UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ______________
Commission file number 0-13311
CityFed Financial Corp.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2527684
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
P.O. 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 September 30, 2000, the number
of shares of outstanding common stock was 18,715,609.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CITYFED FINANCIAL CORP.
STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and December 31, 1999
(Dollars in Thousands)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
------
Cash $ 4 $ 63
Investment securities at amortized cost
(Market value $6,354 in 2000 and $9,430 in 1999) 6,356 9,444
Other assets 150 145
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TOTAL ASSETS $ 6,510 $ 9,652
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
LIABILITIES:
Contingency reserve $ 4,193 $ 6,353
Other liabilities 4,444 4,504
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Total liabilities 8,637 10,857
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, 30,000,000 shares authorized:
$2.10 cumulative convertible, Series B, $25
par value, issued and outstanding: 63,471 63,471
2,538,850 in 2000 and 1999
Series C Junior, cumulative, $.01 par value,
liquidation preference $3.00 per share,
shares issued and outstanding: 8,257,079 82 82
in 2000 and 1999
Common stock, $.01 par value, 100,000,000
shares authorized, issued: 18,914,609 in
2000 and 1999, outstanding: 18,715,609 in 188 188
2000 and 1999
Additional paid-in capital 108,868 108,868
Accumulated deficit (173,736) (172,814)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
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Total stockholders' deficiency (2,127) (1,205)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 6,510 $ 9,652
========= =========
See notes to financial statements.
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<TABLE>
CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2000 and 1999
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME:
Interest on investments $ 105 $ 156 $ 360 $ 383
Other income - - 24 -
Total income 105 156 384 383
----------- ----------- ----------- -----------
EXPENSES:
Compensation and employee benefits 41 31 127 95
Other operating expenses 25 27 142 85
----------- ----------- ----------- -----------
Total expenses 66 58 269 180
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 39 98 115 203
LOSS FROM DISCONTINUED OPERATIONS - - ( 1,037) -
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ 39 $ 98 $ (922) $ 203
=========== =========== =========== ===========
NET LOSS AVAILABLE FOR COMMON
STOCKHOLDERS $ (2,120) $ (2,061) $ (7,398) $ (6,273)
BASIC LOSS PER SHARE:
From continuing operations $ (0.11) $ (0.11) $ (0.34) $ (0.34)
From discontinued operations $ - $ - $ (0.06) $ -
Net loss $ (0.11) $ (0.11) $ (0.40) $ (0.34)
AVERAGE SHARES OUTSTANDING 18,715,609 18,715,609 18,715,609 18,715,609
DIVIDENDS PER COMMON SHARE - - - -
</TABLE>
See notes to financial statements.
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CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(Dollars in Thousands)
(Unaudited)
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 568 $ 365
Operating expenses (360) (256)
Settlement payment (3,169) -
Other income 24 -
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Net cash (used in) provided by operating
activities (2,937) 109
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investment securities 2,880 (96)
Other - net (2) -
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Net cash provided by (used in) investing 2,878 (96)
activities ---------- ---------
NET (DECREASE) INCREASE IN CASH (59) 13
CASH AT BEGINNING OF PERIOD 63 48
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CASH AT END OF PERIOD $ 4 $ 61
========== =========
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income $ (922) $ 203
Loss from discontinued operations 1,037 -
Settlement payment (3,169) -
Contingency reserve payments (34) (56)
Increase in other assets (5) (4)
Increase (decrease) in accrued income and expense, 156 (34)
net ---------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (2,937) $ 109
========== =========
See notes to financial statements.
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 (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. 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 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, 2000, the
Company's business activities consisted primarily of attempting to resolve
outstanding indemnification 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 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, 1999 ("1999 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, 2000, dividends in
arrears were $60.0 million and $37.2 million on the Company's Series B and
Series C Stock, respectively.
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4. COMMITMENTS AND CONTINGENCIES
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 and for settlement amounts.
As described below, 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 (as such terms are
defined below). 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 and
the "Indemnification Claims Relating to Deferred Compensation Plans"
(described below), CityFed is currently aware of several other legal
actions and matters with respect to which current or former officers,
directors or employees of CityFed or its former subsidiaries have
requested that CityFed advance expenses and indemnify them. Except for the
indemnification requests relating to the Notice of Charges (which
CityFed's Board of Directors has not yet considered), CityFed had
generally agreed to advance expenses in connection with these requests,
except where certain preconditions to advancement and indemnification have
not been met or where advancement and indemnification may not be warranted
under applicable law.
