__________________________
1 Losses applicable to Common Stock are net of preferred stock dividends for the
nine months ended September 30, 1999 and 1998 in the amount of $6,476,000.
Losses applicable to Common Stock are net of preferred stock dividends for the
three months ended September 30, 1999 and 1998 in the amount of $2,159,000.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000744765
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 61
<SECURITIES> 9,567
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10
<DEPRECIATION> 10
<TOTAL-ASSETS> 9,786
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
63,553
<COMMON> (64,754)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,786
<SALES> 0
<TOTAL-REVENUES> 383
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 203
<INCOME-TAX> 0
<INCOME-CONTINUING> 203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
