UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-13311
CityFed Financial Corp.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2527684
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
PO Box 3126, Nantucket, MA 02584
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(Address of principal executive offices)
(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 April 30, 2000, 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
<TABLE>
Item 1. Financial Statements.
CITYFED FINANCIAL CORP.
STATEMENTS OF FINANCIAL CONDITION
March 31, 2000 and December 31, 1999
(Dollars in Thousands)
<CAPTION>
March 31, 2000 December 31,
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(Unaudited) 1999
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ASSETS
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<S> <C> <C>
Cash $ 51 $ 63
Investment securities at amortized cost
(Market value $9,487 in 2000 and
$9,430 in 1999) 9,495 9,444
Other assets 145 145
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TOTAL ASSETS $ 9,691 $ 9,652
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
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LIABILITIES:
Contingency reserve $ 7,389 $ 6,353
Other liabilities 4,467 4,504
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Total liabilities 11,856 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:
2,538,850 in 2000 and 1999 63,471 63,471
Series C Junior, cumulative, $.01 par value,
liquidation preference $3.00 per share,
shares issued and outstanding: 8,257,079
in 2000 and 1999 63,471 63,471
Common stock, $.01 par value, 100,000,000
issued: 18,914,609 in 2000 and 1999,
outstanding: 18,715,609 in 2000 and 1999
Additional paid-in capital 108,868 108,868
Accumulated deficit (173,774) (172,814)
Treasury stock (199,000 shares of common stock) (1,000) (1,000)
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Total stockholders' deficiency (2,165) (1,205)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 9,691 $ 9,652
============ ============
</TABLE>
See notes to financial statements.
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CITYFED FINANCIAL CORP.
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
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March 31,
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2000 1999
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INCOME:
Interest on investments $ 132 $ 113
Other income 24 -
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Total income 156 113
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EXPENSES:
Compensation and employee benefits 35 35
Other operating expenses 44 29
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Total expenses 79 64
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INCOME FROM CONTINUING OPERATIONS 77 49
LOSS FROM DISCONTINUED OPERATIONS (1,037) -
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NET (LOSS) INCOME $ ( 960) $ 49
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NET LOSS AVAILABLE FOR COMMON
STOCKHOLDERS
BASIC LOSS PER SHARE:
From continuing operations $ (0.11) $ (0.11)
From discontinued operations $ (0.06) $ -
Net loss $ (0.17) $ (0.11)
AVERAGE SHARES OUTSTANDING 18,715,609 18,715,609
DIVIDENDS PER COMMON SHARE - -
See notes to financial statements.
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CITYFED FINANCIAL CORP.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(Dollars in (Unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 184 $ 202
Operating expenses (117) (120)
Other income 24 -
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Net cash provided by operating activities 91 82
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment securities (103) (105)
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Net cash used in investing activities (103) (105)
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NET DECREASE IN CASH (12) (23)
CASH AT BEGINNING OF PERIOD 63 48
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CASH AT END OF PERIOD $ 51 $ 25
======== ========
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net (loss) income $ (960) $ 49
Loss from discontinued operations 1,037 -
Contingency reserve payments (6) (15)
Decrease in accrued income and expense, net 20 48
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 91 $ 82
======== ========
See notes to financial statements.
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CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 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 March 31, 2000, 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, 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 March 31, 2000, dividends in arrears
were $57.3 million and $35.5 million on the Company's Series B and Series
C Stock, respectively.
5
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4. COMMITMENTS AND CONTINGENCIES
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 Financial Corp.
("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 OTS charged that CityFed was unjustly enriched and that its violations
involved reckless disregard for the law or applicable regulations or prior
order of either the FHLBB or the OTS. 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 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 was 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.
The OTS charged that the individual Respondents had an affirmative
obligation to see that CityFed complied with its net worth maintenance.
OTS alleged that some of the 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
Respondents in the RTC action in the United States District Court for the
District of New Jersey, RESOLUTION TRUST CORPORATION V. ATHERTON, ET AL.,
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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 Respondents to make restitution, reimburse, indemnify or guarantee the
OTS against loss in an amount not less than $400,000, which OTS alleged to
be the 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 Respondents was
$51,750 each.
On February 1, 1996, the Administrative Law Judge granted OTS' Motion for
Partial Summary Disposition and denied such motions by CityFed and the
Individual Respondents. The Administrative Law Judge ("ALJ") concluded
that CityFed's retention of dividends and other funds received from its
former subsidiary, City Federal, constituted "unjust enrichment" within
the meaning of 12 U.S.C. Section 1818(b)(6), giving rise to liability for
restitution, and that the net worth maintenance Stipulation was
enforceable by the OTS against CityFed.