CityFed is not continuing to advance expenses in connection with any of
the indemnification and advancement requests referred to above. CityFed
may be required to make payments of legal fees and expenses (including
settlement amounts) to the individuals who have settled with the RTC or
Federal Deposit Insurance Corporation ("FDIC") in the Second RTC Action.
For more information regarding these settlements, see "Second RTC Action"
below.
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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 efforts to set aside the Temporary Order (as defined below); (3)
the Supreme Court Case (as defined below); and (4) the administrative
enforcement proceeding brought by the OTS against CityFed and the
Individual Respondents (as defined below). In the letter, the Outside
Directors demanded that, pursuant to CityFed's Bylaws and Restated
Certificate of Incorporation, 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 also received similar letters in connection with the
deferred compensation matters described below. See "Indemnification Claims
Relating to Deferred Compensation Plans." 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, 2000, CityFed received, but has not paid, bills
totaling $4,357,000 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.
On May 19, 2000, CityFed finalized with the OTS and the FDIC a settlement
("Settlement") that settled the action described below under "In the
Matter of CityFed Financial Corporation." Pursuant to the Settlement, the
Temporary Order was dissolved, and the Escrow Agreement (as described
below) was terminated. Following the Settlement, CityFed may undergo
reorganization, perhaps involving a bankruptcy proceeding. It is
anticipated that these indemnification claims will be addressed prior to
or as part of any such reorganization.
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. 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
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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.
IN THE MATTER OF CITYFED FINANCIAL CORPORATION, OTS Order No. AP 94-26
(June 2, 1994) - On June 2, 1994, the Office of Thrift Supervision issued
a Notice of Charges ("OTS Action") 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 ("Individual
Respondents"), who are current or former directors or officers of CityFed
and of CityFed's former subsidiary, City Federal.
The OTS charged that CityFed failed to maintain the net worth of City
Federal at levels required by applicable capital requirements in violation
of a Stipulation dated December 4, 1984. CityFed had provided the
Stipulation to the Federal Savings and Loan Insurance Corporation in
connection with the approval by the Federal Home Loan Bank Board of
CityFed's acquisition of City Federal in December 1984. Federal Home Loan
Bank Board ("FHLBB") Resolution No. 84-664, dated November 21, 1984,
approved CityFed's acquisition of City Federal on the condition that,
among other things, CityFed provide the Stipulation to the Federal Savings
and Loan Insurance Corporation. 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 sought restitution in an amount not less than $118.4
million, which the OTS alleged to be the regulatory capital deficiency
reported by City Federal in the Fall of 1989.
The OTS also sought 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 was $2,649,600.
The OTS charged that the Individual Respondents had an affirmative
obligation to see that CityFed complied with its net worth maintenance.
The OTS alleged that some of the Individual Respondents (Messrs. Allen,
Atherton, Hedden, Kellogg and Roessner) were unjustly enriched through
CityFed's 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, of
litigation expenses to those Individual Respondents in the RTC action in
the United States District Court for the District of New Jersey,
RESOLUTION TRUST CORPORATION V. ATHERTON, ET AL., Civil Action No. 93-1811
(consolidated with RESOLUTION TRUST CORPORATION V. SIMMONS, ET AL., Civil
Action No. 92-5261-B). The Notice of Charges requested that an order be
entered by the Director of the OTS requiring the Individual Respondents to
make restitution, reimburse, indemnify or guarantee the OTS against loss
in an amount not less than $400,000, which the OTS alleged to be the
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amount of legal expenses CityFed paid on their behalf from April to
December 1993.
In the Notice of Charges, the OTS also assessed a civil money penalty
against the Individual Respondents on the grounds that they allegedly
"violated a condition imposed in writing and/or a written agreement." The
amount of civil money penalties assessed against the Individual
Respondents was $51,750 each.
Also on June 2, 1994, the OTS issued a Temporary Order to Cease and Desist
("Temporary Order") against CityFed. The Temporary Order sought to
"freeze" CityFed's assets by placing them in various respects under the
control of the OTS. CityFed and several of the Individual Respondents
attempted to have the Temporary Order set aside in court, but that attempt
was unsuccessful.
On October 26, 1994, CityFed and the OTS entered into an Escrow Agreement
with CoreStates Bank, N.A. (now First Union National Bank) pursuant to
which CityFed transferred substantially all of its assets to First Union
Bank for deposit into an escrow account. The Escrow Agreement provided
CityFed with $15,000 per month for normal business expenses and allowed
CityFed to sell and purchase securities in the escrow account. Although
the Escrow Agreement was terminated, CityFed's assets continue to be
invested in money market instruments with a maturity of one year or less
and money market mutual funds.