On August 20, 1997, then OTS Director Nicolas Retsinas reversed the ALJ's
recommendation of 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 disposition, and he remanded
the case to the ALJ for further proceedings consistent with his decision.
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 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 provides
CityFed with $15,000 per month for normal business expenses and allows
CityFed to sell and purchase securities in the escrow account. 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.
CityFed, OTS and the Federal Deposit Insurance Corporation ("FDIC") are
engaged in ongoing settlement discussions and have reached an agreement in
principle to settle the OTS claim. The parties are presently engaged in
documenting the settlement and in securing necessary approvals.
As presently contemplated, the settlement would become effective upon the
issuance of an Order by the OTS accepting an offer of settlement
("Settlement"). The terms of the Settlement would include the following:
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o CityFed would pay to the FDIC, as receiver for City Federal,
$3,169,115;
o CityFed would assign to the FDIC all of CityFed's interest in
its goodwill claim (see "Supervisory Goodwill Action" below);
o CityFed would convey to the FDIC its ownership interest in
City Federal and will give up any claims against its
receivership estate;
o The OTS would dismiss with prejudice the OTS Action, and the
OTS and the FDIC would give full and complete releases to
CityFed and the Individual Respondents;
o CityFed and the Individual Respondents would give full and
complete releases to the OTS and the FDIC; and
o The OTS would dissolve the Temporary Order and would authorize
First Union Bank to release to CityFed all of its assets
remaining in the escrow account following payment of the
settlement proceeds.
CityFed contemplates that, if the Settlement is finalized on the terms
outlined above, CityFed will, as part of that Settlement, relinquish its
ownership interest in City Federal. Following the Settlement, CityFed
intends to undergo reorganization, perhaps involving a bankruptcy
proceeding. However, under the terms of the Settlement as presently
contemplated, the Settlement may be declared null and void if bankruptcy
proceedings are instituted by or against CityFed within a stipulated time
period. If the Settlement becomes null and void, the OTS and the FDIC
would have the right to reinstate all claims against CityFed and the
Individual Respondents and could seek to litigate those claims in the
bankruptcy court or elsewhere. As noted above, claims based on
commitments to maintain the capital of federally insured depository
institutions 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).
While CityFed believes that the Settlement will become effective on the
terms outlined above, there can be no assurance that it will be so
finalized and, in such event, CityFed will remain subject to the Temporary
Order.
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
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
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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
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
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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.
If the proposed Settlement described above is finalized, the FDIC will
release 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
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
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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 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.
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, but only if the OTS and CityFed settle the
administrative proceeding or final judgment is entered against CityFed in
the proceeding. Mr. Pelson agreed to pay the RTC $650,000 to settle the
Second RTC Action. The settlement agreements for John Kean, Marshall
Criser, Alfred Hedden and Gilbert Roessner include (1) an assignment by
them to the RTC or FDIC of their respective indemnification claims against
CityFed for settlement payments they make to the RTC or FDIC to settle the
Second RTC Action, and (2) retention by them of their respective
indemnification claims against CityFed for legal fees and expenses
incurred in the Second RTC Action. The settlement payments agreed to be
made by Messrs. Kean, Criser, Hedden and Roessner to the RTC or FDIC, and
thus the amount of indemnification claim assigned by them to the RTC or
FDIC, are $1,200,000 for Mr. Kean, $400,000 for Mr. Criser, $250,000 for
Mr. Hedden and $335,000 for Mr. Roessner. The RTC agreed to allow a
$70,000 credit toward the amount to be paid by Mr. Roessner 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.
If the proposed Settlement described above is finalized, the FDIC will
assign any rights it acquired in the settlements described above to
CityFed. See "Indemnification Claims" below.
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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 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.
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 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
12
<PAGE>
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 efforts to set aside the Temporary Order; (3) the Supreme Court
Case; and (4) the administrative enforcement proceeding brought by the OTS
against CityFed and the Respondents. In the letter, the Outside Directors
demanded that, pursuant to CityFed's Bylaws and Restated Certificate of
Incorporation, and in light of the Order issued in the Ridder Action
described below, CityFed pay all outstanding invoices from Skadden for
legal services rendered to the Outside Directors in connection with the
Cases. The letter states that, if CityFed refuses to make the payments
demanded, the Outside Directors will consider taking appropriate legal
action to enforce their rights. CityFed received a similar letter from
Venable, Baetjer, Howard & Civiletti, counsel for John Kean, who was a
party to the Second RTC Action, as well as from Alfred J. Hedden, Gilbert
G. Roessner, and Gordon Allen, who were or are parties to the Cases.
CityFed is considering what action to take in response to these letters.
CityFed expects that it may receive other, similar letters demanding
payment from other current or former directors and officers who were or
are parties to one or more of the Cases.