The terms of the Settlement generally include the following:
o CityFed paid to the FDIC, as receiver for City Federal, $3,169,115;
o CityFed assigned to the FDIC all of CityFed's interest in its
goodwill claim;
o CityFed conveyed to the FDIC its ownership interest in City Federal
and gave up any claims against its receivership estate;
o The OTS dismissed with prejudice the OTS Action, and the OTS and the
FDIC gave full and complete releases to CityFed and the Individual
Respondents;
o CityFed and the Individual Respondents gave full and complete
releases to the OTS and the FDIC; and
o The OTS dissolved the Temporary Order and authorized First Union
Bank to release to CityFed all of its assets remaining in the escrow
account following payment of the settlement proceeds.
For further information regarding the Stipulation, see "First RTC Action"
below.
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
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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"). The Ridder Action has been settled
and the Expense Agreement was terminated.
On September 30, 1993, CityFed was advised by the 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 the
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. 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.
Pursuant to the Settlement, the FDIC released CityFed from all claims in
the First RTC Action.
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
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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
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 2, 1996, the FDIC, as statutory successor to the RTC, filed a
Third Amended Complaint ("Third Amended Complaint") in the Second RTC
Action. The Third Amended Complaint alleged that the defendants in the
Second RTC Action were liable for negligence as well as gross negligence
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and breach of fiduciary duty under federal common law. In all other
respects, the Third Amended Complaint was 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.
CityFed is aware that all of the defendants in the Second RTC Action 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, which occurred pursuant to the Settlement. 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 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, John W. Atherton, Jr., 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.
Pursuant to the Settlement, the FDIC assigned any rights it acquired in
the settlements described above to CityFed. See "Indemnification Claims"
above.
SUPERVISORY GOODWILL ACTION - The United States Supreme Court held in the
Winstar case that the loss by a financial institution of supervisory
goodwill carried on its books as a consequence of earlier supervisory
mergers, as a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, constituted a breach of contract by the United
States. 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
on its books as a result of various acquisitions by City Federal of
troubled depository institutions. 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.
Pursuant to the Settlement, CityFed assigned to the FDIC all of CityFed's
interest in its supervisory goodwill case, ceased to be a party to that
case, and has no right to share in the recovery in that case, should there
be one.
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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'
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; however, CityFed
has included in its contingency reserve the full settlement amount of
$790,000.
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 1999. CityFed's
position is not free from challenge, although CityFed believes that its
position is reasonable under the current tax law.
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CONTINGENCY RESERVE - As noted above, the Company is subject to a number
of loss contingencies for which it is currently unable to reasonably
assess the probability or range of loss. At September 30, 2000, the
Company had a $4.2 million contingency reserve that includes amounts for
claims asserted for indemnification of expenses in the OTS Action,
expenses and settlements in the Second RTC Action and the claims described
above under "Indemnification Claims Relating to Deferred Compensation
Plans." The reserve also includes amounts representing the current minimum
legal expenses estimated to be incurred related to these claims. The
charges for the nine months ended September 30, 2000 include $3,169,115
relating to the Settlement. The following is an analysis of the Company's
contingency reserve:
Balance - December 31, 1999 $ 6,353,000
Charges (3,197,000)
Provision 1,037,000
-----------
Balance - September 30, 2000 $ 4,193,000
===========
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. ("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 interest in
City Federal was 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. For a
fuller description of the receivership, see Item 1., "Business" in
CityFed's 1999 Form 10-KSB. In the Settlement relating to In the Matter
of CityFed Financial Corporation, OTS Order No. AP 94-26 (June 2, 1994)
("Settlement"), CityFed conveyed its interest, if any, in City Federal
to the Federal Deposit Insurance Corporation and gave up any claim
against the receivership estate of City Federal. See Note 4 to the
Notes to Financial Statements for the Nine Months Ended September 30,
2000 in this Form 10-QSB ("Notes") under "In the Matter of CityFed
Financial Corporation" for further information regarding the
Settlement.
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 the Notes. 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
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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 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, on February 12, 1999, an Order was
issued extending the requested exemption until February 12, 2000, and,
on February 9, 2000, an order was issued extending the requested
exemption until February 9, 2001.