Through March 31, 2000, CityFed received but has not paid bills totaling
$4,359,000 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.
If the proposed Settlement described above is finalized, the Temporary
Order will be dissolved, and the Escrow Agreement will be terminated.
Following the Settlement, CityFed intends to undergo reorganization,
perhaps involving a bankruptcy proceeding. It is anticipated that these
indemnification claims will be addressed 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. CityFed also does
not know whether the RTC or FDIC will request payment on the
indemnification claims assigned to it by individuals who have settled with
the RTC or FDIC in the Second RTC Action, as described above. Thus, it is
not possible for CityFed to estimate with any accuracy the probable amount
or range of liability relating to current or potential indemnification
claims pursuant to CityFed's Bylaws, although the amount of such claims
could be material.
Certain insurance policies may provide coverage to CityFed for
indemnification payments made by CityFed. These policies, subject to
certain exclusions, limitations and loss participation provisions, provide
coverage to CityFed for amounts that it may be obligated to pay to
indemnify its current and former directors and officers, and in some cases
also provide coverage to the directors and officers of CityFed directly
for covered losses resulting from claims made against CityFed's directors
13
<PAGE>
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 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, filed a complaint
against CityFed in the United States District Court in Newark, New Jersey.
RIDDER, ET AL. V. CITYFED FINANCIAL CORP., Civil Action No. 93-1676. The
Ridder plaintiffs sought advancement of their legal expenses incurred in
the defense of an action for fraud and breach of fiduciary duty brought
against them by the Resolution Trust Corporation, RESOLUTION TRUST
CORPORATION V. FIDELITY AND DEPOSIT COMPANY, ET AL., Civil Action No.
92-1003 (D.N.J.) ("F&D Action"). CityFed denied all liability.
On December 29, 1999, the Ridder Plaintiffs agreed to settle all of their
claims against CityFed for a single lump sum payment by CityFed to them of
$140,000. That payment has been made. The Ridder plaintiffs have released
CityFed from any further liability to them, and all litigation by the
Ridder Plaintiffs against CityFed has been dismissed with prejudice.
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.
CityFed's case is one of more than one hundred supervisory goodwill cases
currently pending in the Court of Federal Claims. The Court has adopted
case management procedures to govern the priority and handling of these
cases, and CityFed's counsel is participating with other plaintiffs'
counsel in coordinated prosecution of these cases.
The FDIC has intervened as a plaintiff in each supervisory goodwill case
involving a closed institutions where there is claimed to be a deficit in
the receivership estate. CityFed's case is such a case, and the FDIC has
intervened as a plaintiff in CityFed's case. The FDIC claims that, as
receiver, it is the proper party to assert goodwill claims, since its
receivership claim likely exceeds any potential goodwill recovery. The
Court has permitted the FDIC to participate in the prosecution of such
goodwill claims, but not to the exclusion of other plaintiffs. The Court
has not yet determined whether the FDIC will be entitled to some or all of
the recovery in such cases.
14
<PAGE>
CityFed's supervisory goodwill case remains stayed, pursuant to the
Court's case management procedures, while the Court completes discovery
and trials in other supervisory goodwill cases.
If the proposed Settlement described above is finalized, CityFed will
assign to the FDIC all of CityFed's interest in its supervisory goodwill
case, will cease to be a party to that case, and will have no right to
share in the recovery in that case, should there be one.
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
15
<PAGE>
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 March 31, 2000, the Company
has a $7.4 million contingency reserve representing the current minimum
expenses relating to pending litigation estimated to be incurred and
provisions 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 also includes an amount to reflect the proposed
Settlement, amounts for claims asserted for indemnification of expenses
and settlements in the Second RTC Action and the claims described above
under "Indemnification Claims Relating to Deferred Compensation Plans."
The reserve, however, does not include provisions for trial-related
expenses or any other potential settlements or adverse judgments 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, 1999 $6,353,000
Charges 1,000
Provision 1,037,000
----------
Balance - March 31, 2000 $7,389,000
==========
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 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
16
<PAGE>
receivership, see Item 1., "Business" in CityFed's 1999 Form 10-KSB. If
the proposed settlement relating to IN THE MATTER OF CITYFED FINANCIAL
CORPORATION, OTS Order No. AP 94-26 (June 2, 1994) ("Settlement") is
finalized, CityFed will convey its interest, if any, in City Federal to
the Federal Deposit Insurance Corporation and will give up any claim
against the receivership estate of City Federal. See Note 4 to the Notes
to Financial Statements for the Three Months Ended March 31, 2000 in this
Form 10-QSB ("Notes") under "In the Matter of CityFed Financial
Corporation" for further information regarding the proposed Settlement.
While CityFed believes that the Settlement will become effective on the
terms outlined, there can be no assurance that it will be so finalized.
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 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 March 31, 2000, CityFed had approximately $9,691,000 in total assets,
$11,856,000 in total liabilities and $2,165,000 in negative stockholders'
17
<PAGE>
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 litigation
and administrative expenses over the next twelve months, any substantial
indemnification expense, settlement or judgment could reduce liquidity to
a level that would jeopardize the continuation of the Company's
activities. As 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. If the proposed Settlement is
finalized, CityFed will no longer be subject to the terms of the Escrow
Agreement.
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
18
<PAGE>
(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 March 31, 2000, was $7,389,000 and, at
December 31, 1999, was $6,353,000.
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
proposed Settlement, the settlements in the Second RTC Action and the
settlements described under "Indemnification Claims Relating to Deferred
Compensation Plans" in Note 4 to the Notes), or adverse judgments. 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
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 proposed Settlement, the Second
RTC Action and the settlements described in Note 4 to the Notes under
"Indemnification Claims Relating to Deferred Compensation Plans"), 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. Pursuant to the Escrow Agreement, First Union
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
First Union 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 First Union. The Escrow Agreement also provides
that First Union 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. First Union will provide to the OTS a copy of all
statements regarding the escrow account provided to CityFed. If the
proposed Settlement is finalized, CityFed will no longer be subject to the
terms of the Escrow Agreement.
19
<PAGE>
Results of Operations
CityFed recorded income from continuing operations for the three months
ended March 31, 2000 of $77,000. This compares to income from continuing
operations in the amount of $49,000 for the three months ended March 31,
1999. No addition to the contingency reserve was made during the three
months ended March 31, 1999 while an addition of $1,037,000 was made in
the quarter ended March 31, 2000.
Interest on investments was $132,000 for the three months ended March 31,
2000 compared to $113,000 for the three months ended March 31, 1999 due
primarily to the higher yields realized. Operating expenses of $79,000 for
the three months ended March 31, 2000 were higher than the $64,000 for the
same period in 1999 due primarily to a higher level of professional
service fees.
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, 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 additional provision of $1,037,000 was made to
the loss from discontinued operations during the three months ended March
31, 2000. The provision increases the reserve to cover claims from the
settlements described in Note 4 to the Notes under "Indemnification Claims
Relating to Deferred Compensation Plans" and the proposed Settlement, less
legal expenses not expected to be incurred if the Settlement is finalized.
Due to the addition to the reserve less a charge to the reserve of $1,000,
the contingency reserve was increased from $6,353,000 at December 31, 1999
to $7,389,000 at March 31, 2000.
The basic loss per share from continuing operations of $0.11 and $0.11 for
the quarters ended March 31, 2000 and 1999, respectively, is after the
deduction of unpaid preferred dividends of $2,159,000 in both periods. The
basic net loss per share of $0.17 in the quarter ended March 31, 2000 is
after the $0.06 loss per share from discontinued operations and compares
to the basic net loss per share of $0.11 in the quarter ended March 31,
1999 where no provision was made for discontinued operations. 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.
20
<PAGE>
(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 March 31, 2000, the
aggregate deficiency on the Series B Stock was approximately $57.3 million
and the aggregate deficiency on the Series C Stock was approximately $35.5
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
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITYFED FINANCIAL CORP.
By: /s/ John W. Atherton, Jr.
-------------------------
John W. Atherton, Jr.
President, Chief Executive Officer
and Treasurer (Principal Executive
and Financial Officer)
Date: May 12, 2000
22
Exhibit 11
CityFed Financial Corp.
Statement Regarding the Computation of Per Share Loss
Three Months Ended
------------------
March 31,
---------
2000 1999
---- ----
Computation of Loss Per Share:
Weighted average number of shares
outstanding 18,715,609 18,715,609
Loss applicable to common stock:1
From continuing operations $(2,082,000) $(2,110,000)
============ ============
From discontinued operations $(1,037,000) $ -
============ ============
Net loss $(3,119,000) $(2,110,000)
============ ============
Basic loss per share:
From continuing operations $ (0.11) $ (0.11)
============ ============
From discontinued operations $ (0.06) $ -
============ ============
Net loss $ (0.17) $ (0.11)
============ ============
- ----------------------
1 Losses applicable to Common Stock are net of preferred stock dividends for the
three months ended March 31, 2000 and 1999 in the amount of $2,159,000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000744765
<NAME> CITYFED FINANCIAL CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 51
<SECURITIES> 9,495
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10
<DEPRECIATION> 10
<TOTAL-ASSETS> 9,691
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
63,553
<COMMON> (65,718)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,691
<SALES> 0
<TOTAL-REVENUES> 156
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 79
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 77
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<INCOME-CONTINUING> 77
<DISCONTINUED> (1,037)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,119)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