Liquidity and Capital Resources
At September 30, 2000, CityFed had approximately $6,510,000 in total
assets, $8,637,000 in total liabilities and $2,127,000 in negative
stockholders' equity. At December 31, 1999, CityFed had approximately
$9,652,000 in total assets, $10,857,000 in total liabilities and
$1,205,000 in negative stockholders' equity. However, as discussed in
Note 4 to the Notes and under Item 1., "Business - Potential
Obligations of CityFed" in CityFed's 1999 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 legal
and administrative expenses over the next twelve months, any
substantial indemnification expense 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
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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 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
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 a
contingency reserve which, at September 30, 2000, was $4,193,000 and,
at December 31, 1999, was $6,353,000. The contingency reserve was
reduced by $3,197,000 during the nine months ended September 30, 2000
as a result of the Settlement.
The current reserves include amounts for claims asserted for
indemnification of expenses in the OTS Action, expenses and settlements
in the Second RTC Action and the claims described above under
"Indemnification Claims Relating to Deferred Compensation Plans." The
reserve also includes amounts representing the current minimum legal
expenses estimated to be incurred in connection with the claims. See
Note 4 to the Notes, and Item 1., "Business - Potential Obligations of
CityFed" in CityFed's 1999 Form 10-KSB for a description of the major
claims that may give rise to expected future costs. Although management
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believes that CityFed's current level of reserves are sufficient to
cover the costs of pending claims, 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., now First
Union Bank ("First Union"), pursuant to which CityFed transferred
substantially all of its assets to First Union for deposit into an
escrow account to be maintained by First Union. Under the Settlement,
CityFed is no longer subject to the terms of the Escrow Agreement.
Results of Operations
CityFed recorded income from continuing operations for the nine months
ended September 30, 2000 of $115,000. This compares to income from
continuing operations in the amount of $203,000 for the nine months
ended September 30, 1999. No addition to the contingency reserve was
made during the nine months ended September 30, 1999 while an addition
of $1,037,000 was made for the nine months ended September 30, 2000.
CityFed recorded income from continuing operations for the three months
ended September 30, 2000 of $39,000. This compares to income from
continuing operations in the amount of $98,000 for the three months
ended September 30, 1999. No addition to the contingency reserve was
made during the three months ended September 30, 1999 or 2000.
Interest on investments was $360,000 for the nine months ended
September 30, 2000 compared to $383,000 for the nine months ended
September 30, 1999 due primarily to the lower amount of funds invested.
In 2000, CityFed received a distribution of $24,000 from CX Partners,
L.P. See Item 1., "Description of Business - Boesky Settlement" in
CityFed's 1999 Form 10-KSB. Total expenses of $269,000 for the nine
months ended September 30, 2000 were higher than the $180,000 for the
same period in 1999 due primarily to a higher level of professional
service fees.
Interest on investments was $105,000 for the three months ended
September 30, 2000, compared to $156,000 for the three months ended
September 30, 1999 due primarily to the lower amount of funds invested.
Total operating expenses of $66,000 for the three months ended
September 30, 2000 were higher than the $58,000 for the same period in
1999 due to the higher level of compensation expense.
CityFed's contingency reserve was established in 1989 and is intended
to include reserves for CityFed's legal and indemnification expenses.
See Note 4 to the Notes and Item 1., "Business - Potential Obligations
of CityFed" in CityFed's 1999 Form 10-KSB for a description of the
major claims that may give rise to expected future costs. An addition
of $1,037,000 was made to the reserve for the nine months ended
September 30, 2000. Due to the addition to the reserve less charges of
$28,000 and the settlement payment in the OTS Action of $3,169,115, the
contingency reserve decreased from $6,353,000 at December 31, 1999 to
$4,193,000 at September 30, 2000.
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The basic loss per share from continuing operations of $0.11 and $0.34
for the three and nine months ended September 30, 2000, respectively,
compares to $0.11 and $0.34 for the three and nine months ended
September 30, 1999. The basic net loss per share of $0.40 for the nine
months ended September 30, 2000 is after the loss from discontinued
operations of $0.06 per share. 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 the Notes for a description of currently pending
litigation.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
(a) None.
(b) CityFed's $2.10 Cumulative Convertible Preferred Stock, Series B,
par value $25.00 per share ("Series B Stock"), is required to pay
quarterly dividends at a rate of $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, 2000, the aggregate
deficiency on the Series B Stock was approximately $60.0 million and
the aggregate deficiency on the Series C Stock was approximately $37.2
million.
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Statement Regarding the Computation of Per Share Loss.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
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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 14, 2000
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